Visa Inc - Class A (V) — Q1 2015 Earnings Call Transcript

Welcome to the Visa Inc’s Fiscal Q1 2015 Earnings Conference Call. All participants are in a listen-only mode, until the question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. And now to turn the conference over to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.

Thank you, Jack. I will start with my usual updates and observations. First, as indicated in our earnings press release, our Board of Directors has approved a four-for-one stock split, where each Class A stockholder of record at the end of business on February 13, 2015, will receive three additional shares for every share they hold on the Record Date, in the form of a 100% stock dividend. Trading on a split-adjusted basis will commence on March 19, 2015. Due to the structure of the different classes, holders of Class B and C shares will not receive a stock dividend. Instead, the conversion rate for the Class B and C shares will be adjusted post-split, ensuring that Class B and C stockholders maintain their relative ownership percentages prior to the split. The second update pertains to foreign exchange. Since our last earnings call, the U.S. dollar has strengthened against most key currencies, and based on the December 31 forward exchange rate, we anticipate a negative impact of 50 basis points on our full-year revenue growth. The third update concerns cross-border activity. Cross-border volumes decreased by 2 percentage points in the September quarter and further softened to 8% growth in constant dollars for the December quarter. We're seeing a decline of 1 percentage point to 7% growth through January 21. The stronger U.S. dollar has significantly reduced travel to the U.S. from Europe, Canada, and Latin America, particularly Brazil. Additionally, the economic difficulties in Russia have also negatively affected cross-border performance. Overall, we now project cross-border volume-driven revenue growth for fiscal 2015 to be about half a percentage point lower than what we estimated at the beginning of the year. On a positive note, a strong rebound in currency volatility has occurred compared to previous quarters, sustained from September to early January, and has increased further due to recent actions by central banks in Switzerland and Canada, along with the recent elections in Greece. Given the unpredictability of volatility, we remain cautiously optimistic about its sustainability for the rest of the fiscal year. For full-year revenue growth, we maintain our guidance of low double-digit constant dollar growth, with a negative impact of two percentage points from foreign exchange, positioning expectations toward the lower end of this range. Looking ahead to Q2, we expect the most significant impacts from foreign exchange and lower gas prices, leading to growth rates lower than initially expected, but still in the mid-single-digit range. Subsequently, we anticipate net revenue growth rates to improve in Q3 and reach double digits in Q4. We are reaffirming client incentives to be between 17.5% and 18.5% of gross revenue. Although Q1 was at 17.4%, we expect Q2 through Q4 to be slightly higher, given the pace of deal activity for the rest of the year. We are also reaffirming our full-year EPS guidance in the mid-teens. It is important to note that last year's Q2 results included a large tax benefit, comprising both one-time and ongoing tax effects, and we will be comparing against an unusually low level of client incentives from the prior year. Finally, we are committed to returning excess cash to our shareholders. In this regard, we repurchased a total of 3.1 million shares during the December quarter at an average price of around $259. As of January 27, we have acquired an additional 2.5 million shares, totaling 5.6 million shares for the fiscal year to date at an average price of $258, leaving us with an open to buy of $4.2 billion. Notably, all share repurchase programs authorized before October 2014 have now been completed. Now, let’s discuss the numbers. I will review our global payment volume and transaction processing trends for the first fiscal quarter, followed by our results up to January 21. Then I will cover the financial highlights of our fiscal first quarter.

Thank you very much, Byron, and good afternoon, everyone. First of all, I’m just going to start by telling you, I think that we as a management team are quite pleased with our results. We continue to produce strong and consistent results in the global economic environment which is providing more headwinds than tailwinds. Consumer spending continues at reasonable levels, but it is not accelerating and we expect gas prices to continue to be a near-term headwind. Geopolitical tensions are playing a more meaningful role in our results as they’ve at different times during our past. Having said that, our growth is still strong and well in excess of consumer spending growth as the movement from cash to electronic payments continues regardless of economic and geopolitical events. As most of you probably know, we’ve put forth a proposal in this year’s proxy to amend our corporate charter that would position us to effect a stock split at an appropriate time and at the discretion of our Board of Directors. As you can see from the announcement today, the proposal did indeed pass and our Board of Directors declared a four-for-one stock split in the form of a stock dividend. This action in addition to our dividend increase and our previously announced share repurchase program are all indicators of our confidence in our future. Our long-term outlook continues to be bright as our investments in digital payments provide growing opportunities for us. Let me make a couple of comments now about our first quarter financial results. As Byron said, it was another strong quarter driven by solid underlying payment volumes in processed transactions globally. As expected, operating revenue grew 7% nominally or 9% on a constant currency basis, while expenses increased 6% and earnings per share registered a healthy 15% growth. Global payment volume grew 11% flat to last quarter and still robust. Solid rates in the U.S of 10% were bolstered by international at 13%, again no change from the previous quarter and still robust in spite of everything that is transpiring across the globe. U.S growth moderated slightly in the month of January driven by further declines in gas prices. And as Byron mentioned, our U.S results benefited from conversions as we converted significantly more accounts on to a platform than were converted away from us. Let me just cover a few topical items now. First, a few words about the U.S holiday spending season. The holiday season spending patterns evolved differently than prior years. Growth was stronger going into Thanksgiving than we’ve seen in the past and it tailed off through the month of December, but a significant driver was the continuing decrease in gasoline prices. Having said that, our rate of growth was higher this year than last year including the decrease in gas prices. We also look at the rate of growth year-over-year excluding conversions and gas prices to gauge the underlying economic environment and it looks to be about flat. On that topic, I want to talk a little bit more about gas for a second. First, to put the drop into context, U.S fuel prices are down approximately 30% since June. This drop amounts to approximately $60 per month for the average consumer. According to our surveys, approximately 50% of the savings consumers are seeing is being saved, 25% is being used to pay down debt and approximately 25% is being spent in other discretionary categories. These categories include grocery, clothing, and restaurants. This is consistent with what we’ve seen in our own spend data. As we look forward, we’d anticipate the savings will accumulate and ultimately we’d see more spent in the discretionary categories including higher ticket items such as home improvement, electronics, and travel and entertainment. Third cross-border volume moderated to 8% from 10% in the prior quarter. We see the effect of geopolitical tensions here and the strong dollar and the corridors affected are not surprising as Byron pointed out. Fourth, the rebound in currency volatility is material. It’s obviously welcomed and not surprising given what's going on in the world. The moderation in cross-border continued into the current quarter, as has increased currency volatility. On the expense front, we continue to manage expenses judiciously and while we continue to appropriately invest in all of our long-term initiatives, there are defensive measures we can and will take if needed in the face of any slowing economic scenario. We're not doing this yet, but we remain prepared. Let me turn my attention now just to say a couple of words about our competitive position. We love our competitive position in the marketplace. We are the industry leader, but this alone doesn't give us comfort. We know that we are the target for others, traditional and non-traditional. Thus far, we’re comforted by the fact that we continue to maintain our share in an intelligent way for our shareholders. We are laser focused on investing to drive cash to electronic payments, partnering with those who will drive commerce in the digital world and creating platforms to embed ourselves in that digital commerce, Visa Checkout, Visa Token Services, Visa Digital Solutions and enabling Apple Pay. These are things that we’ve done so far and there is much more to come. Let me turn now and make a couple of comments and updates regarding the legal and regulatory front. On the domestic front, we're certainly pleased with the recent outcome of the Supreme Court's decision not to hear the National Association of Convenience Stores’ appeal against the Federal Reserve Board. The decision is an important step in bringing clarity to the debit interchange landscape. We are hopeful this will encourage all parties to work more closely to address areas of mutual interest. Speaking more broadly to the merchant litigation, we made considerable progress in settling the MDL opt-out cases. Through the end of the first quarter and to date in January, we paid out approximately $335 million to opt-out merchants. We are optimistic that we will continue to see good progress. Additionally, we had approximately 1,100 requests from smaller retailers to opt back into the class. They will be compensated accordingly under the terms of the Class Agreement. In Russia, we continue to work with the Central Bank of Russia and the Russian National Payment Card System to transition our domestic processing to their network. We continue to estimate that 2015 full-year impact to be $50 million. A quick update on Visa Checkout. As I mentioned last quarter, Visa Checkout saw excellent initial traction in the early fall, which is accelerated during our first fiscal quarter, capped off by the holiday shopping season. This was driven by a strong media campaign in conjunction with our NFL sponsorship as well as individual merchant media collaboration. Thus far we have conducted 24 co-marketing campaigns with some great merchant partners. Visa Checkout now has over 240 financial institution partners across the United States, Canada and Australia, which account for almost 50% of our global e-commerce volume. Several issuers are also participating in marketing programs, including e-mail and online campaigns. To date we have over 3 million registered users and consumers can now use Visa Checkout to stop at over 110 e-commerce retailers representing over 42 billion in addressable volume. We continue to see good success with Apple Pay, and with all involved parties actively promoting the service either independently or in concert with each other. As Apple reported yesterday, about 750 banks and credit unions have signed on to bring their customers Apple Pay. To date 43 of our issuing partners have enrolled in our tokenization services. These issuers collectively represent 75% of our aggregate U.S. payment volume and over 500 of our clients have signed the Apple Pay contract and we are actively working with them to enable the service. As importantly the token technology employed here sets the standard for other digital experiences and you will see others come to market over the course of the next year. As we gauge the success, I agree with Apple’s assessment that its early days of the excitement we see is encouraging. It will take some time to build out the NFC acceptance infrastructure for Apple Pay and others. That is happening now and will continue as merchants upgrade their terminals to accept chip-enabled cards. I would also note that few, if any, chip-enabled terminals are shipped that don’t also contain NFC functionality. More specifically on EMV chip cards, we continue to work closely with all industry players and are very optimistic that the adoption of chip cards will continue to accelerate over 2015. Based on the Payment Security Task Force projections, we expect to see well over a half a billion chip cards enabled in consumer’s hands by the end of 2015 and roughly half of all terminals of surveyed acquirers will be activated by year-end. We expect that by the end of 2017, roughly 70% of all cards in all terminals will be chip-enabled. Moving on to the emerging and evolving technologies like host card emulation. In the fall, we launched our sandbox environment for Visa Digital Solutions. We have several clients and partners that have been actively developing new mobile and digital services in our sandbox. Next week our Visa Digital Solutions platform will launch and be live in production. We expect that several of our clients and partners will launch the new services over the coming months. Lastly, we are putting the finishing touches on several other initiatives that we will be announcing during the upcoming Mobile World Congress meeting in early March, so stay tuned. Just to close, we are very pleased with the start to our fiscal year. As we indicated last quarter, while we expect volumes to remain relatively strong, we are expecting revenues to be softer in the first half of the year including the second quarter, which we expect to be the trough. The back half of the year should improve as gas prices stabilize and the effect of our previously announced pricing changes become effective. It will continue to be a very exciting time in the payments arena and I fully believe that Visa will continue to be in a leadership position not only in terms of growing our payment volumes and processed transactions, but as importantly driving new technologies and ways to pay as we work in concert with our issuers, acquirers, merchants, and other parties. With that, Byron and I are ready to take your questions.

Great work this quarter. I want to first address the FX volatility levels you mentioned. Byron, you pointed out that they have clearly increased. To clarify, in your outlook, are you factoring in the recent levels or are you using lower levels? Additionally, could you provide some insight into the potential impact on your cross-border volume if you were to extend the current levels of volatility for the rest of the year?

We have included our forecast for foreign exchange rates based on the forward rates as of December 31. The guidance we provided reflects our most up-to-date analysis using these forward exchange rates. Regarding volatility, we anticipate some continuation of the trends we've observed, but we approach this with caution for the remainder of the year, as forecasting in this area is quite challenging. We've observed a strong start to the year, with volatility performing above the 10-year median, which we mentioned in our last earnings call. However, volatility tends to fluctuate significantly, distinguishing it from FX and its effects on our translations, which we are projecting based on December forwards. In light of this volatility, we are adopting a more conservative approach for the second half of the year.

Hi, guys. So the strong dollar obviously as you highlighted has had that negative impact on U.S inbound cross-border travel from some of the key international card. So I just wanted to get your take on whether or not you think that the 7% cross-border volume number through the first three weeks of January will prove to be the trough for the year, because I know you do have some easier comparisons coming up in the March and June quarters in particular.

That one is really hard. We are projecting based on our trends, but the dollar is continuing to strengthen and that strengthening dollar is fundamental to our forecast for the balance of the year in terms of its impact on volume and subsequent impact on revenue.

Thank you. Could you provide any clarity you might have Charlie on the rules that are governing the opening of China's domestic payments market and when this might be material for Visa?

I guess a couple of things first. First I just want to be clear; China is an important market for us today. We don't compete domestically for transactions, but we’ve very close relationships with banks in China where we issue cards that are used outside of China. So to the extent and at the appropriate time when the Chinese marketplace opens we're not starting from ground zero relative to building relationships within China. Relative to the timing of the opening, we really unfortunately cannot provide any additional clarity. We know what you know, which is that the Chinese government made the statement that they will allow domestic competition that they’re in the process of writing those rules and my guess is we'll see them when you see them and we continue to work with our Chinese partners and meet with the government. But relative to when the market will open, what the rules will look like and how meaningful it would be, we really don't know. I would just remind you, while I know a lot of you know this fact, but when they’ve opened the market up in other industries that are industries somewhat like ours, it generally takes a period of time, sometimes quite a significant period of time before it's going to become something significant for the Company.

Thank you. Have you seen any notable difference in the impact of lower gas prices on affluent consumers versus the general population? And maybe on the comments that you’ve made about cross-border, could you kind of address whether you're seeing any early signs of more U.S travel abroad given the strengthening of the U.S dollar and if so, is any of that factored into your outlook?

Let me address the second point first. For both the U.S. and international markets, the strong dollar has maintained its impact. We haven't observed any significant increase in U.S. travel abroad, which might have been expected due to the stronger dollar. However, we have seen a consistent healthy growth rate in outbound U.S. travel. Regarding gasoline spending and its effect on affluent consumers, as I mentioned earlier, our data shows that gasoline spending tends to be more supported by debit than credit. We’ve noticed minimal impact on credit spending, which is where you would typically find more affluent consumers. On the debit side, we have observed some impact, primarily from less affluent consumers who use debit more frequently. As Charlie noted, there has been a significant decline in debit spending related to gasoline in the U.S., with some of that spending shifting to other categories, while much of it, according to our surveys, has been saved. It's important to remember that the average gasoline expenditure of $60 per month remains stable, making it unlikely for spending behavior to change significantly. If we consider that people fill their tanks roughly once per week, that amounts to about $15 weekly, which doesn't leave much room for differing spending habits. The areas where we are witnessing this shift in spending include groceries, fast food, and especially places like home improvement stores that could see that extra spending. From our surveys, we understand that around 50% of the savings are being set aside. As people recognize these additional funds accumulating, they may eventually invest in higher-priced items over time.

Yes, Charlie, I was wondering if you could talk a little bit on the rollout of tokenization for online, and when you think it could also rollout internationally around Apple Pay. And then lastly, have you seen increased discussions from other smartphone manufacturers and players post to Apple Pay?

Sure. On our tokenization efforts we are very actively working with issuers in other parts of the world, and would expect to see some tokenized solutions in the marketplace this calendar year. On the topic of other people whether it's handset manufacturers or others there is a very, very active dialogue that’s going on that was happening, but I think the work that Apple has done and winding up in-market with their solution, it certainly accelerated people's thinking. And we’ve been very, very clear relative to ourselves which is, we are very excited about what Apple is doing. We think it’s a very elegant solution that we are thrilled with our participation in. But we want to enable as many scalable solutions that have wonderful customer interfaces that adhere to the highest security standards. And we would expect to see a series of those in the next couple of quarters come to market.

I just have one more on FX. How did the hedges affect next year, I mean, did they differ some of the impact that we might have seen if you weren’t hedged this year into next year? And then just one data point question, do you know that sum total of those that are still opt out in the merchant litigation? Thank you.

Regarding the hedges, yes, we start our 12-month forecasts and hedging process in October, which marks the beginning of our fiscal year. The hedges we implement this month will be in place until the end of January, covering the first four months of the upcoming fiscal year. If the dollar continues to strengthen, the hedges will be beneficial; if it weakens, the opposite will occur. Our goal is to reduce volatility rather than eliminate it entirely, as we are not completely insulated from foreign exchange impacts. The hedges focus on operating income rather than revenue, using our expenses in other currencies as a natural hedge, with additional transactional hedges to cover risks associated with expenses in non-U.S. currencies.

Hey, guys. Can you talk a bit about tokenization? Where are we in terms of introducing the service to banks, and some of the feedback, and then maybe you can talk a bit about, how should we think about this looking into next year? Thanks.

So, those financial institutions that I referenced in my opening remarks are all using our token services for Apple Pay. And as I said, we’re working with another 500 or so institutions here currently to get them involved in Apple Pay and therefore using our tokenization service because that is a prerequisite for participating in Apple Pay. As I said before, we continue to work with issuers around the world and expect to see more tokenized solutions as time goes on. What was the second part of the question?

Thanks. Good afternoon and thanks for taking my question. Relative to your commentary on incentives, I believe last time you had talked about incentives being front half loaded in the first part of the fiscal year. And I think today you said that you now expect them to be, to trend upwards as we go through the year. Has something changed in terms of deals pushed out or additional deals signed? Maybe give us some color on the cadence of those incentives as we go through the year?

One of the things we’ve learned over the past seven years is that, we have been doing earnings calls is that incentives is very difficult to project quarter-by-quarter. We have gotten pretty good at projecting it on a full year basis. And so, with every passing quarter we get smarter about the deals that close, and the deals that are taking longer to close that we thought might close. And so, nothing has occurred that has changed our outlook for the year. But we are reaffirming the lumpiness of incentives and that’s really what we’re seeing here. We have one quarter in the bag and three to go and we’re very comfortable with our guidance of 17% to 18.5% and we expect the three out-quarters to run at a higher rate than what you saw in the recently completed Q1.

Thank you. At your analyst day a year and a half ago, you guys estimated that there would be 38 million mobile plant cell locations by 2017. Just wondering if you guys can give us an update in terms of how things have played out versus your initial expectations and are there any particular geographies where you’ve seen acceptance increased noticeably due to mPOS?

That's a good question, and while I have the number, I do not have it on hand regarding the number of mPOS locations. However, that number is growing very rapidly. The last data I saw, which is likely outdated by now, indicated we were around $5 million, and I believe the number was over $10 million the last time I checked. The growth is significant, and besides just the mPOS devices available, the usage is extremely important. We will ensure to provide you with that number, and next time we speak publicly, we will mention it so that everyone has access to it.

Thank you, Charlie. It seems you mentioned that you can maintain the bottom line if the macro environment worsens. Could you clarify if that was related to expenses? Also, could you provide an update on the timing of the CFO search? Thank you.

Sure. Regarding the economic environment, the strengthening dollar is making our jobs more challenging. However, we are not altering our spending patterns or the ongoing projects based on current global conditions. We are not laying off employees and have no plans to do so. We intend to continue focusing on growing the company as we believe this is the right long-term strategy for us. As Byron mentioned, we expect to keep performing well as a company. That said, we also recognize that like any business, we can tighten up our operations, prioritize effectively, and determine the most critical actions we need to take. If we see significant impacts from global conditions that affect us more than anticipated, we can make necessary adjustments. While we're not considering these changes at the moment, we would approach them thoughtfully to ensure we can still invest in the right areas. Essentially, if warranted and prudent, we could reduce company expenses or at least slow their growth, but that is not our current plan. As for the CFO search, I hope to have an update to share soon.

Hi, guys. Just a couple of clarifications. I guess, Charlie what's the strategy for rolling out tokenization for browser-based ecommerce? I guess, I was under the impression, this spring you guys will be rolling something out. I’m just curious what the plans are there? And then, secondly Byron on FX, just given your comments on some of the hedges in the rolling off of some hedges. Should we think start modeling in a couple of point impact for fiscal year ’16? Thanks so much.

So, on the first piece. In the spring of this year we will have some tokenized solutions in the marketplace for some browser-enabled solutions.

Okay. And on the FX, Bryan I wish I had a crystal ball. But let me relay the following circumstance which is the dilemma. When we gave foreign exchange guidance on the fourth quarter call we had a full year of hedges in place. Three months later, we’re saying that the interim FX developments have negatively impacted our revenue growth by about 50 basis points. So, within three months of our last projection of FX we’re off 50 basis points in the year it was hedged. So, we are not yet ready to talk about FY ’16. That said, your projection of just how strong, how much further strengthening the U.S. dollar can achieve. How long it can sustain at this level before the inevitable cycle goes back the other way, is as good a guess as ours will be. In terms of impact, we’re using as our best proxy the December 31 forward exchange rates.

Great, thanks. Could you talk a little bit, I mean you mentioned during the opening comments about the holiday spending being a little different kind of debit spending being affected by gasoline. Are there trends that you think that will be persisting throughout 2015. I know we’ve got some differences in the way tax refunds are going to be paid this year. I mean any other things that we should be aware of as we go through ’15 particularly in the U.S. and keeping that stuff in mind?

We spend a lot of time analyzing the holiday spending numbers. The points I mentioned were crucial for understanding the conversion rates, which provide a clear picture of spending. We've discussed the effects of gas prices and what we expect will be their ongoing impact. One area we didn't cover, but is important, is ecommerce volume. Ecommerce was exceptionally strong during the holiday season, continuing a trend we've observed. Growth rates in ecommerce were two to three times higher than in physical stores. This is beneficial for us because cash transactions are less effective online, resulting in a much higher participation rate in ecommerce compared to face-to-face interactions. Other than that, I can't recall anything else.

Yes, good evening. Thanks. First, could you give us a little bit of commentary on the impact that pricing changes that we have seen reported by the acquirers will contribute to your guidance on revenue growth? And secondly, we have seen EVMCo produce a draft of 3DS 2.0 based on Visa and MasterCard’s work indicating that you’ll be able to take additional authentication metrics into account starting in, at the beginning of ’16. Does this also mean that what we’ll get a cardholder present-like interchange tier to show up at time as well? Thanks.

Let me take the first one. As we described on our fourth quarter call, we have a number of price adjustments that will take place in the second half, U.S. acquiring card service fees in April roughly two basis points, about 40 basis points on U.S. acquiring ISA again in that April timeframe, these get phased in. So, no impact in Q2, fiscal Q2, at beginning in fiscal Q3, full impact in Q4. So as you think about modeling it on a fiscal year basis we would expect our lowest revenue growth rate to be in the upcoming Q2, and then as the price adjustments start to kick in delving in Q3 and then by Q4 having an impact that would bring us to double digit revenue growth in fiscal Q4. Put that altogether and we are still reaffirming the guidance we gave in Q4 for the full year, but today largely because of FX at the lower end of that range.

And then on your second question, I wouldn’t relate those two dates. The work we’re doing on 3D secure, in re-looking at the rates as we said. As with tokenized solutions being in the marketplace, we are constantly looking at what makes sense, constantly looking at the fraud, looking at the value added. And if it makes sense for us at some point to do something different within a change rates, we’ll do it. But right now, we have no specific plans to talk about.

Thanks and good afternoon. Charlie, just going back to your comments, I guess throughout the class action that is starting to settle with those that opted out et cetera. Any comments you would have just around sort of the tone of collaboration, with yourself and the retailers would sort of come to the end of this, and just trying that into anything we should think about maybe longer term around rebates and incentives and the mix that would move more towards retailers versus banks, if there is anything we should consider there?

Our relationships with merchants are extremely important to us. Settling these lawsuits is beneficial as it allows us to move forward and discuss potential collaborations. One clear example is Visa Checkout. Merchants are now advertising alongside us, which was not a consideration a few years back. They are motivated not by personal affinity but because they see value in our product. In the ecommerce sector, retailers want customers to complete their purchases. By offering a solution with a higher conversion rate that is user-friendly, and leveraging our brand together, we can attract new customers for them, which excites them. These are the significant discussions we can have now, although not all merchants are ready for this approach. We aim to establish such partnerships widely. This is a long-term effort where we need to demonstrate that our solutions are truly beneficial. For instance, through Visa Checkout and our Visa Transaction Advisors program, we've enhanced our analytics capabilities to help oil companies reduce fraud at fuel pumps with real-time risk scoring. Overall, it's a positive sign, but it requires ongoing discussions, and results will manifest over time.

And with that, we want to thank everybody for joining us today. If anyone has any follow-up questions, feel free to give Victoria or myself a call. Thanks.