Visa Inc - Class A (V) — Q2 2015 Earnings Call Transcript

Thanks, Shania. Good afternoon, everyone, and welcome to Visa Inc's fiscal second quarter earnings conference call. With us today are Charlie Scharf, Visa's Chief Executive Officer; and Vasant Prabhu, Visa's Chief Financial Officer. This call is currently being webcast over the internet and is accessible on the investor relations section of our website, at www.investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. A PowerPoint deck containing financial and statistical highlights of today's commentary was posted to our website prior to this call. Let me also remind you that this presentation may include forward-looking statements. These statements aren't guarantees of future performance, and our actual results could materially differ as a result of a variety of factors. Additional information concerning those factors is available on our most recent reports on forms 10-K and Q, which you can find on the SEC's website and the Investor Relations section of our website. For historical non-GAAP or pro forma related financial information disclosed in this call, the related GAAP measures and other information required by Regulation G of the SEC are available in the financial and statistical summary accompanying today's press release. And with that, I will now turn the call over to Vasant.

Thank you, Jack. In keeping with prior practice, let me begin my remarks by highlighting some key call-outs from the quarter. First, we reported a solid quarter of financial results despite a backdrop of continued domestic and international economic cross currents. Importantly, revenue growth of 8% was a couple of percentage points better than we had expected and telegraphed last quarter. The upside was driven by lower incentive levels than previously assumed and a higher currency volatility benefit. Our flat EPS growth for the period year over year was a direct result of the favorable tax impact we enjoyed in the second quarter of FY '14. Second, the overall strengthening of the dollar continued to exert pressure on revenue growth. Exchange rate headwinds this quarter reduced reported revenue growth by approximately two and a half percentage points. We expect dollar strengthening and its associated impacts to continue for the balance of the year. Third, for the second consecutive quarter, our client incentive rate came in below expectations. This was once again due to the timing of certain contractual obligations, as well as moderately lower payouts associated with lower payment volumes in several challenged geographies like Russia and Brazil. We expect client incentives to be higher in the second half of the year. Fourth, our effective tax rate was 32% in the second quarter, 10 points higher than Q2 last year, when we recorded an IRS section 199 tax benefit related to multiple years. Our tax rate will fluctuate from quarter to quarter this year, as I will discuss later. Overall, the underlying drivers of our business remain stable and healthy, as evidenced by payment volumes and transactions growth. However, the strong dollar impacts us negatively this year, not only on currency translation but also in our cross-border business. Despite these headwinds, we're maintaining our outlook for the year in line with guidance previously provided. There are, however, some significant shifts from quarter to quarter which we want to make sure are clear to you all. First, on the revenue front, after a better than expected second quarter, we now project the third quarter to represent the low point of growth for the year at 6% to 7% on a nominal basis. Growth will pick up again and approach double digits in Q4. The third quarter is expected to be negatively impacted by higher client incentives, some are shifting from the second quarter, the continuing drag from lower gasoline prices, and tougher comparisons in the other revenue line which benefited last year from revenues associated with our FIFA World Cup sponsorship. The full benefit of price increases and the smaller incentive drag, due in part to the lapping of a deal intensive quarter in FY '14, will help Q4 revenue growth. Second on the expense front, we expect a meaningful step-up in expense growth in the third quarter, as a number of programs including marketing and certain technology initiatives have been phased to the back half of the year. As always, we will continue to carefully monitor the economic backdrop and can and will make expense adjustments as necessary. Our full year expense growth expectations remain unchanged at this time. Third, we expect a higher tax rate in the third quarter, followed by a substantially lower tax rate in the fourth quarter. Our estimated tax rate in the third quarter is expected to be as much as 200 basis points higher than the rate in the second quarter. However, as currently anticipated, we expect to take advantage of certain tax benefits as early as the fiscal fourth quarter, which would drive an effective tax rate in the low 20s in Q4 and no change to our full year fiscal tax rate expectation of the low 30s. When you put this all together, we're now looking at third quarter fully diluted EPS being $0.06 to $0.08 lower than analysts' current expectations. For the year, we now expect our fully diluted earnings per share growth to be at the low end of the mid-teens range, in line with current analyst expectations. Moving on to second quarter business drivers and our financial results, I will start with global payments volume and process transaction trends. Global payments volume growth for the March quarter in constant dollars was 11%, unchanged from the prior quarter. The U.S. grew 9% and international grew 13%, both at similar levels to the December ending quarter. Drilling down further, in the March quarter, U.S. credit grew 12%, a two percentage point moderation compared to the December quarter. The account conversion is complete and consistent with last quarter contributed approximately 3 percentage points to our overall credit growth in the period. This positive impact will continue for the next two quarters, though at a declining rate before lapping. Lower gasoline prices, the full effect of which hit payment volumes this quarter, reduced credit volume growth by two points. As such, gasoline prices appear to be the primary driver of the step-down in credit growth. U.S. debit grew at 6% in the March quarter, generally in line with the December quarter. Lower gasoline prices had an outsized effect on debit growth, reducing it by approximately three percentage points. In aggregate, lower gasoline prices impacted U.S. payments volumes by a negative three points in the quarter. A portion of the savings from gasoline price declines is being spent in other categories, primarily grocery and restaurant segments. This is evident in debit payment volumes, not yet in credit payment volumes. More recently, through April 28th, U.S. payments volume growth was 9%, with U.S. credit growing 12% and debit 6%, essentially unchanged from Q2 trends. Global cross-border volume delivered an 8% constant volume growth rate in the March quarter, unchanged from the December quarter. The U.S. grew 6% and international grew 10% in constant dollars. The further strengthening of the U.S. dollar since the beginning of the year continues to have a negative impact on cross-border commerce. Forward currency curves imply that the dollar will gain in strength. If this materializes, these cross-border trends are likely to persist and perhaps worsen. Through April 28th, cross-border volume on a constant dollar basis grew 9%, with a U.S. growth rate of 6% and an international growth rate of 10%, generally in line with the second quarter rate. As you can see, when you adjust for the dollar, the underlying drivers of our business have remained very stable in aggregate. However, the significant currency moves we've experienced this year are impacting cross-border commerce in a variety of ways, with the largest impacts coming from the U.S. dollar. Overall, cross-border volume growth has remained suppressed from historical levels. As may be expected, outbound cross-border commerce from weakening currencies like the Euro, Ruble, and the Canadian dollar has been slowing. Hardest hit corridors were Russian cardholder spending across Europe and the Middle East and Canadian and EU cardholder spending in the U.S. Offsetting this to some extent is accelerating cross-border commerce of the strong currencies, primarily the U.S. dollar. In Q2, we saw U.S. cardholder spend stepping up in Europe and Latin America. Chinese travel across the world continues to be robust. And cross-border spend out of Latin America is also picking up, helped by easier year to year comparisons. Currency shifts will remain a critical variable to watch as the year progresses. Any moderation of dollar strength will help our business and vice versa. Any pickup in economies like Europe, Brazil, and Russia would be welcome. Transactions processed over Visa's network totaled 17 billion in the fiscal second quarter, an 11% increase over the prior year period, which was a one point improvement from Q1. The U.S. grew 9%, while international delivered 14% growth. Transaction growth in the U.S. is helped by some spending shift from gas to lower ticket categories of spend like QSRs. Through April 28th, processed transaction growth was 10%, with a U.S. growth rate of 8% and an international growth rate of 14%. Transactions grew 14% in the period as our reboot of the business continues to pay off. CyberSource will celebrate its five-year anniversary as a part of Visa this year, and we have completed the integration of this business into our global merchant services and solutions functional area. With the integration complete and since CyberSource transactions do not represent a material component of Visa's business, we will no longer call out this data separately after this quarter. Turning now to our Q2 reported financials, net operating revenue in the quarter was $3.4 billion, an 8% increase year-over-year, driven primarily by solid growth globally across all revenue categories, and as mentioned earlier, negatively impacted by approximately two and a half points by the strong U.S. dollar. Solid global payments growth volume drove service revenue up $1.6 billion, up 8% over the prior year. As I mentioned earlier, underlying payments volume growth in local currencies remains very healthy. Data processing revenue at $1.3 billion was 9% over the prior year's quarter, based on continued strong growth rates in Visa processed transactions, both in the U.S. and internationally. As mentioned, transaction growth in the U.S. was helped by some gasoline related savings being spent on lower ticket size transactions such as QSRs. International transaction revenue was up 11% to $964 million, with higher currency volatility countering impacts from moderating cross-border payment volumes and currency translation. As we measure our key currencies, volatility was at five-year highs in Q2, meaningfully contributing to international revenues. Total operating expenses for the quarter were $1.1 billion, up 1% from the prior year, with moderate higher personnel, depreciation, and G&A costs offset by lower marketing and network and processing expenses. Higher personnel costs are primarily the result of higher headcount, reflective of our strategy to invest for future growth. The uptick in G&A was primarily the result of a loss related to our debit processing business in Asia, which we sold during the period. Higher depreciation was a result of ongoing investments in technology assets and infrastructure to support our digital solutions and core business initiatives. Offsetting these were lower marketing expenses, due to the absence of the winter Olympics and FIFA World Cup spend in the prior year, as well as shifts in current programs to the second half of the fiscal year. As mentioned earlier, this will result in a step-up in expense growth for the balance of the fiscal year. Our operating margin was 67% for the second quarter, in line with our annual guidance of mid-60s. Capital expenditures were $98 million in the quarter. At the end of the quarter, adjusting for our recent stock split, we had 2.45 billion shares of class A common stock outstanding on an as converted basis. The weighted average number of fully diluted shares outstanding for the quarter totaled 2.46 billion. On a split adjusted basis, we repurchased a total of 16.2 million shares during the March quarter at an average price per share of just under $65 per share. Fiscal year to date, we have repurchased 28.6 million shares at a price of just under $65 per share, for a total of $1.9 billion. We currently have authorization to buy up to $3.8 billion of stock. Since the IPO, Visa has had a clear capital allocation strategy of investing cash to grow our business organically and through acquisitions as job number one, then returning excess cash to shareholders through stock buy-backs and dividends. Our dividend policy remains unchanged, and our Board recently declared a $0.12 quarterly dividend per split-adjusted share. For the past seven years, Visa has had a consistent approach to stock buybacks, with the pace being modulated to some extent from quarter to quarter by valuation considerations. This approach to buybacks will continue, as evidenced by our purchases year to date. This is a growth business that generates significant cash flow and a low base of stock. A systematic buyback using excess cash after capital investments and dividends is a strategy we have been and will remain committed to. In summary, the underlying drivers of our business remain robust. The strong dollar and other large currency moves have created some headwinds this year, as have the sharp decline in gas prices. These are the normal fluctuations one expects in the course of business. The very attractive long-term secular growth trends in our business remain intact. Despite the headwinds this year, our results are on track so far, and we're comfortable reaffirming the guidance we provided to you at the start of our FY '15. To conclude, this is my first earnings call as CFO of Visa. I'm delighted to be part of Charlie's team. I look forward to meeting with many of you in the coming days and weeks, and with that, I will turn the call over to Charlie.

Thank you very much, Vasant. An official public welcome from all of us. First of all, let me start with commenting that we're very pleased with the quarterly results. We think of them as solid and consistent and certainly gratifying in the face of some of the more challenging economic conditions and geopolitical concerns that we see around the world. Net revenue grew 9% nominally. FX impact hurt growth by two and a half points. Operating income growth of 11%, payments volume increased 11% on a constant dollar basis and cross-border volume growing at 8% on a constant dollar basis are all very solid numbers. We see very little change in the overall global economy, with some exceptions, and we see more short-term risk than we see upside. Consumer spending in the U.S. specifically continues at reasonable levels but is not accelerating. Gasoline prices continue to negatively impact both credit and debit. Outside the U.S., we see continued weakness in Russia and Brazil, but we do see strength in China and our Middle East and North Africa region. And the effect of the strong U.S. dollar, as Vasant pointed out, is meaningful. We see this through the FX translation impact, but additionally, the benefit that we see of U.S. spenders outside of the U.S. is outweighed by the negative impact on the non-U.S. spenders spending less in the United States. Away from the economic growth environment, we continue to feel terrific about our activities to drive growth, which I will talk more about. We continue to make excellent progress on our evolving technology initiatives, which include everything we're doing in the digital space, mobile specifically, Visa Checkout and the work we're doing in our global merchant services and solutions groups. We continue to have a strong flow of significant client wins and renewals. I will speak a little more on several of these points in a moment, but in sum, while we remain appropriately cautious in the short term, we remain quite bullish on the medium to long term and continue to believe there are tremendous opportunities for years to come. Let me just amplify some of the comments that Vasant made regarding payment volume for a second. First, the negative impact of gasoline on our U.S. payment volume is significant, at three percentage points. Though the initial impact on payment volumes was felt in our first quarter, the full impact did not hit until the second quarter, and so the revenue impact will not be fully felt until our third quarter, because of the quarter lag on service revenues. In an update to our March quarter, Visa Insight Survey, things haven't changed much with consumers. About 30% tell us they're spending more in other categories, up from 25% last quarter. The two categories that continue to stand out are the lower ticket categories, groceries, and quick service restaurants. As I said last quarter, the lag time between lower prices and spending, we think, is about six to nine months, as consumers accumulate enough to feel comfortable making larger purchases. Keep in mind, consumer confidence and confidence in sustained lower gas prices will impact their willingness to spend. Cross-border volume remains steady at 8% in the quarter, as we said. And as I have mentioned and Vasant mentioned, the effect of the strong U.S. dollar against certain global currencies is negatively influencing cross-border spending and ultimately revenue growth. The U.S. cardholders are spending more outside the U.S. as a result of the stronger dollar, resulting in higher transaction and payment volume growth on a constant dollar basis at international merchants. However, given currency translations and generally lower acquiring fees in foreign countries, that volume is not as lucrative as what we would have enjoyed on an inbound basis. The strengthening of the U.S. dollar has hurt inbound spending to the U.S., primarily from the Canadian, European, Brazilian, and Japanese corridors. As Vasant mentioned, higher currency volatility has offset some of this. Let me just turn now and talk about some important client activity. Starting with the U.S., we renewed a multi-year credit issue agreement with U.S. Bank, a great partner and one of our leading issuers and the fifth largest commercial bank in the United States. U.S. Bank has been a longtime Visa partner, and we look forward to building further upon the exciting things we've done with them, in terms of innovation, new product development, and security. In the U.S. co-brand space, Best Buy, the world's largest retailer, will convert their consumer credit card portfolio to Visa later this summer. We also renewed a multi-year credit agreement with BP. BP has been a longtime Visa partner and launched its first co-brand in 2006. We're thrilled with our new agreement with Costco. We're very pleased to have been selected to replace American Express as the credit card network for its U.S. warehouse clubs and gasoline locations, beginning April 2016. A strategic benefit for all Visa issuers and their cardholders. We're also excited to be partnering with Citi on the new Costco Visa co-brand credit card. We view Costco as truly unique opportunity and very strategic. As I said, it is good for Visa, but an even bigger benefit for all of our clients. They're one of the largest and best retailers in the world, the third largest merchant in the U.S. according to the national retail federation, someone who historically did not accept our credit product, and we now have an opportunity to gain acceptance where MasterCard and American Express are not accepted in the credit space. We also love that this is a truly long-term acceptant and co-brand partnership. For all of our clients and their consumer and business clients, it will be the first time in 16 years they gain access to the tens and tens of billions of dollars of annual credit payments volume that heretofore went to American Express. It is a great opportunity to drive incremental usage. It should help all Visa issuers drive their cards towards the top of the wallet and increase new account and cardholder acquisition opportunities. This was a very competitive process, and there has been much discussion of what drove the outcome here. I don't want to speak for Costco, but let me say that I have not met a retailer that cares more for their clients, their members more. Going forward, Costco will be entrusting their clients, their members, these precious relationships to Visa. If it were me, money wouldn't win the day. The best brand with the best capabilities would win. I've consistently said price matters but cannot win the strategic relationship. So our strategy is not to be the low-cost provider. As I think about what drove the decision here, I look at a series of things, including a view that we're the premier brand for Costco members, the belief that our brand will help Costco grow more than all the others, clear, strong brand preference among their members and target market, specifically with the higher growth affluent and millennial holders, which in this case will drive membership and sales growth directly for Costco. Our broad global acceptance, our superior data and analytics capabilities, and our leadership in innovation. I would also point out that we feel that all the benefits I've outlined, plus what our issuers bring to the table, can create more value than others. Specifically and quite simply, we, our issuing partner and the co-brand can make more and provide greater value to our clients than smaller, closed-loop networks. As a reminder, the implementation of these agreements is subject to the purchase of the existing co-brand credit portfolio by Citi. Turning to our business outside the U.S., let me first start with China. Before I turn to market opening, which I know is a topic that you all want to hear about, I want to talk for a second about our existing business. It is doing extremely well. We have a significant and fast-growing business, with relationships that have been growing and deepening. We're the market share leader versus non-Chinese providers, and that share has been steady since 2013. We continue to sign contracts and be awarded new issuing business from Chinese banks. As examples, this quarter we renewed and expanded our agreement with China Civic Bank, one of the largest partners in China. The program will now include issuance of Visa-only branded companion cards, in addition to the dual-branded program in place. China Everbright Bank, one of China's largest financial institutions, renewed their credit agreement with Visa. Regarding the market opening news, clearly this is a significant and positive step. The facts as we've read them thus far are consistent with our expectations, and we're very excited to see more specifics, which obviously will be important. We do intend to apply for a license. As I've said, we have a strong business today with great local relationships, which have only become stronger over the past several years. We're excited to participate in one of the most important markets in the world. And for Visa to help in the growth of the domestic Chinese marketplace, working with Chinese companies and the Chinese government. To be clear, we're not pursuing this for the short-term profit opportunity. This is a long-term commitment which will pay off over the long term. We intend to prove our value as a partner within China, so bringing our value-added capabilities to help grow the Chinese economy will come before our revenue and profit growth for quite some time. Regardless of when we start to participate domestically in China, we do not expect this to be a meaningful contributor to our financial results for many years to come. Turning away from China, First-Ran Bank, a large issuer in South Africa and our largest issuer in sub-Saharan Africa, extended their contract with Visa. We also renewed our partnership with Desjardins, the leading financial group in Canada and the fourth largest cooperative financial group in the world, and lastly, Banorte, one of Mexico's oldest and largest national institutions, renewed their credit agreement with Visa. On the other side of the equation, Citibank and Itau will be moving their business away from Visa. In certain regions around the world, we have contacts with Citi which will continue to run for quite some time. In terms of how quickly these conversions commence, and ultimately how long it takes has not been made clear to us, and we will let you know as we learn more. While losing any business is disappointing to us, we know that we're not going to win everything, as we operate in a very competitive environment. We've always been very thoughtful and strategic about choosing for which clients we want to be aggressive in this competitive process, and we feel great about our portfolio of client relationships. Importantly to us, we remain disciplined in our approach to negotiations, and the net of these recent wins and losses leaves Visa and our partners in a better strategic position for the long term than would have otherwise been the case. A couple of other quick updates on the regulatory and legal fronts. First of all, in Russia, we have been actively working with the national payment card system and central bank to achieve full migration of Russian domestic Visa transactions with minimal disruptions. All domestic Visa transactions will continue to be processed in accordance with the national payment system law. And in the U.S., on the merchant litigation case, we continue to make good progress in settling the opt-out cases. Fiscal year to date, we've paid out $321 million, and additional settlements are progressing nicely. We continue to lead the world towards the world of digital commerce. Visa Checkout continues to make great strides. We now have 260 financial institution partners and 140 merchants live globally. To date, we have over 4 million registered users, over $46 billion in total addressable volume accepts Visa Checkout, and we continue to add merchants, including small and medium-sized retailers, where our acquiring partners are helping us grow acceptance. We're also deploying Visa Checkout outside of the U.S. As an example, we launched Visa checkout in China at the end of March. China Merchant Bank is the first institution in China to introduce Visa checkout to its customers. In the coming months, we're going to be working with other Chinese institutions to deploy checkout. In April, we kicked off consumer marketing campaigns in both Australia and Canada, in partnership with some of the biggest merchants in those regions. We're on track to be live in a total of 16 markets this year. ComScore conducted a study last month to evaluate our progress with merchants since launching Visa Checkout last July. The findings are very clear. Visa Checkout customers convert to buyers 69% of the time. This is 66% higher than conversion rates reported with traditional online checkout. The product is doing exactly what we said it would do, solving the online friction problem at a rate that's higher than the competitive solutions we surveyed. In the digital solutions space, a few comments. In my time here at Visa, it is amazing the amount of companies that are working and talking about the future of payments in the role, some very young, some very established. Regardless of tenure, it's clear to me that they fall into two categories: those that talk about being innovative and those that are actually driving innovation in a way that truly drives incremental value and can scale. I'm proud of the work of the Visa team and proud to be leading the industry into this digital world. When we launched tokenization, we told you it was more than a set of just security standards. We said it was a platform to enable new commerce experiences, then came Apple Pay. When we participated in the Apple Pay launch, we said it was just the beginning, and there would be more solutions that leverage our digital platforms. Since then, Samsung has announced the new Galaxy S6 payments experience, and Google's Android operating system is supporting host card emulation. We have several clients developing new HCE based applications in our sandbox as we speak. As the industry leader, a Visa partnership gives the chance for these experiences to be successful because of our technology, our scale, and our leadership. Our innovation is not something every consumer sees, but it is the things that we do as a platform that others can build upon, and it is our platform that becomes embedded in all sorts of devices, operating systems, and mobile apps. Essentially, we're enabling our partners to take advantage of one common payment platform and set of standards, but still able to customize their solutions to their specific client needs appropriate to their markets, with their preferred user experiences. Great companies come to Visa first because they know we understand the technology of payments better than anyone else, and we understand the needs of their users. And we continue to build out our capabilities to support our merchant partners. We completed our acquisition of TrialPay this quarter. It is a platform that we've worked with before and one that proved its value proposition before we decided to acquire the company. Combined with our broader merchant capabilities across Visa Analytics, Loyalty Products, and VisaNet capabilities, this is a platform that we intend to use to help merchants improve their marketing and thereby drive their incremental sales. During the last six months, we introduced to the market three new products and solutions specifically designed to help our merchant partners. First, we created a customer intelligence dashboard, a custom analytic dashboard for merchants to enable them to understand who is shopping with them at the store level. We're helping merchants not only understand the sales trends but also who is shopping, their demographics, where they live, where else they shop, etc. The platform is helping our gasoline merchants better predict demand, airlines to optimize routes and load factors, and many others to optimize marketing campaigns. The second solution is a digital marketing measurement product. Earlier this year, we launched a new platform that enables our merchant clients to measure their digital market spend with an entirely new level of accuracy. When a merchant runs a digital campaign, we're able to show them in real time how many of those impressions led to specific sales using a Visa card. For many years, merchants have taken a big leap of faith that clicks led to real sales. For the first time ever, we're now helping them measure the actual sales. The final example is a pilot program but one that we're excited about, a platform that actually drives new customers into our client's store. The platform is powered by TrialPay, where we place targeted merchant offers on the web and on mobile apps. For example, you're checking into a flight, you will see an offer to get 500 miles if you shop at Pete's coffee in the next week. When the customer comes in to buy their coffee, they're notified in real time that they've received their bonus, in this case. Also, we track the purchases and show the merchant in real time how many of the customers are coming into which specific stores. Early days, but client interest remains very strong. As you can see, these are products which we believe over a period of time change our dialogue with merchants as we help them grow their business. So just to wrap up, we're very pleased with our performance for the first half of the fiscal year, especially in light of some of the challenging aspects of the economic environment. It continues to be a very exciting time in payments, as you can tell from all the recent announcements. We remain bullish on our future, and we continue to broaden and deepen our work relationships with issuers, acquirers, merchants, governments, and other third parties. With that, Vasant and I will be pleased to take your questions.

Okay, Shania, we're ready for the Q&A.

Just trying to square a little more of the discussion on EPS growth being at the low end of the mid-teens guidance range, given your unchanged revenue growth guidance. Was it primarily tax rate assumptions in the second half of the year? And then just to further add to that, are you incorporating further volatility benefits, FX volatility benefits in your outlook and guidance? Because it clearly helped your cross-border revenue growth this quarter. Thanks, guys.

Darrin, just a couple of things. I think the two things you should take away from what we said was there's a certain amount of moving around going on between the third quarter and the fourth quarter. We said that the revenue growth in the third quarter will be the low point of the year in terms of growth and then it will pick up in the fourth quarter, approaching double digits. So that's one thing. The second is expense growth will step up a bit in the third quarter. Still in the mid-single digits level for the full year, but step up in the third quarter as some expense is shifting between the first half and the second half in marketing and technology. And then if you look at our personnel expenses, you should be looking more at what the first quarter level was and a little bit of growth with some of the initiatives we have underway. And the last piece that shifts things, mostly between the third and the fourth quarter, was the tax rate. The main takeaway from all this is, as we said, $0.06 to $0.08 shift out of the third quarter. For the full year, all we're saying is we still feel good about the range we provided, but we're at the lower end of the range. Really in line with where the street is right now. Your other component of the question was currency volatility. We did tell you that it was at five-year highs in the second quarter. So in terms of what we're expecting going forward, as you know, we benefit when there's volatility because FX spreads widen. It does offset a little bit the translation impact of currencies. We're not assuming they stay at five-year highs. We're assuming that there's some amount of regression to the mean, but we're not assuming they go to the kinds of lows we saw last year. So it's anybody's guess really. So we're just assuming that it's not going to stay at this level, but nor is it going to be as calm as it was last year.

Could you talk a little bit about how you will be trying to protect the volume from Costco, together with Citi, from American Express trying to win it back? And maybe just as a corollary, talk a little bit about your thoughts about what's going to happen when existing co-brands come up for renewal and the competitive environment?

Let me take the second one first. Co-brands are in the market certainly all the time. It's been a competitive marketplace. And all the things that I talked about in terms of the advantages that we think we brought to Costco, we think we can provide to almost all co-brand partners out there. In this case, it's certainly helpful to be the incumbent and the leader in the space. We've got deep relationships with the largest co-brand providers, certainly here in the United States and others across the world. And those relationships, where we believe if you treat the partner properly, you prove to them over a period of time you help them grow, there's got to be a reason for them to want to do something else, other than be with you. And so we feel very good about our positioning there. On the Costco front, I think when you take a look at what we bring to the equation, you can assume that Costco, who's got the most to lose in this, has thought an awful lot about what risks they have and what opportunities they have. And the reason for them to want to go and take the risk of moving the portfolio is because they think there's more upside doing business with us and Citi in this case. And when we think about and they think about the brand preference that their customers have, as I said in my remarks, the things that specifically the affluent and millennials think about our brand versus the competing brands out there, we're very confident that we'll be able to do a better job for Costco than the incumbent. And that will start day one, as we work extremely closely with Citi and Costco, and that work has begun already.

So can you just confirm whether or not some of your planned pricing actions for April got implemented as expected? And then can you also just clarify related to Costco, do the incentives there hit in FY '15 or in FY '16, when the contract actually begins?

So Costco will be 2016.

And the pricing is in. Just to clarify, the pricing there were two changes, both of which happened in April. The first was U.S. acquirer service fees on all credit products, and the second was U.S. acquirer international service assessments. They went in roughly around the same time, but the impacts are somewhat different. One of them hits a little earlier in terms of impacts on our financials; the other a little later. So we get the full benefit of the pricing in the fourth quarter. We get a little less of a benefit in the third quarter. It's really a small difference.

I guess I have a follow-up question to the Costco. Charlie, you mentioned it's been competitive in co-brand, but is it from an economic standpoint incrementally more competitive and does that then play out further as you renew some of the other co-brands down the line? I guess secondly, how confident are you that Citi will be able to secure the portfolio from American Express? Thanks.

So when you say, is it economically more competitive? It's getting progressively more competitive, meaning are the economics materially different than they were before? First, let's talk Costco for a second, then we'll talk more broadly about co-brands. I tried to make this point clearly. Let me just make sure that I'm even clearer on it. We view Costco as something extremely unique. And so this is an industry where it's amazing, the gossip. And I don't know whether it's the consultants or what it is, but everyone likes to go around and talk about everything that's happening in terms of pricing and who did what to whom on this. What I would tell you is what we and my guess is issuers were willing to do for Costco is very specific to a unique opportunity to gain the kind of credit acceptance that we've talked about and the kind of co-brand that we've talked about for a partner now that didn't accept our products in the past of this size. We view it as a unique opportunity to capture that volume and then to use the ability to have that acceptance to grow our products elsewhere, regardless of whether they're co-brand or not co-brand, but obviously the co-brand here will bring with it extraordinary benefits. So Costco to us stands on its own in terms of the way we think economically about what we should be willing to do. In terms of whether the co-brand space is getting more competitive economically, I'm not sure. It's very, very competitive, as is the issuing business. And I think when people lose relationships like this, they need to figure out where they're going to look, and so we assume that they'll continue to be competitive. As we think about our future and we think about our ability to continue to deliver the kind of growth that I think you are all expecting from us, we factor that into our assumptions along the way.

Okay. And just the Citi portfolio? AMEX's sales to Citi of the existing portfolio.

Everything that we hear suggests confidence, but we're not a party to it.

Apologies for another Costco question, but was wondering if you could speak to whether any of your issuing bank partners have expressed any sort of concern about the interchange rate at which the Costco volume will be coming over? Just in the sense that it could be difficult for them to offer rewards on the Costco spend. Just curious if you think that could be an issue?

Well, I guess I would start with, there were more issuers than Citi who wanted to win the co-brand. And so whoever certainly was involved in the process understands the competitive dynamic and what would exist. And again, I think from our perspective, the conversation is exactly what I've said here. It's a unique and strategic opportunity to get access to an extraordinary amount of volume that we and our clients weren't going to have access to. And if you think about if we didn't win, the kind of conversation that we were going to have and the kind of conversation we would have to have with our issuers and their clients about not being able to participate in the opening of one of potentially the biggest retailers in the world, is not a conversation that we would have relished. So we feel very good about what we've done here. When we make decisions that affect our clients, we take them extraordinarily seriously and understand that they will look at those decisions in the context with everything else that we do for them, and we feel good about where we've come out and are confident that it's a benefit for them.

Question on Brazil, the Itau loss, from what we understand that will be fairly material as a percentage of that business. And with ELO creeping into the market as well, are you concerned at all about Visa's historic market share in Brazil shrinking significantly? And following up on your comment on a Mexican win, do you have any greater visibility on when that market will open for Visa processing? Thanks.

Let me start with the first question, and then, Jack, please remind me about the second one. In Brazil, losses are losses. I want to clarify that these types of decisions are not usually made without discussions with various stakeholders. We certainly participated in multiple conversations. Ultimately, decisions are made based on what stakeholders are willing to do and at what price. When a major issuer indicates they will redirect volume away from us, it becomes challenging to recover that volume through other means. We made a decision about how aggressive we would be concerning pricing. As I mentioned earlier, it is crucial for us to not only win volume and incremental revenue but to do so in a way that is strategic for us and for the long-term health of the payments industry. ELO is a reality; it has distinct capabilities and primarily targets different consumer segments than those we typically focus on. I feel confident about our relationships with the other major issuers in Brazil and believe we have the potential to continue gaining market share from them, although that won’t fully offset the losses from Itau.

Mexico processing.

Yes, Mexico. There is no timetable. We're actively working on some things there, where we think that we can prove to the issuers that by us processing, it actually becomes a benefit for them and there's nothing imminent there, but it will evolve over time.

My question is about the increase in expense growth occurring alongside your rising incentive fees. It seems to suggest that you anticipate something ahead, perhaps in the second half of this year or early next year. Could you provide more details on this? Why did you decide to make both moves at the same time? Additionally, why did the incentive fee slip happen? What caused the delay in the client's conversion, and what were the discussions like during that period?

Let me address the first question. The two topics are unrelated. There’s nothing on the horizon that we can identify. As mentioned, regarding incentives, I’ve been here for two and a half years, and it seems we discuss this every quarter. We do our best to provide clarity, which we certainly need for our own planning regarding quarterly incentives. However, we don’t have much control over it. It’s challenging to predict when negotiations will conclude or when contracts will be finalized, as these factors affect the incentive levels. As discussed before, we focus more on the full year, which gives us greater confidence compared to looking at it quarterly. While we would prefer to have things close more quickly, delays can occur in the normal course of business. On the marketing front, we're planning specific activities for the second half of the year, particularly related to the shift from summer to preschool and then towards the holiday season, which will influence our marketing spend timing.

I want to emphasize that we are maintaining our expectations for full year expense growth. There is no change, and we did not take any actions that would alter our plans for the third or fourth quarter. As Charlie mentioned, we have some marketing initiatives, especially related to Visa Checkout, that we believe will gain significant traction during the back-to-school season. This is funding that has been coordinated with merchants, making it the ideal time to allocate. We also have some regional marketing programs scheduled for the second half of the year. Additionally, there are technology initiatives that are gaining momentum, even though they started slower than anticipated. However, this was all expected. Regarding personnel expenses, there is a reasonable predictability, although it can fluctuate from quarter to quarter with some minor variances. If you consider our first quarter run rate and factor in anticipated growth from our initiatives, the bottom line is that we are not taking specific actions to increase expense growth, and our expectations for the full year remain unchanged. As we mentioned, if circumstances change, we are prepared to reassess our spending needs.

I wanted to ask about commercial. Charlie, any perspective about how you are doing on the commercial side? One of your competitors had called out some weakness on the commercial side, at least in North America in the calendar first quarter. Do you think that you're taking share, and how are you competing in the commercial market?

Setting aside the share question, commercial payments growth for us in the second quarter was quite healthy at 10%; it's performing well. There is a lot of interest from non-financial institutions and participants looking to provide value-added services. We are seeing many non-traditional players entering this space, such as technology providers and healthcare entities.

The only thing we talk about in the commercial space is one of the great opportunities. The two significant opportunities that the industry has, aside from the business as we know it, are P2P and commercial. There are substantial sums of money in the commercial sector where we compete. We've worked really hard on our products and we're performing well. I'm not sure about our market share as it's difficult to gauge. However, I believe the 10% growth has the potential to be much larger. We are actively exploring this, and hopefully in the upcoming quarters, we'll provide more details on our efforts. It's an important business for us today. The question is whether we can make a significant leap rather than just incremental progress.

Charlie, relative to the China opportunity, I realize that there's a lot of unwritten rules at this point and there's a lot of things still in the air, but can you maybe talk about your operational readiness from a network perspective to enter China and what you need to get to a level of full functionality, there and kind of the game plan on that front?

Yes. I would emphasize that the specifics will be crucial in terms of how the rules are structured. It has been our expectation that what has been communicated aligns with our plans, and we have been preparing for it. There are various timelines outlined by the state council regarding when everything needs to be ready, and we have teams across the company dedicated to ensuring we can enter as soon as possible.

Could you clarify the growth in international transaction revenue and specify how much of this change is linked to the increase in foreign exchange volatility? The gap could widen even more next quarter, so do you have a currency-adjusted growth rate that could help us understand this better? Also, are there mix differences due to changes in cross-border spending?

Yes, I think there are three factors influencing the international transactions line. Firstly, all these transactions occur in various currencies, leading to a negative foreign exchange translation effect. Secondly, in strong currency markets, outbound commerce is improving, but the purchasing power is higher, meaning we don't fully benefit from the volume growth despite increasing transactions. In weak currency markets, we see a decline in outbound commerce along with a weaker currency. Overall, these factors have a negative net effect. On the positive side, we have gained from volatility, although we haven't specified the extent of these benefits publicly. The negative currency translation impact has been somewhat offset by the widening of the spread, and the two factors are not correlated. Currency movements can occur without corresponding shifts in volatility. We will keep you updated. As mentioned earlier, we do not expect volatility to remain at these elevated levels and are anticipating a moderation in the second half of the year. We also do not expect currency markets to return to the calmness experienced around this time last year.

It depends on what else it affects.

Exactly; there are other things. As I said, three things going on in that line. Higher volatilities will help us on that particular dimension. On the other hand, a move in currencies which affects the translation line and so on. There are many things going on in that line.

Just wanted to hopefully get some way to quantify the Citi and Itau losses and is it offset by some of the gains that you've had? Just trying to think about future modeling purposes. And then secondly, on tokenization, my understanding is we'll probably suspend charging for any fees even beyond FY '16? Just hoping to get an update on that.

So we don't talk specifically about the volumes of Citi and Itau. As I said in my remarks, not clear to us what the migration looks like. So it is hard to be very, very specific other than things like Costco and the other positive developments that we have make us feel very good about how those things all fit together. Tokenization, what's the question?

Are we going to continue to charge in 2016? Will we charge.

We have the rate card available. We waived it through 2016 and are carefully considering the best approach for understanding tokenization in the long term. However, it's important to note that it should not be expected to serve as a monetary driver for us.

Just wanted to ask on Europe, with legislation getting closer to being finalized. Does that change the probability of the put in any way? What's the latest there, Charlie? And then just on Costco, real quick. Just the exclusive merchant acceptance, how critical is that for Costco, I guess, Visa? I know that's driving a lot of the uniqueness to it. Thanks.

On the first one, listen, I don't think it changes the probabilities at all from our perspective, because we're not inside their boardrooms to understand exactly what they're saying and what their drivers are. It's a consistent question that people ask us, in terms of what the probabilities are, and we really don't know because they need the 80% vote. Until they get the 80%, then it's not going to happen. So really don't know, really don't understand what the dynamics are and again, what really matters is how the blocking group of people feel about it. So those that don't want to vote for it. That's something that we're not privy to because we're not in those boardroom discussions. But again, to circle back, we work really closely with Visa Europe. Example, a whole group of people here today, Nicola, the CEO, is here today, as we're working through all the things that we're doing together to do a great job for our global clients and enable them to be as competitive as they can be versus the competition in Europe. And then the credit acceptance versus MasterCard and American Express is hugely relevant. That's why when you talk about the uniqueness of it, it just doesn't exist for a merchant this size that never accepted our product and now all of a sudden doesn't accept our other major competitors here in the United States. As we think about what that means for all of our clients and for our cardholders, that's certainly factored into our thinking, and I'm sure the issuer is thinking in terms of the importance and what it could mean certainly for our brand.

And with that, we would like to thank everybody for joining us today. If anybody has any other questions, feel free to give Investor Relations a call.

Thank you.