Visa Inc - Class A (V) — Q4 2015 Earnings Call Transcript

Thanks, Dexter. Good early morning, everyone, and welcome to Visa Inc.'s fourth quarter and full fiscal year 2015 earnings conference call and Visa Europe acquisition discussion. With us today from London are Charlie Scharf, Visa's Chief Executive Officer; and Nicolas Huss, Visa Europe's Chief Executive Officer; while here in California we have Vasant Prabhu, Visa Inc.'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 investor.visa.com. A replay of the webcast will be archived on our site for the next 30 days. PowerPoint decks containing the financial and statistical highlights of today's earnings commentary and an overview of the Visa Europe transaction were posted to our website prior to this call. Let me also remind you that these presentations 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 Form 10-K and 10-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 Reg G of the SEC are available in the financial and statistical summary accompanying today's press release. And with that, I'll now turn the call over to Charlie.

Thanks a lot, Jack, and greetings from London. It's great to have Nicolas here as well, you'll be hearing from him in just a little bit. We certainly appreciate the early hours, especially for those on the West Coast this morning. Given our announcement regarding Europe, we thought it was important to do the call as early as possible given the desire to communicate with our clients, employees, and partners here in Europe. We're quite excited about our announcement and have a full agenda, so we'll try and move through our prepared material quickly, leaving plenty of time for Q&A at the end. We have six topics to talk about this morning. First, we reported a solid fourth quarter and strong year-end to fiscal 2015. Second, we'll view our outlook for the fiscal 2016 year on a standalone basis. Third, I have some brief comments on a previously announced dividend increase. And fourth, we announced the acquisition of Visa Europe. As you know, we have been clear that this was a transaction that we thought made tremendous sense for both our company but also for Visa Europe and its members, so we're thrilled to be able to move forward as one company. And with the Visa Europe acquisition, we announced two other items regarding our capital structure. First, our board has approved an increase to buyback authorization to bring the total available to $7.8 billion. And second, we announced that we will implement a new capital structure for the company. We intend to raise $15 billion to $16 billion of debt in conjunction with the Visa Europe announcement, but you'll see that we view this as a trigger to implement a more efficient long-term capital structure for the company. We'll first talk about our earnings results and outlook for 2016, then we'll discuss the Visa Europe acquisition and our capital actions, leaving time for questions. And with that, I'll turn it back to Vasant.

Thank you, Charlie. As Charlie indicated, we have a lot to talk about on this call. I will only comment briefly on our fourth quarter and 2015 results and spend most of my time giving you as comprehensive a picture as we can of our outlook for fiscal 2016. We're pleased to report another strong quarter and full fiscal year results with solid revenue and earnings growth. Our high growth in a tepid global environment demonstrates yet again the fundamental resilience of our business model. Results were generally in line with our expectations going into the quarter with a few call-outs. First, our core metrics remained robust around the globe. The underlying secular conversion from cash and checks to electronic forms of payment continues at a fast clip as demonstrated by high domestic payment volume growth rates. This is obscured by the significant drag caused by the strengthening of the dollar against most major currencies over the course of the year. In the fourth quarter, this impact worsened as the dollar strengthened further against key currencies. This hurts us not only in currency translation terms but also in slowing cross-border volume growth. Second, as expected, client incentive levels in the quarter came in at 18.4%, well above the full year run rate of 17.1%. This sets us up well for fiscal 2016 payments volume growth. Several key renewals as well as a couple of significant wins will drive the incentive rate higher in 2016. I'll talk more about this when I discuss our outlook for 2016. Third, expense growth was somewhat higher than we had anticipated due to a legal settlement in Australia and Visa Europe transaction costs. This cost us about $0.01 of EPS in the quarter.

Thanks very much, Vasant. I'll try and keep my comments brief so we can move on to Europe. First of all, we're very happy with our performance both in the quarter and 2015. We continued to deliver strong results in a global economic environment which still has more headwinds than tailwinds for us. Adjusted earnings per share growth of 14% in the quarter and 16% for the full year include the continuing negative effects of a series of items, including the translation impact of a strong U.S. dollar, reduced cross-border volume driven by that strong dollar, and continuing drag from lower oil prices. Of course, there are positive offsets including strong payment volume, healthy processed transaction growth, and high currency volatility. Our strong results in the face of these pluses and minuses speak to the resilience of our business model. Regarding what we see across the world, I'll keep it simple and just say that the economic environment has shown little change over the last quarter, with some slight deterioration especially outside of the United States. Having said that, domestic activity is still fairly strong. And while we didn't get much help from an accelerating economic environment, our business still showed continued strong growth. Our longer-term bullish growth outlook is intact and, most importantly, the underlying fundamentals of our business continue to deliver, and these will continue to drive continued growth.

Thank you, Charlie. A few comments from a European perspective. The first one is that the time is right. Payments are increasingly global with more and more power from competition, scale and investment capacity are also increasingly important. Adding to this dynamic is regulation which you're all well aware is a key focus for our company and industry. We're now seeing the worlds of payment becoming more global from consumers traveling and shopping across borders through retailers and, of course, many of our most important bank issuers and acquirers being more regional or global players. We're also seeing the tech giants and mobile companies launching services in this payment space here in Europe and the relationship between issuers, acquirers, and merchants is changing.

On slide 10, we outline the financial impact of the acquisition on Visa. Assuming the transaction closes April 1 next year, 2016 will be a stub year with two quarters of Visa Europe in our numbers. We expect low single digit percentage point EPS dilution in fiscal year 2016 before onetime integration costs. There are three reasons for this. First, we will be issuing preferred shares, which at the time of issue will on an as-converted basis amount to approximately 80 million shares of our class A shares, or 3.3% of shares outstanding. This creates almost $0.025 of EPS dilution each quarter until we buy back an equivalent amount of class A shares. We plan to do this through open market purchases over six quarters post-closing. In other words, we expect to have bought back an amount of our class A shares equal to the preferred shares issued on an as-converted basis in addition to our normal buybacks by the end of 2017.