Visa Inc - Class A (V) — Q1 2018 Earnings Call Transcript

Thanks, Athena. Good morning, everyone, and welcome to Visa Inc.'s fiscal first quarter 2018 earnings conference call. Joining us today are Al Kelly, 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 be archived on our site for 90 days. Our slide deck containing the financial and statistical highlights of today's call have been posted to our IR website. Let me also remind you that this presentation may include forward-looking statements. These statements are not guarantees of future performance, and our actual results could materially differ as the result of a variety of factors. Additional information concerning those factors is available on our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of Visa's 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, let me turn the call over to Al.

Joon, thank you, and good afternoon to everybody and thanks for joining us today. As always, Vasant and I are going to make some relatively brief comments on our results and then we'll open up to whatever questions you have on your minds. We're off to a solid start in our fiscal year and I'm pleased with our company's performance this past quarter. Our performance was driven by healthy economies around the world, growth and acceptance in the continued rise in E&M commerce, especially in developed countries. U.S. tax reforms certainly have and will continue to impact our business in positive ways. We have made a few initial decisions about our investments as a direct result of the lower corporate tax rate and we continue to talk about and analyze additional incremental spending options to support our talent, our business, and the communities in which we work; all with the goal of fulfilling our corporate mission of helping individuals, businesses, and economies thrive. Looking at our business drivers, payments volume grew 10% on a constant dollar basis as we saw healthy growth around the globe. The Central Europe, Middle East region led the way with 19% growth driven by the Gulf countries of the Middle East. Latin America was up 14% with particular strength coming from Argentina, Canada grew 11%, up 4% sequentially resulting from high gas prices and increased spending in retail and telecom. In the United States, payments volume grew 10% driven by increases in consumer credit and holiday spending which I'll spend a few minutes on later. Europe maintained a solid growth rate of 9% with strength coming from Turkey and Southeast Europe, and Asia Pacific grew 8% as we saw improved volumes from Australia and Taiwan. And although we're partially lapping that demand utilization in India, total processed transactions continue to grow at a double-digit rate of 12%. Turning to the financial metrics, net revenue grew 9% driven in part by strong holiday season and accelerating ecommerce growth. We saw good momentum in our cross-border business with revenue growth of 12% in constant dollars and volume growth of 9%. Despite the lapping of Brexit and a stronger currency dynamic, the European cross-border business performed better than we expected. In the United States, we saw a sequential increase in cross-border growth resulting from increased inbound activity as the dollar remained relatively weak throughout the quarter and this weak dollar trend has continued into the first few weeks of this quarter. Client incentives were 21.4% of gross revenue, roughly in line with the prior quarter. As we discussed in the last call, we're making significant investments in our business initiatives and our strategic priorities which have led to increased expense levels in the quarter. And with the new U.S. tax reform in place, a portion of the benefit is reflected in our fiscal first quarter results; this will lead to adjusted EPS growth of 26% which includes the benefits from tax reform. Vasant will go into greater detail in the impact of tax reform and provide more background on the numbers. Now let me provide some more detail on the subject of U.S. holiday spending. The 2017 holiday season was stronger than the prior year as both consumer credit and debit grew at higher levels. Growth was driven by better performance in retail and entertainment which includes movies, gaming, fitness, and sporting goods. Additionally, higher gas prices contributed to some of the growth. Both offline and online volume had higher growth rates than the prior year, with online growing approximately four times faster than offline. During the holiday season, ecommerce continued to gain share jumping to over 30% of consumer U.S. holiday volume. Ecommerce growth was strong across a number of categories but was more significantly strengthened by retail performance. Interestingly, the retail spending was stronger earlier in the holiday season; the couple of weeks prior to Thanksgiving and Thanksgiving week looked quite a bit stronger than the growth we saw in the prior year. In other markets, growth was better than last year in Brazil, Australia, and Canada, while it was essentially flat in the United Kingdom. Turning to our business activity, we had a strong quarter for announcements; we are very pleased to expand our global leadership position in the co-brand arena with the launches of the Starbucks and Uber programs. Additionally, we renewed our strong and long-term partnership with Marriott. We also advanced our digital products, most notably; we announced the partnership with Facebook in October as they joined our Visa digital enablement program to use our token service to accelerate payment services on the digital properties. With this partnership, Visa clients who use Facebook Messenger will now be tokenized and therefore the account numbers are not exposed. This partnership furthers our efforts to encrypt and devalue payment information in the payments ecosystem. Additionally, this partnership advances our effort to enable and develop new digital commerce experiences as consumers spend more time in messaging environments like Facebook. In November, we launched Visa Direct in Europe which provides real-time push payment solutions for person-to-person, business-to-business, and business-to-consumer applications leveraging our global network. The advantage of Visa Direct is that it utilizes our existing network connections and incorporates critical controls like transaction limits and sanctions screening. Because of this tactical and operational leverage, the implementation time and cost for Visa Direct is lower than many alternative options. As we mentioned before, we believe that Visa Direct is a key product to enable fast payments across Europe. More recently, we initiated a small pilot for new biometric cards for contactless payments which serves as an alternative to pin or signature authentication. This is the first commercial pilot to test an on-card biometric for contactless payments. We're committed to ensuring secure, fast, and convenient payments at the point of sale. Core to delivering this commitment is the continuous evolution of the marketplace in terms of dynamic authentication methods such as EMV chip, and we are investing in emerging capabilities that leverage biometrics. As stated previously, we want to make strategic investments that will drive long-term growth for our business. With that objective, we're investing in contactless transactions and authentication methods as this is the natural evolution following the adoption of the EMV infrastructure. Consumer research and internal data has shown that there is strong interest in contactless payments as it creates a faster and more convenient experience at the point of sale. We've seen significant adoption in markets like Australia, the UK, and Canada, and we hope to increase adoption in other markets. We're particularly excited about the U.S. market given the buildout of the EMV infrastructure that will support the transition towards contactless transactions. Echoing my earlier remarks, the recent tax reform will create benefits and opportunities for our business. We're exploring a range of options, prioritizing long-term sustainable investments versus one-time actions. One area of focus is on our employees and talent development, which is foundational to our business. As the first step, we enhanced our benefits for U.S.-based employees and increased our company contribution to the U.S. 401(k) program, acknowledging the importance of retirement planning. This allows U.S. employees to enjoy sustained benefits that correspond with their ongoing contributions to our business, clients, partners, and shareholders. Additionally, we're exploring global benefits and investments for our business around the world. Throughout the year, we will continue to make strategic investments in our people, digital products, technology operations, and merchant solutions as we position the company for long-term sustainable growth. Furthermore, in light of tax reform, the board increased the quarterly cash dividend to $0.21 per share, ultimately using funds to grow our business organically, which remains our top objective for capital allocation at Visa. Last year, we evolved our global social impact strategy and announced the formation of the Visa Foundation. Funds available through the foundation will help drive real progress across the world with a primary focus on helping micro and small enterprises thrive through access, growth, and resilience. I'm pleased to say that the foundation made an inaugural grant this past quarter to Women's World Banking; this grant will help support millions of women-led small and micro enterprises which are underserved financially around the world. Let me spend a few minutes on the international front. In Europe, we are making good progress on our ongoing integration efforts and identifying growth areas. We're working closely with our clients and have now resolved over 80% of the contracts moving to commercial incentives. In terms of tactical integration, we expect Visa net migration to begin this quarter and continue throughout 2018. We have planned carefully with our clients to ensure the highest standards of preparation and testing in the months leading up to the migration, with regular updates from the business leaders to ensure a smooth and stable migration. Once the migration is completed, we'll be able to deliver new products, services, and capabilities to the region, bringing the best of our global capabilities to our European clients. As I mentioned in the last call, I spent significant time with the European leadership team in planning and strategy meetings this past quarter. Having spent three of the last six weeks in Europe, it reinforced my belief that there are still meaningful growth opportunities in the region. Regarding India, we hold a market-leading position in debit and credit with significant share in both categories. After partially lapping the impact of demonetization, we saw domestic payments volume grow over 20% and processed transactions grow 12% in the past quarter. We continue to engage with regulators, government, and our clients to ensure the sustainability of the economics and we are investing and partnering with issuers, acquirers, and the government to grow electronic payments. We have crossed 3 million acceptance points and are working to scale up contactless payments and QR usage at these points. As we look at our capital allocation plans, our top priority, as I indicated earlier, continues to be investing for the future growth of our business and delivering shareholder value. Additionally, we remain committed to returning capital to our shareholders. In fiscal Q1, we returned $2.2 billion of capital, consisting of $1.7 billion of share repurchases and nearly $460 million in dividends. As I stated on our last call, we expect to return over $9 billion of capital to shareholders this fiscal year. I already talked about the dividend increase to $0.21 per share; the Board on Tuesday also authorized an additional $7.5 billion share repurchase program, resulting in a current authorization level of $9.1 billion. In closing, we're off to a solid start to our fiscal year. I'm pleased with our consistent business execution and excited about the many growth prospects we have.

Thank you, Al. We had a solid start to fiscal year '18 with GAAP EPS growth of 25% and adjusted EPS growth of 26%. Implementation of the Tax Cuts and Jobs Act added approximately 9 percentage points to this adjusted growth rate, which I will discuss in more detail in a few minutes. Excluding the impact of U.S. tax reform, EPS growth was 17%. Net revenue growth was 9%. Growth of key business drivers—payments volume, cross-border volume, and processed transactions—remained strong and stable across the globe. As a reminder, several significant factors have a meaningful impact on year-over-year revenue growth comparisons this quarter. First, and by far the most significant factor, rebates to Visa Europe members ended in the first quarter of fiscal year '17, leading to the first quarter of apples-to-apples revenue growth comparisons for Europe. This affects reported service fees, data processing, and international revenue. We are also at apples-to-apples growth comparisons for Costco and USAA credit. The India demonetization impact started in November 2016, so we partially lapped that in Q1, and finally, fiscal year '18 price increases, which are smaller in scope than the fiscal year '17 increases, will go into effect in the second half of the year. A few other items of note: we bought back 15.5 million shares of Class A common stock at an average price of $110.67, totaling $1.72 billion this quarter. Our board has authorized a new $7.5 billion share repurchase program; including this additional authorization, we now have $9.1 billion available for share repurchases. In addition, our board has increased the quarterly dividend to $0.21 per share, reflecting an almost 8% increase commensurate with the higher earnings potential of the company post-tax reform. This is in addition to the 18% increase in the dividend last quarter. Finally, in October 2017, we used the proceeds from our September debt offering to redeem $1.75 billion of senior notes scheduled to mature in December 2017. A quick review of the key business drivers in the fiscal first quarter: payments volume on a constant dollar basis grew 10%, even with the growth from Costco and USAA credit on an apples-to-apples basis, U.S. growth accelerated one point, increasing from 9% in the fourth quarter to 10% in the first quarter. This reflects solid underlying growth from a strong holiday season, particularly in the credit business. Credit was up 11%, debit was up 8%; adjusted for conversions, underlying growth rates for both credit and debit stepped up. As Al described, we saw higher growth in consumer payments volume this holiday season driven by acceleration in retail and entertainment spending, especially online, as well as rising gas prices. International payments volume growth in constant dollars was stable at 10%. The growth rate stepped up in Canada, Australia, across Latin America, and the Middle East. The rate of decline in Chinese dual-branded card volumes slowed, which was offset to some extent by the impact of lapping India demonetization. Cross-border volume on a constant dollar basis grew 9%; this is one point lower than the fourth quarter of fiscal '17, primarily due to the drag from an ecommerce payments platform shifting acquiring of UK cardholder volume to the UK from another EU location. The total impact of this shift is greater than 3 point reduction in our reported cross-border constant dollar growth rate. This shift has only a minor effect on revenue since it is an intra-EU move made by the platform to optimize its European business. U.S. outbound spending slowed moderately as the dollar weakened. As we expected, growth of inbound commerce into the U.S. picked up as the dollar weakened. Inbound commerce into Europe remained robust, but growth slowed in part due to the weakening of both, the pound and euro after the Brexit vote. Growth in outbound spending from the Caribbean has returned to typical levels after the hurricanes; however, inbound spending remains weak as travelers choose other destinations while many islands recover. Process transaction growth of 12% is down one percentage point versus last quarter, largely driven by partially lapping India demonetization. Through January 28, constant dollar U.S. payments volumes growth was 9%, U.S. credit growing 10%, and debit 8%. Cross-border volume on a constant dollar basis was up 11%, and processed transactions grew 11%. A brief review of fiscal first quarter financial results: net revenue grew 9%. As I mentioned earlier, net revenue growth deceleration versus the prior quarter is driven by several significant factors, particularly the removal of European rebates. Exchange rate shifts helped Q1 net revenue growth by around one point. Incentives as a percentage of gross revenues at 21.4% were lower than our outlook this quarter, but up 2.5 percentage points from last year as the Europe contract conversion and renewals in the second half of fiscal year '17 impacted us in fiscal year '18. We expect to see an uptick in incentives as the percentage of gross revenues in the remaining quarters based on the timing of renewals. We're on-track to complete the conversion of contracts in Europe from rebates to incentives by the end of the second quarter. Operating expenses grew 13%, primarily driven by personnel costs. As a reminder, personnel expenses were low in the first quarter of fiscal year '17 and ramped up throughout the year. We have some expenses that are loaded in the first half, including the Winter Olympics in the second quarter as well as Europe integration costs as we complete the technology platform harmonization and begin client migrations. Our spending on investment initiatives is higher in the first half of fiscal year '18 than in the first half of last year since we ramped up many of these investments during the second half of fiscal year '17. In addition, the first quarter of fiscal year '18 operating expenses were higher than we expected due to timing shifts and some non-recurring items. Non-operating expenses were lower than expected due to higher interest income on our cash balances, as well as a gain on the sale of an investment. Our tax rate for the quarter on a GAAP basis was 22.1%, which included two special items related to the implementation of U.S. tax reform. First, we had a $1.13 billion one-time non-cash tax benefit from re-measuring our net deferred tax liabilities based on the new corporate tax rate. Second, we had an offsetting $1.15 billion charge related to the transition tax. In moving to the new territorial system, the tax code requires a transition tax on previously untaxed deferred foreign income; this tax, payable over 8 years, is 15.5% on amounts held in cash and cash equivalents and 8% on the remaining non-cash amounts. These two items are estimated based on the information available to us at this time and may be adjusted over the year as we analyze additional information and guidance. Adjusted to exclude these two items, our effective tax rate was 21.7%. The GAAP and adjusted tax rates were each 6 percentage points lower due to the lower corporate tax rate. Implementation of the tax act added $0.07 to our GAAP EPS and $0.08 to our adjusted EPS in the first quarter, translating to 9 percentage points of additional EPS growth. Exchange rate shifts added an additional 1 point to reported EPS growth. With that, I'll move to our updated outlook.

We are revising our fiscal year '18 outlook for the impact of U.S. tax reform. Let me briefly start with what is not changing. Annual net revenue growth is still expected to be in the high single-digits on a nominal dollar basis. This includes one half to one percentage point of positive foreign currency impact. The impact of the U.S. dollar strengthening relative to the Japanese Yen, Brazilian Real, and Mexican Peso is offset by the impact of the U.S. dollar weakening relative to the Euro and the Pound. The quarterly cadence of revenue growth remains unchanged versus our prior expectations. Our outlook for fiscal second quarter net revenue growth remains a couple of points below the full year rate. We also reiterated our outlook for client incentives as a percentage of gross revenues in the 21.5% to 22.5% range, and an annual operating margin in the high 60s. Now to what is changing; our GAAP and effective tax rate is expected to be 6 points lower, or approximately 23% for fiscal year '18. This is driven by the reduction of the U.S. federal tax rate on our U.S. taxable income from 35% to 21%. This benefit from the reduction in the federal tax rate is partially offset by deductions that are no longer available and a lower benefit for state taxes paid. The 6 percentage point reduction of our fiscal year '18 tax rate represents three quarters of the lower U.S. federal tax rate starting January 1, 2018, through the end of our fiscal year in September. The annualized reduction in our tax rate is 8 percentage points. As such, we will see another 2 point reduction in our overall tax rate in fiscal year '19. The tax reduction could be partially offset by new provisions of the Tax Cuts and Jobs Act that take effect in 2019, such as the repeal of the Section 199 deduction, the 13.1% floor on global intangible low taxed income, and the base erosion and anti-abuse tax. We will assess the impacts of these provisions over the next few months and update you as we have better estimates. At this point, we expect an additional 1 to 2 percentage point reduction in our fiscal year '19 tax rate, over and above the 6 percentage point benefit we realized in fiscal year '18 as a result of U.S. tax reform. We plan to reinvest approximately 1 percentage point of pretax earnings in our business and our people. Al mentioned the change we made to our 401(k) matching contributions to U.S. employees. We are evaluating additional investments with a focus on actions that will drive long-term sustainable revenue growth. We anticipate that this additional investment will increase our operating expense growth in fiscal year '18 by approximately 2 percentage points to the high end of mid-single digits, adjusted for special items in fiscal year '17. We are still expecting operating expense growth to be higher in the first half and lower during the second half for all the reasons we discussed previously. Double-digit growth in operating expenses is expected to continue into the second fiscal quarter. The impact of these changes on our EPS outlook for fiscal year '18 is approximately 9 to 10 points. We now expect EPS growth to be at the high end of the mid-20s range on an adjusted non-GAAP nominal dollar basis. This still includes 1 to 1.5 points of positive foreign currency translation impact. We project adjusted free cash flow to be approximately $10 billion, up $900 million from what we estimated last quarter; this is largely driven by U.S. tax reform. Our quarterly dividend at $0.21 is 27% higher than our fiscal year '17 quarterly dividend. We have over $9 billion available for stock buybacks, and we continue to anticipate buying back over $7 billion of Visa stock during fiscal year '18. We ended the quarter with global cash-on-hand, including marketable securities, of $14.1 billion, of which $6.3 billion is currently offshore. During the quarter, we returned $1.8 billion of non-U.S. cash back to the U.S. We're working on additional actions to further reduce our offshore cash in fiscal year 2018. As a reminder, we will adopt the new revenue recognition standard on October 1, 2018, the beginning of our fiscal 2019. If applied to the first quarter of fiscal year '18 reported results, the impact of the new standard would have been small. The impact to fiscal year '19 is partially dependent on the terms of new incentive deals executed and will therefore vary. We will continue to assess the impact of the new standard throughout fiscal year '18 and provide an update if we believe that the application of the new standard to new deals in aggregate could have a more significant impact on reported results. As a reminder, the new accounting standard has no impact on cash flows or the economic value of our business. In summary, fiscal year 2018 is off to a strong start, driven by a healthy global economic environment. The shift away from cash to digital forms of payments remains a powerful secular trend. Europe's performance and integration plans remain on track. Our outlook for operating performance remains unchanged; tax reform in the U.S. will add 9 to 10 points to EPS growth after the additional investments we're planning. We remain committed to our capital allocation strategies; our Board has raised the quarterly dividend again this quarter to reflect the higher earnings potential of Visa post-tax reform, and we have over $9 billion in authorization to fund our stock buyback plans. With that, I will turn this back to Joon.

And with that, Athena, we are ready to take questions.

I thought I'd ask about U.S. debit; it looks like growth has settled in nicely around 8% the last two quarters. Is this a good clean rate to assume for U.S. debit as we look ahead? And as for your decision to no longer require a signature at checkout in the U.S.; what's the opportunity there, and how does this change the dynamic of pin versus signature? Any thoughts there would be helpful. Thanks.

Regarding your first question, obviously we're not going to forecast ahead, but U.S. debit has performed well, and as I mentioned in my remarks, both debit and credit looked very good during the holiday season. Regarding your second question, the reality is that the vast majority of transactions in the U.S. didn't require a signature anyway—especially in debit—because of the requirements not needing a signature for transactions under $25 or $50. Our decision, which we approached thoughtfully, is slightly different from some competitors as we decided to move to no signature as long as the merchant is EMV enabled. We believe it's important to continue encouraging the adoption of EMV for security reasons. I also think there's still a place for signatures in specific situations, like higher-ticket items, where consumers want validation and merchants prefer to have that verification. Additionally, in situations where consumers are adding to the base amount of a purchase, they may want to provide a signature.

Could you update us on your strategy to expand Visa Europe into some of the higher growth markets where you're less well represented, for example, Nordics, Italy, and Germany?

As I noted in my remarks, I have been over there three of the last six weeks, and we have largely built out our leadership team and significantly advanced our strategy for Europe. You're absolutely correct; if you look at our business in Europe, we have strong positions in the UK and France, and a good position in Spain, but there are many markets where we can grow, including Italy and Germany. We are actively staffing up in a number of markets. One of my objectives is to ultimately have fewer people in our London hub and more out in the markets where the action is. We are integrating our digital products into Europe, including Visa Direct and Visa Token Services, while building our relationships with issuers. Charlotte Hogg, our new European CEO, has dedicated significant time to meeting with our clients throughout Europe. I absolutely believe that Europe, particularly the continent, represents great opportunity, and we are just starting what will be a long journey to strengthen our business there.

Just a quick follow-up; you mentioned the launch of Visa Direct in Europe; could you discuss your broader strategy for PSD2? At Analyst Day, you mentioned keeping your options open for potentially acquiring a payment service provider; I'd be curious about your current thoughts.

As we mentioned previously, PSD2 is a long-term play, and it will take time to see how it plays out. We believe we are well-positioned as it relates to PSD2 entering Europe. The strong customer authentication will create a premium on risk and authorization capabilities. This enables third-party access to accounts, which we strongly advocate for, alongside an outstanding payment experience. We are working closely with our issuer partners to adapt to this evolving regulatory environment. It will be a slow build over time, but we believe we are in a good position.

It appears there is a round of billing in dollar benefits from tax reform that we can expect throughout the year based on the tax rates you're giving us. You addressed some specific items regarding retirement contributions and investments in growth; could you share more specifics on the breakdown of that dollar amount across categories and the sustainability beyond this year? Also, Al, when considering market share, I would love to hear your thoughts on the pipeline of opportunities given some competitors show higher growth profiles. Is it something you've noticed or just timing factors?

On the tax question, we anticipate the full benefit of reducing the U.S. federal tax rate from 35% to 21% annually to be 8 points. This year we get 6 points due to the tax reform taking effect, with 2 points expected next year. This translates to about a $1 billion after-tax benefit from lower cash taxes. We plan to reinvest about one point of that reduction in taxes back into our business through various investments affecting growth and talent. This additional investment will elevate our operating expense growth for fiscal year '18, but our outlook for expenses remains consistent with prior expectations.

We can’t deploy capital organically very quickly, but we have key investment areas aligned with our strategic pillars. We will focus on those areas moving forward, whether it’s in security, expanding access, or facilitating digital transactions. Regarding market share, I believe there are tremendous opportunities for medium- to long-term growth. Our focus is on growing the market, attracting more users into the payment mainstream, and displacing cash and checks. Although we've had a strong quarter, we cannot gauge every performance strictly on a quarter-by-quarter basis, but on sustained long-term growth.

Thanks for taking my question. Regarding market share within Europe across both debit and credit, where do you see opportunities to improve, particularly in individual countries? Long-term, do you anticipate this could come at the expense of local processors or your traditional peers?

I'm hesitant to go into specifics right now about market share and pricing structures as we move through the integration. We foresee that many contracts will move to commercial incentives, which aligns with our growth strategy.

Total process transaction growth was strong this quarter despite the previous year’s impacts from Indian demonetization. What are your thoughts on whether the electronification progress in India is a permanent change in the market, or could cash usage revert over time as media reports suggest varying outcomes?

Using a baseball analogy, we're still in the first inning or maybe the start of the second in India; we've only just begun. Although we've seen substantial growth in acceptance points and volume over the past 14 months, the Indian government strongly supports electronic transactions and desires more digital transparency from a tax perspective. Although we've seen more cash circulating post-demonetization, electronic and digital transactions will continue to rise, and the number of acceptance points will keep increasing.

In terms of metrics, while cash is still prevalent, the number of acceptance points has doubled, and more people are using cards with a higher frequency. We will continue to build acceptance, and the growth rate will be measured once we've fully lapped the effects of demonetization, but we are seeing significant progress.

First, can you talk about cross-border volume and how you're setting expectations, especially given recent deceleration? Additionally, at the Analyst Meeting two quarters back, Amir mentioned potential acceleration in B2B opportunities. What should we track for the emergence of B2B opportunities?

On cross-border, we have seen improvements in January, which we expect to sustain; however, the shift in Europe has impacted reported numbers. Our U.S. acquired business is recovering, and while it was low previously, it’s returning to double-digit growth, which could further enhance our cross-border business. We monitor European currency strength and its effects on travel out from Europe, which could help as well.

Regarding B2B opportunities, it is substantial. We are putting a senior person in charge as well as forming a team to focus on B2B growth. We plan to utilize Visa Direct to meet small and medium-sized merchants’ needs through initiatives like single-use virtual cards across sectors like healthcare and travel. We will aim to provide updates on progress and insights into metrics you can track to evaluate our success.

During the holiday season in the U.S., e-commerce represented about 30% of volume. Can you provide broader e-commerce metrics globally, including how fast it’s growing? Additionally, what’s the issuer response to contactless initiatives in the U.S. as it relates to expenses?

We are not prepared to provide country-specific breakdowns on e-commerce versus card-present growth. In developed countries, trends mirror what I detailed regarding the U.S. In less developed markets, the dynamics differ. Regarding contactless in the U.S., we anticipate that by the end of the year, 50% of terminals will be contactless enabled, and issuers are excited about the customer experience. We don't expect an immediate overhaul of terminals, but as new cards are issued or older ones replaced, NFC-enabled cards will be more prevalent. This journey will take time, and we will reach a significant inflection point as the scale expands.

I wanted to ask about operating margins; they were down about one point year-over-year, and it looks like they might be short of estimates. Is there a trend regarding personnel and G&A costs, and to what extent did you take advantage of the lower tax rate to increase expenses?

Regarding expense growth, we had indicated in our last quarter that it would be higher in the first half. Personnel costs had been unusually low in the first quarter of last year, which accounts for part of the growth. Some expenses are front-loaded, including the Winter Olympics. We also invested deliberately due to tax reform, so our expense outlook is still aligned with previous expectations.

Regarding the technology migration in Visa Europe, while we haven't begun yet, we expect to observe benefits once we complete the migration. However, it's early to determine specific impacts on timing and margins.

Athena, I think we have a bad connection. Can we move to the next question?

First, can you give insights into cross-border volume and how current trends affect your expectations? Additionally, how can we track B2B emerging opportunities?

On cross-border, we began to see a positive trend in January and expect it to continue. However, intra-European dynamics continue to impact our reported numbers due to the shift that we first mentioned in July. The mix of acquiring business is a factor. Our U.S. acquiring business is slowly growing, and weaker outbound spending has affected the commerce balance, so we will need to stay vigilant regarding what’s happening in that space.

On B2B opportunities, it’s a significant domain. We plan to focus on B2B through Visa Direct to serve small and medium-sized merchants’ needs across various verticals, including healthcare and travel. We’ll aim to provide insights into metrics that can track our progress.