Visa Inc - Class A (V) — Q2 2020 Earnings Call Transcript

Thank you, Jordan. Good afternoon everyone and welcome to Visa's fiscal second quarter 2020 earnings call. Joining us today are Al Kelly, Visa's Chairman and Chief Executive Officer; and Vasant Prabhu, Visa's Vice Chairman and Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at www.investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted to the IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K, 10-Q, and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. For historical non-GAAP financial information disclosed in this call, the related GAAP measures and the reconciliation are available in today's earnings release. And one last note before we get started. Given the amount of content we have today, we want to allow time for Q&A, and so we're likely to run over by a few minutes. And with that, let me turn the call over to Al.

Hey, Mike, thank you very much. And good afternoon everyone, and thanks for joining us today. First and foremost, I hope you and your families are well and safe. A year that looked quite promising after a solid first quarter has been substantially disrupted by COVID-19. While the business has been negatively impacted, in March and April, our focus has been on doing the right things for our employees, our clients, and our communities around the world whose lives have been affected in unimaginable ways. We continue to manage our business for the long-term, although we are pragmatic in understanding short-term circumstances. To that end we are certainly being quite careful about our spending on our expense base, and we are pulling back on discretionary spending especially related to personnel, travel, professional services, and marketing. Throughout all of this we remain committed to investing in the future, in product development, in technology, our brand, and business development. You may recall that at our Investor Day we laid out a compelling case for Visa's growth as we look to be a single point of connection for money movement globally. And there are three primary levers to that growth: consumer payments, new flows, and value-added services. I want to be absolutely clear that nothing has changed about these opportunities in terms of the medium and long-term growth for the company. On our call today, I'm going to cover our results, our response to COVID-19, and some updates on the underlying business and long-term prospects for growth. To start, our second quarter results. Net revenues in fiscal second quarter were $5.9 billion, an increase of 7% or 8% in constant dollars. Although cross-border volumes were already weakening in February, driven by Asia, for the most part, the business drivers were not meaningfully impacted by COVID-19 until the latter part of March. A quick snapshot on our quarterly results are as follows. Payments volume grew globally 5% or 7% excluding China, with over 500 million transactions on Visa per day for each of the 91 days in the second quarter. Cross-border volume declined 2% on a constant dollar basis, and we processed 34.9 billion transactions on our network, an increase of 7% over the prior year. Our non-GAAP EPS growth was 9%, helped by prudent expense management. We recognize, given the environment, that the investment community would appreciate as much information on our performance as possible. And to that end, Vasant will dive into more detail than usual when I am finished with my remarks. Since the COVID-19 outbreak we've been in very close and regular contact with employees, clients, partners, and governments globally to help them navigate these challenging times. Our foremost priority is the health and well-being of our employees and their families. To that end, I pledge to our 20,000 employees that there would be no layoffs in calendar year 2020 related to COVID-19. We recognize the critical role Visa plays in maintaining the stability, security, and resiliency of the global payments ecosystem. And let me state that our network infrastructure and application performance has been unaffected even as we transition the vast majority of our employees to a work-from-home status. Our business operations have comprehensive and coordinated plans in place to address business continuity and recovery needs around the world. We're working closely with our clients in a number of initiatives, starting with tap to pay which has gained even more momentum in the United States with issuers and merchants as they seek to reduce the need for cardholders to make physical contact at the terminal. Navy Federal recently started issuing tap to pay cards. So now nine of top 10 U.S. issuers are participating, and we have surpassed 175 million tap to pay cards in the United States that have been issued, which is more than any other country in the globe. On the merchant side, a large grocery chain recently rolled out tap to pay to more than a thousand stores, so now nine of the top 10 grocery stores are enabled for tap to pay. At the end of the second quarter, almost 60% of face-to-face transactions, excluding the United States, were tap to pay, and tap to pay transactions grew over 40% year-over-year. We've also launched a website where merchants can request free tap to pay signage for their terminals. And large merchants like KFC and Pizza Hut have ordered them for all their stores in the United States. Globally, we actively engaged with merchants, acquirers, issuers, and governments to increase tap to pay limits. In fact, over 50 markets in the last few weeks have announced increases. To name a few, 26 European countries, including the U.K., Poland, and Ireland; 25 countries in the Middle East and Africa, including Ukraine, Georgia, and Egypt; also Canada, Australia, and New Zealand have increased their limits. And we expect other countries to follow, recognizing the benefits of digital payments. Visa is also working closely with governments around the world to respond to the crisis in a number of ways. For example, in the Dominican Republic we developed a virtual prepaid solution to rapidly expand the government's emergency disbursement program, from 800,000 to 1.5 million beneficiaries. Likewise, we will be deploying Visa Direct solution to support Guatemala's emergency relief program to reach two million households over the next three months. In the United States, Visa supports over two dozen state government programs, including unemployment insurance programs. And given the environment, we are seeing a 400% growth in accountholders just in the last. Data is another area where Visa has been able to assist governments during the crisis. We're providing helpful insights into economic performance to nearly 20 government agencies around the world. Visa is also helping our communities. We recently announced the commitment by the Visa Foundation of $210 million to support two programs: $10 million towards charitable organizations on the frontlines responding to the COVID-19 pandemic, such as public health and food relief in each of the five geographic regions in which Visa operates, and $200 million to support small and micro businesses around the world with a focus on fostering women's economic advancement. Let me now shift to updates on the underlying business, which will be really very good for us in the medium to long-term prospects for growth. Even with COVID-19, commerce and innovation continued, and our core business had a number of positive developments with several key relationships renewed and new partnerships formed. This is all in support of the opportunities for meaningful growth that we see in consumer payments, new flows, and value-added services. Let me just highlight a few of them. In the United States, we are very pleased to announce the extension and meaningful expansion of our consumer credit, consumer debit, small business, and commercial issuing, as well as our DPS debit processing partnerships with Truist, the sixth largest U.S. issuing bank. We look forward to working with this bank on a myriad of Truist brand building, innovation, and consumer experience efforts in the years ahead. Additionally, following the merger of TCF Bank and Chemical Bank to create the 27th largest bank in the United States, these are one of the existing businesses and new debit businesses. In Europe, we continue to make progress. In the U.K., we extended our long-standing partnership with Barclays, which processes nearly half of the UK's debit and credit transactions, enabling us to jointly focus on innovation and support Barclays' growth into new markets. Also in the U.K., Visa signed an extended agreement with Cooperative Bank, building on our 30-year relationship to support their 3.4 million retail and small business customers. In France, Visa renewed a 10-year agreement with Group BPCE, our largest client in Continental Europe with more than 40 million customers. Visa and one of the largest German Banks, Comdirect Bank, announced an agreement to issue consumer debit cards and grow their consumer credit business, and ING-DiBa extended its relationship with Visa for both debit and credit. A Pan-European commercial bank selected Visa to grow their consumer credit and corporate card business across six European markets: Austria, the Czech Republic, Slovakia, Slovenia, Bulgaria, and Bosnia and Herzegovina. In the rest of the world, we renewed and expanded partnerships with some of our largest clients. We renewed deals with two large debit issuers, Al Rajhi Bank, the largest retail bank in Saudi Arabia, and Chunghwa Post, the Post Office in Taiwan. In Australia, we signed a 10-year exclusive issuing partnership renewal with the Bank of Queensland, one of Australia's leading regional banks, to serve their close to 1 million personal and business customers. In Latin America and the Caribbean, we extended partnerships with the largest issuers we have in Panama, Peru, Jamaica, and Costa Rica. In Brazil, we were chosen as the preferred brand by Caixa, the largest banking customers and debit card issuance; and XP, a leading investment platform that is moving to issue digital credentials and cards. We also obtained our license to operate as a clearinghouse for card payments in Mexico, which will allow Visa to provide domestic network processing services. This is a key step for Visa to bring innovative solutions as well as World Class security and reliability to a very important market. As you know, Visa is the global co-brand leader, and this quarter was no exception in terms of sizable wins. We announced the co-brand partnership with Accor Hotels as the fourth largest global hotel chain with 39 brands such as Fairmont and Sofitel. This represents the most significant de novo co-brand opportunity in the travel sector in recent history. Our partnership will expand the Accor Live Limitless Loyalty program to its 64 million loyal member base and more than 250 million customers globally. In February, United Airlines, Chase, and Visa announced an extension of our long-term credit card partnership into 2029. We're excited to bring the strength of our brand and network to continue building on the program's success to deliver even more value and cardholder engagement. As Visa seeks to grow our consumer business, wallets remain very important for both new issuance and acceptance, and we've made noteworthy progress this quarter. Previously mentioned partnership agreements with Paytm in India and Toss in South Korea are now issuing credentials. In addition, we added new wins with STC Pay in Saudi Arabia, AGA in Nigeria, PayCo in Korea, and Kias in Japan. In China, we signed a five-year partnership with Tencent, the parent of the WeChat platform with more than 1 billion monthly active users. This collaboration with Visa marks Tencent's first co-brand card with an international card scheme. And we look forward to partnering on innovative cross-border solutions for Chinese credential holders. In Sub-Saharan Africa, we've announced a strategic partnership with Safaricom, the largest telecommunications firm in Kenya, and the provider of financial services through M-PESA. With 24 million M-PESA users and 173,000 M-PESA merchants, wallet partnerships like these are paramount to expanding our issuance and acceptance globally. Collectively with WeChat and Safaricom, we now have relationships with wallet providers that give us the potential to embed Visa credentials in two billion wallets. Shifting to new flows with $185 trillion of opportunity, we're focused on moving money end-to-end for businesses, governments and consumers. In Europe, we're working with Lydia, the number one Fintech in France for young people below 30 years of age, and a P2P service with over three million users growing at over 4,000 users per day. In the United States, we recently renewed our important relationship with Square for their cash app program, including Visa Direct capabilities and the cash card issuing platform. Visa Direct continues to be a powerful capability, especially in the COVID-19 environment. As one specific example, Visa Direct transactions for workers seeking earned wage access or on-demand pay across supermarkets, quick-service restaurants, healthcare, and hospitality categories increased well over 100% year-over-year this quarter. We're also working on digitizing cross-border payments. This quarter, Remitly launched cross-border in seven countries. MoneyGram expanded to 11 additional countries, and KB Kookmin card, one of the leading issuers in South Korea, also initiated a cross-border program, all with Visa Direct. Cross-border also plays a sizable role in the B2B space. We entered into an agreement for B2B virtual cards with ICBC, the largest bank in China, representing our first B2B partnership with a bank in China. Visa and Australian cross-border Fintech, Airwallex announced the new Global Partnership with the launch of a borderless B2B cross-border card, and we continue to look for new ways to drive new flows with unique capabilities and solutions. Value-added services are an extension of our core business and represent a significant opportunity for us to deepen relationships, help clients, and grow our business. This quarter was no exception in terms of clients looking for assistance. In DPS, in addition to Truist, we renewed six issuer deals that represent nearly 20% of DPS's annual transaction volume. In terms of disputes, our recently acquired Disputes platform, Verified, signed an agreement with a large e-commerce provider to enable the delivery of key transaction details from their CRM systems to issuers in near real time, which helps prevent disputes and reduces chargebacks. In terms of data, as you can imagine, our clients are very interested in benchmarking their performance throughout the quarter, leveraging our Visa Analytics platform. Nearly 5,000 client users were enabled at the end of the quarter, accessing 33% more reports than the first quarter for a total of 90,000 reports accessed. In consulting, clients are consulting and analytics at an increased rate. We delivered approximately 50% more projects than in the second quarter of last year. The CyberSource business continues to gain momentum globally, supporting acquirers and merchants around the world with innovative omnichannel, gateway, and fraud management services. For example, in India, CyberSource is now the market-leading payments gateway, in part due to the introduction of our safe click technology for e-commerce merchants, which allows cardholders to enroll and store card information for quick and secure checkout. Merchants also saw a 15% increase in authorization rates when using Safe Click. These are just some examples of how during challenging times our clients look to us. So, in closing, you can see that there's a lot of business momentum. Yes, there is no doubt that our performance will continue to be impacted by COVID-19. We continue to focus our attention on supporting the shift to e-commerce, the acceleration of tap to pay, and digital payments, as well as providing our clients with critical value-added services. Although the road ahead will certainly have its challenges for a number of quarters, our business model is resilient, and our strategy to enable the movement of money globally is more relevant than ever. With that, let me turn it over to Vasant.

Thank you, Al, and good afternoon, everyone. This is an unprecedented time. And we know you all have many questions about the COVID-19 impact on our business. To provide you with up-to-date data in this fast-moving crisis, we will discuss trends occurring after the quarter ended more than we normally would. Also, while the absolute level of growth or decline is important, the second derivative of the rate of change in trend lines is equally important. To help you with all this, we've added a slide to our earnings presentation with weekly data for March and for April through the 28th. This slide provides additional details on U.S. payments volume growth, as well as processed transaction and cross-border volume growth. Starting with U.S. payments volume, after strong growth in January and February, payments volumes dropped precipitously in the second half of March, as lockdowns went into effect across the U.S. By the last week of March, payments volumes were declining 28%. Credit spending was harder hit than debit, and declines have been more than 25% every week in April. On the other hand, debit was down in the mid-teens through the first two weeks of April and spiked into positive territory in both weeks three and four as the first wave of economic impact payments were distributed. It is too early to tell if this uptrend in the second half of April is the start of a recovery, a new plateau, or will fade in a couple of weeks. Through April 28, U.S. payments volumes are down 19%, debit is down 6%, and credit is down 31%. As may be expected, there is a drastic difference in thought present and card not present performance with card not present or e-commerce volume excluding travel up 18% in April and card present volume down 45%. There are also significant differences in how lockdowns have been impacting spend categories. One-fifth of U.S. payments volume is full in drugstores along with Walmart, Costco, and Target. This is the only category still growing at approximately 20% in April, and essentially all this growth is coming from online spending up over 100% in the last two weeks of April, assisted by the adoption of curbside pickup and delivery. Another one-fifth of U.S. payments volume is in categories that are less discretionary, like telecom, utilities, insurance, and business supplies and equipment. These are holding up relatively well, shrinking less than 15% at the end of March, and have recovered to flat with a prior in April. A third of our U.S. payments volume is in categories that are declining between 15% to 50%, such as retail, automotive, healthcare, education, and government. There are significant variations in performance within these categories with more essential purchases showing more resiliency. For example, home improvements within retail, or hospital and medical equipment within healthcare, categories where spending can be delayed or is more discretionary or more heavily impacted. For example, federal spending within retail or dentist and doctor visits within healthcare. About one-fourth of our payments volume is in the hardest hit categories, including travel, fuel, restaurants, and entertainment, all declining over 50% in April. The travel decline affects all sub sectors and is the deepest at around 80%. Fuel declines were driven both by falling prices and fewer gallons purchased, which typically offset one another to some degree, but not right now. Within restaurants, quick-service restaurants are holding up better, in part due to being better equipped for this environment, but apps drive-thru and delivery infrastructures already in place. Within entertainment, amusement parks and movie theaters are especially hard hit, while gaming is a small component of the category is up over 200%. Visa Direct activity has slowed a bit, but growth remains robust at around 70% in the second quarter and in April. Use cases such as P2P and food delivery disbursements even accelerated while ride-sharing and merchant settlement disbursements are negatively impacted. As economic impact payments have been distributed, we have seen significant increases in home improvement, automotive, healthcare, and some retail goods and services categories. Travel, fuel, restaurant, and entertainment categories have not benefited. International payments volume growth in constant dollars was 4% and over 7% excluding China in the second quarter. Growth remains strong in CEMEA, and Latin America growing 19% and 14% respectively, in part due to climate both regions. Asia-Pacific, excluding China grew 3%, decelerating four percentage points from the last quarter, as the COVID-19 impact was significant starting in early February for a large part of the region. Europe grew 6%, down two percentage points versus last quarter, with the largest deceleration in central and southern Europe. Looking across some key international markets that we process the majority of transactions, major markets in Europe as well as Canada have trends similar to the U.S. both in terms of the trajectory and the depth of the decline. Australia appears to have locked down better with a shallower decline. Much like the U.S., leverage in all these markets is outperforming credit, and there has been a tick up in the second half of April. Within Asia, there are variations. Hong Kong dropped in early February along with the rest of China and appears to be recovering in April. Singapore dipped early then stabilized and has dropped sharply again under most stringent restrictions. Japan is on a downward trend, as a lockdown goes into effect. India, with a very rigorous and sudden lockdown, has experienced one of the fastest and deepest declines. Elsewhere, Brazil is doing relatively better so far. Across markets, performance by category is generally similar to the U.S. Differences across countries seem to be driven by the quality of the e-commerce infrastructure in place, and consumer adoption of digital payments prior to the outbreak. With economic stimulus payments in the second half of April, categories benefiting the most are some sectors of retail like home improvement, business supplies and equipment, healthcare, education, and government. Travel, fuel, restaurants, and entertainment generally remain depressed. In two key markets, where we do not process transactions, Korea and China, we have some limited data sets. This data indicates Korea may have been among the least impacted markets. In April, a recovery is well underway in both markets. Process transactions grew 7% for the quarter, with sharp declines in March, and are down 25% to April 28, slightly better than levels reached in the last week of March. Transactions typically grow several points faster than volume, as we penetrate small ticket transactions in everyday spend categories. In the recent uptrend or stimulus payments, that relationship has temporarily changed, as consumers have prioritized higher ticket categories like home improvement and automotive over low ticket categories like restaurants and entertainment. Constant dollar cross-border volume declined 2% in the second quarter, or 5% excluding volume within Europe. Volume growth was strong and steady in January and started to slowdown in Asia by the second week of February, as the crisis spread around the world. We saw significant week by week volume declines in March, exiting the month declining 44% or 51% excluding intra-EU volumes, and volume remains down 43% to April 28 or 52% excluding intra-EU. The majority of the cross-border spend decline is travel-related, both card present and card not present. All card present and travel-related non-card present spend represents roughly two-thirds of our cross-border volume, excluding volume within Europe. This spend declined over 40% in the month of March, and is down 80% in April in line with the last week of March. The trajectory and depth of cross-border travel related declines is quite uniform across corridors and regions. Growth and cross-border e-commerce spend excluding travel decelerated in March but remain positive led by retail spending. In April, cross-border e-commerce spending is recovering across categories and markets and has grown faster than pre-crisis levels. A quick review of our second quarter financial results, net revenues grew 7% in the quarter, or 8% in constant dollars. As a reminder, our service revenue is driven by last quarter's payment volume. Based on current quarter volumes, total net revenue growth would have been around two points lower. Second quarter service revenues grew 9%. Data processing revenues rose 11% supported by value-added services and acquisition-related revenue. International transaction revenues grew 2%, continuing to benefit from last year's pricing actions. Other revenues rose 20% over the prior, aided by value-added services. Client incentives were 22.6% of gross revenues, up slightly from last quarter. As we told you previously, we expected client incentives to step up due to high renewal activity, which continued in the second quarter as noted. The majority of client incentives are tied to overall payments volume growth in the current quarter, but there are contracts with clauses specific to cross-border, as well as annual or multi-year targets that are adjusted with changes in performance. GAAP operating expenses were up 4% excluding the amortization of acquired intangible assets and non-recurring acquisition related costs. Non-GAAP expense growth was 3%. This is significantly lower than our original plans for the quarter as we moved fast to reduce expenses when we saw the widespread impact of COVID-19. GAAP non-operating expense was $95 million for the fiscal second quarter, including $2 million of equity investment losses. Our GAAP Q2 tax rate was 19.4%. Moving now to how COVID-19 might affect the rest of this fiscal year. This pandemic is global in scope, very significant in its impact, and early in its evolution. There is a high degree of uncertainty about what happens over the next few months. As is self-evident, our prior outlook for fiscal 2020 is no longer relevant. And it is not possible to provide you with any reliable forecasts for the second half. Our revenue trajectory over the near term will be driven by three critical variables: first, the depth of the decline; second, the time we stay at trough levels; and third, the trajectory of the recovery. It is impossible to reliably forecast how deep the decline will be, or what the timing, trough and trajectory of recovery will be over the near term, especially since these variables differ across categories and countries. It will depend on many factors, which we will be tracking including city, county, state, and country decisions on when and how they reopen, the staging of the reopening by business type and category, how permanent the shift in consumer behavior is by category, consumer willingness to engage in activities where social distancing may be harder to execute, like dine-in restaurants, mass entertainment, hotel stays, and airline travel, and when borders reopen, consumer confidence, and venturing beyond their geographic zone of comfort. In the final analysis, this is a health crisis. As such, consumer behavior and the pace of normalization will be significantly influenced by the availability of testing, advancements in therapeutics, and ultimately a vaccine. We have no crystal ball that allows us to reliably forecast revenues in this environment. As it relates to our revenue, there is one point to note: we report service revenue with a one quarter lag, so when we have a recovery it will take another quarter before it shows up in reported service revenues. In fiscal year 2020, our third quarter will be helped, and the fourth quarter hurt by this lag. Why revenue outcomes are hard to predict? We can give you more clarity on expense outcomes, since we have more control over them. In early February, as we saw the impact of COVID-19 in Asia, we moved fast to rethink our expense plans. As a result, we were able to reduce second quarter expenses from our previous expectation of mid-teens growth to the 4% we reported. In fact, if you exclude the acquisition we completed in the fourth quarter of fiscal '19, which were not in our expenses in the second quarter last year, expenses were up only 1%. We have plans in place to hold second-half expenses flat compared to last year, and excluding acquisitions, our expenses will be down in the low single digits year-over-year. We're evaluating additional actions to reduce expenses even further. As you all know, ours is a business where expenses are largely fixed. And we want to preserve, to the extent possible, critical investments that will drive long-term growth in new flows and value-added services. Also, as Al has indicated, we will not lay off employees related to this crisis in calendar 2020. Operating within these parameters, we have reduced expenses in the second half by scaling back hiring plans to only the most critical roles, redeploying existing resources to high-priority areas, reducing and redeploying marketing spend, as is planned for the now-delayed Tokyo Olympics, prioritizing projects to reduce professional fees, and the use of external resources. And of course, like most companies, we're saving on travel and meetings for the foreseeable future. While we expect operating expenses to be flat or down in the second half, non-operating expenses will be higher. With the $4 billion in debt reissued in April, interest expenses will be higher, while interest income has dropped sharply with the rate declines. We now expect non-operating expenses to be in the $250 million in the second half excluding gains or losses, versus $148 million in the first half. Moving on to cash flow, liquidity, dividends, and buybacks, our free cash flow in the first half of fiscal year '20 has been tracking ahead of expectations. However, given the anticipated revenue decline in the second-half, our free cash flow this fiscal year will be below what we had planned last October. Despite the COVID-19 impact, given the cash characteristics of our business, we still expect to generate a very healthy level of free cash flow this year under any scenario. We ended the quarter with $13 billion of cash, cash equivalents, and investment securities on hand. Since the end of the quarter, we have added to our cash balance with our $4 billion debt issuance. We issued debt in three tranches, seven, 10, and 20-year maturities, at a weighted average coupon rate of 2.16%. We have ample liquidity with cash on hand as well as access to the commercial paper market on favorable terms, and a $5 billion revolver which remains undrawn. Our dividend policy remains unchanged. In the second quarter, we bought back 17.8 million shares for $3.2 billion at an average price of $180.10. Year-to-date we have bought back 30.9 million shares for $5.6 billion at an average price of $179.94. Our plan to buy back over $9 billion in stock this fiscal year remains unchanged. Crises bring with them both risks and opportunities, and this one is no different. We've acted fast to mitigate the risks. We are actively working on identifying and capturing the opportunities. It is very likely that this crisis could accelerate trends that were already underway, like the shift to e-commerce and the shift to digital forms of payment. It is speeding up tap to pay adoption, driving growth of new flow use cases we highlighted at our Investor Day, increasing demand for our value-added services, and offering opportunities to add to our capabilities through selective acquisitions. While our short-term performance will suffer a setback, we remain confident in the long-term growth potential of our business. With that, I'll turn this back to Mike.

Thank you. Jordan, we're now ready to take questions.

Thanks. Good morning and I hope you guys are all staying well and healthy. Just a question now on the structural nature of travel, could you just talk about how you feel about cross-border travel and the structural impacts that might occur as a result, and when you expect it to rebound? Thanks.

Thanks, Sanjay. I hope you are doing well too. Currently, many countries are in lockdown, primarily due to government mandates. I believe that over time, these restrictions will ease. Domestic travel is likely to be the first to rebound as people seek to move around again. However, cross-border travel may take longer to recover, as we will need advancements in testing, therapeutics, and ultimately a vaccine to help everyone feel more at ease. It will take some time, but I am hopeful about a recovery. There is also a chance that business travel may not return to previous levels since many people have adapted to working from home over the past several weeks and realized they can accomplish their tasks remotely. We will have to see how this develops. On the positive side, the cash displacement opportunities in our business and the surge in e-commerce represent real structural changes that weren't as prominent before COVID-19.

Thank you.

Next question, please.

Great. So following up actually on that last question and answer, could you talk a little bit, Al, about the evolution, if you will, of e-commerce and cash conversion, and related perhaps to the elements of the economics to your business of those types of transactions? And probably should have said at the outset, glad you are all healthy. Thanks for the extra data, and hope you can keep that up too.

Thanks, Moshe, appreciate it. Hope you and your family are well as well. First of all, there isn't a tremendous amount of difference in terms of the economics to Visa whether it's credit or debit, or card present or card not present. There just isn't that much of a difference. I think that's the main point. I think beyond that we're seeing people during these last couple of months start to buy things in the e-commerce environment that they would typically buy in store, whether that's furniture, electronics, in some cases apparel. And I think to the degree that they've had good experiences, that's a really good thing. And remember, when you think about e-commerce the reality is that it's a very, very positive thing for us because cash isn't a competitor in that space. So the reality is that we get a lot higher share from those transactions that go to e-commerce than we get in the face-to-face world, and I think there are some permanent changes. Now, whether gaming stays up at the level as people are finding things to do while they're home, I suspect that'll come back down a bit, but I think, in general, e-commerce will explode coming out of this.

Yes, I would like to highlight a few points. You may have observed that cross-border e-commerce, excluding travel, is currently experiencing a growth rate that exceeds pre-crisis levels, largely driven by retail spending. More than half of this spending falls into categories where consumers purchase goods and services online. Additionally, there are now categories like food and drugs, which previously favored in-person transactions, that have seen significant shifts to online purchasing due to the lack of alternatives. Some of these changes may be lasting. Furthermore, even in face-to-face interactions, there's an increasing reluctance to use cash, and many are opting for contactless payments. This aversion to cash could be enduring, indicating that the adoption of digital payment options in face-to-face transactions might grow faster in a structural way than it did before the crisis.

Great, thanks very much.

Hey, good afternoon. Thanks so much for all this data. Just on the client incentive side, forgive me if I missed it, but did you give us a little bit of an outlook there on how the second half might look on client incentives with all the wins that we have listed? I heard the majority is tied to volume growth, but any other detail would be great. And then just as a quick follow-up on Truist, can we assume the legacy non-Visa SunTrust cards will be flipped or would those be reissued at expiration? Just wanted to clarify that. Thanks.

Tien-Tsin, thank you, and hope you're well. I'll take the second half and let Vasant comment on client incentives. We're obviously thrilled with the deal that came out, and over time there's going to be some cards swept, but we're going to work very hard with Truist. Remember, they're building a new brand here. So the BB&T and SunTrust brands, they're looking to sunset those and get the Truist brand out there as soon as possible. So I think given that these cards are an ongoing manifestation of the brand that are shown every time they get pulled out of the wallet, I think they're going to want to move fairly quickly. But we're still working through the details as the deal just recently got done. Vasant, you want to comment on the client incentives?

Yes, Al. So on client incentives, I think you asked two questions. Our expectations in terms of client incentives as a percent of gross revenue, we gave you a range at the beginning of the year. I believe it was 22.5% to 23.5%. That range has not changed. So we still expect to be in that range, even as we've had, as we told you, a very, very high level of renewal activity as well as wins and so on, that Al went through. As far as how our incentives might respond to what's happening right now, the incentives are always meant to be linked to performance, and especially volume performance. So our incentives are pretty much linked to volume performance and should move with volumes. And that'll play out over the next few quarters. So hopefully that answers your two questions.

No, it does. I appreciate it, guys. Stay healthy.

Hi, thank you and good afternoon everybody. A follow-up I guess on just the growth of value-added services and what you're seeing in the growth rate of value-added services over the last several weeks. And then I guess in line with adding the value-added services, the acquisition of Plaid, is that still on track, and how is Plaid performing?

Hey, Bob, thank you, nice to hear your voice. First, in terms of value-added services, these tend to be excellent revenue streams and quite resilient. And some of them are certainly transaction-dependent, and the volume could go down, but honestly in times like this the value goes up to our clients. So those would include things like CyberSource or our risk products or debit issuing processing products. And then obviously, we have value-added services that really are not tied to volume, and they're also extraordinarily valuable in times like that. I referenced two of them in my remarks, both the criticality of data to our clients, because everybody is seeing the numbers go down and they want to make sure that they're not way out of whack with where everybody else is, and then obviously consulting services. It's also an exciting time for us to be able to introduce other new clients to some of our value-added services. So the crisis gives us an opportunity to have dialogue and make sure that our clients are using all the tools that they can from Visa. So we're going to continue to make sure that we stay in close contact with our clients throughout this, and where appropriate introduce them to value-added services offerings that they may not be using. As it relates to Plaid, we're on track. As you know, we have to go through regulatory review, and we expect to have that done by the end of the year, and we remain as excited about Plaid as we did when we talked about it at Investor Day. In terms of how it's doing, we don't own them so I can't really comment on that at this time.

Thanks, Al. Thanks, Vasant, appreciate it.

Thanks, Bob.

Hi, good evening, and good to hear your voices. The government involvement in the digitization of payments has been something that you manage very carefully because it has its pluses and minuses. As you're going through this crisis how do you anticipate how the governments might act differently with respect to digital payments coming out of the crisis, meaning any new regulations you could foresee, new government-funded initiatives, positives or negatives for your business? Thanks.

Well, I think, Lisa, first of all, you're right on that I think that governments are just as interested in digitization as any other business at this point, and it helps with transparency, it helps them understand whether funds are going with more accuracy than they might get otherwise. Certainly, I think it's also possible that governments could, on the other hand, look at pricing in the marketplace. I continue to believe that pricing should be set by markets and not by governments. I think markets do a far better job of doing it than governments do, and I would say that specifically as it relates to interchange, there's a tremendous amount of value delivered by our bank partners in terms of the credit they extend to enable buying to the services they provide to the servicing they provide, to the fraud they provide, to the risk services they provide and the rewards that they provide. So there's a tremendous amount of benefits that the economies of countries see and the individual citizens in those countries see. So I would also say that any actions that would disrupt any type of recovery during a pandemic like this would be foolish and potentially very damaging.

Thank you. Thanks, guys.

Thank you. Hi, Al. Hi, Vasant. Hope you're all healthy, and appreciate the incremental detail. I wanted to ask about this pricing in the current environment, but the ability to exercise price improvements to reflect value and other factors and the willingness to use it when merchants are not in great shape. So that, and then the quick follow-up just on the clarification on one of the charts, when I look at U.S. payments volume growth versus process transactions growth in the operational performance metrics mid-April, they both look down 30%, but now one is down 10% and the other is down 20%. So there's a different pace of recovery. I was wondering if you could explain that.

I can take that question on transactions versus payments volumes. And Al, I'm sure will take the other one. I had it in my comments, so I’d encourage you to go back and look at them, but just to repeat that, it is we think a temporary shift. Typically, as you know, transactions growth does better than volume growth because we are penetrating more deeply into smaller and smaller transactions. The reason it's different in the last two weeks of April is what we have seen is that as some of these stimulus payments have come through, people are prioritizing pent-up demand in areas like automotive, like home improvement, and they're not spending it on lower ticket categories, like entertainment and restaurants. So what you're seeing is a mixed shift in how people are spending money to higher ticket items. As a result, payment volume has improved more than transaction volumes. So that's what you're seeing, and that's probably not what the long-term trend is going to be, but it's what we're seeing right now.

Hey, Ashwin, just let me first add to Vasant's comments: think about a normal day, when people actually go to work and they're not working from home, you go and you get some coffee at a gas station or at a mass transportation shop, you pay for your transit, you pay for your breakfast, you pay for your lunch, all of those kinds of everyday low ticket transactions are not happening in this environment. So, in addition to what Vasant was saying, you could just, that's a huge driver of the change here and why we're seeing higher average ticket costs, but a lower level of transactions. The other question you asked was about pricing. Look, we're in an unprecedented period, certainly not something I've witnessed in my life, where the impact of this pandemic is truly global. Our focus right now is to make sure that we're bringing as much stability through the payments ecosystem as possible, which is why we issued our major co-release this month of April where we normally do, and I don't know that we've ever not done it before, but this is the time where it was called for, and I think we're going to certainly be very cognizant of the uniqueness of this time in terms of pricing. As I think most companies in most industries will be reevaluating their plans on all kinds of fronts, including the pricing lever and how much they pull it given this new reality.

Thank you very much.

Hi, thanks guys. I'm glad everybody's doing okay there. Look, I wanted to start off just if we, Al, if we had to sort of put all the pieces together longer-term, and assume that some travel maybe wouldn't come back per se, we're not sure yet, but there are enough positive implications of what's happening around contactless incremental flows, and more digital and maybe some of your services that you think can actually offset that. Is this, I mean, have you done the work to think about whether those can add up to maybe offset, but then just one quick follow-up would be on capital allocation. I guess I maybe I missed it, but I didn't hear anything about changing plans around buybacks or anything along those lines. Can you just give us some update on that? Thanks guys.

I'll address the first question, and then Vasant can discuss capital allocation and buybacks. Darrin, we believe there are significant opportunities in e-commerce and cash displacement. With $18 trillion being spent in cash, people are starting to realize that cash carries germs, and there's a growing desire to avoid the risks associated with handling it. This shift towards cashless transactions is gaining momentum, as evidenced by governments increasing contactless limits, merchants moving to contactless solutions, and issuers beginning to issue contactless-enabled cards. We're hopeful that long tail sellers who previously hesitated to accept cards will now see the necessity in a cash-averse environment. E-commerce also presents a substantial opportunity. As Ryan McInerney highlighted in his presentation, about $0.15 or $0.16 of every dollar globally is spent on Visa cards in face-to-face transactions, compared to around $0.44 or $0.45 in e-commerce, marking a significant area for growth. While we anticipate a temporary decline in travel, as people may be hesitant to travel internationally until there are advancements that alleviate their concerns about being stranded, we believe there remains a global citizenry eager to travel and explore. At this stage, we haven’t yet analyzed how these trends may balance each other out. Currently, we’re more focused on studying the aspects that Vasant mentioned earlier to better understand the recovery before assessing any potential permanent changes. While these discussions are ongoing, we haven't finalized any specifics yet, but I do believe there are exciting opportunities that could counterbalance shifts in consumer behavior regarding cash. Now, I'll turn it over to Vasant for an update on capital allocation.

So, with the list of capital allocation, first in line of course, as we want to invest as much as we need to in our business because we still think the long-term growth opportunity remains extraordinary, and to that end, even as we scale back expenses, we have preserved the investment in critical growth areas like new payment flows, including Visa Direct, B2B in our value-added services. So that's part one. Part two is M&A. We remain very focused on adding to our capabilities where it makes sense through acquisitions, and there may be some opportunities here over the next months and years, and certainly Plaid is something we're looking forward to closing on as Al said, but M&A would be next in line. In terms of dividends, there has been no change in our dividend policy. In fact, last week, our board approved our regular quarterly dividend. So those of you who are owners of our shares will get that soon. And finally, in terms of buybacks, we have had no changes in plans. As I mentioned in my comments, we have bought back $3.2 billion in stock in the second fiscal quarter. So through the first half, we bought back $5.6 billion. So we're a little ahead of our pace. Since we view this particular crisis as structurally one that does not diminish our business in the long run and most likely enhances it, and we don't see any long-term secular trend lines changing. We felt that in period, in the month of March, our stock was trading below our views of intrinsic value, and therefore we were buyers. So there has been no change in our buyback program. We do have plenty of liquidity. We're watching that very closely. As I told you, we had $13 billion in cash and cash-like instruments on hand and then we issued $4 billion in debt. So, as we speak, we're close to $17 billion in cash on hand. So we are very focused on ensuring adequate liquidity, and that is cash on hand, not counting our revolver or even our access to commercial paper markets. So hopefully that addresses all your questions.

Yes, it's helpful. Thanks, guys.

Good afternoon, thank you for taking my question. So I have a follow-up on e-commerce, as you noted that e-commerce is very good for you as cash is simply not an option. Can you expand upon other benefits Visa sees in e-commerce in terms of greater sought services, tokenization, and value-added as we process more of those digital transactions? And then as a follow-up based on what you're seeing in the market, is the uptick in e-commerce usage coming from people who are already very avid e-commerce users or is it new demographics who are also coming online, who were historically reluctant to buy? We're just trying to figure out if new payment habits and digital views are being acquired now?

Thank you for the question. Regarding e-commerce, it certainly presents us with an opportunity to promote our CyberSource capabilities, especially as more businesses pursue an omni-channel approach. Companies that have not embraced this shift have faced challenges. Vasant mentioned that there is a noticeable difference between countries with mature e-commerce infrastructures and those without; the latter have struggled more. E-commerce relationships often become established over time, especially when customers store their payment information. We've observed that e-commerce attracts new customers who might not have spent otherwise, as the ability to purchase online is crucial. I anticipate that this will lead to improvements in the e-commerce experience. However, we still have work to do, as abandonment rates remain high and authorization rates can be insufficient, presenting a clear opportunity for enhancement, with FRC being a key focus area for us. We're also witnessing significant increases in new e-commerce users in sectors like food, drug, restaurants, and QSR, where online shopping wasn't previously common, as consumers seek alternatives to traditional supermarket offerings.

Last question, Jordan?

Great, thanks very much. Can you hear me all right?

Yes.

Okay, great. So I know it's a little difficult in the context of the withdrawn revenue guidance, and as you've underscored, there's many conflicting dynamics there, but is there some way that you could help us frame how we should be thinking about maybe the puts and takes in operating margin? Obviously, you've done a lot to contain costs. It sounds like there's going to be some yield shifts on the revenue side, of course, you've got Plaid on the horizon. So, is there some way over time you could help just frame what operating margin might look like or within some bounded range or something?

Sure. You can analyze it yourself. We provided insights into our expense growth for the second half, indicating it will be flat including acquisitions and down in the low single digits excluding them, with hopes for improvement. We are still implementing some expense reduction initiatives. Keep in mind, our non-operating income will increase, while non-operating expenses will rise due to higher interest expenses and lower interest income. The overall situation depends on revenue performance. You can project a revenue decline and understand our expense levels, which will indicate the resulting margins. We believe margins are an outcome, not a goal, and depend on the relationship between revenue and expense growth. If expenses are decreasing in the low single digits but revenues are declining more than that, likely in the third quarter, it will affect the margins. Regarding revenue modeling, we have provided the latest information on trends. The outlook depends on whether this is the low point and when recovery might begin. Additionally, the nature of recovery remains uncertain. It could be a sharp V-shaped rebound, a gradual U-shaped recovery, or a mix of shifts with periods of recovery and stabilization. This variability is evident across different categories and countries, which is why we are refraining from providing specific forecasts for now.

Thanks for the clarity.

And with that, I'd like to thank you for joining us today. If you have any additional questions, please feel free to email or call us and Investor Relations team. So thanks again and have a great evening.