Visa Inc - Class A (V) — Q4 2022 Earnings Call Transcript

Thanks, Holly. Good afternoon, everyone. And welcome to Visa’s Fiscal fourth quarter and full year 2022 earnings call. Joining us today are Al Kelly, Visa’s Chairman and Chief Executive Officer; and Vasant Prabhu, Visa’s Vice Chair 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 on our 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 the result of many factors. Additional information concerning those factors is available in 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 our website. For non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today’s earnings release. And with that, let me turn the call over to Al.

Jennifer, thank you, and good afternoon, everybody, and thank you for joining us. Visa’s performance in 2022 was very strong even with the uncertainty created by inflation, the war in Ukraine, COVID, the timing of cross-border travel recovery and a potential recession. On a full year basis, credentials increased 9% year-over-year and are up 13% excluding Russia. We crossed 4.8 billion tokens surpassing the number of card credentials and almost doubling from last year. Merchant locations, including locations from payment facilitators grew 11%. Global Tap to Pay penetration grew 10 points to 54% of face-to-face transactions excluding Russia and this was helped by 20 additional countries crossing over the 50% penetration mark. Excluding the U.S. and Russia, global Tap to Pay penetration was 71%. Visa’s network processed 70% more Tap to Ride transactions on global transit systems in FY 2022, surpassing 1 billion transactions for the first time ever. In FY 2022, we signed over 400 commercial partnerships with fintechs globally from early-stage companies to growing and mature players. Visa Direct had 5.9 billion transactions excluding Russia, across 60 plus use cases and over 2,000 programs helped by more than 500 enablers. Over half of our clients utilized five or more value-added services in 2022 and a third used 10 or more. All of this helped to drive fiscal full year net revenues up 22% year-over-year and non-GAAP EPS of $7.50, up 27%. Now let me transition to our fourth quarter performance and key highlights and then make a few comments about 2023. Fourth quarter net revenues grew 19% year-over-year and non-GAAP EPS was $1.93, up 19%. Total Q4 payments volume was up 10% year-over-year or 135% versus three years ago, down 1 point from Q3. Excluding Russia and China, payments volume was up 16% or 145% of 2019. U.S. Q4 payments volume was up 12% year-over-year or 145% of 2019, down 1 point. International volume was up 9% year-over-year or 126% of 2019, down 1 point versus Q3. Excluding Russia and China, International volume was up 20% or 146% of 2019, flat to Q3. Q4 cross-border volumes, excluding intra-Europe were up 49% year-over-year and 130% versus three years ago, up 7 points from Q3. Excluding Russia, cross-border year-over-year growth was higher by about 5 points. Travel-related cross-border volumes rose 12 points from 104% of 2019 in Q3 to 116% in Q4 as travel continued to recover. Processed transactions were up 12% year-over-year or 140% versus 2019 and we processed 553 million transactions a day during the quarter. Now I will provide an update on the drivers that propel this growth in consumer payments, new flows and value-added services. Our consumer payment strategy has three components to it, growing credentials, increasing acceptance and deepening engagement. Total consumer payments revenue for the fourth quarter and the year were both up more than 20% in constant dollars. On the credential side, we signed several significant deals with financial institution clients, co-brands and fintechs in the fourth quarter. Starting with financial institution clients in our Asia-Pacific region, we signed with China Construction Bank, Bank of Communications and Shanghai Pudong Development Bank, leading banks in China. Throughout fiscal year 2022, we have renewed with eight of our top China issuers. In our CEMEA region, we signed with National Bank of Kuwait, the largest bank in Kuwait, and ADIB, the largest Islamic issuer in the UAE. In Latin America, we renewed and expanded our partnership relationship with the second largest bank in Colombia, Banco Davivienda, including credit, debit, commercial and Visa Direct. Another key renewal in Latin America this quarter was with Dock, one of Visa’s a few full stock enablers providing BIN sponsorship, issuer processing, acquiring as a service and program management via a single connection, already servicing more than 100 fintechs in Brazil. Dock will expand across new markets, including Mexico, Colombia, Peru, Argentina, the Dominican Republic and Ecuador. In Europe, we renewed and expanded our relationship with UBS, the largest issuer in Switzerland. We made excellent progress in Germany with our share growing significantly since 2018, adding more than 12 million debit credentials in the market. Visa Debit is now offered by three of the most significant banks in the market, ING, DKB and comdirect. We are also pleased to announce that Santander Germany will begin issuance in 2023, making Visa the single scheme of choice for Santander in that country across debit and credit. Altogether, across the European continent, our quarterly active credentials were up 18% year-over-year. In the co-brand space, we continue to expand our position in several countries with two recent wins and an extension. First, in India with the Samsung co-brand card targeting existing and prospective Samsung users. Second, in the U.S., Visa and Kohl’s with Capital One as the issuer recently entered into an agreement to launch at Kohl’s co-branded Visa credit card. And also in the U.S., we are excited to share that Visa signed a multi-year co-brand agreement extension with Disney for cards issued by JPMorgan Chase. Now moving to fintech and wallet clients. In Egypt, mobile network operated Etisalat Egypt with more than 28 million customers has signed a deal for virtual and physical card issuance. The first digital bank in Iraq, Visa Iraq Islamic banks seeking to digitize payments and drive a cashless society through Visa credit, debit and prepaid card issuance across their 400,000 customers. And large cryptocurrency exchange, FTX, with over 5 million registered users has signed on to expand issuance of Visa credentials beyond the U.S. to over 40 countries, bringing our total number of issuing partnerships with crypto platforms to more than 70. Finally, GoHenry Group is the U.S., U.K. and Europe-based fintech that provides prepaid cards and financial education app for children age six to 18 to over 2 million members. They will be expanding their U.K. Visa issuance to Continental Europe and the U.S. On the acceptance front, we signed an agreement with Flywire, a global payments enabler and software company that supports the higher education industry to grow card acceptance in Mainland China, Hong Kong and Korea. In Mexico, we renewed our relationship with Clip, an important payment facilitator, which will aid in the expansion of acceptance to micro, small and medium merchants. In Mexico, we have more than doubled acceptance since 2019 to nearly 3 million merchant locations. Our efforts across Latin America to grow acceptance and win processing share has paid off. Outside of Brazil, we have expanded our processing penetration by more than 20 points since 2019, with the migrations of domestic transactions in Argentina, Chile, Ecuador, Colombia and, most recently, Uruguay. Customer engagement is very important, and Tap to Pay is one of the best ways to pay in the face-to-face environment. In Q4, the U.S. reached 28% penetration and saw more than 1 billion tap monthly transactions for the first time ever in July, surpassing the U.K. as the largest country for Tap to Pay transactions, and this is nearly double the number of transactions from last year and more than five times the number of transactions from two years ago. Now moving on to new flows, which grew fourth quarter and full year revenue over 20% in constant dollars. Our B2B business had nearly $1.5 trillion in payments volume for the full year, growing 30% in constant dollars. In the fourth quarter, B2B payments volume was almost $400 billion, growing 21% year-over-year in constant dollars. Within B2B, our strategy is focused on card-based payments, cross-border payments and accounts receivable and accounts payable payments, and we have made progress across all three this quarter. Visa has signed a long-term agreement with European payments as a service provider, Modulr, to issue Visa virtual cards to support B2B travel clients issuing out of Europe. Also in Europe, Visa won the credit card portfolio, Crédit du Nord, encompassing Societe Generale in addition to renewing consumer credit and debit portfolios in both industries. We also recently reached a new fleet product partnership agreement with Edenred, which is making their Edenred essentials product available to commercial and public sector organizations with vehicles in the United States. In cross-border flows, we signed an agreement with Visa B2B Connect with TD Bank, our first bank in Canada. We also signed banks for the first time in Switzerland and Korea. Recently, our CEMEA region signed five banks across Kazakhstan, Qatar and Azerbaijan. In the accounts receivable and payable space, MineralTree, a U.S. automated invoice-to-payment solution provider for the middle market and enterprise businesses, recently enhanced their relationship with Visa to support cards for their payables customers. For other new flows, Visa Direct grew transactions 36% this year excluding Russia, reaching 5.9 billion transactions. In the fourth quarter, Visa Direct had 1.7 billion transactions and grew 42%, up 7 points from Q3. In addition to growing the existing Visa Direct business, our strategy for growth includes; one, scaling new use cases with a particular focus on cross-border; two, expanding existing use cases to new geographies; and three, accelerating through enablers. In terms of scaling new use cases, I am pleased that eBay, one of the largest third-party marketplaces in the world, has enabled faster payouts for its sellers via Visa Direct in the U.S. We recently signed a deal in the U.S. with Gopuff, a consumer goods and food delivery service with millions of customers across hundreds of U.S. cities, to provide their delivery partners the ability to cash out their earnings balance in real time. In terms of bringing existing use cases to new geographies, in addition to some of the issuing deals I mentioned earlier, we have also signed Visa Direct deals with China Construction Bank and Etisalat Egypt. Other new geographies also include Norway, where Norwegian mobile payment application, Vipps, will offer users access to Visa Direct for all domestic payments. This will improve the card-based experience for Vipps, roughly 4.3 million users covering over 80% of Norway’s population. On the enabler strategy, Square has expanded their instant transfers to Canada, offering their business a way to have faster merchant settlement opportunities. U.S. money movement automation platform, Astra, is using Visa Direct to let developers add real-time transfer functionality to their applications. Millions of its end users can fund cards, wallets and demand deposit accounts with their eligible debit cards. Visa Direct has extensive reach, including more than 3 billion cards and over 2 billion accounts. Recently, Visa Direct has signed with Singapore-based payments infrastructure platform, Thunes, which has a network of mobile wallets across 44 countries and territories. Our partnership will add a send-to-wallet capability with either direct through Thunes’ B2B payment platform and provide access to 78 already integrated digital wallet providers, representing over 1.5 billion digital wallets globally. With this partnership, we will expand our total reach to nearly 7 billion endpoints covering cards, accounts and wallets. As part of new flows, aligned with our global network of network strategy, we are focused on building the infrastructure that enables our clients to deliver cross-border products and services for their customers. One of our newest capabilities in this space, Currencycloud, signed 35 new partnerships this quarter, including Paycent, a global end-to-end payment platform with over 7 million customers and 17,000 SMEs. Paycent intends to expand capabilities of its Paycent business platform for clients to collect and hold up to 34 currencies and seamlessly convert funds back to the required currency at competitive FX rates. Now moving to value-added services, which had $6 billion in revenue for 2022, up 20% in constant dollars. For the fourth quarter, revenues were up $1.7 billion and grew 20% in constant dollars as well. Our strategy here is also three-fold; one, to deepen client penetration of existing products; two, to build new products and launch new solutions; and three, to extend geographically. On the first strategy, deepen client penetration of existing products, let’s explore two of our largest value-added services businesses, DPS, debit processing services and CyberSource. DPS, our issuer processing business, hit a major milestone, exceeding $2 trillion in annual authorization volume in FY 2022. DPS has also renewed with nearly 30 clients, representing over $600 billion in annual DPS processed authorization volume. CyberSource remains a compelling gateway solution for merchants. Most recently signed McDonald’s, Little Caesars and JetBlue. We also continue to expand CyberSource relationships with acquirers, first with the Bank of New Zealand, New Zealand’s largest acquirer. Together with Japanese acquired SMCC, CyberSource continues to provide payment processing solutions for more than 100,000 terminals in both card-present and card-not-present environments. SMCC is also leveraging CyberSource’s capabilities for value-added services such as fraud management. Most recently, CyberSource is powering SMCC’s expansion of the EMV transit acceptance, supporting commercial and pilot launches with 24 different transit operators across Japan. Deutsche Bank will offer CyberSource’s Decision Manager to its merchants so that they can receive a risk value for each e-commerce transaction using rules and AI to help prevent online retail fraud. On the second strategy, build new products and launch great new solutions, our recently acquired capability, Tink, is a real example. Tink recently signed Adyen to offer a white-label pay-by-bank open banking solution on its single platform. Adyen will utilize Tink’s payment initiation technology, so businesses can enable account-to-account payments. Adyen’s open banking integration will launch first in the U.K. with plans to expand to multiple markets during 2023. Last quarter, I mentioned our newly developed risk-as-a-service capabilities powered by our network-level data, AI capabilities and our risk experts. Recently, Navy Federal in the U.S. and several banks in the CEMEA region signed engagements for the service, which aims to deliver enhanced fraud prevention and management. Our third strategy is to extend geographically, in many cases through tailored solutions. Since our acquisition of Visa Europe, we have made significant effort to bring value-added services to clients. Across Europe, clients enrolling onto Visa advance through authentication and Visa risk management products tripled between October 2019 and September 2022. These clients span across 14 different European countries. In CEMEA, Visa Risk Manager launched a network-agnostic pilot with Emirates NBD, a leading issuer in the UAE. As part of Visa’s network of network strategy, network-agnostic VRM will allow clients to manage card payment risk across their entire portfolio. We recently brought our Buy Now, Pay Later solution to Canada and have continued to make progress adding some of Canada’s largest merchants, including Simon’s and Canada Computers. RBC and Visa have entered into an agreement to launch the Visa Installment solution on eligible RBC consumer credit cards. In conclusion, our 2022 performance was very strong and demonstrated that our strategy for each of our growth levers are delivering. We see new flows as a way to drive additional volumes and transactions and value-added services as a way to drive additional yield on existing volumes and transactions. Vasant is going to go into a lot more detail, but let me make four points about 2023. One, in the year ahead, I see significant opportunity for the business across all three of our growth areas, consumer payments, new flows and value-added services. Two, we faced some headwinds, in particular lapping Visa and a challenging FX environment. Three, we did not factor a steep economic downturn or a recession into our numbers. To the extent one occurs, it will have some impact. Four, we will continue to manage our business for the medium and long-term, and we will invest in initiatives that are compelling and will provide future growth. That said, we recognize that some economies around the world could face increased pressure. So we will be monitoring things very closely. We will, as we have in past periods, be flexible and prudent in the management of our expenses. As a leadership team, we have demonstrated Visa’s ability to manage through many different environments, and I remain confident that our strategy will continue to position Visa at the center of money movement for years to come. With that, over to Vasant.

Thank you, Al. Good afternoon, everyone. Our fiscal fourth quarter results reflect sustained strength in domestic spending and continued recovery in cross-border travel. Net revenues were up 19% and GAAP EPS was up 13%. Non-GAAP EPS was up 19%. The strong dollar was a stiff headwind, dragging down reported net revenue growth by 4 points and non-GAAP EPS growth also by 4 points. Discontinuation of operations in Russia reduced net revenue growth by about 5 points. A few key highlights, in constant dollars, global payments volume was up 10% year-over-year and 35% above 2019. Excluding China and adjusted for Russia, global payments volume was up 16% year-over-year and 45% higher than 2019. U.S. payments volume was up 12% year-over-year and 45% above 2019. In constant dollars, international payments volume, excluding China and Russia, was up 20% year-over-year and 46% above 2019. The cross-border travel recovery continues. However, the pace of recovery has moderated as most borders are now open, except China. Index to 2019, cross-border travel volume, excluding transactions within Europe, rose 12 points in the fourth quarter versus a 22-point gain in the third quarter. Our three growth engines, consumer payments, new flows and value-added services, all grew revenues in excess of 20% in constant dollars. In fiscal year 2022, we bought back $11.6 billion of stock at an average price of $205.97. Contributions to the litigation escrow account, which have the same effect as a stock buyback, added another $850 million. We also paid out $3.2 billion in dividends. At the end of September, we had $5.1 billion remaining in our buyback authorization. In October, our Board authorized a new $12 billion stock buyback program and increased our dividend by 20%. Now on to the details. In the U.S., credit grew 17% year-over-year to 36% over 2019, helped by travel and entertainment spending. U.S. debit grew 7%. Relative to 2019, debit was up 54%, sustaining significantly above the pre-COVID trend line even as credit has recovered. U.S. cost present spend grew 11% year-over-year and was 27% above 2019. Card-not-present volume excluding travel grew 10% year-over-year and was 68% higher than 2019. E-commerce spending remained well above the pre-COVID trend line even as card-present spend continues to recover. On the International front, Latin America was up 33% year-over-year and 109% higher than 2019. Our CEMEA region excluding Russia grew 32% year-over-year and was 105% higher than 2019. Growth in both regions was fueled by client wins, cash digitization and acceptance expansion. Europe was up 12% year-over-year and 34% higher than 2019, impacted by a portfolio conversion underway in the U.K. Ex-U.K., Europe volumes grew 30% year-over-year and was 67% above 2019, reflecting share gains in multiple markets. Asia-Pacific excluding China continues to recover, up 26% year-over-year and 32% above 2019. Global process transactions were up 12% year-over-year and 40% over 2019 levels. Constant dollar cross-border volume, excluding transactions within Europe, but including Russia in prior periods, was up 49% year-over-year and 30% over 2019. Excluding Russia, year-over-year growth was higher by approximately 5 points. Cross-border card-not-present volume growth, excluding travel and excluding intra-Europe grew 12% year-over-year and was 60% above 2019. Cross-border travel-related spend, excluding intra-Europe grew 101% year-over-year and is now 16% above 2019. The cross-border travel index to 2019 went from 112 in June to 115 in July to 118 in September. While the recovery continues, the rate of improvement from month-to-month has slowed as borders, excluding China, are now open. Travel in and out of Asia recovered sharply in the quarter, up 16 points from the high 15 to the mid-70s index to 2019. There is more recovery to come in Asia, especially when China starts to lift restrictions. Summer travel in and out of Europe was also very strong, with a travel index to 2019 in the 130s, up 13 points from the third quarter. European travel appears to have benefited most from the strong dollar. Travel outbound from the U.S. to all geographies continued to pick up steam, rising to the mid-130s index to 2019, up 10 points from the third quarter. However, the inbound travel recovery was sluggish, still indexing in the low 90s and up only 4 points. The strong dollar and delays in Visa issuance from some countries appear to be impacting travel into the U.S. Travel into Latin America and the Caribbean remained very strong and stable, indexing around 150 to 2019 levels. Finally, travel in and out of CEMEA indexed in the mid-120s relative to 2019, up 10 points in the quarter. Moving now to a quick review of fourth quarter financial results. Service revenues grew 11% versus the 12% growth in Q3 constant dollar payments volume. Exchange rate drag more than offset growth from utilization of card benefits. Data processing revenues grew 10% versus the 12% of this transaction growth. The primary reason is that our data processing revenues are impacted by Russia. However, our transactions growth is not. Adjusted for Russia, data processing revenues were up 15%. International transaction revenues were up 52% versus the 49% increase in constant dollar cross-border volumes, excluding intra-Europe. Revenue growth was helped by high currency volatility and pricing actions more than offsetting the impact of the strong dollar. Other revenues grew 13% led by travel-related programs and pricing actions. Client incentives were 26.9% of gross revenues in line with expectations. Revenue growth was robust across our three growth engines, each growing more than 20% on a constant dollar basis. Consumer payments growth was led by the recovery in cross-border volumes, high currency volatility and continued strong domestic volumes and transactions. New flows growth was driven by carded B2B recovery. Commercial card volumes grew 21% year-over-year and are up 43% versus 2019, excluding Russia; Visa Direct transactions grew 42%. Value-added services growth was driven by higher volume, increased client penetration and select pricing actions. Currencycloud and Tink added about 0.5 points to revenue growth. GAAP operating expenses grew 20%. Non-GAAP operating expenses grew 18%. The inclusion of Currencycloud and Tink added about 3 points. Exchange rates were about a 4.5 point benefit. We stepped up investment in our business in the second half of the year as the recovery trajectory accelerated. Personnel costs were also higher due to annual salary increases granted a quarter earlier than our normal cycle and higher incentive compensation accruals. We recorded losses from our equity investments of $122 million. Excluding investment losses, non-GAAP non-operating expense was $99 million, benefiting from higher interest income due to rising rates. GAAP EPS was $1.86. Non-GAAP EPS was $1.93, up 19% over last year, inclusive of a 4-point drag from the strong dollar. For the full year, net revenues increased 22%, and non-GAAP EPS of $7.50 was up 27%, with exchange rates reducing reported revenue and non-GAAP EPS growth by over 2 points each. We are now in fiscal year 2023 and through the first three weeks of October, business trends have remained strong and stable. On a year-over-year basis, U.S. payments volume was up 11%, with debit up 9% and credit up 14%. U.S. spend growth versus 2019 was up 47%, with debit up 57% and credit up 39%. These trends are consistent with the fourth quarter and with performance in major markets around the world. Processed transactions grew 12% year-over-year, up 40% versus 2019. Constant dollar cross-border volume, excluding transactions within Europe grew 42% year-over-year and was 33% over 2019. Card-not-present non-travel growth were 61% above 2019. Travel-related cross-border volumes were 18% above 2019. Moving now to our perspectives for the coming year. Forecasting four quarters ahead has been difficult through the COVID years. While COVID impact is now largely behind us, as you all know, we are in a very uncertain macroeconomic and geopolitical environment. As we have said before, we are not economic forecasters. Clearly, there’s a high risk of a global recession, but we do not have a specific point of view on if, when or the kind of recession we might have. For internal planning purposes, we are assuming no recession. Of course, we will stay very vigilant, closely monitoring our trends day-by-day. We will stay very flexible. We will have contingency plans in place should we have an economic or geopolitical shock that impacts our business. And we will be prepared to act fast should we need to. So that is the context for our planning assumptions, which I will walk through now, starting with revenue drivers. Payments volume and processed transactions indexed to 2019 have been very stable in the U.S. and globally for the past three quarters. In other words, we believe the recovery from COVID is behind us when it comes to domestic spending. We are assuming this stability sustains through fiscal year 2023 with normal year-over-year growth rates in the low double digits for both business drivers. On payments volumes, Russia will impact growth rates in the first half. Russia will not impact reported processed transactions growth. Cross-border e-commerce trends have also been stable, especially when you adjust for Russia and crypto-related volatility. We are assuming cross-border e-commerce growth rate sustain in the mid-teens, excluding Russia and crypto, and in the low double digits with Russia and crypto impact included. Cross-border travel, excluding intra-Europe, has continued to recover but at a slower pace, up 6 points from 112 to 118 index to 2019 between June and September. For planning purposes, we are assuming that this recent month-to-month pace of recovery sustains through fiscal year 2023. As was the case last year, there will be periods of deceleration and acceleration. Hopefully, China starts easing restrictions as we enter calendar year 2023. Two variables will have a significant impact on our reported revenue growth in fiscal year 2023, Russia and the dollar, which has strengthened to extraordinary levels through fiscal year 2022. Since we discontinued operations in late March, Russia will reduce first half fiscal year 2023 revenue growth by over 4 points, with 4 points in the first quarter and as much as 5 points in the second quarter. As you might recall, we recorded two quarters worth of service fees in fiscal year 2022. Russia will obviously have no impact in the second half. Russia will reduce full year net revenue growth by 5 points. We faced very stiff exchange rate headwinds as we enter fiscal year 2023. Based on where the dollar is today and the forward curve, exchange rates will reduce reported net revenue growth in fiscal year 2023 by around 4 points. Since the dollar strengthened through fiscal year 2022, the impact is greater in the first quarter at around 5 points, around 4.5 points in the second quarter and moderate through the year. When you pull all this together, our planning assumptions get us to mid-teens constant dollar net revenue growth on a run rate basis, i.e., adjusted for Russia. With a 2-point Russia impact and a 4-point exchange rate headwind, reported nominal dollar fiscal year 2023 net revenue growth would be in the high single digits. Client incentives are expected to be in the 26.5% to 27.5% range as a percent of gross revenues. With a 4-point Russia drag and a stiffer exchange rate headwind, first half reported nominal dollar net revenue growth is expected to be lower than the second half, lowest growth in the second quarter, which has the largest Russia impact and stepping up in the third and fourth quarters with no Russia drag and hopefully a moderating exchange rate headwind. Moving on to operating expenses. We are managing expense growth in line with our revenue growth expectations, rigorously prioritizing investment plans. As you know, this is a long cycle business. Investments we make today will have revenue growth two years to three years out. It is important for us to continue to fund key growth initiatives across consumer payments, new flows and value-added services. As Al said, we have extraordinary growth opportunities and need to ensure we are investing to realize their potential. Our current plans are for low double-digit non-GAAP operating expense growth in constant dollars, high single digits in nominal dollars, Tink and Currencycloud, which closed during fiscal year 2022 at about 1 point to expense growth, offset by the discontinuation of Russia operations and exchange rate changes, which are expected to be about a 1.5 point benefit each. Non-GAAP operating expense growth will be higher in the first half for two reasons. First, Tink and Currencycloud add 2 points to expense growth in the first half. Also in the first half, we lapped a lower expense base last year since we stepped up investment spending through the year as the cross-border recovery accelerated. As such, non-GAAP expense growth in nominal dollars is expected to be in the low double digits in the first half and at the high end of mid-single digits in the second half, highest in the first quarter, which is also impacted by the FIFA World Cup and moderating through the year. Should there be a recession or a geopolitical shock that impacts our business, slowing revenue growth below our planning assumptions, we will, of course, adjust our spending plans by reprioritizing investments, scaling back or delaying programs and pulling back as appropriate in personnel expenses, marketing spend, travel and other controllable categories. In a business like ours, this always requires a careful balance between short- and long-term considerations. As interest rates have risen, non-operating expense will benefit from higher interest income from our cash balances. We currently expect non-operating expense to be in the $200 million to $250 million range for fiscal year 2023. We will provide quarterly updates through the year. Our tax rate is expected to remain in the 19% to 19.5% range in FY 2023. Honing in on the first quarter, based on everything I just walked through, we expect reported nominal dollar net revenue growth in the high single-digit range, with client incentives on par with the fourth quarter of fiscal year 2022. Nominal dollar non-GAAP operating expense growth is expected to be in the low teens. The tax rate could be lower than the 19% to 19.5% range in the first quarter, depending on the resolution of some items. Second quarter net revenue growth is expected to be lower than the first quarter because of the Russia impact, which is higher. Second quarter operating expense growth is also expected to moderate to the low end of double digits. In summary, we assume stable conditions through fiscal year 2023. We are prepared to act fast should circumstances change. Regardless of near-term uncertainties, we remain as certain as we have ever been about our extraordinary long-term growth opportunity. There is still plenty of cash to digitize in core consumer payments. We are accelerating volume growth by vastly expanding the use cases we can serve through our new flows business, while enhancing the yield on transactions in our network by layering on value-added services.

Thanks, Vasant. And with that, we are ready to take questions, Holly.

Thank you for taking my question. Al, I wanted to follow up on your comment in the prepared remarks about Visa now having 4.3 billion tokens, which has more than doubled year-on-year. Can you elaborate on a couple of aspects of tokenization? First, what progress have you made on selling your tokenization services as a value-added service to other alternative networks? Additionally, since you don’t monetize tokens directly, how should we understand the indirect benefits of tokenization to Visa now that the number of tokens exceeds the number of card credentials? Thank you.

Yeah. It’s 4.8 billion. We have had some, but not a tremendous amount of success yet in terms of selling tokens into other networks. We view it as critical to the security of the ecosystem and, ultimately, the trust of the ecosystem as it relates to card transactions that convert to tokens. Over time, we expect this to have very positive impacts on our issuers and merchants in terms of fraud. There are a few cases, the clearinghouse being one, global payments being another, where I know that we are getting revenue today from the tokenization capability that we are building for them.

Thank you very much. Could you gauge the impact on processed transaction growth for FY 2023 from U.S. Federal Reserve’s enforcement of two unaffiliated networks to process every online U.S. debit transaction beginning July 1, 2023? And related to that, do you have any mitigation strategies to offset the impact, for example, potentially adjusting prices?

Yeah. I'll answer the first part of the question. I am sure Al will have more to add on the second part. Obviously, we have to wait and see the pace at which the second network is enabled on cards for e-commerce transactions. Our current expectation, given that our fiscal year, as you know, goes through September, is that the effect in 2023 will be minimal, if any. But we will keep you posted. More broadly, just in terms of our views about the impact longer term, people come to us because of the value we create and that value comes in the form of having a dual message network and everything that goes with it, the security and the reliability we offer that is unmatched, as well as the dispute resolution and other sets of services, tokenization, all our risk management services that we layer on. We have competed for business in the past and merchants have chosen us based on the value we provide. I am sure, Al, you have more to add on this front.

Yeah. I think that our capabilities are just terrific, and in an e-commerce world, the liability for fraud sits with the merchant. So they are going to be very, very careful about whom they do business with. They have done business with us for years and know that we have very strong risk capabilities, very strong fraud prevention capabilities. Those are the types of things that in our experience since Durbin in 2010 have led a good number of merchants who solely stick with us; they never route to the unaffiliated network because of those security and fraud capabilities we have. Plus, as Vasant alluded to, we have the ability to dual message, which makes a big difference in car rentals, hotels. In the online world, we can make a big difference when people order multiple items from a merchant. It will allow the merchant to ship in different shipments as opposed to waiting until all the products are gathered before shipping. I think we have a lot of history and many important capability differences and many of our merchants in the United States are very familiar with the strengths that they get from doing business with us.

Next question.

Hey, guys. Thanks. Your outlook and your budget you gave us was obviously helpful, and I clearly underscore the resilience of the consumer so far. But just to touch on the water for a minute. I think you have about a third of your revenues now coming from new flows, services, many of which had are early stages of growth. So putting that together with higher inflation, Al, would you expect any type of difference and set of outcomes on the top line if we were to see a notable downturn? And then, Vasant, just maybe you could touch on the flexibility you think you have on the expense side to help manage through any type of change?

So, Darrin, just to be clear, your one-third is about right for that plus new flows, not just new flows. As you alluded to, I mean, right now, we are seeing nothing but stability, and it’s been true over the last numbers of quarters. Our business is very different than it was the last time there was a downturn. We are much more into everyday spend categories. E-commerce has evolved tremendously. There has been a lot more cash digitization. We have a very heavy debit portfolio, which tends to perform better during downturns. Frankly, I don’t think any of us know what the impact is going to be coming off of the pandemic where there still seems to be a lot of pent-up demand for travel, which is a highly discretionary purchase. We are in an unusual time where employment has really held up. We will certainly watch if payment volumes are impacted in any significant way. Back to your core question, obviously, we will have some hit on our revenue line, but we will continue to manage on the expense side, and I will let Vasant take that half of the question.

Yeah. I mean, continuing on revenue for a minute, I mean, clearly, we now have new flows and value-added services, which are businesses in new use cases that are very different than we have had in past times when we had recessions. They are also ramping in many cases, and value-added services is clearly a whole range of new services that are not necessarily all tied to economic ups and downs. So clearly, there are a lot of differences from the past. But as Al said, recessions can come in all shapes and sizes, whether global or regional, deep or shallow, with lesser impact on consumer spending and so on. As it relates to expenses, as I said in my comments on planning assumptions, I’d say three things. One, we are moderating expense growth as we go into the year. So expense growth is clearly coming down from the levels you have seen. For the year, our going-in planning assumption is nominal growth of about 9%. But I would just note that in the second half of the year, the fiscal year, the growth is actually at the high end of mid-single digits. So it is moderating through the year, and we don’t know when there will be a recession or if there will be a recession. But if you look at what all the various prognosticators are saying, most people think if there’s going to be a recession, it’s sometime next year, probably six months from now. Now that would put us in the second half of our fiscal year. So we already have expense growth moderating to the sort of the high end of mid-single digits. Clearly, we will look to reprioritize, scale back, postpone, et cetera. And depending on the nature of the recession and the impact it’s having on our revenue, we would seek to manage our expenses to be even better than what our planning assumptions might be and bring the growth rate down. So we will calibrate as we go along.

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Thank you. Appreciate it. Al, I was wondering maybe just if you could give some thoughts on what you are most excited about as we head into 2023 and 2024, and what has surprised you, if anything? And Vasant, can you give us a little bit of color on goods versus services, have you seen what the trend on growth rates have you seen on those two items?

In terms of what we are excited about, we are seeing some impressive early signs across all three businesses. In consumer payments, the trend towards cash digitization is becoming more significant globally, and we are pleased with the progress in Tap to Pay. Our e-commerce business has seen substantial growth, particularly in Europe where the growth is very strong. Markets like India, Brazil, Germany, Canada, and Japan are also performing well with varying dynamics, but all are achieving excellent growth. I recently visited Nigeria and the Democratic Republic of the Congo. While Africa might not contribute significantly in 2023 or 2024, we have now established offices in 13 countries there. In new flows, Oliver Jenkyn is leading a focused effort on driving new use cases worldwide and bringing in more enablers to support this. We are particularly concentrating on cross-border transactions, moving beyond the early domestic P2P and B2B use cases. In value-added services, we are excited about our recent acquisitions of Tink and Currencycloud, which will enhance our capabilities. We have dedicated a lot of time to planning sessions between our teams and those running these businesses, and we see great opportunities ahead. Vasant, would you like to address the question regarding the trends in goods versus services?

Yeah. A few things on goods versus services, as you know, we tend to look at how various segments are performing versus the pre-pandemic level in 2019. It’s a clean way to look at things. While there’s been a lot of talk about how goods are underperforming, most of the goods categories index for 2019 actually have done quite well and they are holding quite stable. What it means is that they grew a lot faster in the early parts of the recovery and then haven’t grown as fast as people shifted from goods to services. Overall, if you compare to 2019, the goods business has done very well, indexing very well to where it was and very much either on or above the pre-COVID trend line. More recently, even as services and restaurants, travel, entertainment, have continued to grow, we are starting to see goods do better. They went through a period where they had very high growth, especially through the stimulus period, recovered much faster than services, then services came back. We are starting to see some recovery on the goods side, too now. But overall, goods is doing quite well on a three-year index, too.

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Thank you for taking my question. Vasant, could you discuss the cross-border revenues in 2023? There still seems to be recovery ahead when comparing travel trends to 2019 and considering metrics beyond just spending, like inflation. However, there are concerns since this is highly sensitive to macroeconomic factors. The U.S. dollar has strengthened significantly, which may affect cross-border inflows into the U.S., and while foreign exchange volatility benefited our revenue this year, we will face tougher comparisons next year. With all these factors at play, how are you approaching this situation? Thank you.

Yeah. Clearly, lots of moving pieces, as you pointed out. So I will just go through them one by one. Yes, we did benefit from very high currency volatility in the second half of this year, and that does help us, as you know. It’s in our international fees line, international revenue line, and what volatility is going to be is anybody’s guess. For planning purposes, we assume that it starts to moderate through the year. It’s still high and we are assuming that it will be maybe higher than normal in the first quarter and then moderates as we go through the year to what we have seen in the past to levels that are normal over a long period of time. That’s the impact of volatility. As it relates to the dollar and its impact on cross-border travel, we have told you that we have seen about a 2-point monthly improvement in that index in the last few months. Again, I mean, it’s very hard to predict these things. We got it wrong last year. The recovery was a lot faster than we expected. We will probably get it wrong again, but we have been very clear about our assumption, which is that the recovery we have seen for the past several months, we think is probably the new rate of recovery. There will be accelerations and decelerations, and maybe if China opens up and lifts restrictions, there could be some acceleration. The main message is there’s still recovery in cross-border happening, but we are also lapping much stronger cross-border levels from last year. Cross-border travel really started to recover last September, and so we are now beginning to lap some really strong periods last quarter. The rate of growth inevitably has slowed and will continue to slow through the year, but it’s still above the long-term trend line because we still are in recovery mode. So hopefully, that helps a bit.

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Thank you. From a headline perspective, I guess, if you are seeing nothing but stability, that has been the situation for a few months, as you mentioned, are there things to highlight on a more granular basis if there are particular areas of strength or weakness? That’s part one. But then it also seems that you are implying that the business is more resilient because you have new flows and value-added services in addition to consumer pay, and I kind of agree with that. But could you maybe talk about the new flows and value-added services and what you might see in a downturn?

First of all, Ashwin, we have observed stability for more than a few months, likely close to the last 12 months, certainly in the last nine months. While there is stability, we recognize that some changes in consumer behavior are happening, but consumers are still spending the same amount of money and paying in the same manner, which is vital for us. We’ve noticed some substitution where people are choosing generic products over brands. We also see that consumers are spending more on food and drug products, resulting in less available money for discretionary spending. The affluent customer is reentering the market, which is a positive development due to their significant spending, and employment levels remain very healthy. While consumers might be changing what they buy across different categories, they are still spending the same amount and using the same payment methods as before. Regarding value-added services and new flows, value-added services rely on transactions; if those transactions decrease, it will affect the value-added services business. The net flows business was impacted by the situation in Russia, but as I reported, it increased by 42% in the fourth quarter, excluding Russia, which was a 7-point increase from the third quarter. The momentum is quite strong, largely due to our successful diversification of that business over the last 15 months in terms of use cases, enablers, and geographies, which has contributed significantly to our performance.

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Great. Thanks a lot for taking the question. I want to talk about the Visa Direct decision. So by businesses, platforms, and governments that are deciding to use Visa Direct relative to other alternatives like RTP systems around the world. I fully appreciate that Visa Direct leverages many of these RTP and other ACH systems around the world, but what is it that is causing them to choose Visa Direct? And as a follow-up, you have often talked about the pricing for Visa Direct, it's very use case-based. Maybe you could just give directional examples of what a higher-priced use case might be and what a lower-priced use case might be?

Let me first explain why Visa Direct is beneficial. Its primary advantage lies in its use of the VisaNet platform, which brings with it all the platform's capabilities. Additionally, Visa Direct offers extensive reach, with nearly 7 billion endpoints, including various accounts, cards, and wallets. We've adopted a flexible approach regarding transaction flow, whether through an RTP network, an ACH network, or a payment gateway. We are continuously investing in Visa Direct's capabilities, which also come with numerous protections such as zero liability, chargebacks, and effective dispute management. We prioritize the security of consumer data and fight against cybersecurity threats, providing consumers with peace of mind. Unlike transactions where money moves immediately from a bank account via an RTP network, where there is often no support or governing rules in case of issues, Visa Direct provides a robust support network that makes it a compelling alternative to RTP networks.

In regards to your second question, maybe we will give you two examples. At one end is a high-value use case and that will be cross-border remittances. The use of Visa Direct gives you extraordinary flexibility. You can do it account-to-account, account-to-account, account-to-account, sitting at home; you don’t have to go to someone to give them cash. It’s also tremendous flexibility at the other end in terms of how someone receives the money. It’s real-time. It has all the other benefits Al mentioned. As you know, cross-border remittances have a very high cost right now. We can do all that for a lot less and still have a yield that is quite attractive relative to our traditional yield. At the other end of the spectrum, P2P, very much a preferred way to do it is to have your debit credentials in there, because it makes it a lot more secure and has all the value we can add. It’s a high-volume but lower-yielding use case and very often it’s the way we get going in most markets. So those are two examples, and in between, you have insurance disbursements, earn wage access, marketplace payouts and so on, all of which are different.

Last question please, Holly.