Visa Inc - Class A (V) — Q1 2023 Earnings Call Transcript

Thanks, Jordin. Good afternoon, everyone, and welcome to Visa's fiscal first quarter 2023 earnings call. Joining us today are Al Kelly, Visa's Chairman and Chief Executive Officer; Vasant Prabhu, Visa's Vice Chair and Chief Financial Officer; and Ryan McInerney, who will become the Chief Executive Officer of Visa next week. This call is being webcast on the Investor Relations section of our website at 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 Form 10-K, 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 the first quarter of 2023 reflects stable domestic volumes and transactions and a continued recovery of cross-border travel. Total Q1 payments volume was up 7% year-over-year or 135% versus three years ago, flat with Q4. Excluding Russia and China, payments volume was up 12% or 146% of 2019. U.S. Q1 payments volume was up 9% year-over-year or 144% of 2019, down 1 point from Q4. International volume, excluding Russia and China, was up 15% or 147% of 2019, up 1 point from Q4. Q1 cross-border volumes, excluding intra-Europe, grew 31% year-over-year and 132% versus three years ago, up 5 points from Q4. Excluding Russia, cross-border year-over-year growth was higher by 4 points. Travel-related cross-border volumes rose 6 points from 112% of 2019 in Q4 to 118% in Q1, driven by Asia Pacific, helped by China lifting restrictions, continued modest improvements inbound into the United States and CEMEA benefiting from the FIFA World Cup. Processed transactions were up 10% year-over-year or 139% versus 2019, and we processed 571 million transactions a day during the quarter. Although first quarter net revenues grew – altogether, I should mention, first quarter net revenues grew 12% year-over-year and non-GAAP EPS was $2.18, up 21%. In each of our growth levers, consumer payments, new flows, and value-added services, we saw strong revenue growth. In our consumer payments business, we made significant progress this quarter through large deals with traditional issuers and co-brands. And with the pandemic largely behind us, we saw many businesses focused on payments through Visa's new flows capabilities. In addition, we continue to develop and expand our global value-added services globally. Now let me explore each of these growth areas. In consumer payments, credentials grew 8% overall, 11% excluding Russia, with strong double-digit growth in the United States, India, and Brazil. Tap-to-pay penetration of face-to-face transactions globally was 72%, excluding Russia and the United States. In the United States, we surpassed a notable 30%, with San Jose, San Francisco, and New York City all above 50%. U.S. drugstores went above 40% for the first time in the United States, and nearly 65% of Costco's face-to-face credit transactions were made with a tap. In the United States, we had several important renewals. First, we renewed our partnership with Bank of America in the United States, maintaining our current debit and credit business, including their cash rewards, travel rewards, premium rewards, and newly launched Premium Rewards Elite consumer credit cards. We are excited to continue to invest together in the growth of our joint business and to innovate with Bank of America to deliver enhanced capabilities and improved experiences for their customers. Second, we renewed with Commerce Bank, a top 25 Visa U.S. issuer across their consumer and commercial portfolios. Finally, we also renewed our agreement with Capital One. In Australia, we renewed our agreement with the country's largest independent payment solutions provider, Costco, with over 4 million cardholders for debit and prepaid, and also signed a new agreement for credit issuance. Also in the region, we extended our exclusive relationship with Kiwibank, the largest New Zealand-owned bank. In Latin America, we renewed with ICBC Argentina, one of the largest issuers in the country, and with Banco do Brasil, one of the largest Visa issuers in the region. In addition, we entered into a new agreement with one of the largest banks in Panama, Banco Nacional de Panamá. Also in Latin America, we reached a new strategic deal with fintech platform, Tigo Money and parent company, Millicom, a leading provider of telecommunication services in the region. Visa and Millicom expect to offer Tigo Money's more than 5 million wallet users the ability to digitize their cash in an easy and secure way, making purchases wherever Visa is accepted with the Visa-Tigo Money Access Card. Another strategic fintech deal was with Niyo in India, a fast-growing cross-border focused neobank with 5 million customers. We've extended our relationship from debit into credit to grow cross-border spending with affluent as well as corporate customers. We are also happy to share that we renewed and extended our global partnership with HSBC. Our agreement covers consumer and commercial and it will foster growth and digital acceleration. This deal also cuts across all of Visa's five regions. As you know, Visa is the leader in travel co-brand globally, and I'm happy to report that we recently reached agreements with three important travel relationships. First, Qatar Airways' Privilege Club has signed a new 10-year exclusive partnership with Visa to enhance and expand its portfolio of co-branded payment initiatives with key financial partners across key markets worldwide. Second, with Southwest Airlines in the United States, Visa will continue to be the exclusive payment network for their co-brand credit card issued by JPMorgan Chase. It represents one of the largest co-brand partnerships in the world. Third, with Star Alliance and HSBC in Australia, this is the world's first credit card created with an airline alliance and is issued exclusively on Visa Credit. We recently advanced our co-brand partnership with Flipkart, one of India's leading digital commerce entities with a registered customer base of 450 million. So whether it's with traditional issuers or co-brand partners, we are continuing to position Visa well for the future. On to new flows, where this past quarter, new flows continued to grow with revenue up more than 20% in constant dollars led by strong growth in B2B payments volume and Visa Direct transactions. Visa Direct had 1.9 billion transactions in Q1, up 39% year-over-year, excluding Russia. We continue to grow globally. Non-U.S. Visa Direct transactions as a percentage of total transactions expanded nearly 20 points, excluding Russia, from Q1 '21 to Q1 '23. Building on the success of our remittance program with Standard Chartered Bank in Hong Kong, we recently launched Malaysia as an additional origination market spanning across six currency pairs with more currencies to come. We also continue to bring existing use cases to new markets. First, in Australia, Visa Direct is now enabling driver payouts with DoorDash. Second, we launched our inaugural P2P program in South Africa with FNB, one of the country's largest banks, to enable their 10 million active customers to move money within their mobile app using Visa Direct rails. Third, we launched our wallet cash payout program in Bangladesh with bKash. With this launch, the nearly 65 million bKash users can make wallet-to-money bank transfers 24/7 in near real-time using Visa Direct. We are enabling several use cases, including seller payouts in the United States on Poshmark, a social media marketplace where more than 80 million registered users, and card top-offs with fintech, GoHenry. As a follow-on to the issuance deal we announced last quarter with them, GoHenry is enabling its members to top up their child's prepaid Visa card with Visa Direct first in the UK, with plans to expand this service across Europe in the future. In addition to Visa Direct, we had noteworthy developments in the B2B space this past quarter, where commercial payments volume grew 15% in constant dollars. In traditional issuance, we signed an agreement with Raiffeisen Bank for a new commercial credit partnership in addition to renewing customer credit across their 3 million clients in Austria. In the United States, we renewed with UBS for consumer credit and debit as well as several business credit portfolios. Another issuing partnership was with Stone, one of the largest acquirers in Brazil focused on small businesses. Stone has recently become a Visa debit and credit issuer of cards that could be embedded digitally in its wallet. On the virtual card front, for accounts receivable and payable, we completed several agreements. First, Divvy, an expense management platform owned by BILL, has renewed its agreement to offer Visa virtual cards for small and midsized businesses in the United States as part of its expense and vendor payment solutions. Second, Viewpost converts U.S.-based B2B check payments to Visa virtual cards. Together, we are expanding card opportunities for issuers and corporates by offering a solution that can be deployed easily to every commercial business that still produces checks. Third, we've reached an agreement with Plate IQ, a leading end-to-end accounts payable automation provider in the United States with direct integrations to accounting systems. Plate IQ will be offering a Visa virtual card solution to commercial partners across multiple industries including restaurants and hospitality, retail, and accounting and bookkeeping, among others. Fourth, in our Asia Pacific region, SUNRATE, a global payment and treasury management platform has launched Visa virtual cards as part of its solution for more than 1,000 B2B clients, including global online travel agencies and small business customers. Fleet issuance continues to grow as well. This quarter, we signed with Zemo, a European fleet and mobility solutions provider to issue Visa Open Loop fleet and fuel commercial cards as they expand from three European markets to 10. In the United States, Highnote, a cloud-native card issuance and embedded finance platform, expanded its relationship with Visa with a five-year card issuance agreement across credit, debit, virtual solutions, and fleet. In addition, Highnote became certified as a Visa Fleet card processor, which provides businesses with more specific product category level controls and more detailed and faster data for real-time decisions on new fleet and fuel card programs. B2B is an active space for fintechs and Visa continues to partner with new players to drive innovation for businesses. A recent example is Konfio, a fintech in Mexico that has already issued approximately 50,000 Visa small business cards and recently expanded its agreement to issue Visa Business Infinite cards. In addition, they are positioned to grow acceptance in the market with their newly established acquiring business, Sr. Pago. Now moving to value-added services, which had about $1.7 billion in revenue this first quarter, up more than 20% in constant dollars. Remember that our focus for value-added services is threefold: one, to deepen client penetration of existing products; two, to build and launch new solutions; and three, to expand geographically. CyberSource is a great example on all three areas of focus. First, on deepening client penetration of existing products. CyberSource's Decision Manager offering provides broad capabilities to existing CyberSource clients and has experienced strong growth throughout the pandemic, more than doubling transactions in the last three years. In Q1, transactions utilizing Decision Manager grew in the low teens year-over-year, demonstrating the continued demand for this solution even as we enter a post-pandemic environment. Another area of growth we have mentioned is with acquirers who utilize CyberSource's capabilities to offer them to their merchant clients. In Q1, we signed agreements with several acquirers for gateway services, including Elavon in North America. In Saudi Arabia, Saudi British Bank has announced its strategic partnership with our CyberSource Payment Gateway and Risk Platform to enhance the overall capabilities of SABB's payment gateway with the aim of fostering the bank's growth in an evolving and dynamic e-commerce space. On expanded geographically, we've continued our efforts to strengthen our global presence. Our non-U.S. CyberSource transactions have nearly quadrupled since the first quarter of 2019, and they now comprise the majority of our transactions, led in particular by the Asia Pacific region. CyberSource has also created new offerings. While historically, CyberSource has been an e-commerce capability, over the past few years, we have accelerated the product development of our card-present and omnichannel offerings, including with the acquisition of Payworks back in 2019. In the past quarter, we saw nearly 50% of year-over-year increase in card-present authorized CyberSource transactions. Other value-added services highlights this quarter include our innovative dispute capability through Verifi, which saw nearly 40% growth in cases processed this quarter as we expanded globally with more than one-third of our cases from outside North America. This rapid dispute resolution solution automatically resolves disputes between merchants and issuers through the acquirer of rails, reducing the average time to resolve a dispute from 24 days to typically seconds. And Tink, our open banking platform continues to deepen and develop relationships across Europe. Tink recently signed a master agreement with BNP Paribas to be their main open banking and money movement services provider for millions of customers across Europe. Tink is already live with several businesses in the group, with 3 million customers using Tink's money management, data enrichment, and transactions products at BNP Paribas Fortis in Belgium and BNL in Italy. Tink has also renewed and expanded its commitment with ABN AMRO to integrate Tink's Money Manager and data enrichment products into the bank's app for more than 3 million customers. In conclusion, in the first quarter, Visa delivered very strong results and continues to effectively execute our growth strategy. Vasant will go into detail on our thoughts for the rest of the year, but I'd like to make a few other brief closing comments. We will continue to manage our business for the medium to long term, and we'll invest in initiatives that are compelling and will provide future growth, all while being very mindful of the current environment. I continue to see a bright future for Visa as we look ahead to the rest of this year and beyond, and I believe we have the right strategy to continue to deliver great results. As we announced in November, effective February 1, 2023, I'll be stepping down as CEO and assuming the full-time role as Executive Chairman. I'm exceedingly grateful to the Board and leadership of Visa, in addition to all of our passionate 26,500 employee colleagues who helped make this job so rewarding. I'm proud of all that we have accomplished together since I started in 2016. Ryan McInerney will become Visa's CEO, and I cannot think of a finer leader to continue to position Visa at the center of money movement in increasingly innovative ways. I worked side-by-side with Ryan for almost 6.5 years. He knows our business, our clients, and he is deeply respected by our employees. He and his team will do a great job, and I expect this transition to be totally seamless. With that in mind, and as Jennifer alluded to, I've asked Ryan to join the Q&A portion of our call today. But before that, let me hand it over to Vasant to provide financial highlights for the quarter and our thoughts on the second quarter and beyond.

Thank you, Al. Good afternoon, everyone. Our fiscal first quarter results reflect sustained growth in domestic spending and continued recovery in cross-border travel. Net revenues were up 12%, GAAP EPS up 8%, and non-GAAP EPS was up 21%. The strong dollar dragged down reported net revenue growth by almost 3 points and non-GAAP EPS growth by approximately 3.5 points. Discontinuation of operations in Russia reduced net revenue growth by about 4.5 points. Adjusted for Russia, net revenues were up almost 20% in constant dollars. Net revenue growth exceeded our expectations as value-added services and new flows growth were very strong, currency volatility stayed high and client incentives were lower than anticipated. A few key highlights. In constant dollars, global payments volume was up 7% year-over-year and 35% above 2019. Excluding China and adjusted for Russia, global payments volume was up 12% year-over-year and 46% higher than 2019. U.S. payments volume was up 9% year-over-year and 44% over 2019. In constant dollars, international payments volume, excluding China and Russia, was up 15% year-over-year and 47% above 2019. U.S. holiday spending growth was in the high single digits on a year-over-year basis and up more than 41% versus 2019. E-commerce maintained its share of retail spending versus last year, up over 5 points since 2019. Spending continues to smooth out over the holiday season with Black Friday and Cyber Monday still significant shopping days but less important post-pandemic. Holiday spending around the globe was generally consistent with U.S. trends. The cross-border travel recovery continues. However, as expected, the pace of recovery has moderated as most borders are now open, including Japan in October and now China in January. As a reminder, we saw a very sharp cross-border travel recovery in October and November of 2021, which we are lapping. Indexed to 2019, cross-border travel volume, excluding transactions within Europe, rose 6 points in the first quarter versus a 20-point gain in the third quarter of fiscal year '22 and 10 points in the fourth quarter of fiscal year '22. New plans and value-added services revenue sustained robust growth in excess of 20% in constant dollars. In the first quarter of fiscal year '23, we bought back approximately $3.1 billion in stock at an average price of $198.74. Contributions to the litigation escrow account, which have the same effect as a stock buyback, added another $350 million. We also distributed $945 million in dividends. Now on to the details. In the U.S., credit grew 10% year-over-year and 35% over 2019, lapping the credit recovery from last year, and as compared sequentially to last quarter, impacted by retail spending and fuel prices. U.S. debit grew 8%, up sequentially over last quarter. In level to 2019, debit grew 55%, significantly above the pre-COVID trend line even as credit has recovered. U.S. card present spend grew 8% year-over-year, impacted by fuel prices and retail spend as compared sequentially to last quarter. U.S. card present spend was 26% above 2019. U.S. card not-present volume, excluding travel, grew 9% year-over-year and was 65% higher than 2019. E-commerce spend remains well above the pre-COVID trend line even as card-present spending has recovered. On the international front in constant dollars, Latin America was up 25% year-over-year and 107% higher than 2019. Our CEMEA region, excluding Russia, grew 25% year-over-year and was 108% higher than 2019 as we saw, all through FY '22, growth in both regions was fueled by client wins, cash digitization, and acceptance expansion. Europe was up 10% year-over-year and 34% higher than 2019, impacted by a portfolio conversion that is now nearly complete in the UK. Ex UK, Europe volumes grew 28% year-over-year and was 71% above 2019, reflecting share gains in multiple markets. Ex portfolio conversions, volume trends in the UK remained stable. Asia Pacific, excluding China, continued to recover, up 16% year-over-year and 34% above 2019. Global processed transactions were up 10% year-over-year and 39% over 2019 levels. Constant dollar cross-border volume, excluding transactions within Europe but including Russia in prior periods, were up 31% year-over-year and 32% over 2019. Excluding Russia, year-over-year growth was higher by about 4 points. Cross-border card-not-present volume growth, excluding travel and excluding intra-Europe, grew 3% year-over-year and was 55% above 2019. Adjusted for cryptocurrency purchases and Russia, cross-border e-commerce spending grew in the low double digits. Cross-border card-not-present, excluding travel, represented over 40% of total cross-border volume in the first quarter. Cross-border travel spend, excluding intra-Europe, grew 63% year-over-year and is now 18% above 2019. The cross-border travel, excluding Europe, indexed to 2019 went from 114 in September to 121 in December. Travel in and out of Asia recovered sharply in the quarter by more than 12 points from the mid-70s indexed to 2019 to 85 for outbound and more than 90 for inbound helped by Japan. Japan alone improved by about 50 points since opening its borders in October. With China lifting restrictions on January 8, we expect more recovery to come. Europe inbound and outbound remained strong, with travel indexed to 2019 in the 120s for outbound and 130s for inbound, both up slightly from the fourth quarter. Travel outbound from the U.S. to all geographies continues to be strong in the low 140s indexed to 2019, up 6 points from the fourth quarter. Travel inbound to the U.S. approached 2019 levels and improved 4 points in the quarter, likely due to the weakening dollar. Travel into Latin America and the Caribbean remained very strong and stable, indexing around 150 to 2019 levels. Travel in and out of CEMEA indexed in the 130s and mid-120s, respectively, relative to 2019, with outbound up more than 10 points in the quarter and inbound by more than 15, helped by the FIFA World Cup. Finally, some color on Mainland China post the removal of COVID zero policies. The 40-day Spring Festival season is underway in Mainland China, the world's largest travel event. Domestic travel is rising sharply. From a revenue standpoint, this will not contribute much. In terms of outbound mainland Chinese travel, this will pick up steam as more flight capacity is available, ticket prices moderate, new passports and visas are obtained and restrictions are lifted in some corridors. The initial destinations for mainland Chinese visitors look to be Hong Kong and Southeast Asia, in particular, Thailand, Singapore, and Malaysia. Inbound travel to Mainland China has not increased much and may not until the COVID situation settles down. Moving now to a quick review of first quarter financial results. Service revenues grew 10% versus the 10% growth in fourth quarter constant dollar payments volume. Exchange rate drag was offset by growth from business mix, pricing, and card benefits. Data processing revenues grew 6% versus the 10% process transactions 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 10%. International transaction revenues were up 29% versus the 31% increase in constant dollar cross-border volumes, excluding intra-Europe. Revenue growth was helped by high currency volatility, although lower than the fourth quarter and pricing actions, which were offset by exchange rate shifts. Other revenues grew 31%, led by marketing and consulting services, pricing actions, and acquisitions. Client incentives were 26% of gross revenues, below expectations due to some adjustments based on client performance and other items. For the year, we expect to renew about 20% of our payments volume with a good amount already completed in the first quarter. Revenue growth was robust across our three growth engines. Consumer payments growth was led by the recovery in cross-border volumes, high currency volatility, and continued strong domestic volumes and transactions. New flows revenue growth was over 20% in constant dollars. Commercial card volumes grew 15% year-over-year and are up 45% versus 2019. Excluding Russia, Visa Direct transactions grew 39%. Value-added services revenue was also up over 20% in constant dollars, driven by higher volume, increased client penetration, and select pricing actions. Currencycloud and Tink added about 0.5 point to revenue growth. GAAP operating expenses grew 25%. Non-GAAP operating expenses grew 15%. Non-GAAP operating expense growth was higher than expected, primarily due to a smaller exchange rate benefit. The primary drivers of expense growth were personnel costs from hiring activity in the second half of last year and into the first quarter, as well as G&A expenses driven by lower exchange rate benefits, higher travel, and expenses from new acquisitions. Marketing increased 18%, primarily driven by the FIFA World Cup spend and client marketing. We recorded losses from our equity investments of $106 million. Excluding investment losses, non-GAAP non-operating expense was $7 million, benefiting from higher interest income due to rising rates and some other items. Our tax rate was lower than expected due to the resolution of a tax initiative coming in at 16% GAAP and 16.5% non-GAAP. GAAP EPS was $1.99, non-GAAP EPS was $2.18, up 21% over last year, inclusive of an approximately 3.5-point drag from the stronger dollar. Through the first three weeks of February, business trends have remained strong and stable. On a year-over-year basis, U.S. payments volume was up 14% with debit up 13% and credit up 14%. Lapping of Omicron-related weakness from last year has contributed to strong January month-to-date growth. The Omicron-related uptick will fade as we get into February. These trends are generally consistent with performance in major markets around the world. Processed transactions grew 14% year-over-year. Constant dollar cross-border volume, excluding transactions within Europe, grew 36% year-over-year and was 42% over 2019 and 32% over 2020. Card-not-present non-travel growth was 75% above 2019 and 52% above 2020. Travel-related cross-border volumes were 25% above 2019 and 20% above 2020. We are now past the pandemic recovery stage on domestic volumes and transactions. As such, starting next quarter, we will no longer provide comparisons to 2019 for payments volumes and processed transactions. Since the cross-border recovery is still ongoing, we will continue to provide comparisons to 2019 for cross-border volumes through this calendar year. Moving now to our outlook for the second quarter. For the second quarter, we are assuming that trends in domestic payments volume and processed transactions are sustained with some benefit from lapping Omicron in January last year. As a reminder, discontinuation of operations in Russia will impact reported payments volume growth rates in the second quarter. Russia will not impact reported processed transaction growth. Cross-border e-commerce trends have been stable, too, especially when you adjust for Russia and crypto-related volatility. We're resuming cross-border e-commerce growth rates sustained through the second quarter, excluding Russia and crypto. The cross-border travel recovery continued generally in line with our expectations in the first quarter. We are assuming recent trends to sustain into the second quarter. We expect most of the Mainland China travel recovery in the second half and beyond for reasons I outlined earlier. We expect outbound travel from Mainland China to recover first. The pace of inbound travel recovery will depend on the COVID situation. Discontinuation of operations in Russia will reduce second quarter net revenue growth by almost 5 points since we recorded nearly two quarters' worth of service fees in the second quarter of fiscal year '22. Based on where the dollar is today and the forward curve, exchange rates will reduce reported net revenue growth in the second quarter by about 2 points. When you put all this together, our planning assumptions get us to mid-teens constant dollar net revenue growth in the second quarter on a run rate basis, i.e., adjusted for Russia. With an almost 5-point Russia impact and a 2-point exchange rate headwind, reported nominal dollar Q2 net revenue growth would be in the high single digits. Client incentives were below our 26.5% to 27.5% range of gross revenues in the first quarter. Second quarter client incentives are expected to run higher at the upper end of the range, finishing the first half in the middle of the range. As we indicated in October, operating expenses growth rates will moderate through the year as we reduce the rate of increase as well as lap higher levels from last year. In the second quarter, non-GAAP operating expense growth in nominal dollars is expected to be 2 to 3 points lower than the first quarter expense growth. Our third quarter non-GAAP operating expense growth rate is expected to decline an additional 2 to 3 points, with a further 2 to 3 point reduction in the fourth quarter. Non-GAAP results exclude certain acquisition-related items and the litigation provision from the third quarter last year. We currently expect non-GAAP non-operating expense to be in the $40 million to $50 million range in the second quarter, driven largely by higher interest income from our cash balances. Our tax rate is expected to be at the upper end of the 19% to 19.5% range for the rest of the year. With a non-GAAP 16.5% rate in the first quarter, the full year non-GAAP tax rate is now expected to range between 18.5% to 19%. As we said last quarter, should there be a recession or a geopolitical shock that impacts our business, slowing revenue growth below our planning assumptions in the second half, 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. We have contingency plans in place and will activate them should we need to. Our business has been resilient so far this year. Our first quarter performance has demonstrated strong consumer payments growth from cash digitization and client wins. New flows and value-added services momentum remains very strong. There is still much uncertainty from an economic standpoint in the months ahead. We will remain vigilant and ready to act. As we look past fiscal year '23, we remain as optimistic as we've ever been about the long-term growth potential of our business.

Thanks, Vasant. And with that, we're ready to take questions, Jordin.

Thanks, and congratulations to Al and Ryan as well. Vasant, as we think about your baseline plan forecast, how are you factoring in the economy? I mean, are we assuming resilient consumer, stable economy or are you assuming some mild downturn?

Well, we went through what we call our planning assumptions in the last call for the full year, and we told you we had assumed no recession. As you can see, business trends have been remarkably stable. The spend levels just around the world, they've indexed in the mid-140s for almost four quarters right now, and there's no evidence of a change in trend. That's reflected in our second quarter outlook. At this point, we're not changing any expectations for the second half. I mean, clearly, the dollar has weakened a bit so that will change the exchange rate impact in the second half, but we're not changing any of our views in the second half. I mean, they are planning assumptions. And if there is a slowdown, then we will react accordingly.

It's encouraging to see that from the trends observed in Q1 and the guidance for Q2, there appears to be a conservative approach based on current patterns compared to what we might experience in the second half, which seems to align with what the market anticipated. When we look at the underlying trends, the fact that debit transactions are still showing high single-digit growth in constant currency in the U.S., despite challenging comparatives, alongside other services, is notable. Could you elaborate on the factors driving these metrics, as they performed better than expected? I'm curious if Visa Direct is contributing to the growth in debit or if there are other factors influencing market share. Additionally, I would appreciate your insights on the strength of other revenue streams.

Yes. Regarding debit, as we've mentioned before, analyzing 2019 has provided us with a clear perspective on the situation. Overall spending has shown remarkable stability. Although good spending has decreased somewhat, spending on services has compensated for that drop. Consumers have adjusted their spending habits, maintaining the same expenditure, which is why debit remains strong. Debit has significantly benefited from the global shift towards digitization, particularly in the U.S., with increased e-commerce, more tap-to-pay transactions, and a rise in the use of digital credentials for payments. There were concerns that once the market stabilized, debit might slow down. However, as you've observed, debit has remained strong even as credit has seen a rebound, helping to maintain stable payment volumes overall. Those are the key trends; do you have any other questions?

Other revenue.

And other revenue was helped by mostly marketing services and consulting revenue, a fair amount of that linked to the FIFA World Cup. There was a lot of client-related marketing and spending related to the World Cup.

Wanted to kind of double click on some of the comments you made around China. It sounds like you guys are looking towards that region as being a fairly big driver of continued recovery in cross-border travel. I think we heard this morning from your competitor that those volumes in aggregate seem to only be something like 1% to 2% of overall cross-border volumes pre-COVID. So was wondering, given how much of a focus this is for investors as a driver of continued strong growth, can you put some guardrails around how we should be thinking about the magnitude of impact of China once it's fully reopened relative to kind of what we saw in the most recent quarter?

Well, there are a few points to consider. First, our figures are quite similar to those of our competitor. As Vasant mentioned, we believe that we will see outbound travel from China to Southeast Asia first. However, it may take some time before Chinese travelers return to Europe or the United States at pre-pandemic levels. People are likely to watch the COVID situation in China before making travel decisions. Vasant indicated that we are not anticipating any significant recovery in inbound travel to China in the second half of the year. Personally, I expect it could take three to five quarters, starting in the second half, for China to reach pre-pandemic levels. Our planning is aligned with what Vasant stated and what I've mentioned. If China recovers more quickly than we expect, it will benefit us. If the recovery is slower, it will negatively affect us.

Yes. In considering the impact, we have been monitoring how cross-border travel is recovering compared to pre-COVID levels and whether we are back on track. We have indicated for several quarters that many routes are performing well above 2019 levels. However, there are three notable exceptions. The U.S. inbound travel is nearing 2019 levels, hindered by the strong dollar, while most of Asia, excluding China, is still significantly below 2019 levels. For Asia to return to pre-COVID numbers and regain the original growth trend, the influence of China will be crucial. We anticipate that the cross-border travel index will continue to improve throughout the year, but this recovery is contingent on China's return. Therefore, it is essential to monitor this situation.

I had a question about the evolution of Visa Direct. You highlighted the plus 39% year-on-year growth ex-Russia in the quarter. Over the last few years, you've been talking a lot with tap-to-pay and contactless about there being sort of this inflection point dynamic where you reach a certain level of critical mass and then growth really accelerates. Is this similar dynamic true for Visa Direct? And can you give us a sense for sort of how we should think about that evolve over the next couple of years?

Well, I think, Lisa, you're absolutely right. We're focused in Visa Direct at this point on extending into new geographies, new use cases, and more cross-border. I would say those are our focuses. Initially out of the chute, Visa Direct in a country goes through Phase 1, which tends to be P2P before you then get into things like gig economy payouts and transactions like remittances or insurance payments, those kinds of things. So in the United States, and every country is going to go through this kind of evolution where they'll start with P2P, get into things like gig economy payouts and then get into more sophisticated use cases. And the United States is much further along that continuum. In other countries, we are – some good progress kind of in that first phase or two but haven't gotten into more sophisticated use cases. And then in other geographies, frankly, we're still not there. So I think there's a tremendous amount of gas left in the tank in Visa Direct. When I look at the opportunities to take use cases to more sophisticated levels in more markets, to open up more markets and to put a real focus on cross-border Visa Direct transactions, which we'll have better yields as well. So I think your bottom line theory of your question is – has some real legitimacy to it, although I would say that it will be probably a bit longer elevation – a bit longer period of time before you meet the maturity simply because of the different amount of use cases, whereas tap-to-pay is really kind of a single type of initiative.

Good job. I guess my question, rest of world debit is the one place where I guess, numbers were a little weaker than we had thought, negative 2% on constant currency. Is that just a function of portfolio deconversions, Russia, some of the one-off things? And when does that kind of inflect back into positive territory?

I think, Dave, when you look at it ex-China and ex-Russia, it grew over 10%. And yes, the UK migrations, in particular, are happening at a faster pace than we thought. As Vasant said in his remarks, they're almost fully migrated, so certainly, that is having a dragging impact on the growth as well.

Al, could you give us your latest thoughts on sort of balance sheet deployment, M&A strategy, what you might be looking for, whether this environment is yielding more potential opportunities or deals? Or is it time maybe to not pursue additional deals as the macro environment remains volatile?

Nothing has changed in our strategy. We're focused, first and foremost, on organic growth and then growing through M&A, and then from there, dividend and share buybacks in that order. Clearly, there's been a little bit of a burst of the balloon in terms of some of the valuations, in particular, in the fintech world. That's a helpful characteristic of the environment right now. But I think we will continue to look for capabilities and management teams that would bring more value to Visa than we could bring to ourselves organically. And we're in constant evaluation of options. We have a very good corporate development team. It's something that Ryan and Vasant, in particular, spent a good deal of time on. And when we see something that we think will make us better as a company and has a fair value attached to it, we're not afraid to go after it.

And thanks for all the work and effort, Al, over time. And I wanted to address kind of a bigger picture question for you and maybe for Ryan, is that one of the questions we get a lot from investors is how do we think about kind of the challenges as we eventually reach some level of maturation of card penetration, especially in the U.S. and developed markets, especially given some of the preferences we've seen in other countries for them to develop domestic schemes or at least favor domestic schemes. So just wondering if you can provide a little bit of reflection on what we've seen thus far, and maybe, Ryan, some ideas on how we should think about kind of maturation and expansion issues going forward.

I'll begin, and then Ryan can chime in. First, I truly believe there is significant potential in the traditional card market, both for consumers and in the B2B sector. There are still hundreds of millions of individuals to integrate into the financial system, and trillions of dollars are still being spent in cash and checks. In the B2B sector, we estimate a total addressable market of approximately $120 billion across card transactions, cross-border payments, and payables and receivables, which I've discussed in various examples from the last quarter. RTP systems are facilitating the digitization of money movement, which is beneficial. Moreover, the disruption from monetization in India has positively influenced the growth of card credentials and acceptance. There remains a substantial opportunity to expand our acceptance network from its current level in the traditional market. These RTP systems are also beneficial for us, as we leverage them to enhance the reach of Visa Direct through our network-of-networks strategy. They assist us with open banking via Tink, allowing better access for developers on one side and financial institutions on the other. I believe RTPs provide us with an opportunity to offer value-added services, and I maintain that the benefits and capabilities of the carded space are significantly better compared to accounts, especially concerning consumer protections. Looking at PICs in Brazil and UPI in India, we see these systems have emerged, but we are receiving substantial feedback from clients about fraud issues associated with these networks. This is understandable, as they haven't invested the decades and hundreds of millions of dollars that Visa has for developing security, fraud management, and risk capabilities that ensure the ecosystem remains secure and trustworthy for consumers. I believe there is potential in the A2A sector to leverage some of these capabilities and generate solid revenue from them. Ryan, what would you like to add?

Not a lot to add to that, Al. It's great. I mean, James, just in short, we still see a ton of runway. We love our products. We love our people. We love our brand. We love our position and all these markets, whether they're mature or emerging around the world. So tons of runway.

Al, I just wanted to ask a question about how when you look at the new business that you've won, let's say, in the past 12, maybe even 18 months or so, how that kind of sets Visa up as we think about the next, I would say, the next two years, not really much beyond that. But the question really here is, is it tilting to take advantage more of debit trends, credit trends, global hospitality? And I'm kind of asking because MasterCard kind of called it out this morning as their positioning in travel, and it sounds like you were also kind of hinting at some positioning for your business. So I would just be interested to know what that new business pipeline that you brought in suggests over the course of the next two years for your company.

I would like to mention a few points, Dan. Firstly, travel has been a priority for us for quite some time. We have approximately 650 co-brand partnerships worldwide, many of which are in the travel sector, and I believe we are the leading player in co-branding globally. When I assess the global landscape, there are certainly opportunities with traditional issuers. Over the past year, we have made significant progress in markets such as Brazil, Chile, the Netherlands, Germany, and Japan. We've successfully renewed several partnerships in the United States over the last few years, including those with JPMorgan Chase, Wells, and the ones I mentioned today with Bank of America, Capital One, Commerce Bank. Additionally, we've made great strides with fintech companies and neobanks, achieving notable successes in the last two to three years as these entities grow in their respective markets. It is crucial for us to maintain a broad perspective on potential service providers. We aim to incorporate Visa cards into as many digital wallets worldwide as possible. I also want to emphasize acceptance; expanding our acceptance footprint is a vital way to advance our business, and there is still considerable room for growth worldwide. In the past year and a half, we have focused on Latin America. If you examine the trend of cash to payment volume in that region over the past couple of years, you'll see that in 2020, only 46% of the volume was payment volume, while 54% was cash. Recently, we observed that 69% of their volume was purchase volume, marking a significant 13-point increase in just under three years. This progress stems from our successes with traditional financial institutions, partnerships with fintechs, and employing a localized, market-by-market strategy, especially in countries like Brazil and Chile.

Al, best wishes to you and we'll miss hearing from you on this call. Ryan, congratulations. Can you talk about how business growth strategy in organization that has evolved under your leadership? Are you starting to focus more or less on certain things or do some things differently? And Vasant very quickly, can you comment under your deceleration from your fourth fiscal quarter to 1Q? You talked about some of the dynamics, but how is that relative to your initial expectations?

Harshita, I don't think we fully captured the second part of your question, so let's address that, and then Ryan can provide his insights.

Yes. I mean, just a couple of things. The Russia impact is a little larger in the second quarter because we had almost two quarters' worth of service fees last year. Remember, we recognize service fees with a lag, so the service fees recognized in the first quarter were based on Q4 growth rates. So sequentially, Q1 was a little lower, so Q2 service fees will be impacted by that. Also, currency volatility is moderating as we speak. It has been moderating for a few weeks. And incentive growth is a little higher as you saw. So you put it all together, we were a little better than we expected. As you know, we thought we would be high single digits in the first quarter. We were higher for the reasons I mentioned, will be high single digits in the second quarter. That's our expectation right now.

Ryan?

Yes, on the first part of your question, I've been a President now for close to 10 years, so I've been shoulder to shoulder with Al and Vasant and the rest of our team as we've made all of our key decisions, as we've developed our strategy, as we've executed our strategy. So probably won't or shouldn't surprise you, I'm going to continue to focus on the three growth pillars that we've laid out, consumer payments, new inflows, and value-added services. My priorities are going to be focused on doing everything that we can to accelerate our progress and accelerate our momentum. So how do we go to market, how do we work with clients, how do we ship product faster, how do we sell solutions more effectively to our clients? And to part of your question, how do we organize? Earlier this month, I announced a new organizational structure that really reflects our strategy that we talked with all of you about all the time. We believe it's going to help us accelerate our progress in all three of those growth factors. To give you a quick sketch of that, Oliver Jenkyn, long-time Visa veteran, who many of you know, is going to lead a new global markets organization that includes driving our consumer payments growth in all of our markets around the world. So our five regional presidents will report to Oliver. Chris Newkirk, who formally led our strategy organization, is going to lead our new flows business unit reporting directly to me. Antony Cahill, who is our former Deputy CEO of Europe, is going to lead our value-added services business unit reporting directly to me. Our global markets team, our value-added services business unit, our new flows business unit, all will report directly to me. Then just to round that out a little bit, Jack Forestell, who also many of you know, will become our Chief Product and Strategy Officer and will partner closely with our President of Technology, Rajat Taneja. The two of them are focused on delivering a robust product and innovation road map, shipping world-class products and services that help our clients grow their businesses and deepen their relationships with their customers. So that gives you a sense of where we are with strategy and the organization.

Thanks for taking the question and congrats to Al and Ryan. I think you mentioned earlier that you're keeping the second half guidance unchanged. Can you just remind us what that guidance was from either a volume or a net revenue standpoint? Just because I think we have only the prior kind of full year guidance, and I know there's FX that's becoming less of a headwind as you get into the second half.

Yes. When we talked to you last quarter, we said for the full year revenue growth would be somewhere in the mid-teens on a constant dollar basis adjusted for Russia. When you adjust for Russia and you adjust for a full year impact at that time of about 2 points on FX, it was going to be high single digits in nominal dollars. And you know sort of where we are in Q1 and Q2. Exchange rates have moved around some so you can do some of the math. We're basically not changing any views on the second half right now because trends have been still fairly stable. The only thing you might want to change is what the exchange rate impact in the second half might be based on where these are right now. I also gave you fairly clear operating expense expectations. We were about 15% growth in the first quarter. We said growth will be 2 points to 3 points lower in nominal dollar terms in the second quarter, and another 2 points to 3 points lower in the third quarter and another 2 points to 3 point reduction in the fourth quarter. That reflects what we had said last quarter that is expense growth will moderate through the year, both as we moderate the rate of increase when also as we lap higher levels of expenses from last year. So those pretty much are the sort of the broad outlines of what we said last quarter. And then we'll update you once again on our next call with any changes we might have based on trends.

Thanks so much, and congrats to Al and Ryan. On the renewal front and new deal front, I'll ask on that if you don't mind. Any call-outs on pricing contract requirements, that kind of thing? I know you'd named a bunch of big names on the renewal front. Just curious what's happening in the whole balance of trade area?

Well, it's a competitive world out there, Tien-tsin, as you well know. I think that there's a price that you need to get to and then a lot of it has to do with the combination of incumbency or not, the capabilities you have, what your lineup of customers' clients are in that market, what kind of experience you've had, and what kind of innovative ideas you bring to the table, the other kinds of capabilities that we have in terms of services and new flows. So every deal is different and potentially hinging on different things depending upon the needs of a particular client. We try to be very bespoke when we look at deals and talk to clients because their needs and their situation will always tend to be a bit different.

And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to reach out to the Investor Relations team. Thanks again, and have a great day.