Visa Inc. (V) Q2 2011 Earnings Report, Transcript and Summary

Welcome to Visa Inc.'s Fiscal Q2 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Jack Carsky, head of Global Investor Relations. Mr. Carsky, you may begin.

Good afternoon, and welcome to Visa Inc.'s Fiscal 2011 Second Quarter Earnings Conference Call. With us today are Joe Saunders, Visa's Chairman and Chief Executive Officer; and Byron Pollitt, Visa's Chief Financial Officer. This call is currently being webcast over the Internet, and can be accessed on the Investor Relations section of our website at www.investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. The PowerPoint deck containing highlights of today's commentary was posted to our website prior to this call. Let me also remind you that this presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are not guarantees of future performance, and as a result from a variety of factors, actual results could differ materially from such statements. These include setbacks in the global economy and the impact of new financial reform regulations. Additional information concerning these factors is available on our last 10-K on file with the SEC. It can be accessed through the SEC website and the Investor Relations section of our website. For historical non-GAAP and pro forma related financial information disclosed on this call, related GAAP measures and other information required by Regulation G of the SEC are available in the financial and statistical summary accompanying our fiscal second quarter earnings press release. This release can also be accessed through the Investor Relations section of our website. And with that, I'll turn the call over to Joe.

Thanks, Jack. And as always, thanks to all of you for joining us today. Visa delivered another quarter of solid financial performance posting net operating revenue of over $2.2 billion, a 15% increase over the same period last year. As has been the case for over a year now, these revenue gains were driven by double-digit growth in payment volume, cross-border volume, and Visa-processed transactions from across the globe. Notably, 62% of our total revenue growth came from outside the United States, getting us progressively closer to our stated objective of having our business outside the United States represent more than 1/2 of our revenue by fiscal 2015. Net income for the quarter were $881 million, a 23% increase over the prior year. This equates to diluted earnings per share of $1.23, a 28% increase over the second quarter of 2010. In the second quarter, we effectively repurchased an additional $630 million worth of shares nearly exhausting our $1 billion authorization first announced at the beginning of this fiscal year. Given that, and recognizing our ongoing commitment to return excess cash to shareholders, today, we're pleased to announce that our Board recently authorized a new $1 billion share repurchase program. This brings our total amounts of repurchases in fiscal 2011 to $2.8 billion. Byron will provide some additional detail on the specifics of the activity. Before covering some of the business highlights from the quarter, I'd like to first address the ongoing legislative dialogue in Washington in the industry's efforts to address the Durbin Bill. Reiterating what I said on last quarters call, since the introduction of the Durbin amendment, Visa has worked with the industry to help educate legislators on the unintended consequences of this piece of legislation. And our efforts are gaining increasing traction. As you know, Senators…

Thank you, Joe. I'll begin with some overall observations. First, Visa's 15% net revenue growth was broad based, with solid 10% growth in the U.S. and a very strong 21% growth rate in rest of world. As Joe mentioned earlier, over 60% of the quarter's revenue growth came from outside the United States. This means non-U.S. revenue is now 45% of Visa's total. Second, U.S. revenue growth has been supported by 5 consecutive quarters of year-over-year positive credit payment volume growth. Most recently, the months of February and March both comped at 11%, which is the first time we have seen double-digit growth since the recession. We are clearly encouraged by this trend. Third call out relates to client incentives. Incentives for the quarter as a percent of gross revenue was 16.7%, up from 15.3% in the first quarter. Taken together, incentives as a percent of gross revenue was 16% for the first half of the fiscal year, at the low end of our guidance. While we still expect client incentives to be in the range of 16% to 16.5% for fiscal 2011, if implementation of the Durbin amendment is not delayed beyond July, it is probable that we would see some upward pressure on this number as a result of potential actions we would take to mitigate volume loss with certain issuers and merchants. Fourth call out relates to Durbin. Whether the legislation gets delayed or not, we still expect to deliver revenue growth in the 11% to 15% range and earnings per share growth of greater than 20%. Finally, it's worth noting that beginning with the second fiscal quarter, our 3 key revenue drivers are now growing at double-digit rates, while comping double-digit growth in the same quarter of the prior year. This is true both globally and…

[Operator Instructions] The first question comes from Bruce Harting with Barclays Capital.

With 60% of growth coming from Rest of World, I'm just trying to circle the next time you have an earnings announcement, hopefully, we'll know one way or another the outcome of the fed decision and whether it's stalled or not. But is it one way to look at it of $2.2 billion of net revenue this quarter, I figure about 10% given your previous numbers came from issuers at U.S. debit, so call that maybe $200 million. And in theory if that were reduced say, 20% just to pick a number or maybe worst case, or $40 million a quarter, the other $2 billion of revenue is growing faster as you said with 60% of revenue growth coming from Rest of World, particularly strong in credit given that credit is much larger Rest of the World than debit. Is it one way to look at it and say that, that other $2 billion of revenue not impacted by Durbin growing say, 15% would more than offset say, the $40 million decline and the $200 million of U.S. debit coming from issuers. Is that one way to try to size this in the second half if we get a worst case?

Without confirming any of the numbers, I think the mindset that we are conveying and you're picking up is that with that 45% of our net revenue in the quarter is now coming from outside the U.S. That revenue this quarter, grew at 21%, twice what the growth rate is of the U.S. at '10. And we were particularly pleased to see that this is the fifth straight quarter of positive payment volume growth in U.S. credit. And so, within the U.S. portfolio, which is being outgrown by Rest of World, credit is beginning to take a stronger presence and thereby putting debit in a different financial perspective than it was say, 12 months ago. So I think that thesis is exactly what we were trying to convey on the call. Thank you for asking.

The next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang - JP Morgan Chase & Co: Joe, I guess I want to ask you, I guess you're teasing us a little bit here with the eCommerce mobile strategy announcement later this month, is there anyway you can elaborate on that further? And I guess, I'd also ask if you can update us on your willingness to work with I'll call it, non-bank partners in the U.S., names like Isis, which I believe is now opening things up outside of Discover?

Well, I can't really expand on the first point because as I suggested, we're going to make an announcement and we'll begin with something in the middle to the end of next week. And so, you're going to have to hold off for a few days or several days in that regard. As it relates to the second part of the question, obviously, one of the things that we're looking at is opening up new and different sources of revenue. And that would suggest that we'll be working with different types of entities and we have pretty much exquisitely worked with before. Having said that, I want to make perfectly clear, we're not going to do this at the expense of our primary customers and financial institutions.

The next question comes from Adam Frisch with Morgan Stanley.

I want to address the 8 online in the quarter because all the calls that I'm getting post their releases is on this. And I know Byron, you went through the details. It was based on the accounting changes around extras and no Olympics this year and so forth. But just to set an apples-to-apples basis, what would the year-over-year EPS compare have been? And as a follow-on, you said that you will continually invest in growth initiatives with the margins of 62%. Does that mean they're not sustainable at current levels?

So on the first one, I think what you're asking, Adam, on marketing is because we took the Visa extras out of the expense base going forward, does that have a P&L impact? Is that the question? Because the revenue came out equal to the expenses, so while marketing is down and it is down in part because of the removal of Extras and also because of timing, the full year impact of the change that we made with Visa Extras is income statement neutral. So no impact on EPS, and no impact on the full year guidance for marketing because when we guided, while marketing is down versus the same quarter last year, there's always, given the campaign that we have last year relative to the Olympics, you would naturally expect it to be down somewhat. So we are still fully consistent with the guidance that we gave earlier on marketing. And the adjustments we made for Extras no income statement impact. With regards to the margin at 62 for the quarter, that would be -- what you should take away is that we are increasingly investing in our products platforms to drive future growth. And the margin will simply be an outcome of the level of investment that we make and we continue to invest aggressively in that arena.

The next question comes from Dan Perlin with RBC Capital Markets.

I had a question as it pertains to watching inflation, gas prices and food. I wanted to know what really has been your experience, where in a certain I guess, friction points or price levels, which could impact your transaction growth relative to what you guys get from higher average ticket prices? And then, are you really concerned at current levels? Or would you be concerned if these levels, where kind of held up for a long period of time?

This is Byron. Let me give you a few -- a little bit of factual perspective first. With regards -- let's talk about this in the context of the U.S. So for gas, historically, go back a year. At gas prices that we're roughly 30% less than they average, on average than they are today, we were running about 8% of total U.S. payment volume in the gas category. We refer to it as oil, in the oil category. In the month of April, that was just a little over 10% of U.S. payment volume, suggesting that the share had moved up about -- that's about a 25% increase in the share of U.S. payment volume. When you compare that to roughly based on our measures of 32% increase in the average price of gasoline, April versus about where we were a year ago, and you factor in that there is probably been some degree of consumption cutback given prices that are now posted in the $4-plus range. That is the immediate impact. We have not yet seen and it may be a bit early, we have not yet seen any specific call outs relative to trade outs on other spending categories, which may be in part due to the additional disposable income created by reductions in withholding tax and social security. So we're still trying to sort that out. Inevitably, there is probably going to be some friction. But at the moment, it's hard for us to identify it.

The next question comes from Andrew Jeffrey with SunTrust.

Byron, if we operate under the assumption that indeed, Durbin is not delayed, and as you said, you would adjust incentives to maintain volume, should we think about that, first of all, I'm assuming what you're saying is you'd be above the high end of the 16.5% range you set. And second, would that effectively be a onetime event concentrated in the second half of '11 and then you'd go back to more normalized levels in the future? Or is that a structurally higher level of volumes to support incentives in your view?

Let me deal with the first part of your question. We've delivered the first 6 months at 16% incentives as a percent of gross. And our guidance was 16% to 16.5%. That 16% to 16.5% guidance did assume that Durbin would not be delayed, that we would have some impact of Durbin before the end of the year and we provided for some degree of incentives in the event that, that were to happen. Without knowing the exact timing, without knowing exactly how the rules will be promulgated, without knowing the timing, the implementation timing associated with those rules, those are some pretty big wildcards with regards to the incentives that we may or may not be putting on the table this fiscal year. And therefore, we were drawing attention to the fact that we've got a year in the bag at 16, but there's some significant uncertainties still to go. But some of those uncertainties we're contemplated. So don't automatically assume that were it to be -- were it not to be delayed that we would necessarily be above that range. But where we end up is going to be a function of the timing and the exact wording of the rules. And I would say on the second, it's just hard to know with regards to how we would be deploying incentives today versus how we would do it under Durbin. The notion that incentives would be in play I think is a fair assumption. To what degree whether it be onetime, sustained. I think it will be -- once we understand better the environment ahead, we'll be much better able to opine on that.

The next question comes from Dave Koning with Baird. David Koning - Robert W. Baird & Co. Incorporated: Guys, I was just wondering if the acceleration in credit growth is just all being driven by just consumer preferences as maybe their incomes arise et cetera? Or if there's some external push from the banks that are just starting to push credit over debit or just deemphasizing debit?

Credit is typically much more discretionary in its use. And therefore, we have continued to see very strong debit growth, which is more nondiscretionary. As the economy recovers, our belief is that consumers in combination with more employment, become more willing to spend on the discretionary side. From what we can see, this is still concentrated in the high-income segment of the market, but driven by more discretionary spend and not coming at the expense of debit at this point.

Next question comes from David Hochstim, Buckingham Research.

Could you just give us maybe a better stance of how much deconversions affected the revenue and payments growth metrics this quarter, if we look at year-over-year comparisons this quarter versus the December quarter?

We are -- we don't actually guide to or disclose what the actual impacts are. But it is a -- conversions are accretive for us through this fiscal year. And we can address that again with fiscal year '12 coming up when we talk about our guidance for that time period at the end of the year. We'll address conversions or deconversions at that point. But it should be accretive in each quarter for the balance of this fiscal year.

The next question comes from Don Fandetti with Citi.

Joe, as you look at markets such as Asia, I mean there's clearly a very strong growth trajectory. I was curious on the headwind side, I mean, how do you feel about the competitive sort of landscape from a regional network perspective. We talked to some folks over there, and it seems like they are continuing to be pretty active?

There's a lot of competitive activity that is different in Asia than in the United States. I mean there's China UnionPay, there's JCB, there's national payment system considerations. And so there's a lot going on. But we've been doing business around the world in a lengthy period of time, we've had people on the ground for decades in most of these countries. And the fact that these economies are emerging, and that electronic payment mechanisms are becoming more and more prevalent, we continue to have a huge opportunity almost everywhere in the world. Now I'm not being dismissive about the competition that we face. I mean obviously, there are areas of the world like China where we can't do business domestically. But I don't think that -- I think that our numbers would suggest to you that we're doing quite well in increasing our volumes in Asia and other parts of Latin America and other regions outside the United States. And so, I'm pretty bullish on where we'll be on the next few years in that regard.

The next question comes from Julio Quinteros with Goldman Sachs.

Byron, maybe just sort of horn in a little bit on sort of the confidence to grow through Durbin, as we think about that longer term, is it the volume growth outside of the U.S., some of the mitigation strategies that you're talking about, what gives you guys the confidence? Or is it a combination of all of the above? You guys have the visibility on obviously, where the growth of the business is? But maybe anyway to sort of hone in on how you're think about the mitigation efforts themselves in terms of post-Durbin world et cetera?

Well, it would be -- this is Joe. It would be kind of silly for me to sit here and tell you exactly what we're going to do, because it clearly has something to do with the competition in the event that the rules change. But we certainly haven't been passive as it relates to understanding what the various implications and scenarios could be coming out of Durbin, whether it is delayed or it isn't delayed, what the final links from the fed would be. And so each of those cases, we have a different set of mitigation tactics that we would intend to use. I mean, obviously, we'll be doing some things that we would intend to do across the board regardless of how things developed. But our suggesting to you that we're comfortable, that we are going to be valuable and a company predicated on confidence that we have as it relates to what we do. If that's sufficiently vague, I'm sorry.

The next question comes from Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG: Maybe just a follow-up on that Joe, some of the things that would mitigate the effects on you wouldn't necessarily even be things that you would do, you might help them. But I was wondering about the idea of how much do you think of debit volume could be shifted either in more upscale customers up to credit or downscale customers to reloadable prepaid that would have kind of better economics for the issuer and for yourself as well? And would Visa be advantaged in that just because you tend to be partnered with the banks that have more robust credit card platforms like JPMorgan and BofA?

Well, yes. I mean I don't -- your logic is good and then also [indiscernible] space is a significant investment. I can't tell you, it's hard to judge what percentage of debit a volume could move up or down in the way that you're suggesting. But I don't certainly wouldn't be saying anything out of score or giving away any secrets if I suggested that there isn't a bank in the United States that isn't.

The next question comes from Craig Maurer with CLSA. Craig Maurer - Credit Agricole Securities (USA) Inc.: Yesterday, on First Data's earnings call, they have mentioned making significant investment in dynamic routing, whether that's premature or not depends on the Durbin delay or not. But I wanted to get your thoughts on the prospect of dynamic routing at the acquirer level and whether that would create a price war at the merchant level for debit?

Well, I mean, look, if this gets back into what are the mitigation tactics that we're going to use, and I understand what FDR thinks, and I understand that they're probably excited about the potential from their point of view. But frankly, I'm as excited about what we can do as they are about what they can do. And I'm really quite prepared to do what I need to do to compete with FDR. And at the risk of sounding -- let's not -- I'm not being flippant. I'm just -- I have a considerably hide the real confidence that we'll be just fine.

The next question comes from Rod Bourgeois with Bernstein. Rod Bourgeois - Sanford C. Bernstein & Co., Inc.: It makes sense that you have your incentives outlook and your 2012 outlook essentially on hold until we get clarity on the fed's debit rules. But I'm wondering if you could give us a way to dimension the percentage of your U.S. revenues that are attached to clients, where your incentive agreement would need to be altered if the fed chooses either alternative A or alternative B, under the no network exclusivity provision. In other words, how much of your U.S. revenue mix is subject to incentive agreement modifications under the Durbin amendment, if in the long run, recognizing that Durbin's timing is very unknown?

Rod, let me try and be helpful in putting some perspective with 2 observations. The first one of which, since we're not going to specifically talk about revenue in the context that you asked. We're already public that roughly a little over 50% of cards are issued in the U.S., where Interlink is exclusive on the bank, number one. In the debit, where Interlink is exclusive on the bank. Second, we have also said on a number of occasions that most of our contracts are set up with incentive arrangements that are tied to volume. And so, we will naturally at our impetus, want to revisit a number of those contracts to make sure that the incentives are structured in a way that makes sense given the legal environment that we will be under post-Durbin. I can't think of very many contracts at all that require us, because of the legislation to revisit the contract. We're going to want to in order to adjust the incentives so that it is a win-win for both us and the financial institution.

The next question comes from James Friedman with Susquehanna.

So Byron, I'm just going to just improvise here in light of your response to that prior question which was intriguing. I just want to kind of reiterate what it is that you have addressed so far with regard to volume and et cetera. So you have said that you're 16.5% for this year had contemplated already some impact from Durbin, but the comment you just made suggested that perhaps volume and incentive would be in your interest to reduce in fiscal '12, should Durbin actually proceed? Am I misinterpreting that comment?

Yes, you're misinterpreting. The incentive contracts that we have in place -- most of them are based on volume growth. And if the routing provisions go into place, where the financial institution potentially has less influence over the actual routing, we just have to look at the incentive provisions to make sure that they are reflective of the way the operating environment will conduct itself under legislation.

The next question comes from Chris Mammone with Deutsche Bank.

Just wondering, I know it's small, I was just wondering if you could elaborate on the PlaySpan acquisition. And we know the digital gaming category is displaying pretty explosive growth, so just any color on earliest thought and the strategy there as you layer in that platform? And then maybe as a quick follow-up, was there anything to call up in volumes, Byron, regarding the Easter shift?

On the Easter shift, I would say there might be -- that one's hard for us. There might be a little noise in April, but we've got a pretty diversified portfolio. And so I don't think there's really a call out April and May. Early days on PlaySpan. Joe, do you want to, I think we just completed the acquisition. So we're fast integrating it and that may be...

It will play a role beyond the gaming space and our strategic direction, which we will kind of an add for next week, so which will be much more apparent next week when we make an announcement.

The next question comes from Moshe Katri with Cowen.

Byron, can you comment on the expected timeframes for contract renewals with some of the maybe top 5 or maybe top 10 banks, and how much flexibility do you have in trying to modify some of those contract terms long before some of those contracts expire obviously, specifically we've been focusing on what you were saying regarding rebates et cetera?

Yes, there are no top 5 contracts scheduled for renewal, I want to say, for a good 18 months or more. We do from time to time, when the opportunity is attractive, we will look at early renewals. But in terms of major contract renewals, at the end of last year, we pretty much cleared the decks and don't expect, we have no scheduled major renewals for at least another 18 months.

And we just announced Regions today.

The next question comes from Bob Napoli with Piper Jaffray.

Joe, I know you're not going to give -- there's a lot more data coming next week. But I was hoping you might be able to give a little more color on -- like with the Visa announcement here leading us to tonight, for next week. Is it going to be something that is comprehensive with other joint ventures combined that is like live business? Is it something that's incremental? I mean maybe a little bit more color to help prepare us for next week?

Well, I think that what I said earlier was that we recognize that as time moves on that mobile and eCommerce technology are going to consume a greater role in the electronic payments arena. And if we are going to remain as a viable player as we are today then we are going to have to be out in front as it relates to interoperability, simplicity, security and factors of that nature. So we have been paying attention to that, the acquisitions that we have made, that in the back of our mind. And we have a strategy both in the United States and other mature economies in a different strategy in different parts of the world, where there are emerging economies that depend more on technology. So it is kind of bringing that together, the way that we think about that. What we've done, what we have ready to induce and what we will be contemplating doing as time moves on. So our point of view, it's significant and from our point of view, it is -- we are better than any in the competition that we think we have to deal with, has been because our solution is a more complete solution than what we've seen in the market before. And so we've been reluctant to talk about it until we have put together and put together in an appropriate where we can tell you something positive and significant. And we can talk about how it all comes together. So that's where we are.

The next question comes from Bill Carcache with Macquarie.

There has been some recent announcements that suggests that EMV is gaining traction in the U.S. Can you talk about whether you're seeing that and share your thoughts what that would mean for Visa?

Chips, it is gaining traction and we've supported it. We've made an announcement several months ago as it related to our support globally. We didn't encourage it in the U.S. There have been a lot of things going on as you are probably aware like the [indiscernible] acting, the Durbin acting. Distracting to issuers in the United States. But for cards to be global, chips are going to play a role and we encourage moving the chip technology. We don't necessarily encourage them into pins and chips. We encourage moving to chips and other forms of identification or authentication than what exist, have existed here before. We don't believe that contact with chips would become something that is ubiquitous within the point of sale marketplace in the United States in the near future. We didn't know that there will be specific things to which it is applicable and for which it will be used, but it won't necessarily be widespread tomorrow or the next day or in 2012, 2013.

And the last question does come from Jim Kissane with Bank of America Merrill Lynch.

Joe, do you think the economics with mobile would be better, worse, or the same, compared with plastic today, given that there's any carriers involved, handset manufacturers involved, potentially technology companies?

I think we have a terrific opportunity in mobile technology. And I did mention answering one or the other questions, I believe that, we believe that not only, well, as it relates to the technology and just payments in general, we do believe that there are other sources of revenue that will be made available to us that are not now, that takes our CyberSource acquisition or PlaySpan acquisition, and other things what we've done and when we put it altogether we're pretty excited about the revenue that can come out of this in the future. Now let me caution you. I'm not talking about the spike in revenue in 2012. I mean this isn't something that happens overnight. It's something that evolves. But as I sit here and look at Visa and I look at our sources of revenue and our growth, I have to anticipate what is going to be fueling that growth 3 years from now, 4 years from now, not just what's going to happen next week. And so I think that what we're going to talk about next week, the way we're putting things together. And mobile technology in particular will be something that we'll be happy -- excited to be involved in as time moves on.

Well, that ends it. Thank you all very much for joining us today. And if anybody has any follow-up questions, feel free to give myself or Victoria a call.

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.