Visa Inc. (V) Q4 2011 Earnings Report, Transcript and Summary

Welcome to Visa, Inc.'s Fiscal Q4 2011 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. 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.

Thank you very much. Good afternoon, everyone, and welcome to Visa, Inc.'s fiscal fourth quarter and full year 2011 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. It 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. A 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 of 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 those factors is available in our last 10-K on file with the SEC. It can be accessed through the SEC website in the Investor Relations section of our website. For historical non-GAAP but 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 today's earnings press release. This release can also be accessed through the Investor Relations section of our website. With that, I'll turn the call over to Joe.

Thanks, Jack. And as always, thank you, all, for joining us today. Visa closed out fiscal 2011 with a solid fourth quarter delivering net operating revenues of $2.4 billion on a 13% increase over the same period last year. Diluted earnings per share for the fourth quarter were $1.27, an increase of 34% on an adjusted basis. As a reminder, our adjusted figures exclude the revaluation of the Visa Europe put option in the prior year. Revenue gains for the quarter were driven by strong payments volume growth around the globe, strong cross-border activity and continued recovery in credit spend worldwide. Net operating revenue growth for the quarter was impacted in part by a strategic decision to increase client incentives, as Visa aggressively pursued routing decisions from U.S. merchants and acquirers. These deals, most of which are onetime in nature, were the primary reason we modestly exceeded our annual incentive guidance of 16.5%. Visa also delivered strong performance for the full fiscal year. Net operating revenue was a record $9.2 billion, a 14% increase over 2010. Adjusted net income for the full year was $3.5 billion, a 22% increase over the prior year. Full year adjusted diluted earnings per share came in at $4.99, 28% ahead of last year. While Byron will get into more specifics on fiscal 2012, we are continuing to commit to our guidance provided in July of high-single to low double-digit revenue growth and mid to high-teens earnings per share growth. This takes into account only modest of global economic growth as well as anticipated industry reaction to the debit regulation. Given our outlook for continued growth, we continued to deliver on our commitment to return excess cash back to shareholders. During the quarter, Visa repurchased $423 million worth of our stock at an average price…

Thank you, Joe. I'll begin with some overall observations. First, Visa's 13% net revenue growth in the fourth quarter was once again broad based with solid 8% growth in the United States and a very strong 19% growth rate in Rest of World. Approximately 65% of the quarter's revenue growth came from outside the United States. This means non-U.S. revenue in the quarter was 45% of Visa's total. Second, U.S. revenue growth has been supported by 7 consecutive quarters of positive credit payment volume growth. Most recently, the months of August and September comped at 11% respectively, which continues the strong growth we have seen all year. While encouraging, much of this volume over the past year has been driven by affluent cardholders. As we enter fiscal 2012, it is worth noting that we have not yet seen any discernible broadening of the U.S. credit spending base beyond this affluent income group. Third, client incentives for the quarter, as a percent of gross revenue, were 19.5%, resulting in a full year incentive level of 17%, slightly ahead of our full fiscal year expectation. Two incentive callouts. First, on the issuing side. As telegraphed on our last earnings call, a disproportionate number of our contracts got signed in Q4. Second, on the acceptance side, we experienced greater success than anticipated in the signing of partnership contracts with merchants and acquirers. Finally, operating expenses for the quarter were 2% above the prior year, while on a fiscal year basis, they were up 7%. During the fourth quarter, we incurred approximately $30 million of previously unplanned restructuring expenses, close to 1/2 of which were the result of the decommissioning of our London office. The majority of these positions will be relocated to other countries, placing them closer to the clients we serve. And…

[Operator Instructions] The first question comes from Bob Napoli, William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Question on the incentives. What are the length of terms of the merchant contracts, and would we expect to see the incentives higher earlier in the year as you continue to aggressively negotiate these routing incentives with the merchants?

Hi. Byron. The answer is the -- let's say, the average length of the merchant contracts that we have been signing are about 2 years. And to your second question, I would say no, they would be more "back end of year" weighted, once we begin to see what the actual routing experience is related to those contacts. Much of what was booked in the fourth quarter was onetime, and therefore, the bulk of the incentives associated with this will be validated during the course of the year once we understand what the actual routing experience is.

The next question comes from Jason Kupferberg with Jefferies. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Just wanted to ask a question related to the non-U.S. side of the business. Obviously, the growth remains very strong there. And I want to get a directional sense on the kind of revenue yield you are seeing outside the U.S. versus inside the U.S. I guess we tend to think that it's less outside the U.S. because you aren't processing as much or as many of your own transactions there. So I just wanted to get a sense that if we continue to see this trend of non-U.S. growing revs and volumes faster than the U.S., what does that imply for overall operating margins over the longer term if you continue to go through that makeshift and ultimately get non-U.S. to be north of 50% of total revs?

We've never disclosed what the revenues are in the countries outside the United States. Obviously, when we're not processing, there is a different yield structure. I just have to say that what is growing are our net revenues as a percentage of our total net revenues. So net of incentives, these are the revenues that we're booking. And so, I think that's a pretty good news story.

And let me add 2 dynamics here. As we begin to grow and penetrate outside the United States, remember, the first areas that are penetrated tend to be cross-volume, cross-border types of transactions. So the yields there, early in the development curve, are much higher. As we begin to penetrate more and more domestic payment volume of countries outside the United States, domestic comes with less international. And therefore, the yields, frankly, in any country, including the United States, will naturally move down as domestic picks up a bigger piece of the payment volume. And then there's one final dynamic, which is actually important to understanding how our incentives behave in 2012, which is, when we originally went public, the notion of having multi-year contracts was primarily a U.S. phenomenon. What has happened over time is that we have pursued a deliberate strategy of entering into multi-year contracts with our major clients. As we have pursued that aggressively outside the United States, the quid pro quo for a multi-year contract is incentives. So as we put more, as our volumes build overseas, as more and more of our clients are under multi-year contract, our incentives will just naturally rise, which then has an impact on yield. So to sum, the most important element is what Joe said, we have a much higher degree of processing penetration in the U.S. Outside the U.S., because of that, it tends to be lower. But we pursue the strategies that optimize the growth of our revenue, and it is revenue measured in dollars we saw [ph] for, not yield.

The next question comes Tien-Tsin Huang with JPMorgan. Tien-Tsin T Huang - JP Morgan Chase & Co, Research Division: I just wanted to ask about client incentives as well, just in the quarter to clarify. Now these one timers designed to secure, I think, you said it was for merchant commitments. But did you also secure some network commitments from the issuers as well? And is there a way to quantify what percent of at-risk volume you've actually protected?

It's merchant and acquirers, not issuers, which have been the focus, Tien-Tsin. And these contracts don't guarantee volume. What they do is they incent volume. And at this point, we're not public on the amount of volume, but it's a meaningful increment of volume that is influenced by these contracts.

Well, I mean, as I mentioned in the script, we signed PNC to a longer-term contract. And we obviously have continued negotiations going on with all of our clients. And well, what Byron is talking about is generally the PIN volume and the decision to route the transaction that's in the hands of the merchant or the acquirer. There still are decisions that issuers make as it relates to the signature portion of the card, and we're in a very comfortable position as it relates to that.

The next question comes from Glenn Fodor with Morgan Stanley.

Lot of a good color on the call here. We're getting a lot of questions on the impact on debit growth from all these checking and DDA fees that banks are levying. So I think if you give us some color could kind of help investors out quite a bit. I mean, what's your take on how this could impact volume growth going forward? And can you draw any correlations to other experiences in the payment industry to kind of defend your view?

Well, first of all, I think the banks are clearly making recent business decisions to adapt in this newly regulated environment. I think all of the banks recognize that their customers have an option to move to a competitor. But they believe, in whatever case you're talking about, that their pricing or their future pricing will reflect the value, will reflect the value that they offer to their customers and the value that the customers bring to them. That being said, I don't believe that anything that's happening is going to substantially alter the macro debit volume in the United States. I don't think it's going to go away. Even the one fee that has been specifically announced is a flat fee. It doesn't make any difference. It's not a per-transaction fee, or anything of that nature. I think that, as a result of the recession and the result of the CARD Act, as a result of the Durbin legislation, you're also seeing a lot more activity wind up in prepaid cards. And our growth in that regard, which is really part of our debit-processing environment, is very significant also.

The next question comes from Julio Quinteros with Goldman Sachs.

Just want to go back to one item that I know came up here in the quarter about small ticket items and the pricing on those transactions. Can you guys go back and just walk us through what the sort of situation is there in terms of what pricing looks like and maybe how some of the potential unintended consequences here are being resolved with small ticket merchants?

Well, I mean that's a good question. The answer is that there were a series of events that occurred, and the end result is that small ticket prices from both associations, were raised to the cap of the Durbin legislation. And I'm not sure that I'm not ready to comment on whether that is absolutely the right thing to do or not. What I will say is that we're pretty confident that there is an answer somewhere on the continuum that will benefit both financial institutions, consumers and merchants. And of course, we will endeavor to be a part of getting to the right solution over a reasonably short period of time.

The next question comes from Brian Keane with Deutsche Bank.

Just wanted to ask Byron about the incentives to merchants. You said the incentives for routing are for both signature and PIN. Just wanted to ask about the signature piece. What would you be incentivizing them for? Maybe you can explain that. Kind of semi-related to that, you guys think that some volume will go more towards PIN debit than signature debit in the marketplace and maybe why that would be?

So probably better expressed is, these are incentive agreements to deliver payment volume, whether it is signature or whether it is PIN. And so, that's the way to characterize that. And we'll just have to see how this plays out in terms of movement between signature and PIN. From our standpoint, it's important to preserve the routing. That's what we're focused on. And whether it's signature or PIN, we'll take both.

Remember, when we incent merchants to deliver volume, there's a lot of things that they can do in-store or otherwise with their customers that incent their customers to use these cards. And we've done that over the years in a pretty significant way, and we'll continue to do that. But it's important to us, so Byron's point of incenting merchants to deliver volume is exactly the right direction.

The next question comes from Darrin Peller with Barclays Capital.

Just when you guys had initially given guidance after some of the Durbin announcements, there was -- it was a discussion with conservatism embedded in on the guidance around what Durbin could mean. Just wondering, since that point, there's been some comments I think, Joe, you made since that point, that have suggested that I think you think you're going to come out okay on this. Just wondering, has anything changed in your expectations around what Durbin will impact your revenue by or your earning's power by? And then maybe just talk a little bit about also whether or not some of the embedded assumptions and conservatism guidance have shifted from Durbin to the macro picture?

Well, I mean, obviously, the macro picture, Durbin, our business outside the United States, our prepaid and commercial businesses. When we give guidance, we embrace all of those things. And so, we gave guidance several months ago. We're delivering the same guidance today. We remain extraordinarily comfortable with that guidance. And everything that we think about Durbin, about the economy, about our competitive position is embraced within that guidance. And right now, we're very happy with where we are and what we're suggesting that we're going to do. And we'll see where it goes. But there's nothing that's happened in the last several months that would change our position on this.

The next question comes from Rod Bourgeois with Bernstein. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division: Back in late September, we heard from industry contacts that Visa is moving to what we've been calling a common-switch strategy. And so, I wanted to ask about the revenue implications of the common-switch strategy. You alluded to this capability in your opening remarks. In particular, will PIN transactions on VisaNet be priced the same as Interlink PIN transactions in terms of network fees charged to both merchants and issuers? And if you can comment to the issuers receiving this common-switch strategy with open arms at this point?

Well, we are pursuing the strategy. We're comfortable with it. I mentioned it earlier today. We haven't had any negative reaction that I'm aware of. There is some work that needs to take place, but it is a rule, and I have no reason to believe that people won't adhere to it. In order to compete for a routing transaction in a predominantly PIN environment, it's going to have to be at similar pricing or the same pricing or lower pricing. And it's got to be Interlink-type pricing or we won't win the transaction, so I think that, that answers that question.

The next question comes from Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: I was wondering, not to beat the incentives thing too much to death, but you mentioned that a large portion of them were onetime. Did that include the incentives that went to merchants? Because I mean, I just was hoping you could explain how that would kind of spur them to bring volume with onetime incentives. And could you just also walk through just the signature PIN, the ability I guess to route over the signature network the PIN transactions that you alluded to?

Well, let me take the second part of the question first, and then I think I'll turn it over to Byron. But the ability to accept a PIN on our debit card network or our signature network is something that has existed for quite some time. We authorize millions of transactions a year, millions, which PIN numbers are used on our signature debit card. While we have defined it more specifically to make sure that everybody understands the capability and hasn't lost the functionality to be able to do that, but it is been a part of our signature card for many, many years.

And to answer your first part of your question, the answer is, yes, that the one timers we're referring to were predominantly associated with the merchant and acquired contracts referenced earlier.

The next question comes from David Togut with Evercore Partners.

Could you give us some or quantify, if you will, Byron, the U.S. debit volume growth trends you've seen since interchange was cut 45% for issuers on October 1?

Honestly, it's way too early to comment on that. So we have seen no discernible change in U.S. debit volume associated with that October 1 date with the shift in the interchange. And that is something that we will give periodic updates on, of course, as the year unfolds. We are as interested in that as you are.

The next question comes from Moshe Katri, Cowen.

So considering some of the structural changes that are taking place on the debit side, is Visa doing anything different to maybe gain share in credit? And then, in that respect, can you also comment on whether some of the slowdown that we've seen as of October in some of the metrics, is that -- I mean, is there anything you can comment on that? Is there anything you can -- can you say anything about that in terms of maybe a proxy for future trends?

Why don't I take the second part first. The trends that we outlined earlier in my talk demonstrated a pretty strong September ending quarter. So I would say, whether you're looking at the U.S. or whether you're looking at Rest of World, those were pretty strong growth numbers. And it didn't look like we were missing a beat. And I'm looking at the numbers now. Split between credit and debit, both of them looked pretty strong, U.S. and Rest of World. And on top of that, these numbers are comping some pretty serious growth numbers in the prior year. When we move into October, recognizing that's only 21 days, I think in any given month, that is hardly a trend for a quarter. And I would say that there's nothing in the trend data yet to show any material shift in the trend curve.

As it relates to pursuing credit card business, that is one of our primary focuses. I think we've talked about it before. I think we've talked about the relationships we have with our clients. We've talked about partnerships that we signed and talked [ph] today, and we're very pleased with where we are. And we are extraordinarily client focused, and we are working with each of our clients on an individual basis to help them develop a credit card strategy, particularly, if they want to expand it, and many of them do. And I think that, that will be one of the big success stories of 2012.

The next question comes from Glenn Greene with Oppenheimer. Glenn Greene - Oppenheimer & Co. Inc., Research Division: I just wanted to ask about it was kind of noticeable that U.S. credit volume growth outpaced debit volume growth in the quarter. It's probably the first time in, I would guess, years? And I was wondering if you can give some commentary on what sort of drove that? Did it perhaps have to do with some kind of competitive factors, i.e., some customer losses or maybe some customer response related to Durbin to drive credit volumes in lieu of debit. Just some color and commentary there.

Yes, so, you're right. This is -- I'm looking at the data right now. This is the seventh consecutive quarter of credit card year-over-year growth. Eight quarters ago, it was actually negative. And I think what we're seeing here is a just a continuation of a recovery. The recession hit credit hard, and it actually turned growth negative. And I'm speaking here of the U.S. And so, in the first quarter of recovery, which was second quarter, our second fiscal quarter 2010, growth was 3% year-over-year. It has gradually moved up, so that now, for the quarter just ended, it's 10%, 10% in October. And so for us, this is been a gradual return to credit. It's been a sustained but very modestly paced build. And then, as you may recall from my earnings commentary today and really over the past several quarters, this is a credit recovery that is primarily in the U.S. affluent driven. And that through the quarter, through, I would say the June quarter, which is the data where we have more granular data, this growth is primarily affluent, and we haven't really seen a broadening of the credit base yet. So that's in terms of increased and growth and spend [ph]. And so, that is the opportunity to come. And with a further recovery, we expect credit to benefit -- future credit benefit growth to benefit from that expanded set of cardholders.

The last question comes from Dan Perlin with RBC Capital.

So as we look at the trends for worldwide process transactions, and I know that the absolute number transactions are still relatively high, but that trend has been coming down throughout the year. And then most recent data, Byron, that you pointed to, is around 8%. So it continues to be kind of on the downward slope. So I'm wondering, what do you attribute that to? And then secondly, to the extent that, that trend continues, do you feel like your business and your strategy going forward is such that you can drive incremental revenue growth, I think from a greater standpoint from increasing prices, throughout the year as opposed to just kind of the secular volume growth?

Our focus on growth is primarily the secular growth. We're not looking to drive any material top line revenue growth from pricing, recognizing that when we talk about pricing, that's pricing net of incentives. So it's one thing to adjust your pricing at the top level. But in the end, it's your net pricing that really matters. And so, it is primarily secular growth, which is one of the reasons why we continue to emphasize how much growth we are now delivering outside the United States. And in the quarter just ended, 65% of our growth, our revenue growth, came from outside the United States. And in the fourth quarter, 45% of our entire revenue base is now outside the United States. And as you know, we have an objective to drive that over 50%, and that is absolutely secular growth. With regards to the process transaction growth, that is primarily attributable to 2 things: one, a slowing in the growth rate of U.S. debit; and then second, a year ago, we began -- we had some significant increases in transaction penetration outside the United States, which are now beginning to anniversary. And so, where we are today and that drift down into high single digits, in terms of Visa process transactions, is primarily influenced by those 2 factors for the moment. But we are very focused in our future strategies at increasing Visa process transactions, increasing the percent of transactions, particularly outside the United States, that Visa processes as a function of the total transactions that are performed on Visa cards. And that's where we stand.

Thank you, José, and thank you, all, for joining us today. If anybody has any follow-up questions, feel free to give Investor Relations a shout.

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