Visa Inc. (V) Q1 2012 Earnings Report, Transcript and Summary

Welcome to Visa Inc.'s Fiscal Q1 2012 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.

Good afternoon, and welcome to Visa Inc.'s Fiscal First Quarter 2012 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. The 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 these factors is available in our last 10-K on file with the SEC. It can be accessed through the SEC website and in the Investor Relations section of our website. For historical non-GAAP or 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. And with that, I'll turn the call over to Joe.

Thanks, Jack. And as always, thank you for joining us. I plan to walk you through 3 key areas during today's call. First, I'll provide a brief update on Visa's financial performance and outlook, including some perspective on key environmental and event-specific factors that could impact our business over the balance of fiscal 2012. Following that, I'll walk through our progress of growing Visa's core business both in the United States and internationally, including an update on U.S. debit. And finally, I'll discuss Visa's investments and innovation, which can help us expand our core business and generate new revenue streams. Visa's global enterprise outpaced our own expectations during the first quarter, an encouraging opening to our fiscal year. Net operating revenues were $2.5 billion, a 14% increase over the same period last year. These revenue gains were driven by robust growth in our international businesses, continued resilience in U.S. credit, sustained cross border spending and strong e-commerce growth. Net income for the quarter was $1 billion, a 16% increase over last year. This equates to diluted earnings per share of $1.49 or a 21% increase over the first quarter of 2011. Overall, our first quarter performance clearly demonstrates the strength and resilience of Visa's global model and our ability to grow even in a challenging global economy. While we look ahead to the rest of fiscal 2012, it is clear we must carefully navigate a complex and uncertain business environment. We see signs of modest global GP -- GDP expansion for the rest of our fiscal year, with emerging markets continuing to grow at rates faster than the global average. That being said, we are closely watching the economic conditions that could impact our business, including continued volatility in Europe. Additionally, we are still working through the implementation of debit…

Thank you, Joe. I'll begin with some overall observations and call-outs. First, Visa's 14% net revenue growth in the first quarter was once again broad based and encouraging, with solid 8% growth in the U.S. and a very strong 22% growth rate in rest of world. Approximately 66% of the quarter's revenue growth came from outside the United States, and non-U.S. revenue in the quarter was 46% of Visa's total. Second, U.S. revenue growth has been supported by 8 consecutive quarters of positive credit unit volume growth. Most recently, the months of November, December and January comped at 12%, 10% and 10%, respectively, which continued the strong growth we have now seen for 2 years. Third, client incentives for the quarter as a percent of gross revenue were 16%, below our full year guidance, as a result of lower-than-anticipated Durbin-related incentive and a lower level of deal activity in the first quarter versus the out quarter. Fourth, note that we are reporting the quarter using a 36% tax rate, above our full year guidance of 33% to 34% on an adjusted basis. We will begin reporting at this lower level once California officially adjusts its tax rate calculation, which we anticipate will be in fiscal Q2. Finally, fifth, for EPS calculation purposes, the as-converted share count reduction, driven by the escrow deposit took effect on December 29 and therefore, had no noticeable impact on the fiscal Q1 EPS calculation, but will have a full effect for the balance of the year. Now let's turn to the numbers. As is our practice, I will cover our global payment volume and processed transaction trends for the December quarter followed by our results through the end of January. I'll then cover the financial highlights of our fiscal first quarter and conclude with our…

[Operator Instructions] The first question comes from Craig Maurer with CLSA. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: I had a question on the tax rate beyond the current year. Could we see that fall below your adjusted 33% to 34% range considering the changes that are coming? And secondly, marketing was dramatically below what I was thinking about for the quarter. So I was hoping to get your thoughts there regarding what opportunities did present themselves in the quarter and if your thought process changed for the year.

For tax, it's a little early to make that call since we've got this year to play out. But we will, rest assured, we will address tax guidance for the coming year in the next couple of quarters, which is our practice. With regards to marketing, no change. Think of this as timing. Our guidance hasn't changed. We have the Summer Olympics coming up, and we are rephasing our marketing spend to coincide better with the Olympics and the promotions that come in advance. So you should expect to see some movement on the marketing line in fiscal quarters 2 and 3 commensurate with that.

The next question comes from Darrin Peller with Barclays Capital.

I mean volume trends looked like they've held up pretty well, especially into January. And now we have a guidance change especially on the -- on both the top line and on EPS. Do you think that the guidance is more -- or the change is more reflective of really more benign impacts of maybe the debit regulations as was included in your previous guidance? Or is it more macro-driven? And I guess just the follow-up question to that would be is there more room around the rebates? Maybe -- the 17% to 18% is just conservative on the rebates because maybe the debit environment or the Durbin environment effects were not as bad as expected?

So let me take that. This is more a reflection of how some of the risks that Joe and I called out on the last quarter's earnings call, how some of those risks are playing out. Recognizing that we have a one quarter lag on our service fees, that means we've already got a line of sight into 7 months of that revenue. Cross border volumes have held up very well. With regards to both the U.S. and the global economy, both have demonstrated sustained momentum. The exciting drama unfolding in Europe has yet to really play out on the volumes. And so the guidance adjustments are more a function of having a portion of our year with a clear line of sight. And some of the risks we were most concerned about we're getting well into the fiscal year, and they haven't materialized to the degree that -- we had to at least contemplate when we gave the initial guidance.

The next question comes from Glenn Fodor with Morgan Stanley.

Joe, thanks for the color on the issuer loss. Was this the ultimate result of a holistic view by the issuer that under no circumstances would they pursue a dual strategy? Or was this a case you wouldn't go as low as they wanted on price? And secondly, could you give us a sense of what portion of your exclusive PIN debit issuers still has to make a decision? What type of win rate have you assumed in your guidance?

Well getting back to the particular issuer that we talked about, it was -- I think it's fair to say that it was just a decision about how they were going to comply with the law and knowing to a certain extent that accepting PIN numbers on signature cards as we've always done was an opportunity. I think it was just their way of rationalizing how they wanted to go forward. It weren't a price issue. And then what was the second part of the question? I'm sorry.

How many still have to make a decision.

Yes, on removing Interlink, I think most of them have made their decision. There is no other major issuer that has Interlink on the back of the card that's contemplating taking it off. And we have had several wins on putting the Interlink mark on the back of non-Visa debit cards, and that will manifest itself certainly no later than April 1. But I can't really talk about it. We're in the final stages of several contracts, and they don't like us to disclose who they are.

The next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: Everything looks really clean here. I just wanted to ask on the client incentives. Byron, you said they were running below the 4-year targets. Should we expect it to spike again around the April 1 exclusivity day? Just trying to get some help with the quarterly spread. And just as a follow-up to that, Joe, you said that the dust hasn't settled. Is it fair to interpret that to mean, how should I say it, that you haven't started playing defense yet with your MPS or the V PIN strategy? Are the issuers, and the acquirers to open the both? Just wanted to get a little bit of color on that.

The second part of the question first. And then Byron can answer the first part of the question. When I said the dust hasn't settled, I also suggested that I'm very happy with how we've implemented our strategies and I am very happy about that, and things appear to be playing out quite well in that regard. But how we get to the end of the year and we see exactly what the actual results are, there is some ambiguity, although changing our guidance and expressing a degree of confidence would suggest that we're pretty happy with where we are and what's going on.

Tien-Tsin, I would say that it's clearly weighted to the second half of the year after April 1. If you think in the context of -- a portion of these incentives are assigned to merchant routing, and they trigger when the routing is successfully sent Visa's way. That's going to weight a portion of the incentives that really hasn't -- that isn't as relevant in the first 2 quarters of the year relative to the second. And then the rate of deal activity, which has nothing to do with Durbin, but has to do with the ongoing course of our business, primarily credit, both in the United States and outside the United States, that level of deal activity was just less than we anticipated in the first quarter. And so that will just carry forward into quarters 2, 3 and 4. So we are -- we reaffirmed our guidance as 17% to 18%. We still feel good about that. No real call-outs, just timing.

The next question comes from Jamie Friedman with Susquehanna.

So Joe, you mentioned that you've been happy with your strategy implementation. Byron, you mentioned that the Durbin incentives were lower than you had modeled. I guess if you had to summarize it at this vantage point, has Durbin turned out to be better, worse or the same than you had originally contemplated?

I think it's modestly better than what we had contemplated. I think that the implementation of our strategy has put us at the better part of that, which is what I've said about the regulation pretty consistently. So I don't -- I just -- I don't know how to put it in total perspective because as I said earlier, we got to see what happens. In some cases, there's been accelerated early adoption. And in some cases, there's been less early adoption. And I think it appears like it's going to even out, and it appears like things will occur in a manner that we've anticipated. When I say that, I'm not really factoring in the potential positive effect of some of the things that we've done to drive volume to us over time. And we will have to see how that works out with the -- through the acquirers and the merchant community.

The next question comes from Bryan Keane with Deutsche Bank.

I guess one question for Joe and then another for Byron. I guess Joe, what kind of impact do you expect in the model, with the change in pricing that's going to go on, on April 1? And I know it's going to be a change in pricing for all products. It's not just debit. I know it includes credit. I'm just curious on what kind of impact do you think it will have. And then Byron, when we look at the international revenues, they're now, for 2 quarters in a row, growing faster than the cross border volume growth. Is that just better pricing that we're getting? What is driving that phenomenon the past 2 quarters?

So let me answer the international one first. So we reported nominal growth at 12%, and there was a 19% increase in revenue. Whenever there is significant above-average currency volatility, then our revenue stream trends up. And then -- and so that's the primary delta that you are seeing. It doesn't have anything to do with our pricing. It's much more a function of currency volatility, and that has largely been courtesy of Europe and the unfolding drama around the euro. With regards to -- let me see if I understand the question. On balance in U.S. debit, when you combine the fixed acquiring network fee with the lower variable transaction fees associated with U.S. debit, this constitutes a net price reduction. And that has been completely folded into our guidance.

The next question comes from Rod Bourgeois with Bernstein. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division: So have your common switch plans and network participation fee plans met any meaningful obstacles? And could you provide more specifics on how the common switch and network participation fee will be implemented presumably in coming months here?

I think that what we've done, we've announced 2 quarters ago, and we've consistently talked about, I think any time you change the paradigm that there's probably some consternation somewhere along the way. But in general, we've met with -- it's been pretty benign, and we've met with favorable receptivity. I would say out of our largest merchants, there are a significant number of them that have signed contracts with us that anticipate the fixed fee. And they're fine with it. I mean I suppose that doesn't mean that they won't complain about it later, but that's kind of the history of our business. As it relates to that, we're putting -- officially we'll put out the specifications for that in about the -- in the next week. As it relates to activate -- fully activating the PIN capability on the Visa debit card, that would begin on April 1. And all of those things are going along as we anticipated, as we had planned. We're very happy with the way that it turned out. And as you might expect, I mean there's been a lot of water that's gone under the bridge. They're both complicated paradigms. As Byron says, we feel that we're in a much better position in the long run with a modest fixed fee and a lower variable fee. We believe that, that suits merchants in a much more compatible way than in the past because they can take advantage of economies of scale. It is not price increases. As we speak today, as it relates to the PIN capability on the signature cards, that seems to be the way things are moving. It's a capability that we have, and we're very comfortable with that as well.

The next question comes from David Togut with Evercore Partners.

Joe, could you highlight some of the innovation you have planned on the credit side? You indicated that a credit volume growth was twice what debit was in the U.S. in December and much of the growth came from the affluent. So how do you see the competitive battle shaping up in U.S. credit versus MasterCard particularly on the affluent side?

Well when I look back over the last 2 or 3 years, I mean I'm very comfortable with how we fared and what we've done. Based on the number of things that I talked about in my remarks, I'm very bullish on where we're going to wind up in 2012 as a result of some new transactions that are on the cusp of occurring. That doesn't mean that I don't consider MasterCard to be a formidable competitor because they are. It doesn't mean that every time we get involved in a transaction, that we'll win and they'll lose. But I'd have to say as it regards to credit, we're in a pretty good position. Remember, we've talked the last 2 quarters about the United-Continental merger and our win in that regard. I think as I mentioned in my remarks, we have the best array of co-branded partners, period. And that is what's driving a lot of the growth. So we feel like we're in a very good position. We don't feel that, that's a position through which we can rest on our laurels. We do believe that V.me and the wallet and the single click is going to make a difference in the credit card world, as well as the debit card world. So I think we're trying to move forward in a very measured way and we're pretty excited about our prospects. And the same goes for our international business.

The next question comes from Ken Bruce, Bank of America Merrill Lynch.

My question actually kind of follows on to that, to the last one in. In terms of the trends that you see within debit and credit, is it -- are you able to tell if this growth in credit is -- whether it be affluent or a broader growth in credit usage or if there's actually consumers making a conscious choice to pick up a credit card versus a debit card? Just as you think about those different trends, are you seeing anything that is fundamentally where consumers are choosing a credit card over a debit card or if it's just that a selection that issuers are pushing more credit cards versus debit?

Well remember the credit card volume has been growing quite robustly for several quarters now. And so you certainly couldn't attribute what's happening in that product totally to Durbin and people switching. And it's too early to tell, looking at the volumes exactly, what kind of switch there may be. Anecdotally, of course you know that rewards have been removed from debit cards and rewards exist on credit cards. So there are probably -- I mean just logically, you have to assume that there's some movement in that regard. Some of that is constrained by the credit worthiness of individuals and their credit lines. And so it's pretty complicated environment and it's a little bit difficult to say. Obviously issuers seem to be pushing their credit businesses a little bit more strongly or a lot more strongly than they do their debit businesses at this point in time, which is what one would expect. So I think that the jury is still out about how much something moves from one to the other. But I think it's pretty clear that you're going to see strong credit card growth at least from Visa in the foreseeable future.

The next question comes from Julio Quinteros with Goldman Sachs.

Byron, this is directly for you. I guess just in terms of the numbers, and I apologize if I missed any of this. But the 9% processed transaction gross versus the 13% data processing revenue growth, obviously, the effects of Durbin and some of the impacts there on debit are a big part of the decline of processed. But the spread relative to the revenue growth was actually much better than expected. So just some color in terms of why that spread went the way that it did and for how long would this actually continue to persist before you see that in your portfolio anniversary?

So the debit processing fees grew at 8%, but we reported at the gross level data processing fee growth of 13%. Of that delta, I would say 60% of it is due to the addition of CyberSource and PlaySpan transactions into the data processing line. And the other 40% is due to value-added services that show up in the other fee category of data processing. And so those are -- that explains 100% of the premium that we are earning above the growth -- underlying growth in data processing transactions. And I would expect that, that premium -- certainly, the CyberSource and PlaySpan piece will continue. We'll have to see how that plays out in the second half of the year as we see much more impact from, or potential impact from implementation of the Federals.

The last question does come from Bill Carcache with Nomura.

I'd like to follow up on some of your comments about Fundamo and your investments in MobileMoney. Does what you're doing there influence your relationship with Western Union in any way? And can you update us on whether you expect to be able to deal with some of the AML issues that arise in mobile money transfer? And just more broadly, can you comment on where you see the cost of electronic-money transfers going especially in comparison to that 500 to 600 basis points of revenues per dollar volume that Western Union has traditionally generated.

I don't think that there's an absolute connection between Fundamo and Western Union and the Western Union-type of business. Remember, I think Fundamo is an incredible part of our future. I think that using mobile technology as an access point to Visa prepaid cards in emerging economies, where there's a lot of under, under-banked people is just one of the most incredible things that I've seen coming along in quite some time. As it relates to money transfer and Western Union, we are much more heavily involved with Western Union today, and will be in 2012 than we really ever have been before. And we are doing a number of things with them and some of the -- as it relates to money transfer in some of the emerging economies. And I'm going to kind of leave it -- leave Western Union at that. But we also, as you know, do business with MoneyGram. And I mean we're pretty invested in money transfer business for the unbanked. We are aware of the issues that surround the transfer of money and the protections that it requires and so forth and so on. And we're doing things through people that have those infrastructures. And we're happy where we are right now. Let me say we're happy to be doing what we're doing, and we will continue to endeavor to.

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

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