Visa Inc. (V) Q2 2012 Earnings Report, Transcript and Summary

Welcome to Visa Inc.'s Fiscal Q2 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 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 and can be accessed on the Investor Relations section of our website at www.investor.visa.com. A replay will also be archived on our site for 30 days. A PowerPoint deck containing highlights of today's commentary was posted to our site 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 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 or pro forma-related financial information disclosed in this call, the 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 site. And with that, I'll turn the call over to Joe.

Thanks, Jack. And as always, thank you for joining us today. Visa delivered another quarter of strong financial performance, posting net operating revenues of $2.6 billion, a 15% increase over the same period last year. These revenue gains were driven by double-digit payment volume growth globally, continued outperformance of credit spend worldwide and a strong cross-border activity. Adjusted net income for the quarter was $1.1 billion, a 23% increase over the same period last year. This equates to adjusted diluted earnings per share of $1.60, a 30% increase over the second fiscal quarter of 2011. Our performance reaffirms Visa's solid business foundation and strategy, including our diversified product and service offerings, our strong client relationships and our commitment to accelerating growth in key markets worldwide. With 2 strong quarters under our belt and insight into our fiscal third quarter service revenues, we are upgrading our guidance for fiscal 2012 by raising EPS growth to high teens to low 20s and reaffirming our 2013 guidance. Visa's global business continues to expand at a healthy pace. A strong March quarter followed the solid results we posted in our first quarter and will drive service revenues in the current June quarter. During the March quarter, Visa's credit and debit payment volumes worldwide grew 14% and 7%, respectively. Cross-border volume also posted healthy gains, increasing 16% globally. Processed transactions grew 8%. In the U.S., payment volumes increased 6% for all products. Our star performer for fiscal second quarter was credit. Building on that, we continue to invest in new and expanded long-term credit relationships with our largest U.S. clients to drive growth in our core business. In fact, of the largest U.S. issuers that consider multiyear partnership agreements, we now have 9 of the top 10 signed into fiscal 2015 and beyond. From a…

Thank you, Joe. As is my practice, I'll begin with some overall observations and call-outs. First. Note that we recorded the quarter on an adjusted basis, having eliminated the positive effect to earnings from the remeasurement of our net deferred tax liabilities due to the change in state tax rate. This remeasurement accounted for an incremental $0.31 to GAAP EPS. We also saw a benefit in the quarter from the catch-up effect of the lower, ongoing state tax rate that accounted for another $0.05. Turning to our actual year-to-date results. The adjusted tax rate now reflects a run rate consistent with our full year guidance. Second. Visa's 15% net revenue growth in the second quarter was once again broad based and encouraging with solid 10% growth in the U.S. and an even more impressive 21% growth rate in Rest of World. Third. U.S. revenue growth has been supported by 4 consecutive quarters of double-digit credit payment volume growth. Most recently, through the 28th of April, credit payment volume growth has comped at a very healthy 11% rate, consistent with continued U.S. economic recovery. Fourth. As expected and fully contemplated in our 2012 guidance, aggregate U.S. debit growth, though modestly positive for the March quarter, will turn negative in the June and September quarters. The impact of regulatory changes, primarily on Interlink volumes, picked up momentum during the March quarter and accelerated in April. As Joe mentioned at the outset, these trends will need to annualize before we see a resumption of positive growth in this U.S. product category. Fifth. Client incentives for the quarter as a percent of gross revenue were 16%, below our full year guidance but in line with our expectations for the first half of the fiscal year. We expect higher incentive levels in the second half…

[Operator Instructions] The first question comes from Jason Kupferberg with Jefferies. Jason Kupferberg - Jefferies & Company, Inc., Research Division: And I really appreciate all the color on the DOJ situation. I think that was very helpful. I was hoping you could talk a little bit about the new FANF fee structure, which I understand just went into effect about a month ago. But what's been the reaction from the merchant community now that we're actually in implementation, finally? And do you anticipate any roadblocks with the implementation there, putting the DOJ situation aside?

Well, this is Joe Saunders. We implemented that on April 1, so there hasn't been any reaction because I don't believe the fee has been billed to anyone yet. Although [ph], there hasn't been a lot of reaction to it. It is part of our -- the total structure we've put to deal with the Durbin regulation. We are not making money per se off of that fee. The combination of discounts and incentives that we have put together, I think, actually relate in a modest loss in the amount of $100 million a year. So we aren't doing this with the intent of raising prices. I don't think that -- well, I don't -- I know that we haven't had any difficulties in getting the structure going, so I think we'll have to wait and see how everything works out.

Next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: Just a follow-up to that, on the CID. Does it in any way change your desire to utilize the, I guess, you call it FASB [ph]? Or is it business as usual there with that product? And also, just the service fee yield. Byron, it was up quite a bit more than what we had modeled. Was there a price change there or a reclass? Or maybe just a mix change? Any help there would be great.

Why don't you go ahead?

Yes, yes. Let me start with the second one, Tien-Tsin. So there has been a mix change. If you look at the payment volume growth, nominally it's 11%. And our service fee growth was 13%. So if I look at it that way, roughly 1% of the -- or roughly half of the increase has been a boost in yield because of the lower mix of Interlink transactions, as I think you were referring to, and the -- our hedging actually produced another percentage point of gain and the rest, I would say, is noise.

As it relates to the strategies that we've implemented, we just implemented them. I don't have any desire to change what we've done. But we put these in place in anticipation of an environment, and we'll look at them and we'll monitor them and we'll change them if it's appropriate to change them. Otherwise, we'll continue down the path. I think that it would be safe to say that we were more successful in dealing with the -- our relationships going forward and we could have projected in the past. So we'll just have to look at everything and take it all into consideration and we'll do what's appropriate. Once again, though, I mean, I feel that the guidance projections that we've made for 2012 and 2013 are safe to support in almost any environment of things that might or might not happen.

The next question comes from Glenn Fodor with Morgan Stanley.

Just so I have the pattern right, so we have -- PIN went negative in January, the PIN growth trajectory. Furthermore, we're a further step down after April 1. You have incentives increasing in the second half. But then you talk about the drag on the PIN growth is supposed to ease by September. So it hasn't anniversaried yet because we haven’t reached next January or next April. So is the logic behind that, just so I have it right, because you're expecting these incentives you're going to pay out to sort of get that volume back to you? Do I have that right?

You have everything right except the PIN piece. The -- you're right, the -- it's going to take 4 quarters to annualize. So when we referred to a positive trajectory, what we meant by that was the impact of payment volume on lag year-over-year will have its greatest impact in Q3. We would then expect continued negative comparisons through -- until we annualized but at an increasingly less negative rate as we progress through the 4 quarters. That would also be true for debit-related transactions. So PV and transactions.

Let me just follow up on that and make perfectly clear one thing. And that is that we are never going to regain all of the market share that we had in the debit card business. Nothing that we say or none of our strategies suggest that, that will happen or could happen or -- and nothing that we've done or thought about or said anticipates that it will happen. The environment has changed by regulation. We're operating in a different world, and we're going to live forever with less share than we once had.

The next question comes from Sanjay Sakhrani with KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: I guess I had a -- you answered my question on just the market share but maybe on share buyback. I mean, I guess you guys didn't buy back stock because you felt the stock was somewhat fairly valued. But, I mean, did -- should we assume that if the shares stay at these levels, you wouldn't buy back any more throughout the remainder of the year?

No, you shouldn't. We are a committed management team to returning excess cash to shareholders. I think if you take a -- and so -- and we remain committed to that. If you would take a step back, we had a very large, in our view, very large share repurchase in the first quarter. And so we time our purchases over the course of the year, looking for both opportunities to do that at attractive pricing but also, in the case of the first quarter, being responsive to an opportunity to put a significant increment of cash into the escrow account. So I think if you take a step back year-to-date, we're all -- we've already made sizable repurchases, and you can count on us to continue to return excess cash not just for this year but years to come.

The next question comes from John Williams with UBS.

Just a couple of quick ones. On the marketing budget, just as we think forward into the rest of the year, regarding calendarization related to the Olympics, and any other things we might need to think about and -- as we look at the marketing line?

I'm not sure what else to add other than every 4 years, we have a particularly attractive opportunity to put significant media into 2 quarters, which is the third and the fourth. And knowing that, that was the feature of what we want to emphasize this year, we kept -- we phased our marketing in the first 2 quarters in order to accommodate that. We will reset marketing from a bottoms up standpoint beginning next year and, in October, give you a sense of what that will look like.

The next question comes from Bob Napoli with William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Just Joe, I mean, just trying to clarify a comment. You said, on '12, '13 guidance, you thought it was safe under very -- under various circumstances. Are you suggesting that if you needed to adjust your strategy based upon the CID, that you still felt confident in your -- in the guidance? Is that -- am I reading that right or not?

That -- the Department of Justice is certainly included in what I said, but it will include a lot more than that. But yes, absolutely certain. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. And, I mean, the CID, I mean, is mostly focused on -- I mean, I guess would you -- would you view it focused mostly on the 2% of revenue of that strategy, on that 2% piece of the revenue or more broadly?

I mean, I don't know how to get into that specifically. You’re asked general questions about what you're doing to react to the legislation, and it's the Antitrust Division of the Justice Department. So obviously, they must have a concern that we were doing things that might undermine that and -- but I don't really want to go any further. I mean, I'm not them, and I can't say that. We have talked to them. We provide information to them. And we have obviously very seriously considered various things that may or may not happen, and we've taken it into consideration and in our guidance.

The next question comes from Moshe Katri with Cowen.

You've had really impressive growth on the credit side, especially the acceleration we've seen from last quarter. Byron, maybe you can talk a bit more about the various moving parts in terms of the major drivers here? Can we talk about the consumer side versus the corporate side?

Yes, our business is still largely driven by the consumer side for sure. The commercial side is growing at good rates. We are very encouraged by the numbers being posted on the commercial side because we think, first and foremost, that's a healthy barometer with regards to how businesses are doing and the continuity in the kind of payment volume growth we're seeing, particularly in credit. And if you take a look at the cross border, which is probably our most important leading indicator, the cross-border trends in both consumer retail as well as commercial are very strong. And so within -- and that is one of the indicators we look to when we put out our guidance, and one of the inputs that gave us confidence to raise our guidance for the year.

Yes. On the consumer side, I mentioned in my comments the extension of our partnerships with a number of financial institutions that represent a significant portion of our volume. I mentioned the United-Continental arrangement, which is going to deliver new volume to us. I mentioned signing other financial institutions that we have done less business with in the past. I mentioned Alaska Airlines. And so the trajectory of what we're doing, we're very happy with, and we're very bullish about it. We're very pleased that this is happening at this opportune time.

The next question comes from Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: I hate to go back to the whole debit thing. But I guess I'm trying to understand how -- the market share loss is that extreme in the short run? I know the revenue impact isn't that large. But even in terms of just the transactions, if your -- if the process allows the merchant to route the transaction over the Signature network -- or has not yet been put in place? In other words, was that -- because otherwise, how is that market share loss that significant if that was already in place?

The –- [indiscernible] you suggest wasn't started until April 14 and isn't fully implemented and won't be for several weeks.

The next question comes from Bryan Keane at Deutsche Bank.

I guess I expected a decline in Interlink volume. But specifically, what's happened in Visa Debit volume that you expect in 3Q and 4Q? And I guess inside of that, how much of that is market share loss versus just banks maybe deemphasizing signature debit?

It's hard to be a totally specific about it. I think that, that has leveled off, and we continue to look at modest growth. But right now, I would attribute the majority of it to the removal of all the rewards programs. I mean, there virtually are no rewards programs associated with debit cards anymore. And those programs did drive volume. And a de-emphasis in marketing these programs by the financial institutions. It's a combination of those 2 things that had an effect on it. There were some small pockets of cards that were put out that never had a PIN capability, and the regulation requires that, that change. And so people that simply couldn't use the PIN numbers, can now. Yes, it -- a combination of those 3 things, in our opinion, at this point in time is pretty much what's going on in the Signature business.

The next question comes from Andrew Jeffrey with SunTrust.

Just to make sure I have this clear in my earnings addled mind, Byron, when you talk about total transaction volume in the back half of fiscal '12 in aggregate across the business, you're thinking about transaction volume being down, correct? And does that mix -- does the shift in mix away from Interlink change kind of what we should think about as the data processing yield as a consequence?

Yes, it -- so my commentary on transactions was for debit, specifically, in aggregate. The -- what I think what will become increasingly important as we look at processed transactions is U.S. credit. And then, separately, what are we doing in the Rest of the World. And I think we indicated that we have very, very vibrant transaction growth rates in U.S. credit as -- and in Rest of World. And with regards to yield, we'll give this -- there is definitely going to be some disconnects in the way that you're -- that you look at this from a modeling standpoint because the -- I think one of the -- you heard this earlier. One of the natural effects of pulling out Interlink transactions is -- since it only affects the DP line, there will be a natural drop just because it will be generating last DP fees. But it's also removing payment volume for which there are no service fees. So that will actually boost the service fee yield on the transactions that remain. And we will give some thought as to how to talk about that with you all by the next earnings call to help sort that out. And if that weren't enough, we're going to take the -- I think we've already mentioned we're going to take the fixed acquiring network fee. And we're -- for the most part, that will appear in data processing as a line item. So we have some work to do to make this more transparent with regards to what will happen to those lines, what we think will happen to those lines. And we'll plan that for next quarter's earnings call.

And as -- just as a reminder, the transaction loss in Interlink is coming from a business that a year ago generated 2.8% of our global revenue and last quarter generated 2% of our global revenue. It gives you an idea of the notion that there are different yields upon different types of payment volume.

The next question comes from Len DeProspo with Janney.

This is a question with regard to sort of the advertising promotion expense. I think the Olympics are going to happen entirely in your fourth quarter, but I assume you all will be doing some spending out of that. So could you just help us break out how much of that incremental spending will occur in the third quarter versus fourth quarter, maybe just percentage split?

Yes, we don't typically provide that. But you are absolutely right. There is a considerable amount of promotional activity done with our banking partners, which has actually -- some of which actually started in our second fiscal quarter. It really ramps during the third quarter. And then in the fourth quarter, you have the last of the broadcast media that is fairly intensive around the Olympics themselves. So to be helpful here, we are holding -- we've said we are holding to our existing marketing guidance so that you have an order of magnitude and you now have 2 quarters in the can. And in terms of what our full year results are likely to be, I think we've bounded that pretty well. And between the quarters, we just -- as I said, we typically just don't break that out.

Yes. You should also think about the fact that the advertising we do in the third and the fourth quarter supports the programs that many of our financial institutions initiate around the Olympics with Olympic theme cards, and that those initiatives generate more particularly credit card volume, which is the reason that we do this. We have, I think, almost -- on a global basis almost 3x as many financial institutions participating in promotions this year as we did 4 years ago.

The next question comes from Julio Quinteros with Goldman Sachs.

Guys, just to go back to the 2013 commentary, Byron, can you just walk us back through both the revenue expectations and the EPS expectations? I want to make sure we have the -- both of those numbers there correct.

So on the revenue, what we said was our expectation is that revenue in '13 will grow off of 2012 levels. So whatever the growth rate in revenue is for 2012, everything else being equal, we would expect it to be somewhat higher in 2013. With regards to EPS growth, if you recall, back in the October earnings call when we reaffirmed the '13 guidance, what we said was we expected EPS to also grow off of 2000 levels, but our expectation at that point, and our guidance at that time on 2012, was that EPS would grow mid to high teens. We are now at high teens, low 20s. And as we indicated in the earnings call back in October, there were a number of components that got us to that EPS growth, one of which was a favorable step-down in our ongoing tax rate. And that represented plus or minus 5 percentage points of EPS growth. And so as we began to, in effect, outperform during the course of the year and raise our guidance, we wanted to make it clear that when we talked about 2013, our expectation was more high teens, recognizing that it wouldn't be likely or possible for us to lap that same kind of tax improvement on EPS, and that way, we'd be substituting instead operating earnings for that tax benefit that we received in '12 that wouldn't expect to duplicate in '13. And so that's why we want to make very clear that, at least at this point in time, our earnings growth guidance should be in the high teens range.

The next question comes from Tim Willi with Wells Fargo.

I wondered if I could just ask a question around the commentary around processing transactions in Brazil. Curious to what extent this has some impact on the conversation around revenue yield, if it's something we would notice if that ramps up over the next couple of quarters. And in conjunction with that, is there further opportunity with bank partners or other services around this agreement to continue to improve that yield if that relationship would mature further in years?

The increase in processing on VisaNet in Brazil has a -- does have an effect on our yield because we're going to be receiving revenues for transactions going over VisaNet that we didn't before. It's going to ramp up over a period of time. I don't think that we're in position right now to tell you how that's going to affect our global yields or our global -- or even our global revenues in the short run. We're very excited about it because it puts us in a position in Brazil similar to the United States where not only are we going to be processing more transactions but we will be able to deliver other revenue generating services. And I think that you'll begin to see that manifest itself in our 2013 projection.

The last question does come from Chris Brendler with Stifel, Nicolaus. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: One clarification, Byron, in response to an earlier question, I think, on the service fee yield, the service fee as a percentage of volume. You had said it's a –- it’s a mix -- or about half of it is a mix issue and the other half is hedging. Just so I understand right, service fees are not earned on Interlink. So the mix we're seeing there is the -- dividing by a lower denominator? Is that what's causing the mix -- the issue -- that yield to go up? And then my unrelated question would be on V.me, do you expect to have anything in your marketing budget or any significant amount on your budgeting for that fourth quarter Christmas holiday launch? I mean, is this going to be a pretty significant launch this year? Or is it going to be more of a soft launch?

You go ahead.

Yes, let me take the first one. Yes, you have it right. What we have -- when you remove the Interlink transactions, you're removing transactions from the denominator, but you're not touching the service fees. So the yield automatically starts moving up.

As it relates to V.me, we will have -- certainly have some advertising in that. But the advertising that we will do will be in conjunction with merchants that are coming on to the network and through financial institutions to encourage their customers to enroll. So I guess in that regard, it would be soft here, and, I guess, you mean [ph] national TV advertising in the fourth quarter.

And with that, we want to thank everybody for joining us. And 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.