Welcome to the Visa Fiscal Second Quarter 2019 earnings conference call. All participants are in a listen-only mode until the question-and-answer session of today’s conference. 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. Mike Milotich, Senior Vice President of Investor Relations. Mr. Milotich, you may now begin.

Thanks Jordan. Good afternoon, everyone. And welcome to Visa's fiscal second quarter 2019 earnings call. Joining us today are Al Kelly, Visa's Chief Executive Officer and Vasant Prabhu, Visa's Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at www.investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of many factors. Additional information concerning those factors is available on our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of our website. For historical non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today's earnings release. And with that, let me turn the call over to Al.

Mike, thank you and good afternoon, everyone. And thanks for joining us today. First, a few highlights related to our financial results as Vasant will go into much more detail later. The company continued to perform well in the second fiscal quarter with approximately 47 billion transactions on the Visa network, driving $2.8 trillion in total volume. Revenue growth was over 8%, slowing versus last quarter as expected, due to 1.5 points of FX drag, lapping high currency volatility last year and slower cross border growth. This was in line with our expectations. Payment volume growth was 8% on a constant dollar basis, however, growth was 10%, excluding China, and the impact of processing days and US credit conversions. Growth in the US, the UK, and China drove most of the growth difference versus last quarter. As you saw in the numbers reported by the US banks over the last two weeks, processing days and the shift of Easter impacted the numbers. That said, volume growth in many markets around the world was still quite attractive. Growth in our CEMEA region was 22% and Latin America grew 14%. Also sub regions like India, Southeast Asia, Central Europe, and Eastern Europe all were growing at mid-teens or better. Process transaction growth was 11%, consistent with last quarter. Growth remained strong in our large tap to pay markets such as Australia, Canada, and the UK. Cross border growth on a constant dollar basis was 4%, slowing three percentage points from last quarter. Adjusting for the e-commerce platform reorienting acquiring within Europe for cross border to domestic and cryptocurrency purchases last year, growth was 6%. And growth improved moderately throughout the quarter. Expense growth was 7%, slowing to the mid-single digits as expected. Growth was primarily driven by personnel related additions focused on…

Thank you, Al. Despite some revenue and exchange rate headwinds, we delivered strong EPS growth of 17% in the second quarter. Net revenue grew a little over 8% as expected. Exchange rate shifts versus prior year were a drag on net revenue and EPS growth of approximately 1.5 points. Through the first half of fiscal year 2019, net revenue was up 11% and EPS up 19%. A few highlights, key business driver growth, payments volume, process transactions and cross border volume was generally in line with our expectations. The slowdown in payments volume growth to 8% was driven by four major factors, fewer processing days in the US, general weakness in the UK economy, continued run-off of dual branded cards in China, and the shift in the timing of Easter negatively impacted several key markets. Process transaction growth remained consistent with the last quarter at 11%. Adjusted for lapping the spike in cryptocurrency purchases last year and the e commerce platform reorienting acquiring within the EU, constant dollar cross border growth was 6%, in line with our expectations. The cross border growth trend has stabilized, moderately improving through the quarter. Net revenue growth was a little over 8%. As we had indicated last October, fiscal second quarter growth was impacted by two significant headwinds, exchange rates and the lapping of high currency volatility in the second quarter of last year. The drag from both exchange rates and currency volatility was actually higher than we had expected. Adjusted for these factors, net revenue growth was in the low double digits. Client incentives were better than expected due to lower incentives from some deals and programs than we had estimated, low volume in some markets and some deal delays. Delayed deals will now get done in the second half. Per the new…

We're ready to take questions, Jordan.

[Operator Instructions] Our first question comes from Jamie Friedman from Susquehanna.

Hi, thank you and we appreciate the incremental disclosures, especially about Europe and India. I guess I'll ask my question about Europe. And that was really helpful that 17% observation. I guess my question is, are you closer to the beginning or middle or end of the pricing journey in Europe? Maybe if you could help us characterize that and update that will be helpful. Thank you.

Thanks, Jamie. I don't really want to get caught up in this game of where we are in pricing. Pricing is something we look at in the business on a continual basis. And we will continue to do that around the globe and in Europe. And it's a lever that we're well aware of and will continue to pull as we think the value that we deliver is commensurate with that.

Our next question comes from Lisa Ellis from MoffettNathanson.

Al, I was hoping to ask you about the Japan market, actually not one that you did a deep dive into, but it's another one where there's a government imperative to drive up digital adoption, it’s large, it’s under penetrated, et cetera. And you've got kind of, you guys with your partnership with [indiscernible] but also players like Alipay Active. Can you just talk and comment on the competitive dynamics in that market, particularly around the use of like card funded wallets versus store balance wallets, QR codes versus tap and pay, et cetera.

Well, Japan is obviously a very exciting market and one where we are investing fairly heavily, given the fact that we're now, I guess, 15, 16, 17 months from the Tokyo Olympics and the government is using the Olympics as a platform to attempt to make sure that payments continue to grow and in fact, driving more payments to digital on a way from cash. So we are working with both the traditional banks and acquirers as well as new entrants there to try to embed ourselves into as many of the payment flows as we possibly can. We just did a deal with SMCC, one of the big acquirers there, where we're integrating cyber stores to help with build their capability that they offer to merchants relative to ecommerce and trying to improve reporting and reduce fraud. So it is – well, it was not a market I called out, it is certainly a market that we see a lot of potential in between now and the Olympic Games next July and August. But we also see Japan as a market that has an awful lot of downstream capability as well.

Our next question comes from Moshe Orenbuch from Credit Suisse.

And Al, when you talked about Europe, you mentioned kind of very heavy concentration in a couple of markets and then other markets where you've got opportunity, just talk a little bit about the plans to how to address that and are there countries or parts of Europe that that seem more, where that's going to be more conducive and talk about that a little bit.

I don't want to give away kind of specific plans by market. But I think that when we look at Europe, there's certainly a focus on trying to see where we can win a little bit more processing. In Europe, we're well established in the debit space, less well established in the credit space. So that's certainly an area of concentration for us. Fin-techs are very prevalent in Europe and Europe was, in fact, the first of the markets that we announced that we were going to get much more aggressive relative to fin-techs. Europe's a place that we're spending a lot of time thinking about transit. I mentioned transit in my remarks. I'm a huge believer and we're investing heavily behind transit and as you know, there's a very established rail and bus system throughout Europe, where transit, when people are commuting or using their product 10 times a week and that really builds the habit of using the card. So we're continuing to try to make sure that we're focusing on transit in several markets. I mentioned PSD2 and we're going to be coming out with a number of pilots of their different capabilities to help issuers throughout Europe who are kind of struggling with getting ready for meeting the requirements of PSD2 and we want to help them with capabilities to make that a bit easier for them. And then I would say Europe is a market where we're pushing hard on Visa Direct, and we see a lot of opportunity to build Visa Direct throughout Europe, particularly in some of the markets that are more inclined to move to digital. Europe's a mixed bag, you've got some countries that are still very, very heavily cash and then you've got some countries that are really have adapted digital. So those can be a number of the things Moshe that I would highlight as things that we're focused on in trying to drive volume, drive business and more volume in Europe.

Our next question comes from Brian Keane from Deutsche Bank.

I wanted to just ask about on the incentives, I see that incentives are coming in a little bit lower and I know there's been some deal delays. Just trying to figure out, I saw the guidance overall a little bit lower, but just trying to figure out the latest update on incentives and how to think about modeling it going forward.

Well, I'll say a couple of things, Brian, and then Vasant can add. First of all, there are some big renewals that have already been occurred in the first half of the year. BBVA, Air Canada, cities, commercial business, [indiscernible] Russia, HSBC, SBI and ICICI in India and then I talked about Scotiabank in Mexico, there's some win back and early with early renewals. It was initially announced that we had lost the TFB debit business in the UK. But I'm very excited to share that we've retained that business and that will no longer be converting their UK debit portfolio. And the last point I'd make is that there were some smaller deals in Asia, CEMEA and Russia that have just been pushed to the second half of the year. So, those are a number of the factors that we -- that lead us to forecast a higher level of client incentives in the second half. Vasant, would you add anything?

Yeah, I think it's a couple of things again to highlight, which I mentioned in my comments. First of all, we make estimates about what incentives are going to be. And it's based on certain ideas on how things will renew and certain programs. We have that we often use incentives to get faster adoption of. Sometimes, we might provide incentives for contactless penetration, et cetera. So one of the reasons incentives is lower is permanent, which is why for the full year now, it will be at the low end of our range of 22 to 23. That's because some of these have come in lower than we expected. So, those are reductions and not delays. Yes, there are some low volumes in some markets. In terms of deals, as Al said, I mean, the second half has more of the larger deals that are likely to be, they're all going well and we expect them to be executed in the second half when the incentives get recognized. We had TFB as a win and that's the second half impact. We also have potentially another early renewal of a very large account that was not contemplated. But we're delighted to have early renewal and that will be a second half impact. So you should assume that our second half will be very much along the lines of what we told you, it will be in that range of 22% to 23% as a percent of gross revenues, and for the full year, it will be at the low end of that range.

Got it. Got it. And then just one follow up. I just wanted to ask on the difference, of course, between cross border volume. I think it was normalized about 6% in the international revenue growth through a 3%. Just that delta again, I know that comes up a lot with investors, maybe you can just help us through that?

No. I think it’s important that people understand those delta. So let me give you a few things to help you with that. The biggest reason why revenue grew 11% last quarter, and is growing 3% this quarter, the biggest swing is the year-over-year impact of changes in currency volatility and their impact on our Treasury revenues. So Q1 this year, currency volatility was, in Q1, it was a significant tailwind for revenue growth on the international revenue line, because last year was a low volatility year in the first quarter, the currency volatility was, let's say, below the five year median. Due to this year, volatility was a significant headwind because volatility last year actually was quite high, above the five year median. So volatility this year was a little lower in the second quarter than the first quarter. But the comparisons to last year were quite significantly different. It went from being a tailwind to a headwind. That's one thing. The second thing is exchange rates are a drag on both quarters, but a larger drag on the second quarter. If you remember, Q2 last year was the high point for the strong dollar, so on a year-over-year comparative basis, exchange rates are a headwind in the first quarter but a bigger headwind in the second quarter. The pricing benefit is essentially the same between both quarters, we had a slight mix benefit in the second quarter because our intra EU volumes were growing slower than intra EU cross border volumes are growing slower than cross border volumes elsewhere. Another way to sort of simplify this for you and wash out some of these quarter-over-quarter things, is to sort of look at a two year stacked growth rate, which tells you that, not a whole lot has changed…

Our next question comes from Jeff Cantwell from Guggenheim Securities.

If we look at your announcements today and really over the past few months, it seems like you're opening up your business very rapidly and in some interesting ways, so I know you can't comment on -- I'm not going to ask you about that. But I did notice a few industry announcements this quarter, one of which was with Coinbase. So, could you frame your expectations around that partnership for us in terms of how much you think it might be incremental to your rounds every time, it just seems pretty interesting to think about a crypto platform plus your network and how that could grow. So I just wanted to get framed out for us. And also I just have a second round related one as a follow up.

Look, we've been watching the whole crypto sets of developments around the world. And I think that this particular announcement with Coinbase, you get that some of the concerns that I think we've had and probably consumers have had, where not having the crypto tied to some kind of fee odd currency makes it challenging to figure out when to use it, when not to use it. And obviously it's difficult for merchants and there is not a lot of merchant acceptance. By Coinbase literally being able to, in this case, convert cryptocurrency to pound sterling in the UK. And then put whatever amount of pound sterling crypto now converted to pound sterling that people want on a Visa Debit Card allows a consumer to be able to use their Visa Debit Card anywhere Visa is accepted online or in a face to face situation. And they have the global acceptance of Visa and they understand exactly what they're paying for. So we'll see where it goes. We're intrigued because of the fact that it's a fairly large crypto player, looking at alternatives to have that crypto currency tied to an accepted market, currency. And that's what we find intriguing. And we'll continue to look for those opportunities around the world. To what degree this is a jumping off point, that other crypto players will copy, we’ll see.

Thanks, I appreciate that. And just second related one, if we look at B2B specifically, this has sort of been under the radar, but blockchain world wire, which is part of IBM was recently launched. I'm just curious if you're looking at partnerships with non-traditional payment companies like IBM as a way of accelerating your share gains in areas like B2B payments in particular?

Well, B2B Connect, as you know, is based on a distributor ledger technology. So we are leveraging distributor ledgers already in the B2B space and B2B Connect is now ready for launch. It has got all the necessary approvals, it's got partners lined up, banks lined up, hopefully, when we talk again, B2B Connect will be live. We talked to everybody in the space. As you know, I mean, as Al said earlier, we’re the network, we facilitate movement of processing transactions for anybody, we try not to pick winners and losers. And so we're quite open to partnering with all new models, not really figuring out ahead of time what's going to work or not. And we talked to all players, including people who want to use distributor ledger type technologies to do what they're trying to do.

Our next question comes from Harshita Rawat from Bernstein.

I want to ask about long term potential in cross border payments, you have a very strong and differentiated franchise and consumer to business cross border. And then now there are other areas in cross border, particularly in B2B and person to person, which have a lot of pain points in the market today. And over the last year, you appear to have doubled down in these flows with your investments and products, such is B2B Connect and Visa Direct. So my question is, if you can talk about how should we think about cross border payments and within that new payment flows, which is B2B dispersed and B2B in the long term for you?

Look, as I said in my opening remarks that getting into as many payment close as possible is a big objective of ours. And those -- that could be with traditional players or less traditional players, and obviously, as we try to get into those flows, cross border plays a big role. You look at the movement around the world toward putting new RTP systems in. Those RTP systems are in many ways kind of modernized APH systems that are focused on speed domestically, but they are domestic based networks and I think we have an opportunity to partner with those networks to kind of extend their reach beyond their borders. There are players that are focused, trying to make cross border payments easier around the world, we're certainly in discussions with as many of them as we possibly can. Our goal is to embed ourselves into as many payment and transaction transfer flows as possible with a unique eye on cross border because of our scale, our security, the number of countries in which we operate. And then we have the real test case or the real proven case of Visa Direct where we have a capability that is facilitating domestic and cross border transactions right now, and has all the advantages that I cited in my remarks at the beginning. Anything else you would add?

No. I think, I mean, the simple answer to your question is, we view P2P cross border and B2B cross border as significant, let's call it, expansion and new payment flow opportunities. And we're already in the business. You've heard us talk a lot about remittances in the last few calls, this call we talked about Remitly. We've talked about MoneyGram before, there are more in the works. The attraction we offer in remittances, for example, which is already a big business, is that we address KYC, AML and sanctions related issues on a real time basis, in addition to being far more convenient, and far more secure than an agent based approach to it. As Al said, I mean, Visa Direct is a big component to B2B also. Visa Direct is already in the business of facilitating B2B payments and B2B Connect then takes that to larger corporates and larger businesses on a global basis, as Visa Direct deals with it on a cross border -- provides cross border solutions for small and medium sized businesses. So this is clearly a central element of our future growth plans.

Our next question comes from Tien-Tsin Huang from JPMorgan.

Al, let me get your thoughts on the recent consolidation in the US with large merchant acquirers joining the core bank processors, any implications for Visa since they touch both the merchant and the bank side separately?

Yeah, it's an interesting quarter with FIS-Worldpay, Fiserv-First Data and then you didn't necessarily refer to it, but BB&T and SunTrust announced merger as well. Look, let me direct your point to Fiserv World Pay. Fiserv-First Data, FIS-Worldpay. We've got very good relationships and a lot of history with all four of these players. And I think in many ways them coming together provides greater -- a smaller number of high scale players that will help us be able to distribute our capabilities through their distribution network. And that's a good thing. Both of these combined companies are very interested in one of their thesis ease of combining is to grow their global footprint, which is good for the payment ecosystem, because in a number of markets, the reality is that there just aren't enough merchant acquirers or issuer processors. So I think that's a good thing. And they're looking for our help. I've spent a significant amount of time talking to the CEOs of these companies over the course of the last three weeks, and they're extremely anxious to work with Visa and to help -- get our help in making sure that they do everything they can to achieve the synergies, revenue and expense that they talked about as well as talking to us about plans and how they can continue to grow their business going forward. So I think this is a good thing. And we're going to build upon the relationships that we have and help them. Since I brought it up, I’ll comment quickly on BB&T and SunTrust, obviously still similarly, they've got to get through all of the approval processes, et cetera. We've enjoyed a good relationship with both institutions, BB&T is much more heavily a Visa bank, SunTrust more of a MasterCard bank. We expect to continue to do everything we can to serve both of them as clients, while they're still individual companies and we're going to do everything we can to obviously push to be their payments partner as they merge.

Our next question comes from Sanjay Sakhrani from KBW.

I wanted to make sure I understood some of the points that Vasant made on the revenue trends. I guess first, as far as pricing impacts are concerned for this fiscal year that are kicking in in April, is that a tailwind for the second half of this year? And then secondly, the FX trends now, you guys are using spot, not a depreciating dollar and then third, the Easter benefit quarter to date? Is there any way to quantify that and how we should think about how it might flow through for the rest of the quarter?

There were several questions there. Hopefully, Mike will remind me what all of them were.

Pricing effect.

Yeah. The first was pricing. So the way pricing works in the second half is, it will mostly impact the service revenue line and the international transactions line. Last year's pricing was most impactful on the data processing line. So we will start to lap pricing from last year. So you lose some of the benefit from the FY18 pricing, you get the benefit from the FY19 pricing, it's a little bit of a wash in the third quarter because you don't get a full quarter of FY19 pricing just based on some of the timing. It is a small net benefit in the fourth quarter. The pricing going in has a more positive impact than the pricing that is now being lapped. So that's sort of the best way to describe pricing. The second question was exchange rates, exchange rates, I mean, if you track where things are, I mean typically what we do, I mean, we don't know how to forecast rates any better than you can. But we do use forward curves and it's always what we've used for want of anything better. You can use spot rates or forward curves and you're going to be wrong both ways. So you should just assume we’ve used forward curves, and on that basis, and again, the forward curves are not the reason necessarily why the FX impact is better in the fourth quarter. It's better mostly because last year, the dollar really started to weaken in the fourth quarter. I'm sorry, the dollar really started to weaken in the fourth quarter. So the comparisons become a little easier. So that's how we get to sort of a 200 basis point net revenue and 300 basis point EPS impact in the third quarter and meaningfully lower impact in the fourth quarter. And then the last question is around -- yeah, look, I think, the impact of Easter is not that easy to quantify. I mean, we do the best we can. And, we've given you sort of our best estimates, I think you should assume that there is some impact of Easter on the first three weeks. And regardless of what the Easter impact is, as we’ve cautioned you, every time we give you these three week numbers is that three weeks don't make a trend. So you should just handle with care, as we say the three week numbers.

Our last question comes from Jason Kupferberg from Bank of America Merrill Lynch.

This is Ryan Cary on for Jason. I just wanted to ask about how you're seeing cross border volume growth going forward. Clearly, you got a nice recovery through the first three weeks of April. So is it fair to say growth bottomed out in this past quarter? Are there other variables you're keeping an eye on for declaring 2Q as the low watermark? Thanks.

Well, as we said in the comments, when we talked to you last quarter, the trend was changing. And we told you we don't know if the trend is going to get worse, stay the same, get better. I think we can tell you that based on what we saw through the quarter, it definitely stabilized and definitely improved through the quarter. And, while there's some Easter impact, it looks to have improved again in April. So, I guess the verdict on where the cross border trend is, it's definitely stabilized and is improving. Whether it improves a lot or is roughly in this range, again, we can’t give you that kind of thing. We’ve assumed in the third quarter that the growth rate will be somewhat better than the second quarter, because we saw this improving trend.

And with that, just like to thank you all for joining today. If you have any additional questions, please feel free to reach out to me either by phone or by email or our Investor Relations team. Thanks again and have a great day. Thank you.

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