Welcome to Visa’s Fiscal Third 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.

Thank you, Jordan. Good afternoon, everyone. And welcome to Visa’s fiscal third quarter 2019 earnings call. Joining us today are Al Kelly, Visa’s Chairman and Chief Executive Officer; and Vasant Prabhu, Visa’s Vice Chairman and 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 in 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 the reconciliation are available in today’s earnings release. Now, let me turn the call over to Al.

Mike, thank you. Good afternoon, everyone, and thank you for joining us. It is clear from our strong results today that the business continues to perform well as we simultaneously invest to deliver growth in the medium to long term. Given that it was a busy quarter, I’m going to streamline my comments on the business performance and only offer a few headlines; then, I’ll discuss how we are enhancing our capabilities through our recent acquisitions and investments; and finally, I’ll review our progress in building partnerships around the globe with FinTechs as well as our traditional clients. So, let’s start with our third quarter results. Revenue growth was better than expected at 11% or 13% on a constant dollar basis. Payments volume growth was 9% on a constant dollar basis or almost 10% excluding China, which continued to be impacted by some runoff of our dual branded cards that captured domestic volumes and had limited impact on our revenue. Cross border growth rebounded up 3 points from last quarter and client incentives were lower than anticipated. Processed transaction growth accelerated to 12%. Adjusted expense growth was 10%, reflecting marketing investments, the impact of the new revenue accounting standard, and a number of nonrecurring items. And adjusted EPS growth was 14%, lapping a low adjusted tax rate of 18% last year. Vasant will share more details in his remarks. As we look ahead to the future, we’re pursuing our strategy by A, investing in growing and enhancing our network, including capturing new payment flows, building out our acceptance footprint and expanding our base of clients. We’re building our arsenal of value-added capabilities that could be components on our network or on other networks, what we call network-agnostic, and see we’re fortifying key bedrock pillars of the business, talent, technology, security,…

Thank you, Al. Despite strong currency headwinds, our business trends accelerated in the third quarter, as net revenue and EPS growth were both higher than expected. Net revenue grew over 11% on a nominal dollar basis and over 13% in constant dollars, while adjusted EPS grew 14% in nominal dollars and approximately 18% on a constant dollar basis. Through three quarters of fiscal 2019, net revenue is up 11% and adjusted EPS up 17% in nominal dollars, and over 12% and 19%, respectively, in constant dollars. A few highlights: Growth across all key business drivers, payments volume, process transactions and cross-border volume accelerated from last quarter. Payments volume growth in constant dollars improved to 9%. Global constant dollar growth excluding China and the UK was over 10%. Chinese domestic volumes are impacted by dual valid cards, which have minimal revenue impact. The UK economy remains weak due to Brexit uncertainty; ex-UK global payments volume trends remain robust. Processed transaction growth accelerated to 12%, primarily due to faster U.S. growth and a full quarter of processing gains in Argentina. Adjusting for cross-border volume within Europe, constant dollar cross-border growth was 9%, up almost 4 points from last quarter, exceeding our expectations. As a reminder, cross-border volume within Europe has revenue yields similar to Europe domestic volumes and continues to be impacted by e-commerce platform, reorienting within the EU. Growth was consistently strong each month after factoring Easter timing in April, and the improvement from last quarter was broad based. Every region’s outbound growth improved by at least 1 point, mostly benefiting Europe and U.S. inbound volume. Net revenue growth was 11.4%, despite 2 points of exchange rate drag and the lowest currency volatility we’ve seen in five years. Growth was helped by stronger cross-border momentum and lower client incentives than expected.…

We are now ready to take questions, Jordan.

[Operator Instructions] Our first question comes from Jim Schneider from Goldman Sachs. Your line is now open.

I was wondering if you could provide any more detail on the extension of the JPMorgan partnership. Whether there is any substantial change in the terms of that agreement outside of the length and in terms of the scope, anything that would show up in the economics of the business going forward? Any color around that would be very helpful. Thank you.

Thanks, Jim. We’re obviously not going to discuss the details of it. I think, both companies are very satisfied with it. JPMorgan is a big and sophisticated issuer. And I think as I talked to the senior leadership team there, we thought it was a good idea to renew our deal and kind of focus on all the various things that are happening in payments and make sure that we weren’t distracted by a negotiation that would happen over the next year or two. I’m not going to add much more color than that.

Next question, please?

Our next question comes from Darrin Peller from Wolfe Research. Your line is now open.

Thanks, guys. Look, it’s great to hear the momentum in the pipeline on the wins and renewals, including obviously the JPM deal. It sounded like you were saying out that the win rate, especially in Europe, is stronger than before. And I guess, first of all, is there anything that’s changed in terms of why you think you are winning at this rate? Is it actually better than it was before? And then, maybe just comment on even in the back of that how rebates and incentives, the guide is actually a little bit lower than it was before, despite these renewals in this pipeline? Thanks, guys.

I’d say a couple of things, and I’ll let Vasant talk a little bit about the incentive. First of all, in Europe, we’re now on our front foot. We are past the integration. We’ve got our management team in place. We’re not all the way there, but we’ve been moving more resources into the markets. And we’ve been able to focus much more on running a very good commercial organization in Europe. And I think that it really is starting to pay dividends to be able to be not distracted by any of the integration activities. I think, the second thing that’s happening in Europe but is also happening around the world is that we’ve gotten our act together as it relates to FinTechs. I’d be the first to admit, I think we were a little bit slow out of the chute a year and a half ago. But over the last five quarters or so, we’ve been very, very focused on FinTechs and making sure that we are easy to do business with, easy to integrate with, easy to get on-boarded. And I think that FinTechs appreciate the various assets that Visa brings to the table from our global reach to our fabulous brand to a lot of our experience and capabilities and our scale. So, I think that those would be the two big factors that would come to mind for me when I think about your question about what is different recently. I don’t know if Vasant wants to add to that or certainly talk about the client incentives.

I think on the client incentives front, there is a variety of reasons why they’re running lower than we might have expected. Several items that are good things where some -- we make estimates on the terms under which deals might be renewed, and in some cases we haven’t had to use up the incentives we thought we might have needed to when we sort of gave you a general view of things. So that’s a good thing and that is actually permanent and continues. Secondly, volumes have been lower in some parts of the world and that does lead to lower incentives. Thirdly, exchange rates that impact the gross revenue line, as you know, help the incentive lines. So, to some degree that is reflected also when you do a year-over-year comparison. And then, as it relates to the wins, which we’re very -- as we said, we’re very happy about what has already happened, but we also have a very robust pipeline, many of which we will be able to tell you about next quarter, and a lot of that is incorporated into our outlook for the fourth quarter. Those wins, they play out over time. The volume comes in over time and the incentives will play out over time. So, you won’t see the impacts right away. So, those are some of the reasons. And in terms of sort of the activity now and the things and their contribution to volume, as you know conversions take time, they play out over time. So, the volume will sort of layer in over a year or two. So, you won’t see the full impact for at least a couple of years from things that we are winning right now.

Next question, please?

Our next question comes from Lisa Ellis from MoffettNathanson. Your line is now open.

Hi. Good morning, guys. Question about the strategy, Al, that you talked about with the acquisitions of Earthport and Rambus, and some of the other organic investments. You’ve highlighted that you are adding more of these network of network type of services that extend beyond the boundaries of VisaNet. Can you just talk a bit about this strategy more broadly, meaning like what market opportunity specifically are you going after, and is this sort of ancillary to the core business or do you expect it to become more core over time? And then, finally, how do you think about maintaining the quality of the Visa network and brand, as you sort of extend and expand into the sort of network of network model?

Thanks, Lisa. So, today, we process about three quarters of the transactions that have the Visa brand on the credential being used, whether it’s a virtual credential or a real card. We recognize that there are other situations where we may not be able to process, whether it’s a real-time payment network that a country decides to build out or a domestic card network, payments network that somebody decides to build out. And when we look at those kinds of networks, we see a lack of sophistication in some of the capabilities. And we believe that we have an opportunity to take our toolbox of capabilities and provide additional value to those networks, either on a licensing type basis or pay-as-you-go type basis. And I see it as very additive to our ability to grow the Company and grow revenue and be involved in as many transactions in some way, shape or form as we possibly can. In no way are we stepping back from continuing to invest in VisaNet. It is a very important asset for us. And we have a number of projects ongoing right now. And we will continue to make sure that VisaNet is the best possible network in the world in terms of capabilities and in terms of security and in terms of reliability, all of which are very, very important.

Yes. I mean, if you look at each of these -- you look at Verifi, it clearly enhances our network because we can streamline dispute resolution on our network, but it’s also network agnostic. And therefore, we can help other networks also provide or streamline dispute resolution. And it not only takes a lot of the time and cost out of it, but is a much better consumer experience. So, there’s value, both to our network as well as the ability to go beyond our network. If you look at Earthport, clearly that allows us to substantially enhance our reach. And to the extent that a portion of how we get the money from point A to point B might not be on our network, does not mean that it isn’t a Visa-branded transaction with all the security reliability et cetera that our brand offers. And so, it allows us to be a network agnostic where it makes sense to be network agnostic in the interest of serving our customers. And then, if you go to Payworks, CyberSource now has a substantially enhanced capability to serve what is an incredibly high demand, which is merchants’ desire to approach their business in a omnichannel kind of way where they can see the customer at the same time between both their online business and their in-store business. So, in every case, it enhances an existing business, but it also allows in every case the opportunity to extend our business beyond, let’s say, our proprietary network.

Next question?

Our next question comes from Bryan Keane from Deutsche Bank. Your line is now open.

Hi, guys. Good afternoon. Al, just wanted to ask on Facebook’s Libra. There is some confusion in the market on how to think about that. Is it a strategic partner for Visa or a potential disruptive threat? Just curious your thoughts and level of expected Visa involvement in Facebook Libra.

So, Bryan, the first thing I’d say, I think it’s important to understand the facts here and not any of us get out ahead of ourselves. So, we have signed a nonbinding letter of intent to join Libra. We’re one of, I think it’s 27 companies that have expressed that interest. So, no one has yet officially joined. We’re in discussions, and our ultimate decision to join will be determined by a number of factors including obviously the ability of the association to satisfy all the requisite regulatory requirements. So, Bryan, in my estimation, it’s really, really early days, and there’s just a tremendous amount to be finalized. But obviously, given that we’ve expressed interest, we actually believe we could be additive and helpful in the association.

Next question, please?

Our next question comes from Tien-Tsin Huang from J.P. Morgan. Your line is now open.

Thank you so much. Good to see the revenue acceleration. I wanted to ask also on M&A. So, you stepped up the number of deals, you said four. I think you did last year one deal. So, I’m just curious, is the appetite for Visa to do more deals going forward. I’m just curious if this is the maybe the new norm for deal activity. And separately, I just want to clarify, maybe with you, Vasant. Aside from FX accounting and the 606 accounting change and also tax, what’s changed in your outlook, if you were to adjust for those items?

Let me handle the first part and then I’ll let Vasant, Tien-Tsin, answer the question that’s directed to him. No, we have not changed our posture as it relates to M&A. And the reality is, when we see an asset that we think is going to add value or bring incremental value for our clients or they are our customers or our investors, we’re going to pursue it. This quarter simply was a much busier one in terms of deals closed or deals where we reached definitive agreements.

In terms of outlook, Tien-Tsin, if you look at our guidance for the full year, our net revenue growth, it’s changed -- it’s unchanged in the low double digits. The FX impact, as you saw, was about 0.5-point higher than we had expected at the beginning of the year. And the accounting impact is also 0.5-point higher roughly. So, it’s sort of a wash. So, the underlying revenue trends, low double digits and generally as good as we thought as you saw somewhat better in the third quarter. Client incentives, as you pointed out, have come down for all the reasons we talked about. Expenses, higher than we had expected at the beginning of the year; some of it is the accounting impact going up a bit; some of it is we’ve continued to invest at a healthy clip. Tax rates, slightly lower than what we expected at the start of the year. And net-net, I think our EPS is starting from the mid -- I think they were mid-teens when we started; now, we are mid to high teens. Other than the fact that the cross-border business started the year softer than we expected but has picked up well, the other big thing that has sort of been negative is the fact that currency volatility, as I pointed out, is now running in the last quarter at the lowest levels we’ve seen in five years, and that has continued into the fourth quarter. But that’s fine. I mean, as you can see, we’ve absorbed it pretty well. If currency volatility had not been this low, clearly, our international revenue growth would have been higher. So, it did have a decent impact on our international revenue growth. But despite all that and despite the currency headwinds being as high as they’ve been, we’re delighted that our nominal dollar growth is going to be in the low double digits.

Next question?

Our next question comes from David Koning from Robert W. Baird. Your line is now open.

Yes. Hey, guys. Thanks. And I guess on days, I know, Q2 was a little light with Easter and processing days timing end of the quarter, Q3 picked up a little, and I think Q4 you actually get maybe another extra day. So, what I’m wondering, you talked a little bit about U.S. decel through the first three weeks of July, and a little bit of transaction decel. But, do you actually pick back up because of the number of days in the quarter and get back to kind of more stable with fiscal Q3?

Yes. In terms of processing days, the easiest way to explain it to you is, this quarter was a normal number of processing days, last quarter was below normal, and next quarter is above normal. So, you’re right, because of the way this quarter ended and next quarter is going to end, it will help us processing days wise in the way that processing days hurt us last quarter. This quarter was more normal. And as it relates to the three weeks, we always tell people three weeks don’t make a trend. I wouldn’t read too much into it. I think, our outlook is that the trends will be roughly in line with the third quarter. So, if something is slightly higher, slightly lower in the first three weeks, I don’t think it tells you much.

Next question, please?

Our next question comes from our Harshita Rawat from Bernstein. Your line is now open.

Hi. Good afternoon. Thank you for taking my question. I want to ask about PSD2 the implementation deadline for Strong Customer Authentication this fall. So, my question is, how your thoughts evolving, and whether the current ecosystem in Europe is ready for this deadline, and what are the long-term benefits and trade-offs of this directive could be?

Harshita, how are you? It’s -- you are absolutely right that we’ve been engaged actively with European and certain nation authorities and trade associations throughout Europe to raise awareness that we think less than half of the merchants are going to be ready by the deadline, which is September 14th when Strong Customer Authentication is supposed to get into place. We’re certainly pleased that the European Banking Authority had a recent opinion that’s going to allow for extensions as set by the local regulators. And I think that most everybody is going to largely kind of look to the -- aside from people not being in compliance. It’s our understanding that regulators in the UK and France, for example, have already communicated that they are not going enforce the September deadline. It would be very, very bad for particularly small merchants. So, there is a reluctance to move the deadline date. But I think where we’re landing is that people will look past it and allow for exceptions for some time to come. In the meantime, we are working with merchants and issuers as much as we can to help them make sure they will be ready. We are also working on various solutions to help identify exempt to non-exempt transactions and trying to figure out how to optimize secure customer authentication. We’ve got a Visa trusted listing capability, which allows consumers to identify merchants that frequently shop and therefore they trust them. There is a Visa delegated authorization that allows acquirers to identify merchants that already are performing strong authentication as spelled out in the regulation. So, there’s any number of things we’re doing to try to help merchants and issuers be ready. But, I think that this won’t really come to the place where people will be required until we get well into 2020.

Next question, please?

Our next question comes from Ashwin Shirvaikar from Citigroup. Your line is now open.

Questions on B2B Connect that recently joined -- launched it globally. I know it’s early days, but I was hoping to get a couple of things answered. First, it seems you are finding now what’s looking like holistic offering, based on your organic and inorganic investments in the ecosystem. So, is that a fair assessment? And if not, what parts need to be added? And secondly, can you comment on any early traction you might be seeing in this area?

It’s just too early. We are just getting past the pilot stage. We’re talking to various banks around the world about connecting. And I just don’t expect to be able to share results probably for a good six months. I think it’s going to take that long before we really see the traction with B2B Connect. So, there is still some technical work banks would have to do, and obviously still some sales work that has to be done to make sure that people understand the capability and what it can do.

Next question, please?

Our next question comes from David Togut from Evercore. Your line is now open.

Thanks. Good afternoon. Piggybacking a little bit on Ashwin’s question, all three mega mergers this year in bank tech and payments have really highlight B2B payments as an important growth objective. And of course, you’ve signed up FIS and Bottomline to B2B Connect and just closed Earthport. So, I’m curious if you could expand upon your game plan, specifically to build out distribution into the enterprise B2B market, especially for cross-border, which you’ve highlighted as a lucrative growth opportunity for Visa?

Well, I think, David, you’ve hit the nail on the head. I mean, the enterprise level volume that has traditionally been wires and check. This is going to require a whole different approach than the approach in the carded area where we rely on issuers and we rely on P-cards and corporate cards and small business cards and virtual cards, in order to be successful. In the enterprise space, you’ve got to be integrated into some of the large enterprise systems and you’ve got to build a network of partners that have the ability to generate the kinds of distribution with credibility that we need. So, we’re going to continue to look for ways to build partnerships and look at investments, like the one we made in PayMate, and one that we made earlier in BillDesk. And we’re going to continue to try to forge investments and distribution partnerships wherever we can because I think that’s going to be a key to unlocking the volume in this -- the non-carded space of B2B.

Yes. I mean, our B2B strategy has many components and B2B Connect is one component. B2B Connect addresses, as you said, high-value transactions on a cross-border basis. Through Earthport and Visa Direct, we can address B2B transactions but low-value transactions that are high volume also on a cross-border basis. We also have initiatives that go beyond cross-border to domestic AR and AP. So, it’s a broad range of things happening on multiple fronts. I’m sure you’ve heard about our partnerships with Billtrust and so on that deal with AR. We have other partnerships that deal with AP. So, it’s a variety of initiatives on multiple fronts. As it relates to B2B Connect, since that was your question, we know that the value proposition is very strong. We bring settlement -- it addresses a whole bunch of pain points. We bring settlement capabilities, the security and reliability that doesn’t exist today, we utilize distributed ledger technology, and we do tokenization to substantially enhance the security of the transaction. I think, as Al said earlier, with anything like B2B Connect, you have to get the network effect going. And that means having both ends represented at scale. That takes some time to develop, which is why as Al said, you have to wait for some time as we get both sides of the network pulled together and then the volumes build. We talked about that when we talked about contactless. There are two or three years where it all builds up and then it takes off. So, it will be some time before the network effect starts working for us in B2B Connect.

Next question, please?

Our next question comes from Dan Perlin from RBC Capital. Your line is now open.

Thanks. Good evening. I wanted to kind of just dovetail a little bit on all these discussions around these new payment flows globally. And the question is really twofold. One is, is there a need for investments, like sizable investments in the coming years to increase the scale opportunities for VisaNet? And then, secondly, Al, can you just talk a little bit about how you do think about security vulnerabilities, as you build out these networks? And your distribution points are clearly getting closer direct-to-consumer. Thank you.

Dan, our new payment flows, clearly, there is always going to be investment to drive them to the level of scale that we won. I mean, in the last year plus, we’ve greatly added to the resources in Visa Direct, which are all kinds of new payment flows into the various use cases that it’s supporting. We’ve obviously built out resources in the B2B business unit as we continue to explore that space. We’ve got people. We’ve had to add people to chase down all the various wallets that are out there in the world, not all of them with financial institutions, they are with all kinds of organizations like Gojek that I talked about in my remarks. So, I think from a technical standpoint -- I’ll come to your security question in a second, from a technical standpoint, I think Visa Direct is, I’m sorry VisaNet is able to handle these various use cases today. As we get into new ones, we may have to do some augmentation of VisaNet to make sure that we can handle a new use case that we might not have anticipated. But, I think, really the bigger challenge in the bigger area where we have to invest is simply getting feet on the street and getting people out there to understand what our capabilities are and realize that we could bring various solutions to them that they might not have anticipated. And clearly with the acquisitions and the nonbinding agreements that we’ve talked about, we’ve got new capabilities that we can bring to our clients all the new around the world that we have to go communicate. So, that’s where I think the preponderance of the investment will be. Security is something weighs on my mind all the time. We have an extraordinarily…

Jordan, we have time for one last question.

Our last question comes from James Friedman from Susquehanna. Your line is now open.

I just wanted to ask, Al, in your prepared remarks, you alluded to the used cases of tap-and-pay and the tax rate between transaction growth and volume growth, you referenced that 2.5 times accelerator in the UK. Is there anything unique about the UK market or do we think of that as a template of things to come? Thank you.

Jamie, the only thing I can say and I think a bit unique or different about the UK market is that we have been in the transit system there for longer than we have in most other big markets around the world. And as I also said in my remarks, we are finding that transit is one of those things that really creates the habit and what people are commuting home -- to work and home 10 times a week, and they are tapping and get used to it. They realize and look to tap in all kinds of instances, particularly instances where heretofore they were using cash for lower ticket purchases. So, I think that as we continue to pursue the 200-plus transit projects that we have going on around the world, not certainly including the one I referenced in my remarks in terms of the MTA here in New York where we’re seeing really nice results in just a kind of a seven-week period since we’ve been up and running. I expect that in markets where we are able to penetrate the transit system and get high levels of adoption of tap-and-pay in general, I think, we’ll see similar type of results. That said, we’ll have to see how it plays out over time.

We’d like to thank everyone for joining us today. If you have additional questions, please feel free to call or email our Investor Relations team. Thanks again. And have a great day.