Welcome to Visa's fiscal fourth quarter and full year 2019 earnings conference call. All participants are in a listen-only mode until the question-and-answer session. 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 fourth quarter and full year 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 to 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 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 thank you for joining us today. The fourth quarter capped another strong year for Visa as we continue to grow our business across a number of dimensions. In our time today, I would like to touch on our results, then discuss how we are strengthening our network with the power of partnerships and a focus on customers and finally provide our initial thoughts on fiscal 2020. To start, our fourth quarter results demonstrate our ability to grow the topline, invest thoughtfully in the business to drive future growth and return capital to shareholders. An important indication relative to the health of our network is transaction growth. In this regard, Q4 ended strongly with over 47 billion payment transactions, an increase of 5.3 billion or 12.6% compared to this quarter last year. Payments volume grew at 9% globally, 10% excluding China. We also saw a strong growth in payments volume across every region and growth accelerated versus the last quarter in every international region. Net revenue growth accelerated to 13% or 15% on a constant dollar basis. Non-GAAP EPS growth was 21% or 23% on a constant dollar basis. We also returned $2.7 billion of capital to shareholders in the fourth quarter, consisting of $2.2 billion in share repurchases and a $0.5 billion in dividends. Our fourth quarter performance brought our full year net revenue growth to 13% on a constant dollar basis and non-GAAP EPS growth of 20% on a constant dollar basis. Total capital returned for the year was $10.9 billion. As a reflect on all of 2019, Visa has made tremendous progress leading a dynamic industry and advancing the growth of digital payments. This has manifested itself in a variety of fronts. To start, over 180 billion payment transactions leveraged…

Thank you Al and good afternoon everyone. I will cover fiscal 2019 fourth quarter and full year results before reviewing our outlook for fiscal year 2020. Building on the momentum from the third quarter, we had a strong finish to 2019. Fiscal fourth quarter net revenues were up 13% on a nominal dollar basis and 15% in constant dollars. GAAP EPS grew 9%, but excluding this quarter's special item related to the MDL litigation as well as a special item in the fourth quarter of last year, non-GAAP EPS grew 21% and 23% in constant dollars. In September, 2019, Visa recorded a $370 million accrual in connection with MDL 1720, depositing an additional $300 million into its litigation escrow and taking into account $70 million of earned interest on existing balances. The funding of the escrow triggers the conversion rate adjustment of Class B common stock to shares of Class A common stock, which has the same effect on EPS as repurchasing $300 million of Class A common stock. Our strong performance in the fourth quarter reflected growth across all our key business drivers. Payments volume growth in constant dollars was consistent with Q3 at 9%. Credit was up 7%, debit was up 11%. Growth excluding China was up 0.5 point better than Q3 at 10%. As a reminder, Chinese domestic volumes are impacted by dual-branded card conversions, which have minimal revenue impact. U.S. payments volume growth was up 8% with credit growing 7% and debit 10%. Lower fuel prices and travel spending, the lapping of commercial card wins and some slowdown in commercial volume were partially offset by a small benefit from processing days. International payments volume growth in constant dollars was 10% and 12%, excluding China accelerating approximately one point and 1.5 points respectively. Growth in CEMEA remained…

We are now ready to take questions, Jordan.

[Operator Instructions]. Our first question comes from David Koning from Baird. Your line is open.

Yes. Hi guys. Thanks. And I guess just two kind of quick questions, first of all, incentives growth. You kind of mentioned, it's much higher than normal this year. Is it high enough than normal with some one-time items kind of with renewals in there that out year might actually be stable or even down maybe? And then the second is quick one just on 606. Is that all completely now in the past? So no other adjustments kind of in 2020?

Yes. On the second question, yes, 606 is behind us. So now when you compare 2020 to 2019, it's apples-to-apples. And as per the requirements, we will no longer be reporting numbers with and without 606 et cetera. So that's fairly clean. In terms of your question about what happens in the future? Clearly, I mean, having all this renewal activity come in from the fourth quarter, you see the full effect in 2020 for the full year and then you have the additional renewals in the first half. As we lap them, I mean, given that we would have renewed about 50% of our business over the two years, you would expect to see some moderation in the growth in incentives. So that should be expected. Obviously, we don't provide any long term outlook on the trend in incentives. It's a function of marketplace conditions. But there is no question that when you renew a third of your business over a three quarter period that it will have a material impact on the rate of growth. And then as you lap it, it should help.

That's great. Thank you.

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

Hi. Good afternoon. AI, my question is on your comment on partnerships. A few years ago, many of the digital wallets around the world were perceived to be risk for you. And recently, many of them have started to look more like partners as they have to refined their monetization strategy. So if I look at some of the sort of lingering competitive risk, for example the domestic networks, can you talk about where are we in that journey that they could look less like competitors and more like partners? I think, if you comment in providing network agnostic services that were still going to be [indiscernible] to some of these alternative networks, it would be great if you can elaborate on that.

Sure. Thank you Harshita. Look, a lot of these players started out in a different business. Then they realized that because, in many cases on banks parts of the population, they end up developing wallets and they started off with having them be in essence a closed loop network that is within their world. And then as they become bigger and we end up having discussions with them, they realized that we could bring a lot of things to them in terms of our global reach, cross-border capabilities, the ability to provide products that could be used to purchase in e-commerce, capabilities to increased security like tokenization. And them, by the way, can help us grow by being both a issuer and acquirer for us. So I think that as we sit down and we increasingly talk to these providers around the world, they see an ability to provide a better customer experience with greater reach for their clients and the same for us. And it's just good for both company's businesses.

Thank you.

Next question.

Our next question comes from Ramsey El-Assal from Barclays Global. Your line is now open.

Thanks for taking my question. I had a somewhat similar question about your guys moving more into other ancillary business lines through fintech partnerships and M&A. How do you manage the risk of channel conflict with your existing customers if you are stepping a little bit more on the toes of folks who are in the network businesses in terms of moving money between banks or maybe people who are acquirers, who are offering omni-channel solutions like Payworks? Is there a risk that you kind of disrupt the value chain kind of moving into these other areas?

Well, Ramsey, today we have 16,000 financial services clients around the globe and they come in all kinds of shapes and sizes. And the reality is that many of these new players that are coming into the marketplace are attracting new segments of the market and they are bringing new capabilities that are accelerating the growth of digital payments and the acceleration of moving from cash and check to digital forms of payments. In many cases, we in fact are opening up the capability for our existing traditional clients to get their credentials involved in places that they probably otherwise wouldn't have been able to get them, but for us forming partnerships with some of these new types of players. So I think in many of the cases, it becomes additive for everybody in the payment system. It becomes additive for our traditional bank partners. It becomes additive for the fintech or the wallet or the neobank player and it becomes additive for Visa. So it is something that we certainly remain focused on it, but it's all about growing the industry for all of the players in the ecosystem.

So Ramsey, I mean, from our standpoint, the question you raise is a question we talk about all the time. This is a business built on partnerships. This is a business where partnerships are very much, as I said in my comments, a force multiplier. In every situation, we have a very explicit conversation around things that we partner to do and things that we should do ourselves. And to the extent that it is a channel conflict question, we very clearly steer clear of those areas. And so when we have those kinds of issues, we typically partner and where we don't, that's when you might find us actually offering the service ourselves.

Thanks. That's helpful. Yes. Thank you.

Next question?

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

Hi guys. Thanks. Cross-border growth looked like it accelerated a bit. I think 8% in October. And there has been questions around macro trends and potentially slower cross-border, just globally in September, October from different parts of the ecosystem and just doesn't look like you are seeing that. So maybe just if you can give us some comment on what you are seeing in cross-border trends a bit more granularity? And then Vasant, it also looks like revenue growth accelerated in the international fees. I know there was pricing earlier in the year on cross-border, but FX vol had weighed some of that down last quarter. So are we now seeing was that better this quarter? Are we seeing the full flow-through of pricing there? Thanks guys.

Yes. On the second question, yes. I mean the full impact of pricing is visible in the second half and it is definitely visible on the international revenues line. It also is the case that some of it was muted in the third quarter because as you know that line also includes some of our exchange FX revenues and the third quarter had some of the lowest volatility in five years. And the fourth quarter saw some improvement. Volatility was still lower relatively speaking, but it was improved from the third quarter. So the benefits of pricing, which were largely washed out by low volatilities in the third quarter, were more visible in the fourth quarter. But you are right that pricing is showing up in that international revenues line. In terms of your first question on cross-border trends. Cross-border trends, as I indicated, were pretty good all over the place. We highlighted some areas where they were stronger like CEMEA, like Southeast Asia. Inbound into Europe has stayed strong for quite a while in the mid-teens. This excludes what we call the intra-Europe cross-border transactions. Inbound to the U.S., which is a sizable business for us, improved a bit, but it's still quite weak. So the strong dollar is certainly holding down inbound to the U.S. There were spots of weakness, as you might expect, like inbound to Hong Kong. In fact, both in and outbound to Hong Kong. But by and large, we saw good improvement in Latin America, good improvement in parts of Asia. Certainly strong inbound to Europe. So no real indication that there is any change in trend. I think there was, we said there was some slowdown in travel, but it was more than made up for improvements in e-commerce. So I would say stable to improving is probably the best way to describe it.

Next question?

That's great. Thanks guys.

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

Thanks. I had a question about, I think your words were, unprecedented levels of renewal activity. And I am thinking in terms of historically it's been 20%, so it would have been parsed out a little bit more evenly. This is clearly more of a compression cycle. And so the question is, is it driven by competition? Is it like strategic positioning on your part? Or is it important to like lock down your partners today so you can drive all this new innovation through their distribution asset? I am just trying to think through that. Thank you.

You know, Dan every year we go in the year, there is just a couple of deals that come up that were not necessarily up for renewal. It happened during the course of the year and they are occur because they have senior discussion about, hey, why don't we extend our relationship and be able to focus on growth over the next couple of years. And this year was no different. There were a couple of deals that were early renewals that just as happens every year. But they were just a couple of the bigger clients of ours with Chase leading the pack in that category. And that's really what drove the number up to the 30% level from kind of a norm of around 20%.

Okay. Thank you.

And the bunching of it sort of around the fourth quarter and the first half, that's just some timing that happens within the year. So it just so happens that it all is happening over a three quarter period where we have a third of our business renewing. So that's a little bit of just things moving around a bit and bunching around three quarters.

High quality problem. Thank you.

Next question?

Our next question comes from Tien-Tsin Huang from JPMorgan. Your line is open.

Thanks so much. Thanks for the presentation. I just wanted to ask on the outlook. The fiscal 2020 revenue growth guidance looks pretty consistent with what you expected for fiscal 2019 a year ago. So do you see any major differences in sources of growth expected this year? I heard the incentives outlook. It sounds like there's a little bit tougher. So what might get better to offset that? Is it pricing? Is it higher expectation for certain products or maybe certain geographies? Any thing you can share there? Thanks.

Sure. We have some benefit in the U.S. because we start to lap the Cabela's conversion. Internationally, we have some wins and we have a couple of our conversions moving away from us happening. So I would say, that's a little bit of a wash. If you look at our cross-border business, our second half trends were somewhat better than our first half, especially fourth quarter. And we are sort of assuming the second half trends are what continue going forward. And as you can see that is continuing. The pricing impact is actually smaller in 2020. We get the benefits of the 2019 pricing through the first half, but it is lower in 2020. So the second half pricing benefit is smaller, especially in the service revenue line and in the international transactions line you should see that. The other area of growth is our value-added services and new payment flow services like Visa Direct, like B2B where we expect some strong growth to continue. We had good growth this year as you saw. We expect strong growth to continue next year. So if you were to look at what are the above average growth parts of the business, it's new payment flows and it's value-added services and those are clearly helping. On the flip side, the higher incentive will be something that we have to contend with that we didn't have last year. Unfortunately exchange rates, which even three or four months ago look like may not be a drag now are looking like could be a drag of roughly the same magnitude as we had in fiscal year 2019. So those are some of the pluses and minuses. And in terms of the underlying macro conditions, we were fairly clear that we are assuming that the trends we have seen in the last two quarters are the ones will that will persist.

Tien-Tsin, the only thing I would add too is related to everything that Vasant said, is we are going to continue to invest in the business. We think there's a lot of opportunity to invest. So continuing to invest in the various levers that we think can grow the business over the next number of years plus these acquisitions adding three points or four points to our expense growth. We are going to have some. We are going to have a healthy level of expense and investment in the business.

Next question?

Our next question comes from Moshe Katri from Wedbush. Your line is open.

Can we talk a bit about the SRC rollout? What are you going to do differently this time just to get better traction, maybe you can talk a bit about that? And then maybe some more color about the U.K., because it seems that based on what you are saying, things may be improving on that part of the business? Thanks.

Good morning, Katri. I understand I know SRC, when you said what will happen this time versus some other time. I mean, this is, I presume you might be referring to Visa Checkout. As I have said it number of times, the reality is that we, the various network players, really have not heretofore done good job in terms of the e-commerce checkout experience. The fact that we put merchants in a position where they have to have a connection for each of the networks and then everybody has their own version of checkout is difficult for merchants, it's confusing for consumers and it's leading to some unpleasant friction in the e-commerce situation. So all of us now, we are going to abandon our proprietary offerings, but because those proprietary offerings are out there like Visa Checkout, it's going to make for a much more streamlined way to get to critical mass fairly quickly. As a reminder, in the case of Visa, we have 52 million Visa Checkout users and we have 350,000 merchants on Visa Checkout. So we would expect that the conversion of those 350,000 merchants will be relatively easy. There is a little bit of work, but relatively easy. Easier then putting people who had not been signed up for Visa Checkout or MasterPass, for example, in the case of MasterCard. It's just that the timing of the year now as we are getting to the end of October, we will see some more merchants come on-board in the coming weeks. But as we get into the holiday season, most everybody kind of resists putting any kind of change into the payments ecosystem. So I think we will have a period where we will have some merchants come on-board. We will get out, work out the kinks with those merchants and then after the holiday season, I expect to see a major pickup in the adoption of the SRC. And again, I think we will have a great head start, because of the 52 million users we have on Visa Checkout and the 350,000 merchants that they are using it at. So that's what gives me confidence that we will get there. It's a better user experience. It's a better merchant experience. And we plumbed a lot of the capability to get this SRC button up by what the work we did it for Visa Checkout.

Next question?

Our next question comes from Sanjay Sakhrani from KBW. Your line is now open.

Thanks. Vasant, I guess the client incentive range is on the upper end. Generally, it's been fairly conservative. As we look out to the 2020 numbers. I mean, can you just walk us through sort of what's baked into at the upper end? And then secondly on the 3% to 4% expense growth related to M&A, how much of it is investments and how quickly can we make these investments profitable?

Sure. On the client incentives, given that the renewal, 30% of our business was renewed in fiscal year 2019 and more than half of that was in the fourth quarter, that's done. So those incentives are pretty well known. And the only reason they would be different is IF volumes are different. But otherwise, that should be pretty locked in. There is another, we said 15% to 20% that is slated for renewals in the first half. And therefore, we should know about that fairly quickly. So I would say, yes, in the last couple of years, we have ended up being lower than we expected. Given how much is already renewed and given how front-loaded 2020 looks, I think you should assume that the range we have provided you is the range. Where exactly we will be in the range may depend a little bit on some timing, but not a lot. And it will get to that range pretty fast. As we said in my comments, you should see us in the range as earlier as the first quarter. So that's the point of view on incentives. In terms of acquisitions, we said that the revenue impact is about 0.5 point. They are all capabilities we are buying. So essentially we need to now build them up from where they are to be able to scale them. And so the expanses we have fall into four categories. One is whatever expenses they came with, what their run rate is. In every case, we are making investments to enhance their capabilities and to get them ready to scale. So we are certainly making investments in them in 2020. Then there are some one-time costs in 2020 that are related to integrating them into our system and especially on the security side. We need, in most cases, to upgrade their cyber security. And then finally, as you know, in every acquisition, there is going to be some deal amortization. So when you put those all together, you get to that expense number that increases our expenses by as much as three to four points and you get to the dilution of $0.05 to $0.06. So that's how we get there. We think it takes a couple of years before we get to getting out of this. This is a dilutive phase. But we will keep you posted on how they are progressing.

Thank you.

Next question?

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

Hi. Good afternoon. Thank you. Al, maybe using Rambus' tokenization capabilities as an example, can you elaborate on the strategy for selling these types of value-added services into domestic account-to-account networks? Meaning, how are you envisioning that will work in a way that doesn't just end up turning those domestic networks into more formidable competitors to Visa's own VisaNet? Thank you.

Thank you Lisa. So when we look at value-added services, we think that first of all, there is an ability to make some of these capabilities available directly to our customers. But beyond that, as you asked the question relative to specific networks, we are going to be awfully careful about what we do. I mean these RTP network that might allow account-to-account capabilities, obviously is a very local business. They vary from jurisdiction to jurisdiction. I think there's probably two examples where I would envision offering value-added services on RTP networks. One is on Visa-branded transactions that run on our network of networks. So we may use other people's rails for the first mile or the last mile of money movement. And in those particular cases, if it's a Visa-branded transaction that is moving, regardless of what rails it touches, we would want to make value-added services available to deliver that value to the clients. And that's what I think they would expect. I think the second situation where we would envision using it, Lisa, is where we have formed some kind of partnership with the operator of the alternative rail. So I think about it right now, we will make decisions on a case-by-case basis, because there are all these situations that are very, very different. But those two broad strategic categories that I described is where I would expect us to use and introduce value-added services because we certainly don't want to just do it in every single case to give away value-added services that could make somebody's else's network maybe not as good as VisaNet, but enrich it in a way that could be competitive to us.

Thank you. Thanks a lot.

Next question?

Our next question comes from Bob Napoli from William Blair. Your line is open.

Thank you. Just on the new payment flows, I guess is there a way, can you comment on like the percentage of your business or way to track the addition to your growth that would come from new payment flows, whether it's B2B or Visa Direct. And also on the contactless cards in the U.S., which I guess is kind of a new payment flow of sorts, any thoughts that you think the contactless cards would have on growth in the U.S., given your experience globally?

So Bob, I gave you a little bit of insight in my remarks, I would say. We are over $1 trillion. So I said in my remarks that we had just under $9 trillion of payment commerce that ran over our network. Of that, we were over $1 trillion in B2B. So it's about 12% of our volume. We know in the carded B2B part of the world, we are still the market leader in the United States globally and in most markets. We also gave a little bit of insight in Visa Direct. We said that we grew in triple digits and we reached the two billion transaction mark. So both of those are pretty substantive. B2B being in the 12% area of all of our volume and Visa Direct getting to the point where it's two billion transactions. So these are not kind of experimental or in any way, shape or form in any kind of pilot mode at this point. These are kind of full-fledged new payment flows that we are continuing to invest in and we will continue to grow around the world and they have reached a point where obviously they are substantive contributors to our revenue and our profit. In the case of contactless, obviously we are very excited about getting to the point where the U.S. starts to scale up as it relates to contactless. I think getting now past the 100 million card mark and getting 80% of, the top issuers involved and at the same time getting a large part of the merchant network out there plump for tap-to-pay, I think that there is going to be a great opportunity to see growth. And what we have seen in the markets that are more mature in tap-to-pay that there is a…

Jordan, we will take one last question.

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

Thanks. Hi Alf. Hi Vasant. Good to see you guys sounding more positive. I wanted to return to cross-border, if I can. Can you discuss sort of the traction and rollout that you have with B2B Connect in Earthport, post-acquisition? Any metrics on that that you can provide in terms of how much do you expect these offerings to accelerate cross-border, perhaps in the coming to 12 months to 18 months?

So let's separate the two. I mean, given what I just said about Visa Direct and that it's a very established platform that is delivering a substantive contribution to our business now, our aim is to have fully integrate Earthport with Visa Direct by the end of the year to have a seamless platform that allows any card or any account to transfer money around the world to virtually any other card or account. And so I think the ability to see in the not too distant future, a real great opportunity as it relates to cross-border payments facilitated by Visa Direct and by Earthport is very real and very, very exciting. B2B Connect is a little bit further behind, but no less exciting. We now have the ability and approvals to operate in over 60 countries. We have got three different ways that people can connect through to connect B2B Connect. One is, coding to our APIs through our Visa Developer Platform or they can connect through a technology provider and we have got relationships now with FIS, Bottomline and Infosys. And then thirdly, they can connect and interact using a host-to-host secure file protocol infrastructure. The latter being kind of the slowest way to get it up and going, using and coding to our APIs being the fastest play. So our focus right now in B2B Connect is actually building out the nodes in the 60 countries. And by the way we want to grow the 60 countries too. So we try to grow the 60 countries and within the countries where we have the capability and the permissions and approvals to operate, we want to be growing the nodes. So that's our focus as it relates to B2B Connect. I think both of them represents an enormous opportunity for us to move funds in a frictionless way, facilitating all the great capabilities of VisaNet from sanctions controls to fraud controls to risk management. And I think in all cases, our aim is to deliver capabilities that are faster, more transparent and a simply better user experience for everybody involved. So it's exciting times on both of those fronts.

And what it allows us to do is, in the B2B space, the cross-border B2B business we think is the most attractive part. And Earthport/Visa Direct will handle high volume, lower value B2B transactions and B2B Connect will handle the large enterprise, high value, lower volume B2B transactions. And as Al said, they will be in place very soon to pull all this together.

And with that, I would like to thank you 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 evening.