Welcome to Visa's Fiscal First Quarter 2020 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 first quarter 2020 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 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. 2020 is off to a strong start with Visa’s first quarter performance. It’s a reflection of our focus on clients and commitment to moving money globally, seamlessly and safely. In our time today, let me first touch on our results and then discuss how we’re going to grow our core C2B or consumer payments business and capturing new payment flows, which is all part of our network-to-network strategies. To start, our first quarter results, we had a terrific quarter and the business is performing well. We reported net revenue growth of 10%. But if you adjust for exchange rates and very low currency volatility, our net revenue growth was approximately 13%. Our EPS growth was 12% or 14% on a constant-dollar basis, excluding the impact of acquisitions made after Q1 last year. Key business drivers were largely consistent with the fourth quarter as we expected. For the first time in our history, total network volume this quarter was over $3 trillion. Payment volume grew at 8% globally, 10% excluding China and the UK. Cross-border volume rose 9% on a constant-dollar basis and we processed nearly 38 billion total transactions on our network, up 11%. Let me touch briefly on holiday spending, starting with the United States, the growth was similar to the 2018 and 2017 holiday seasons, which were both strong years. Credit growth was slightly better than last year and debit growth slowed slightly due to lapping tax reform, which had a positive impact on U.S. debit growth throughout all of last year, including the holiday season. E-commerce grew three to four times faster than non-e-commerce. E-commerce also drove more than one-third of all consumer spend, up two percentage points versus last year. Retail spend…

Thank you, Al and good afternoon everyone. We had a strong start to fiscal 2020 with results coming in consistent with our expectations, excluding acquisitions and investment gains, constant-dollar net revenue and EPS growth about 11% and 14% respectively. Exchange rates reduced revenue growth by over one point and EPS growth by approximately one and a half points. The four acquisitions completed in the last six months, increased reported revenue growth by approximately half a point and expense growth by approximately three points. starting in fiscal 2020, we're providing adjustments to our GAAP numbers each quarter to help investors’ better track ongoing business performance. Non-GAAP results will exclude three items: 1) the impact of equity investment gains and losses 2) amortization of acquired intangible assets or acquisitions completed in fiscal year 2019 and forward, and 3) certain non-recurring acquisition-related costs. Prior non-GAAP results were also adjusted to reflect this change. this quarter, the impact of non-GAAP adjustments is de minimis. In addition, you will find a helpful schedule on the first slide of our earnings presentation. In addition to GAAP and non-GAAP results, we provide the growth rate impacts of exchange rates as well as the inorganic impact of acquisitions. in other words, the revenue expense and EPS impact that acquisitions had on our reported numbers this year, which were not in our reported numbers in the first quarter last year. A few highlights from the quarter. Key business driver growth rates, payments, volume, process transactions and cross-border volume that's stable and consistent with prior quarters. Net revenue grew 10%. However, the underlying growth trend in revenues is masked by two significant drags related to currencies. First, a stronger dollar reduced nominal net revenue growth rates by over one point. second, currency volatilities were at the lowest level we have…

We're now ready to take questions, Jordan.

[Operator Instructions] Our first question comes from Jason Kupferberg from Bank of America. Your line is now open.

Hey, good afternoon, guys. So just wanted to start on the incentive side, I mean the guidance change here is really only half a point, I mean if people were previously modeling the middle of the range. I'm just wondering if you expect to make up for that half a point through better gross revenue or does it feel more like you just may land net revenue slightly lower within that overall unchanged low-double digit guidance range, especially since the currency volatility has fallen off as you guys pointed out?

Yes, a couple of things, Jason. Yes, we'll see how incentives play out for the year, but the way it looks right now, the renewal activity will be higher and so we are signaling that it could be at the upper end of the range. And as you said, if people are in the middle of the range, that's up a point higher. On the other hand, we are signaling that if exchange rates stay roughly in the range they're in on where people are expecting, that is about at the lower end of the range too. So you pick up some of it there. In terms of currency volatility, we were able to absorb most of it in the first quarter and still get very close to as you saw what our expectations were. We're factoring that into our second quarter outlook. What is going to be for the second half? I think we'll wait and see. It's not something you can predict further out and the time will tell.

Next question.

Our next question comes from Dan Dolev from Macquarie. Your line is now open.

Hey guys, thanks for taking my question. So a quick question on cross-border, it looks like a nice uptick. Can you maybe talk a little bit about that? Thank you.

Well, I guess, remember last year, Dan, you had a number of things going on, especially at the back end of the quarter with a government shutdown, Brexit, U.S.-China trade talks, et cetera. So we were expecting some uptick off of some of those factors that had a negative impact on cross-border at the time. And so we're back up in what I think we would expect to be a fairly normal range at this point.

Next question, please.

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

Thanks so much. Everything was really consistent here, but just looking at the regional volumes, just a couple of questions or clarifications. On the Asia front, it looks like it’s slowed to the 4% zone. Curious what was the outlook here based on what you see? And then with Europe, I'm pretty stable, soften and tends to go low end of the 8% to 9% range. But I know you guys have made a lot of investments there. What are your expectations for European? Can you sort of break out of this zone based on some of the investments you've made? What do you see there? Thank you.

Yes, I might start and I'm sure we'll add. In Asia, we highlighted three areas. Japan was really more of a quarter-over-quarter comparison. There were some changes in consumption taxes in Japan that seemed to push some spending into the period ahead of the tax going up. So it was pushed more into the last quarter. And so it's – we don't think that's an ongoing issue. The other one was Australia. Australia, you had some of the wildfire impact. And that seems to be one of the bigger factors there. And last was Hong Kong, and you saw – you know what some of those are. We have seen impacts in Hong Kong from some of the protests going on. So that was pretty much it. Across the rest of Asia, the trends are very good. In Europe – UK is a big chunk of our business and the UK has been very weak and actually slowed through the elections and had a very relatively weak holiday season and slowed by a point in the quarter. If you take the UK out, growth was a pretty healthy 12% in the rest of Europe. The only thing – I'd add two points, Tien-Tsin, one is the consumption tax that Vasant referred to. Now the government has decided to re-date some of that consumption tax when people do contactless transactions in Japan as part of the government's push on the cashless going into the 2020 Olympics in Tokyo. So that actually going to turn out to hopefully be a good thing, not only stimulate spending, but to stimulate tap-to-pay spending. The other point on Europe; as Vasant rightly pointed out, the UK has been a bit of a drag for us, but we've been extremely focused on the continent and had some – we've had some good wins in fintechs and some good renewals. And those things are in the pipeline and I feel pretty good about where Europe's going to head over the next couple of years in terms of growth.

Next question.

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

Hey, thanks, guys. Just a couple of quick ones. One is on the, look, the improvement in volume we're seeing in January seems to really underscore the comments you made around like nuances in Q – calendar Q4, like the processing day. Just if you can comment on what you're seeing in terms of the consumer given, are these improvements into January just timing or do you actually see a healthier type of spending trend? Al, just one quick follow-up also was around the rebates incentives given, so many are being done now. Can you just comment on the types of returns you're expecting to see for those? Are these longer contracts than they used to be? Are they coming with more value added offerings? Something along those lines would be great.

Well, I think Darrin other than in the UK consumer has held up pretty darn well. And our volume in this last quarter when you factor in the processing day change, which is kind of a bit of an anomaly, but if you look in September, the last day of September in 2018 was a Sunday and a lot of merchants that acquires whole volume on a Sunday. So what ended up happening, a bunch of one day worth of – a lot of volume for one day got pushed into the first quarter of 2019. We did not have that same phenomena this past quarter because the last day of September this year was a Monday. So we just simply had a dynamic that it was – was hard to grow over. And so when you actually adjust for that, our growth quarter-over-quarter was pretty similar. So in general, I think the consumer has held up quite well and there's no reason to see it go down other than, again, depending upon where this coronavirus ends up going and who knows at this point. Just to be clear, when you have to have rebates and incentives, when I was referring to the rebate, that was a rebate being given by the government in Japan. I don't know whether that's what you’re referring to. But in general, we are trying to obviously strike the right balance in terms of incentives that we do in deals, try to make many of them as many of those incentive dollars growth-oriented as possible so that as partners’ volume picks up, their incentives picks up, but we're also getting the associated volume with them. And as – it’s probably no guarantee, we obviously push for contracts that are as long as possible. There's – to some degree, most of them kind of fall in a five- to seven-year cycle. Every once in awhile there's some 10-year deals. And then there's issuers that like to do deals every couple of years and those would tend to be more of the issuers that have dual issuers. So, it’s always a bit of a balancing act to try to get to the right level, but I think we try to structure these incentives in smart ways, where they’re growth oriented, they’re focused on consumption of different numbers of Visa products, and try to build relationships with issuers that go well beyond just an issuing relationship to encompass Visa Direct to encompass tokenization, et cetera.

Next question?

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

Hi guys. I wanted to ask about Capital One, I know Mastercard also announced a renewal with Capital One. So maybe, you could help us sort out of that contract breaks and if this is a net positive for both networks. And then just secondly, Vasant, on expense growth, I think your comments last quarter was expected to be similar to the fourth quarter, which I think was around 11.4% that came in a little bit higher. Was there any pull forward in expenses, because I think operating margins at the street we’re expecting were a little higher than they came in. Thanks so much.

Bryan, let me just try to point on Capital One and then I’ll let Vasant comment on acquisition. Look, Capital One has been a classic dual issuer and it – always, it depends on what portfolios each network happens to have and how they perform at any given point in time. But there were big terrific banks with a lot of innovative people on your team. We love working with them. and so it’s a good thing for us and I’m sure that next, I would say it’s a good thing for them as well.

Yes. Expense growth was a couple of points higher than we might have expected. Some of it is exchange rate. So, as you saw, the exchange rates were somewhat better than – the exchange rate impact was somewhat better than we expected on revenues, which means on the expense side were somewhat worse, I think that was about a point. And as we – as I indicated in my comments, there were a few other non-recurring types of things that added another point. So, in general, they want any real surprises, they will pull forward of investments that it was just a couple of these kinds of items.

Next question please?

Our next question comes from Trevor Williams from Jefferies. Your line is now open.

Hi, good afternoon, and appreciate you taking the question. This is a little bit higher level, but I’m curious internationally with a couple of government-backed systems like Mir in Russia and Troy in Turkey that mandate domestic processing. I guess first just, how you see your role in the economics you can earn in both of those markets over the longer term. And then second, more broadly, if you’re comparing today’s backdrop to, I don’t know, five or 10 years ago, just what kind of threat you guys think nationalist’s payments agendas could pose to the international business going forward? Thanks.

Trevor, some of these domestic – our processing platforms with domestic teams are not terribly new. Our objective is to work closely with both regulators to make sure it’s an even playing field and then work closely with our clients to make sure that we get a fair share of business. Many times our processing network of VisaNet actually just playing a simple has a lot more richness to its various offerings. And people we’ve had cases, where banks see that and preferred to process with us, because of the investment, the level of security, level of innovation. So, we’ll continue to be up against this kind of – this backdrop, but I think, it’s still allowing us to grow at healthy levels and we’re trying to partner in a thoughtful way as much as we can. Your question about the backdrop on nationalism today versus and years ago, I think you’d have to say, it has become a little bit more pronounced simply, because it wasn’t that nearly as prominent, a decade or so ago. But again, I think our job is to continue to innovate more closely with regulators and with our clients to have as much of an even playing field as possible and continue to show that processing on Visa or minimally partnering with Visa as your team has good advantages to it that people want to work with us.

Next question please?

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

Hi, good afternoon. Thanks for taking my question. Al, if I look at a long-term history of your growth versus your largest competitor, it’s been quite stable more recently though the last one or two years, you’ve seen some Delta open up between your metrics and your peers. So, can you talk about some of the drivers of this and more importantly, if you look out next few years, can we expect the gap to narrow, because of what you’re doing with fintechs internationally in order to strengthen Visa direct?

Thank you, Harshita. Look, both companies that perform extremely well on a number of dimensions, look at the most recent quarter, we’re very pleased with our results. And look, Mastercard had a great quarter and they’ve had some good quarters, the last couple of years as have we. That said a few points, first of all, volume metrics are – don’t have any standards attached to them and it’s really difficult to do an apples-to-apples comparison between the two companies and really understand what’s going on fully in terms of the volume. On the revenue side, revenue Deltas have been a bit smaller in a number of the recent quarters is huge mix differences in our business. We’ve had a very big position in the United States and we want to trade that for the world. It’s just playing simple and much more mature market that doesn’t have the same high double-digit, mid double-digit, even over 20% kind of growth prospects to it. But we’re certainly pleased to have the partnerships with the banks that we have in the position that we have in the United States. The last one I’d make is I – my expectation is based on the investments that we’re making in value-added services, in new payment flows, in working with fintechs, working with neobanks, working on engagement with our existing customers, building out our effective footprint that I’m quite confident that overtime, we’ll close that gap and continue to perform very well for our investors.

Next question please?

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

Hi, good afternoon guys. A question on Visa Direct, you mentioned the greater than 700 million transactions in 1Q. You’ve highlighted previously the Visa Direct was growing in the triple digit. So, I guess question one is it still growing that rate and then also how are the yields tracking in Visa Direct? I mean, is it sort of comparable to debit? I know there’s a lot of cross-border in there too. And last one, Al, related to Visa Direct, I promise that you mentioned a few new partnerships as you complete the Earthport integration. What are some of the major use cases for Visa Direct you’re seeing rolling in as we move through 2020? Thank you.

So, first of all, Lisa, our growth of Visa Direct remains incredible. It didn’t quite get the triple-digit growth this quarter, but it was a very, very high single-digit, double-digit and close to that level. In terms of yields, we really haven’t talked much about it. but to your point, this addressing is going to increasingly have some more cross-border transactions that will run over that, that platform and that our push platform. and that is obviously a very – a very good thing for us. I think when we talk about use cases, I think they’re going to fall into some of the same topics they fall into today P2P disbursements, remittances and I think that those businesses will continue to grow. And you’ll see on Investor Day that we’ll highlight a good number of Visa Direct use cases with quite a few specific examples. So, we look forward to taking you through on 11th.

Next question please?

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

Thank you. Good afternoon. Given the ongoing weakness you’re seeing in UK volumes and the incremental one point deceleration you called out, could you update us out on your growth pivot moving employees out of London and into some of the higher growth markets of Italy, Poland and Germany, and when might this growth pivot accelerate your volume growth in Europe?

So, David, we don’t have any active plans to kind of move people out of the UK. We’re just playing simple as we grow the business, adding employees on the continent and certainly, adding the vast majority of employees, where we would add in that region or in market offices on the continent. First, I’d also comment that I’m certainly hopeful now that at least there is some clarity around the Brexit outcome that we might find a new normal in the UK that would allow their economy to pick up. Certainly, I was in Davos last week and certainly, the officials in the UK that I talked to feel as if it’s on the verge of starting to come back. We’ll see what happens. in terms of the continent, in many of these markets, we’ve been behind playing simple. And over the last four or five quarters, we’ve been – after we got the integration behind as we started in investing in fairly significant ways and we’re winning deals and trying to build our credit business, build our acceptance footprint. And so it takes a little bit of time for the pipeline to work its way into the numbers. But I think over the next couple of years, we’ll start to see some real payback for the progress that we’re making now on the continent of Europe.

Next question please?

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

Thanks. I appreciate your commentary on the coronavirus, but I was wondering if you could dimensionalize the cross-border China business and maybe, any impact it may have and sort of how you could address it? And then secondly, on the three to four unplanned renewals, is there any context as to why it’s happening that banks are choosing to renew early? Thanks.

So, on coronavirus, it’s – let me start, it’s certainly just too early to know. When we look at our numbers, we see some declines. But Chinese New Year this year was earlier this week, January 25, and last year in 2019, it was February 5 and spending slows around the holiday. So, we’re given that we’re about 12 days earlier this year, it’s hard to know what’s really impacting the volumes at this stage. As said, that’s definitely going to be impacted. I mean, when planes are being halted both in and out of China, and you’re probably reading as we are that companies were telling their employees to stay home. So, even for the e-commerce world, employees are staying home, who’s picking and – who’s picking goods and shipping them. So, I think for sure, there’ll be some impacts and – but we’ll have to see how pronounced it gets and how long it goes. I’m not into predicting game for that at the moment. In terms of the early renewals, what tends to happen is probably about half the time, it’s us and half the time, it’s the client, who says as we’re talking to them about deepening our relationship and we’re talking about to them about all the dynamics that are going on in payments and/or we’re talking to them about building a deeper relationship by them consuming more and more of Visa’s capabilities and solutions. If a deal is going to be up in a year or a year and a half or two years – excuse me, that’s no longer than that. But if the deals are going to come up and say you haven’t had the two years or less, one of the two of us also the client will say, why don’t…

Next question, please?

Next question comes from James Faucette from Morgan Stanley. Your line is now open.

Thank you very much. I wanted to ask about the acquisitions that you've been doing, and perhaps the changing reporting, what that may indicate. In the past, Visa has done a lot of investments in companies and fintech, et cetera, even before fintech was coined as a term, but it seems like you've picked up, at least in the last year the pace of acquisition. Is this part of – should we expect more acquisitions and you'd be more active in actually acquiring companies that then you have been the past? Or is this maybe a little bit anomalous? Just wondering how you're thinking about incorporating some of the development that's happening outside Visa into Visa proper?

Well, I think I will add some more things. We'll talk more about this at Investor Day, but just a quick response to that question. I don't think we are deliberately stepping up the level of acquisition activity or investment activity in some kind of change of direction. Our approach has always been, we build any core capability and if it is faster or cheaper or the talent that we can get from the outside that would be valuable. Then you would consider acquisitions and there's a logic to every one of those we did. On the investment side, typically, when it's complementary capabilities, we prefer to partner and we do lots and lots of partnerships, as you know. Business has built on partnerships. Occasionally, we get into a situation where a company may like us to invest or we want to invest because we do want to enhance our relationship, get closer, have a better commercial agreement, get some exclusivity and so on. The reason the volume has gone up to some degrees because as you know, there's a lot of activity nowadays in terms of companies with business models and capabilities that are very valuable to us, either as capabilities for us to own or capabilities to partner with. So it reflects what's going on in the marketplace too. And it will – the pace of activity will depend on exactly applying the criteria I just mentioned. It could go up if we find more than meets our criteria or it could go down.

Next question, please?

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

Thanks. Al, you went through a pretty exhaustive list of breaking down core versus new flows and then reduced friction has kind of three big tenets of growth. Where I'm trying to, I guess parsed out, how do you break those down? I mean, it's core like 80% of the growth as we think about the next couple of years. Then layering in these other two to three assets? Or how should we kind of parse out that as we kind of think through all of these opportunities for you? Thanks.

Well, yes, Dan, on Investor Day, we'll talk a lot about all three of these. To be very honest, we don't have a debt mix that we're trying to get to across the three items that you cited. We're trying to make sure that we do as well as we possibly can against all three, to try to make sure that we're delivering a sustained good level of revenue growth. And some of it will depend on what's happening at a particular point in time and economies and where we end up choosing to put investment dollars. So there's a lot of factors that go into it. But we're not setting out to hit some certain mix. We're setting out to do a really good job in our core business. We're doing to try to extend the business through new payment flows and value-added services. And with the acquisition of Plaid extend of business and our network and network business even further. So that's really what our objective is. Dan.

And one last question Jordan.

Our last question comes from Dave Koning from Baird. Your line is now open.

Hey guys, thank you. When we look at cross-border, the reported volume growth all through last year was pretty slow and I know that has to do with just currency, right? But the revenue growth was way, way above volume growth. This quarter volume growth has gotten better, but the disconnect, I guess between volume and revenue has gotten smaller. Like that gap between volume and reported revenue growth has gotten smaller. Why is that? And should it be closer? Should it stay closer like that throughout this year?

Yes, the delta between volume growth and revenue growth are driven by a variety of factors. The most important of currency related, right? Most of the time the delta is driven by currency impacts. Clearly pricing plays a role. So there was some pricing in there that was causing the revenue growth to be faster than volume growth. Currency effects can then move in one direction or the other. And then when volatility is moving in a big way and this quarter, we had a very big move. If you're looking at volatilities, we are at five years lows now, not seen since 2014. Historically, those have corrected over time, so that we think is a transient thing. But when volatility has declined, the revenues related to those volatilities are also in that line. And this quarter those had a big impact. If volatilities were the same year-over-year, our revenue growth would have been fairly comparable to last quarter on the international fee line.

Thanks, Jordan. And thank you all for joining us today. If you have any additional questions, please feel free to call or email our Investor Relations team. Thanks again, and have a great day.