Visa : Q2 2024 Visa Earnings Conference Call Transcript

Corrected Transcript

23-Apr-2024

Visa, Inc. (V)

Q2 2024 Earnings Call

CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Visa's Fiscal Second Quarter 2024 Earnings Conference Call. All participant lines are in a listen-only mode until the question-and-answer session. Today's conference is being recorded. [Operator Instructions]

I would now like to turn the call over to your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin.

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Jennifer Como

Senior Vice President & Global Head-Investor Relations, Visa, Inc.

Thanks, Holly. Good afternoon, everyone, and welcome to Visa's fiscal second quarter 2024 earnings call. Joining us today are Ryan McInerney, Visa's Chief Executive Officer; and Chris Suh, Visa's Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at 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 annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. For non-GAAP financial information disclosed on this call, the related GAAP measures and reconciliation are available in today's earnings release and the related materials available on our IR website.

And with that, let me turn the call over to Ryan.

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Ryan McInerney

Chief Executive Officer & Director, Visa, Inc.

Good afternoon, everyone. Thank you for joining us. We delivered strong second quarter results with $8.8 billion in net revenue, up 10%; GAAP EPS up 12%; and non-GAAP EPS up 20%. For our key business drivers, we saw relative stability.

Overall payments volume grew 8% year-over-year in constant dollars. US payment volume grew 6% year-over- year, and international payments volume grew 11%. Cross-border volume excluding intra-Europe rose 16% year- over-year, and processed transactions grew 11%.

Visa's business performance demonstrates our strategy at work in consumer payments, new flows, and value- added services. Furthermore, across all of these growth levers, tremendous opportunity remains. I'll spend a few moments on each growth lever.

Let's start with consumer payments. The opportunity in consumer payments is enormous. Based on the latest public data from calendar year 2022 and our analysis, we estimate that the total global purchase personal consumption expenditure, or PPCE, excluding Russia and China was approximately $40 trillion. Within that $40 trillion, our addressable opportunity is more than $20 trillion. This includes three components.

One, cash and check, which is about half of the addressable opportunity. Tap to pay is a great example of how we are converting small ticket cash transactions to Visa credentials. Two, ACH and other electronic transactions. We have many examples in this space including the work we are doing to extend Visa as a bill pay method in acceptance categories like rent, education, and loan repayments. And three, cards that run primarily on domestic networks. We have been focused on converting these domestic-based cards to Visa credentials in countries around the world, and I'll share a good example from Europe in a moment. There is a very long runway ahead, and I remain excited about Visa's future growth opportunity in consumer payments.

We continue to capture that growth by delivering innovative and secure payment solutions for buyers and sellers including new credentials and issuance, tap to pay, and e-commerce. I'll briefly talk about each.

First, we're making great progress in expanding the number of Visa credentials. We have added over 100 million credentials from September to December for a year-over-year growth rate of 6%. One area of focus is in Europe, with the UK growing credentials at its fastest rate since 2016, driven in part by strong growth from fintech clients. In addition, from 2018 to 2023, we converted more than 20 million credentials in Europe that primarily ran on domestic networks to Visa debit credentials with millions more in the process of being migrated. This is a great example of the opportunity I mentioned a moment ago.

We're particularly excited as we prepare for the Paris Olympics which are less than 100 days away. We have close to 300 clients across 85 countries globally working with Visa to activate our Olympic sponsorship for marketing campaigns and cardholder engagements such as credential issuance and on-site cardholder events. And in Europe alone, we expect our clients to have issued over 5 million Olympic and Paralympic-branded Visa credentials before the start of the Games.

Also this quarter in Europe, we renewed our relationship with Caixa Geral de Depósitos in Portugal across consumer credit, debit and prepaid, and commercial credit and debit as well as a suite of value-added services including risk solutions and analytics.

Another area of strength is our co-brand issuance. Visa is the primary network partner for 8 of the top 10 co-brand partnerships in the US today, and we are pleased that Visa has finalized a multi-year extension of our successful credit co-branded partnership with Alaska Airlines, a portfolio that benefits from a loyal customer base and high cross-border usage.

We have also had significant co-brand momentum in CEMEA. First, we launched a new co-brand card in partnership with Qatar Airways, British Airways, and National Bank of Kuwait. Second, we expanded our strong global Marriott relationship to launch Qatar's first hospitality co-brand card with Qatar Islamic Bank. Across the United Arab Emirates, we now have exclusive agreements with all the leading airlines, marked by a recent agreement with Emirates Skywards, and we also signed an inaugural airline co-brand agreement in Morocco with Royal Air Maroc.

Now, newer digital issuers are equally important to our future growth in consumer payments. And in Saudi Arabia, fintech STC Pay, which has over 12 million customers, is transitioning from a digital wallet to a full digital bank and expanding its Visa prepaid business into Visa debit and credit.

Digital bank, Maya, in the Philippines has chosen Visa to offer its millions of mobile wallet users and bank depositors access to consumer credit cards with new issuance of affluent products.

In the US, we signed a newly expanded credit deal with brokerage platform, Robinhood, including the launch of a new Robinhood Gold card, which offers 3% cashback for all purchases.

In Europe, broker and savings platform, Trade Republic, has launched a new Visa card that combines spending and savings for their 4 million customers across 17 markets. Over 1 million people joined the waitlist for the card in just a few weeks.

As I've mentioned in the past, we feel great about our products, our value-added services, our new flows capabilities, our brand, and our people, all coming together to deepen and expand our partnerships with our clients around the world. As we think about Visa's growth, tap to pay and e-commerce are key drivers in the digitization of payments. This quarter, tap to pay grew 5 percentage points from last year to 79% of face-to-face transactions globally, excluding the US. Of note, Japan nearly doubled its penetration since last year to almost 30%.

In the US, in the second quarter, we're nearing 50% penetration with New York City at over 75%, the first US city to reach this milestone, up from 50% two years ago, demonstrating the impact that transit and our focused issuance and acceptance have on accelerating growth.

On the e-commerce front, we continued to see Visa's US e-commerce payments volume grow several points faster year-over-year than face-to-face spend, and the same is true in many key countries around the world including Canada, Brazil, Australia, and India. And this matters to Visa's growth because in the e-commerce space, cash is not usually an option. And although e-commerce payments are a highly competitive environment, we believe our capabilities and our focus on safety, security, reliability, and user experience position us very well.

Adding to the potential for growth is tokenization, which brings several benefits to the ecosystem, especially in e- commerce, including reducing fraud, improving authorization rates, and therefore making it easier for a customer to purchase a good or service. As of the second quarter, we have over 9.5 billion tokens globally and have surpassed a milestone of 1 billion tokens in Asia Pacific, joining the ranks of the US and Europe. We continue to be focused across all of these efforts in addition to seeking new areas of acceptance and spending.

Now, moving to new flows. We mentioned last quarter that we see $200 trillion of opportunity excluding Russia and China and we are delivering Visa's commercial and money movement solutions to help digitize these flows. This quarter, new flows revenue growth improved to 14% year-over-year on a constant dollar basis with Visa Direct overall transactions growing 31% for the quarter to $2.3 billion and commercial volumes up 8% year-over- year in constant dollars.

Throughout the quarter, we remained focused on our Visa Direct strategy across several areas of growth, including through new use cases, expansion to new geographies, and enablers. One recent example is our expanded agreement with Thunes, which increased the number of countries in which Visa Direct can enable push-to-wallet from 78 to 108. In addition, Thunes is implementing Visa Direct's push-to-card capability to enable payouts made to eligible Visa cards and accounts. We have also expanded Earned Wage Access in Canada through an agreement with Payfare and have brought our first Visa Direct cross-border capability into Taiwan with Taishin Bank.

On the enabler front, we are pleased that our longtime partner, J.P. Morgan Payments, will be seamlessly integrating Visa Direct into their acquiring operations to offer their business clients faster push payments capabilities. In addition, we continued to deepen our relationship with Chase in the small business market with investment and enhancements in products and services.

And in accounts receivable and payable, we renewed and expanded our multi-year agreement with BILL on their accounts payable, spend and expense management platforms. We have also reached a global partnership with Taulia, an SAP company and a leading provider of working capital management solutions. The collaboration will incorporate Visa's digital payments technology into Taulia Virtual Cards, a solution that integrates with SAP ERP solutions and business applications to make embedded finance accessible for businesses through a seamless and streamlined payments experience for buyers and suppliers.

One vertical in new flows that has immense potential is government payments, representing over $15 trillion in annual payments volume opportunity where we are in a strong position to combine many of our new flows offerings. A recent example is in Kenya where we signed an agreement with Pesaflow, a technology partner for the government of Kenya to expand card payments on eCitizen, the government's electronic platform with over 12 million users. We achieved this by bringing together Visa virtual credentials and Visa Direct into the platform.

Now, let me move on to value-added services where revenue was up 23% in the second quarter in constant dollars. The growth and opportunity in value-added services continue to be significant and broad-based. In acceptance solutions, we signed an agreement with Millicom International Cellular in Latin America for Cybersource Gateway, Decision Manager, and Token Management Solutions.

As it relates to open banking, just about two years ago, we acquired Tink as we saw the opportunity in open banking to enable the movement of data and money and to provide consumers with control over their financial data. Over those two years, we have been expanding our presence in Europe, winning deals with such as Adyen and Revolut.

We're now expanding open banking solutions through Tink into the United States, having signed several data access agreements, including with Capital One, Fiserv and Jack Henry, so that their customers may share data with Tink. We've also signed partnerships on the fintech and merchant side, including Dwolla and MaxRewards.

And across our risk offerings, we continue to bolster them through our technology, innovation and AI expertise and are expanding their utility beyond the Visa network. Recently, we announced three such capabilities in our Visa Protect offering. The first is the expansion of our signature solutions, Visa Advanced Authorization and Visa Risk Manager, for non-Visa card payments, making them network-agnostic. This allows issuers to simplify their fraud operations into a single fraud detection solution.

The second is the release of Visa Protect for account-to-account payments, our first fraud prevention solution built specifically for real-time payments, including P2P digital wallets, account-to-account transactions and central banks' instant payment systems. Powered by AI-based fraud detection models, this new service provides a real- time risk score that can be used to identify fraud on account-to-account payments. We've been piloting both of these in a number of countries, and our strong results thus far have informed our decision to roll these out globally.

The third solution is Visa Deep Authorization. It is a new transaction risk scoring solution tailored specifically to the US market to better manage ecommerce payments, powered by a world-class deep learning recurrent neural network model and petabytes of contextual data.

We also continue to make our offerings available through third-party platforms. We mentioned ServiceNow last quarter, and we are excited to have recently joined the AWS Partner Network to help seamlessly provide our

clients running systems in the cloud access to Visa's solutions, initially starting with Currencycloud, now known as Visa Cross-Border Solutions, and Pismo.

We also signed an agreement with Stripe for them to distribute Verifi solutions through a self-service dispute management platform for their merchants. All of these efforts are part of our strategy to build and offer our solutions for both Visa and our network of networks.

Before I hand it to Chris, I wanted to note that we have commenced the exchange offer for Visa's class B-1 common stock that is set to expire at the end of next week. I also wanted to highlight that this quarter, after nearly 20 years of litigation, we have agreed to a landmark settlement with US merchants, more than 90% of which are small businesses, lowering credit interchange rates and capping those rates into 2030 once approved by the court. The injunctive relief class settlement also provides updates to several key network rules, giving merchants more choice in how they accept digital payments.

Last, let me share a few closing thoughts on the quarter and beyond. First, our second quarter was marked by stable results and strengthened relationships with clients across the globe. Second, as we head into the back half of our fiscal year and beyond, New Flows and Value-Added Services remain key areas of focus. We also see significant opportunity in Consumer Payments by digitizing cash and checks, enhancing our capabilities in ecommerce, and building new solutions for our network of networks. I could not be more excited for what lies ahead.

Finally, all of this is possible because of the 30,000 Visa employees who come to work every day in service of our clients and partners. I am grateful for everything what you do.

Thank you, and now, over to Chris.

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Christopher Suh

Chief Financial Officer, Visa, Inc.

Thanks, Ryan. Good afternoon, everyone. As Ryan said, Q2 was a strong quarter, with relatively stable growth across payments volume, processed transactions and cross-border volume. Looking at our drivers, in constant dollars, global payments volume was up 8% year-over-year and processed transactions grew 11% year-over- year. Cross-border volume growth, excluding intra-Europe, was up 16% year-over-year in constant dollars.

Fiscal second quarter net revenue was up 10% in nominal and constant dollars, which was slightly above our expectations, primarily due to lower than expected incentives and better than expected value-added services revenue that collectively more than offset lower than expected currency volatility. GAAP EPS was up 12%, and non-GAAP EPS was up 20% in nominal and 21% in constant dollars.

So let's go into the details, starting with total payments volume. Global payments volume growth in Q2 was 8%, consistent with Q1 growth. There are a couple things I'd like to highlight when comparing Q2 to Q1. First, the extra day for leap year was a benefit to the quarter. This was offset primarily by slowing payments volume growth in Asia-Pacific, mostly due to macroeconomic weakness in Mainland China. When we adjust for Asia and some other smaller factors, we see second quarter global payments volume growth generally in line with the first quarter.

Now, onto the US. US payments volume grew 6% year-over-year, credit grew 6%, and debit grew 6%. Card present spend grew 4%, and card not present volume grew 8%. Reg II had a similar modest impact in Q2 as we saw in Q1. When we normalize for leap year, we see relatively stable US payments volume growth. Consumer

spend across all segments from low to high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments.

Moving to international markets, where total payments volume growth was up 11% in constant dollars. Payments volume growth rates were strong for the quarter in most major regions, with Latin America, CEMEA, and Europe, ex-UK, each growing more than 19% in constant dollars. Normalized for leap year and weakness in Mainland China, total international payments volume growth was relatively stable to the first quarter. As a reminder, domestic volumes in Mainland China drive a very small amount of revenue, and therefore, the impact to our financial statements is not significant.

Now to cross-border, which I'll speak to in constant dollars and excluding intra-Europe transactions. Total cross- border volumes were up a healthy 16% in Q2, generally in line with our expectations. Cross-border card not present volume growth, excluding travel and adjusted for cryptocurrency purchases, was in the mid-teens, stronger than expected. Cross-border travel volume was up 17% or 152% indexed to 2019.

Consistent with our expectations for the year, we continue to see strong travel volume growth in and out of LAC, Europe and CEMEA, and out of the US, ranging from 158% to 192% of 2019 levels. The US inbound travel volume has continued to recover within our expectations, up several points from Q1 versus 2019 levels.

Asia-Pacific travel volume continues to recover, but the pace has been slower than we anticipated. Travel volume into Asia indexed at 142% of 2019 levels for the quarter, up 8 points from Q1, while travel volume out of Asia was up 2 points to 124% of 2019. We see the primary drivers being, one, macroeconomic weakness in key markets like Australia and Mainland China; two, weakness in some Asia-Pacific currencies, which is impacting consumer purchasing power, particularly for Japan; and three, airline capacity that is still below 2019 levels, particularly the Mainland China and North American corridor. Altogether, we're pleased with our total cross-border volume growth, with ecommerce growth generally offsetting the travel weakness in Asia, and this is a great testament to the strength and diversification of our model.

Now let's review our second quarter financial results, starting with the revenue components. Both service revenue and data processing revenue grew generally in line with their underlying drivers, which resulted in their respective revenue yields remaining relatively consistent to the first quarter. Service revenue grew 7% year-over-year versus the 8% growth in Q1 constant dollar payments volume. Data processing revenue grew 12% versus the 11% processed transaction growth.

International transaction revenue was up 9% versus the 16% increase in constant dollar cross-border volume, excluding intra-Europe, impacted by lapping strong currency volatility from last year. As volatility reached lows that we haven't seen in about four years, the revenue growth was lower than expected.

Other revenue grew 37%, primarily driven by strong consulting and marketing services revenue growth, and to a lesser extent, pricing. Client incentives grew 12%, lower than we expected, due to client performance and deal timing.

Across our three growth engines, Consumer Payments growth was driven by relatively stable payments volume, processed transactions and cross-border volume. New Flows revenue improved as expected to 14% year-over- year growth in constant dollars. Visa Direct transactions improved to 31% year-over-year growth, helped by growth in Latin America for interoperability among P2P apps.

Commercial volumes rose 8% year-over-year in constant dollars. In Q2, Value added Services revenue grew 23% in constant dollars to $2.1 billion, primarily driven by issuing and acceptance solutions and advisory services.

GAAP operating expenses increased 29%, driven by increases in the litigation provision and G&A expenses. Non-GAAP operating expenses grew 11%, primarily due to increases in G&A and personnel expenses. FX and Pismo each represented an approximately 0.5 point headwind.

Excluding net losses from our equity investments of $30 million, non-GAAPnon-operating income was $189 million. Our GAAP tax rate was 15.4% and our non-GAAP tax rate was 16% due to the resolution of some non- US tax matters.

GAAP EPS was $2.29 and non-GAAP EPS was $2.51, up 20% over last year, inclusive of an almost 1 point drag from exchange rates and an approximately 0.5 point drag from Pismo.

In Q2, we bought back approximately $2.7 billion in stock and distributed over $1 billion in dividends to our stockholders. At the end of March, we had $23.6 billion remaining in our buyback authorization.

Now, let's move to what we've seen so far in April through the 21. US payments volume was up 4%, with debit up 4% and credit up 5% year-over-year, down from March primarily due to Easter timing. Processed transactions grew 9% year-over-year. Constant dollar cross-border volume, excluding transactions within Europe, grew 15% year-over-year.Travel-relatedcross-border volume, excluding intra-Europe, grew 15% year-over-year in constant dollars, or 151% indexed to 2019, and cross-border card not present, ex-travel, grew 15% in constant dollars.

Now, onto our expectations. Remember that adjusted basis is defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentation for more detail.

Let's start with the full year. We are reaffirming our prior year guidance for the full year for adjusted net revenue and operating expense growth in the low-double digits and EPS growth in the low-teens. As for drivers, things are progressing generally as we expected, except for the trends in Asia that we discussed. Accordingly, we are making a small adjustment to our outlook for total payments volume growth to the high-single digits from the low- double digits. Total cross-border volume, excluding intra-Europe, is expected to continue to grow strongly in the mid-teens, with the strength in e-commerce generally offsetting weakness in Asia travel.

Remember that our drivers assume no recession or no further increase in Reg II impacts. Currency volatility remained low, and we are assuming volatility in the third quarter continues at a similar rate to the second quarter and adjusts up slightly in the fourth quarter.

Now, onto the third quarter expectations. We expect adjusted net revenue growth in the low-double digits generally in line to the adjusted second quarter growth rate. Adjusted operating expenses in the third quarter are expected to grow in the low-teens, driven primarily by Olympic-related marketing expense due to the strong client engagement that Ryan referenced. Non-operating income is expected to be between $50 million and $60 million, and the tax rate is expected to be between 19% and 19.5% in Q3, with the full year unchanged. This puts third quarter adjusted EPS growth in the high end of low-double digits.

For the third quarter, Pismo is expected to have minimal benefit to net revenue growth and an approximately 1 point headwind to non-GAAP operating expense and an approximately 0.5 point drag to non-GAAP EPS growth.