Visa Inc. (V) Earnings Call Transcript & Summary

Good morning and welcome to the Virtual Wolf Fintech Forum Fireside Chat with Visa, hosted by Wolfe senior analyst covering payments, processors and IT services, Darrin Peller. [Operator Instructions] And now I hand the call over to Darrin.

All right. Thanks, Danielle, and thank you, everyone, for joining our Virtual Wolfe FinTech Forum. So it's the tenth year we're doing this conference. Didn't want to do it in virtual forum ahead but obviously, just given all the travel restrictions and really, for the safety of everyone that would have been here, we thought it was the right move. So hope everyone is doing well and is safe and really appreciate everyone joining us. Really good participation yesterday. Obviously, folks not just wanting to stare at their screens in this environment but actually get some good content. With that in mind, I really want to thank Visa and Ryan, the President of the company, for joining us today on a fireside chat, to really talk about the strategy of the company. So Ryan, thank you for joining us. Appreciate having you guys here, in this format, especially.

Yes, thanks for having me. And hope that you can hear me okay. I'm looking forward to discussions so thanks for having me.

Sure. Yes, we can hear you great.

All right. So look, just -- I think the obvious place to start, just given the elephant in the room is the coronavirus and what you're seeing. Look, you guys preannounced recently, I think you talked about 2.5% to 3.5% impact on your fiscal second quarter growth rate. Based on what you had seen thus far, can you give us a little context into what went into those assumptions and maybe a little more of whatever you can tell us on what you're seeing, whether it's travel cross-border or U.S.?

There's clearly a lot going on in the world right now. And as you noted, we did preannounce. I guess the first thing I'd say is our top priority is our people, Visa employees. This situation is evolving incredibly fast. Our leadership team is meeting several times a day, 7 days a week to track the latest developments and take whatever actions that we feel we need to take to ensure that our team members are safe and they're able to do the work that they need to do to support our clients and partners effectively. I do want to thank our Visa team members all around the world. They're just -- they're working incredibly hard, they're fantastic leaders, and they're navigating a tricky situation every day during the day. We're also in very close and regular contact with our clients, our partners, governments around the world. We're doing everything that we can do to help them navigate what are obviously complicated times for all of us. You know, as it relates to our business and the spending trends, as you said, we released an 8-K last week on March 2. As you know and everybody has been tracking, since then, the virus has continued to spread to countries outside of Asia. As we expected, spending has continued to deteriorate, especially in travel. We factor this continuing deterioration during the month of March into the updated Q2 revenue projection that you referenced a moment ago and we included in our 8-K. And just given the recency of the spread and the impact that we're seeing on spending, it's honestly too early to tell what the overall impact is going to be. As I think you would expect and you would hope in terms of expenses, we're doing a number of things inside our company. We're taking a series of actions to reduce expenses where we think it's smart and is not going to impact the health of our business, certainly in the medium to the long term. We continue to believe and I look forward to talking about a tremendous set of growth opportunities that we have for the company and we outlined on Investor Day. So Darrin, listen, the situation is very fluid. There's no question we continue to monitor it very closely. Given the uncertainty surrounding the magnitude, the duration, the geographic reach of the impact, we're going to give an update of our views for future quarters and the full year for 2020 on our earnings call in April.

Okay, okay. But it does sound like you're at least willing to pull some levers when necessary on the expense side, like you guys have done in past economic cycles.

That's absolutely right. Yes, I think -- I think we've shown over time in many different economic cycles that we do. We have the ability to flex our expenses, take a series of different type of belt-tightening actions when our revenue slows, we've shown that in different cycles over time, our ability to do that. So we don't obviously know exactly what's going to happen in this situation, but we are prepared to take the set of actions we think are most prudent this state of time, and like I said, things that aren't going to impact the medium or long-term growth opportunities that we're very, very excited about.

All right. That's really helpful. Look, I think our view and hopefully most people's view is that 2021, god willing, won't be as affected by these kinds of things and that the earnings power of companies like yourselves shouldn't be as affected. So I think at this point, we should just start talking now about the bigger picture, longer-term for investors to understand what the implications could be on valuation, given some of the drawdowns that we've seen. Your Investor Day provided a great overview on a number of incremental opportunities, and you definitely talk a lot about your addressable market growing versus what we used to think about when we think consumer payments exclusively. If we just revisit this high level, starting with the legacy consumer payments opportunities, new flows, value-added services, can you just -- how do you think about the magnitude of each of these? And then perhaps, it'd be helpful to hear your views on the timing for you to reach some of these 3 opportunities over there.

There's a lot in there, so I'd love to talk about it. So I'm excited to turn our attention to the growth opportunities. I'll start talking and you feel free to interrupt me if I'm going too much but I'll try to hit all those points. As I said at Investor Day, I can't think of a time in Visa's history where there's been more opportunity for growth. We laid out a series of opportunities and the actions that we intend to take to capture those opportunities in 3 big areas: consumer payments, new flows and value-added services. I'll just go through each of them, I guess, as you asked about it. In consumer payments, there's 5 forces that we see fueling this enormous opportunity. Even with all the success that we have had electronifying payments, there's still $18 trillion in cash and checks spent every year around the globe, and that number continues to go up. The second thing you see happening is this shift from physical to digital commerce, and there's an enormous runway that remains there as well. And this really works in our favor because our share of digital commerce is about 3x higher than it is in the physical world. Third thing that we see happening is many, many new issuers are being created all around the world, which is helping to grow credentials and provide new experience in both mature markets and less mature markets, especially for the unbanked and the underbanked. Fourth thing is it's really never been easier to accept digital payments. If sellers no longer need a dedicated devices and high-cost hardware, it's much cheaper, much faster, much easier to become a seller on their network. And then finally, we're seeing a lot of action from governments. We see the benefits of digitizing payments and they're taking a number of steps and actions to really accelerate the transition to digital payments. So all of those work in the favor of driving this consumer payments opportunity. And then as we laid out, beyond that, we see an enormous opportunity in new flows. And the addressable market here is 10x what we see in the consumer space. So we laid out $185 trillion, as I think you referenced. So we spent a lot of time studying the $185 trillion opportunity. And we break that down into a series of subsegments: B2B, which is a huge one at $120 trillion. This kind of addresses space that can be -- addressed with both card-based solutions as well as a number of other solutions that we laid out. You've got kind of what we've been calling B to little B, which is another $5 trillion, so this is kind of big business to small business; you have disbursements from businesses to consumers, which is another $30 trillion, you get things like on-demand payroll, insurance payouts, gig economy payroll and the like; P2P, which is another $20 trillion; and then the relatively nascent G2C, which is another $10 trillion. So I mean, all of these are very ripe opportunities and really significant. And then the third area that you alluded to as well is value-added services. And here, we're very excited about the opportunity to meaningfully expand our revenue while also importantly helping our client be more successful. And we -- and we can talk more about this if it's helpful, but we lay out our value-added services in 5 primary areas: we've got a robust set of solutions for issuers in helping them deliver consumer solutions; second is acquirer and seller solutions; security and identity; data solutions; and then our Visa consulting and analytics business. And these services are going to drive revenue growth of more than 20% this year, which should be about $3.5 billion in revenue. And in terms of timing, which I think was the last part of your question, consumer payments is really -- it's our core business, and it's going to fuel growth for now and into the future. For both new flows within the B2B, it's the cardable and the cross-border opportunities that are much more near term. The more domestic kind of APAR solutions are going to take some time to truly scale. So if I kind of go back to those numbers I mentioned a minute ago, of the $120 trillion in the B2B space, I'd say about $30 trillion of that is really in the near term. And then for the remaining $65 trillion in new flows -- so we think Visa Direct use cases are all very near-term opportunities, probably -- maybe except some of the government-to-consumer ones, which are a little further out. So I'd say they're -- probably $55 trillion of the $65 trillion is very much in the near-term space. So you add all that up, it's a very, very significant opportunity. You take the $18 trillion in consumer, call it $85 trillion in new flows that are addressable in the near term. It's a lot of opportunity. And just to put it in context, I guess, maybe and I'll close on this, Visa Direct brought 2 billion transactions in 2019 to our network and had $68 billion in payments volume just in the fourth quarter of 2019. Our B2B payments business today is over $1 trillion. So these are big, meaningful opportunities that are growing at significant rates. So...

No, no, that's all helpful and great to hear. Look, I mean, I think when you put all that together at your Investor Day, and you talked about the potential for revenue acceleration from 10% to 12% you called out or you showed in that slide. We get this question inbound from investors, is the company telling us that's what they actually believe will happen? Or that's what could happen if everything just sort of goes at the rate it's going? I guess that's a nuance, but it's a question I'd like to put to you.

You're talking about the addressable market?

No. Your CAGR -- you talked about the opportunity to accelerate revenue growth from 10% to 12% because of the newer businesses growing well.

Yes.

And I guess, the question we get sometimes is, does the company actually just say that's what they expect will be the case because, like in other words, if the run rate of what we're seeing today holds, that's what would happen. Or is the company saying they actually believe that will happen because there's no reason that anything that we're talking about should decelerate?

Here's how we think about it, right? We come in to work every day, and we're focused on building products, solutions and services that are going to help our clients and partners all around the world grow their businesses. And we're very focused on these 3 specific areas of growth. We have built out detailed plans on how we're going to attack each of these areas to create products and solutions, to digitize the cash and checks and consumer payments and new flows and deliver value-added services. And we're focused on how do we deliver against the road map that's going to help us grow 2, 3, 4, 5 and 10 years out into the future. So that's what we're focused on. That's how we think about the opportunity. We've organized against it. We have planned against it, and we're doing everything we can to deliver great products and services to digitize those folks.

Right. All right. I mean, it does sound like those opportunities in combination should allow for that 10% to 12%, which is something I think investors were constructive on. But let's go in for a minute. If we think of the digital piece, I thought that was a really good data point at the Investor Day when you guys said that you'd touch $0.43 of every dollar that's digital versus $0.15 of every physical POS dollar spent. It's just such an enormously outsized percentage of market that you see on digital. I think if you can expand on that, what does that mean for your model, your investments and the runway there? I mean, digital does seem like it should and will be a very big part of your story going forward. And what more can you do, I guess?

It's a very important and a very positive part of our story, and we're doing a lot. Just to put in context, the digital opportunity remains a huge untapped opportunity all around the world. It's been growing very fast. Since 2016, digital commerce, I think, has grown a little over 20% CAGR all around the world, but it's still only chipping away at kind of traditional retail. E-commerce is only about 14% of global retail spending. So even with all of that growth, there's still enormous runway for digital commerce to grow all around the world. And as you alluded to, it's very important and a very positive trend for us. Quite frankly, in the digital world, cash is often not an option for consumers. And when it is an option, it's usually a relatively, I'd say, terrible customer experience. And it's more expensive, and it's more costly for sellers. So that's why our natural share of spend in the digital world is much, much higher than it is in the physical world. And the numbers that you just referenced show that, that it's about 3x -- our share is about 3x higher than we otherwise would get. So as we think about e-commerce and kind of it fueling kind of a meaningful amount of both domestic and cross-border business, it's a very significant area that we're investing in, building new products, delivering a road map of solutions to the market. And I'd say, first and foremost, we're looking to improve kind of the consumer experience in the digital world. We're trying to help sellers increase their conversion rates, helping decrease abandonment, helping reduce fraud to give both consumers and sellers confidence in the digital commerce space. Guest checkout is one example that I would highlight. In e-commerce, right, where you're a known shopper, which a lot of us are, we have maybe Card-on-file, we stored our payment credentials, the experience for using your Visa card is pretty darn good. It's easy. The site remembers you, it stores your credentials. You usually just click checkout and you're done. But guest checkout is only about half of e-commerce. For the other half of e-commerce, consumers face a much messier and less efficient kind of guest checkout experience. We've all done it. The site doesn't recognize you. You have to fill out a bunch of different kind of steps of the process. It can take 20, 25 steps. It can take 2, 3, 4 minutes. It's messy. So this is an area where we've invested in click-to-pay, so that now when you go to sites, hopefully, in the e-commerce space all around the world, you look for a button, you select your card, hopefully, it's a Visa card, you click and you're done. So kind of replicating the Card-on-file experience in guest checkout. That's kind of one example. Another example would be tokenization. We are continuing to invest in building out tokenization capabilities to help improve both security but also customer experience in the digital world. We're building out our risk and fraud services to help, as I said, sellers reduce fraud and issuers to reduce fraud. In the physical world, chip cards have had a huge impact, but what has happened is what we expected. You've seen a shift in fraudsters focusing online, so we're investing a series of our capabilities to help reduce fraud there. And I guess the last thing I'd mention, and I could go on in this space, is installments. We think that the "buy now, pay later" offerings kind of growing around the world are going to continue to grow. And we build out a series of those offerings as a network service so that sellers can deliver a "buy now, pay later" offering to all of their consumers that come to buy. So those are some of the investments that we're making. As you'd expect, there's a lot more. And as you said, digital is a huge opportunity for us to continue to grow.

Okay. All right. That's helpful. Maybe we could just shift for a minute. Another topic within consumer payments is tap to pay or contactless, which obviously, even in this environment, probably even more relevant. But look, you guys called out, I think, 20% lift in transaction numbers after tap to pay is rolled out in some developed market in the past. Obviously, a lot of smaller transactions. Can you just touch on the opportunity for this in the U.S. now and then maybe globally as well?

Yes, sure. We've been talking about tap to pay for a number of years. And it's because of what you said, that we've seen the opportunity that it creates. And now we're very excited that we're able to show all of you the results for -- like in the physical world, there's no question about it. Tap to pay is the best experience. It's the best experience for buyers, it's the best experience for sellers, and we've proven it now again and again in country after country around the world. Consumers love it. Sellers love it. It's a fantastic buying experience, which is what we're ultimately trying to deliver. And globally, we've reached a point where 1 in every 3 card-present transactions that runs over our network is now tap to pay. And that's up from 1 in 4 just a year ago. So the growth is incredible. And it reflects, I think, the significantly improved seller and buyer experience. This past year, we doubled the number of countries whose face-to-face transactions are now at least 2/3 contactless. And if you take the U.S. out of things for a minute, we can come back and talk about the U.S., we have more than half of all the transactions last year were tap to pay. 55%, I think, of total global transactions, excluding the U.S., again up from 40% just a year earlier. So it's significant growth. And getting -- I guess, getting to the core of your question around 20%. It's really -- the experience is effective at replacing smaller ticket transactions that would otherwise be cash. And it increases the number of Visa transactions that ultimately start to happen through this habituation process that happens. Transit is a great enabler of this. We've talked about that a few times. And if you go back to the U.S., the U.S. is clearly earlier in the journey, but it's absolutely picking up steam. The data really starts to play it out. The U.S. -- in the U.S., I think we've got about 145 million tap to pay cards out there now, and we've said there will be 300 million by the end of the year. 17 of the top 25 issuers are fully issuing tap to pay cards now in the U.S., so they're getting cards into people's hands. And then equally important, the sellers are ready. 8 of the top 10 merchants are accepting tap to pay, and I think it's 83 of the top 100 merchants in the U.S. And actually, we look at -- I think it's 60% of all in-store transactions in the U.S. are now taking place at terminals that are enabled for tap to pay. So in the U.S., it's happening. We've now got adoption curves for dozens and dozens and dozens of countries around the world. We know how it plays out. We have a very good view of how these adoption curves mature. And typically, it takes 2 to 3 years for the usage to really accelerate, and we're excited about the next year or 2 in the U.S. of hopefully seeing that.

Yes. I mean, I just have to think -- and correct me if I'm wrong, but is there any reason why it would not drive some level of lift in the U.S. in '21 versus 2020 in terms of the U.S.? I mean, you should be at mostly ubiquitous levels by the end of the year. Putting macro conditions aside, I would think that there should be a lift in the number of transactions purely attributed to contactless in '21 over '20 and over '19.

I think as it relates to the U.S., it's going to take a couple of years, as I mentioned, for this tap to pay journey to play out, just like we've seen in other large markets around the world. In some of them, it's more, I'll call them mature tap to pay markets around the world, and I think we showed some of these curves at Investor Day. You clearly see the transaction growth, which is why we're so excited and why we're making all the investments that we're making in the U.S.

Okay. Let me shift gears. The network of networks concept, which is something that we've been pretty excited about. I mean, you guys are partnering now with networks really around the world, whether it's Paytm or LINE Pay or Gojek or others. And I think you mentioned 1 billion -- potentially 1 billion new users that could be on the Visa network that weren't there before, comparing that to maybe the 3 billion or 4 billion that actually have Visa cards now. It's just an incredible lift when you think of all those new users potentially even maybe for cross-border. Are we thinking about this the right way? I mean, I know the amount of times they would use Visa beyond the Visa network may be less than the average Visa user but still may be higher-yielding at cross-border?

So I think one of the most important things that's happening in payments around the world right now is the opening up of what were previously closed digital commerce ecosystems. And just to put this in perspective, if you look back a couple of years, we saw and we all talked about the rapid rise of all these new digital commerce ecosystems around the world, right? It started in China with Ali and WeChat, it spread quickly to the rest of Asia, Latin America, Africa, the rest of the world. And Darrin, if we were doing this conference a few years ago, like we would have -- you would have been asking me a bunch of questions about the competitive threat that these ecosystems pose because they were largely closed to Visa. And that would have been the thread of the discussion that we were having a couple of years ago. But today, we're really seeing a fundamental shift from what were otherwise closed ecosystems to now open ecosystems. And we see these digital platforms all around the world moving from what were competitors to now very important partners, like they're becoming issuers of Visa credentials, enablers of Visa acceptance. And the opportunity for Visa and for our partners is enormous. And some of them you mentioned, right? There are partners like LINE and Paytm and Gojek and Toss, and I could go on and on. And so we do believe the opportunity, as you referenced, is more than 1 billion potential credentials and I think about 70 million potential sellers. And most of these are not on the Visa network today.

When did those kick in, in terms of actually impacting your numbers? Is it a '21 event where we start to see some impact?

The work that our teams have been doing, which I'm really proud of all around the world, has been engaging with these partners and helping them realize the potential of opening up their networks, the potential to grow their business by issuing credentials and opening up acceptance. And that's where we've been spending the bulk of our energy. Now we're working with these partners to solution, to create experiences, to create issuance experiences. And if and when and how all of those credentials start to materialize, it's tough to predict. It's going to take time. It will evolve over time. But when you kind of look at the opportunity versus where it was a couple of years ago, there's no question that it's just an enormous opportunity for our partners and, therefore, for Visa. Again, if we were -- if you and I were having this conversation a couple of years ago, you would have asked me something about like a company like Paytm, like everything going on in India, "Isn't Paytm going to be a big competitor to Visa in India?" And now you can see a company like Paytm is the opposite. They're a great partner, one of our most important partners in India. They have grown like a rocket ship a few years ago in a closed ecosystem model. They've built out, whatever it is, 0.5 billion users and 15 million, 16 million sellers. Now we're working with Paytm to issue both digital and physical Visa cards, debit cards, credit cards to their 500 million users. We're working with them to open up acceptance. They're becoming an acquirer, an enabler of Visa acceptance at their millions of sellers all across India. So I mean, exactly when and how this materializes into numbers, it's just tough to predict. But I can tell you all around the world, the opportunity is enormous and very, very excited about it.

Okay. The other key -- one of the key, other key new drivers we're pretty excited about, I've done a lot of work on, is Visa Direct. And you mentioned before the $68 billion of volume in fiscal fourth quarter. It was a mind-blowing number when you think of it being literally almost $300 billion annualized now, $300 billion out of, call it, $4 trillion or so debit, right? So we're talking 8%. I know not all of it, but most of it is in debit, growing, right? I think you guys said it's almost -- it's still nearly triple-digit growth. You've got to remind us what the growth profile of Visa Direct was, but it was by far faster than the rest of your business. So is there any reason why that shouldn't keep growing at these strong rates and potentially lift the overall debit volume profile in terms of growth?

Listen, we've been excited about Visa Direct for many years now, and we are excited that we've been able to now show you all some of the numbers that underlie our excitement for the platform. And you described the growth profile right. That's how we think about it. It is -- it's been a great growth engine so far, but we're really excited about the growth engine that it represents going forward. And we've got -- we have a broad set of existing use cases that we've laid out and I can talk about. We've got teams working on expanding into new use cases, new geographies. The growth is really -- the growth potential is really significant. And I think it's important to think about -- for all of you to think about, Visa Direct is not a product, right? It's an end-to-end money movement platform, and we run Visa Direct as a business, like it's got a business leader, it's got a full management team, it's got a sales force, a customer service group, et cetera, et cetera. Inside of Visa, the Visa Direct platform is a full end-to-end business unit, and it's powering dozens of kind of fast payment use cases all around the world. I think a lot of people may not understand kind of how we've built the business to get it to where it is today. We have -- our leadership team has done a lot of detailed analysis to identify the use cases that have the biggest potential. And we go through and we assess the market vertical to understand what is the value chain all the way from a sender to a receiver. It's detailed work. And we go through, and we understand the receive side of the business. We help our partners prepare them to enable the new use cases. We go through different ticket sizes, transaction velocity, risk management solutions. I mean there's a whole bunch of work that goes in use case by use case to deliver it. And then we have to develop, for any given use case, a bunch of segment-specific infrastructure. The different set of APIs, different integration methods, all focused on how do we help our partners enable kind of these fast payment use cases to help drive their business. So it is an exciting platform. We're seeing enormous growth in P2P, in B2C, in the gig economy, as I mentioned, big B to small B. Happy to talk about any of those use cases, but it is a business that we continue to invest in. We see significant growth today and into the future.

Okay. We're almost out of time. I'll give you one last question. I'll take maybe 1 or 2, if we have time, from the audience. There's a bunch of questions already coming in. But just in interest of time, what -- I guess, what kind of deals are you thinking about potentially doing, if any at all? What are the leverage levels you'd be comfortable with? And really, where do you see Visa as being both ahead of and behind competitors?

We're focused on our strategy. We're focused on executing day in and day out against our strategy, delivering for our partners and ultimately delivering growth. And as we spoke about at Investor Day, our first priority is always about how can we build product solutions and services ourselves and deliver those across our global ecosystem, both on our network and increasingly on our network of networks. When we see opportunities when we can use either commercial partnerships, investments or acquisitions to fill gaps, move more quickly and enable that growth strategy, we're always looking at those opportunities. We laid out our criteria very clearly at Investor Day, but it's not -- acquisitions are not something we come into work every day thinking about how do we get done. It's all about our strategy. What is our strategy? What do we need to get done to deliver our strategy? And how do we deliver products and services and solutions globally to make that happen? And we'll look at always the best ways to do that. So that's what we're really focused on.

Okay. All right. Maybe we'll take a couple. Just -- we have only 2 minutes. So one question is how much of Visa Direct is cannibalizing existing flows versus new flows? I guess that's the question.

Yes, Visa Direct is all about new flows. I mean if you think through the use cases that we're tackling and they're almost all check and cash use cases. P2P is an obvious example. Visa Direct is kind of the underlying platform fueling a lot of use cases for nearly all the largest P2P platforms that you know and probably use around the world. I mentioned insurance claims payouts. That's entirely incremental. B2B -- I'm sorry, business loan payouts. So Visa Direct is a fast payments platform that is entirely focused on digitizing new flows that we otherwise would not be capturing in our core B2C business.

Okay. That's good to hear. All right. Next question is -- it's a question around your expense growth rate. In other words, at the Investor Day, you talked about a higher expense growth rate versus your prior Investor Day a couple of years ago. I mean, I know it's probably more of a Vasant question, but any thought process around that? Is that just the level of investments you're making now? Or...

It isn't -- hopefully, you get a sense of how excited we are about the growth opportunities that we have. And so notwithstanding the current environment that we're in right now and what I said earlier about our focus on being very disciplined in this environment on expenses, to just back up more broadly, we are being prudent and thoughtful, but we are absolutely investing to go capture what we think is a terrific set of growth opportunities all around the world in our core business, in the B2C business, but also in the 2 other big growth levers in terms of delivering solutions to capture new flows and also value-added services.

Right. Okay. Look, we have more. But just in interest of time, we'll have to stop it now. So Ryan, just want to thank you very much. To the clients that asked those questions, I'll follow up with management and try to get you answers on those as well. If anyone else has any, feel free to e-mail us. Ryan, really appreciate your time. I hope you guys stay safe and all is well in the next couple of months, and we'll be in touch shortly after you report earnings, I guess.

Thanks, Darrin. Same to all of you, and thanks for having me this morning. Really appreciate it.

Thanks, guys. Everyone on the audience, the next one is with the CFO of Western Union. Presentation time is at 10:50. All right. Ryan, thanks again, guys. Have a great day. Take care.