Visa Inc. (V) Earnings Call Transcript & Summary

Good morning, and welcome to the third and final day of our 2020 edition of the TMC conference here at JPMorgan. I would also welcome you to today's breakfast keynote. I'm John Hall, I'm the Vice Chairman of Investment Banking with a background of fintech and payments. This is our first virtual conference. It's been a huge success. We've had over 5,000 individuals participate in each of the last 2 days, which is over 2x what we normally have in an in-person event. It's perhaps established a new modality or format for doing these events, and we look forward to your feedback on how we can make the event more effective. I'm pleased to introduce our keynote speaker, Al Kelly, the Chairman and CEO of Visa. Prior to Visa, Al held many leadership positions at American Express and ultimately served as President of the company. At Visa under Al's leadership, the company has, what I would say, adapted and prospered in what I would call a dynamic world of payments, which has been reflected in the share performance over the last 4 years. When Al joined in December 2016, the stock was at $79. And at its height in mid-February prior to the pandemic, the stock had appreciated over 3x -- nearly 3x over that period of time. And with -- at the close yesterday, the stock had appreciated over 2x, double its value from 2016. Tien-Tsin Huang, our payments and IT services analyst, will interview Al. Over to you, Tien-Tsin.

Thank you, John. Al, great see you. Thanks for doing this again.

Tien-Tsin, thank you for having me. And John, thank you for your introduction, way too warm. I'm blessed to work with a lot of great people who are the people who deserve all the credit, not me. So thank you.

Great. So we'll do a fireside chat, and we will be taking some questions through the Ask a Question portal. So investors, feel free to ask through there. But I've got a pretty exhaustive list of questions to go through, Al, that I've gathered from the investment community. So if you don't mind, let's just dig right into it.

Sure. Let's go for it.

All right. So the obligatory COVID-19 question. What are you doing for clients to help them manage through this crisis?

Well, it's -- we all know this is truly unprecedented territory, uncharted waters. But at any point in time, good or bad, focusing on our clients is a #1 priority for us. And I should say, by the way, upfront, Tien-Tsin, I know my friend Ajay released some numbers yesterday. I'm not planning to give an update on numbers since we just had earnings 2 weeks ago. But -- we certainly can talk about any of those numbers, but I don't plan on talking about them today or giving an update. In terms of clients, number one, we decided a number of weeks back that we should act as if this was the holiday season and make sure that we do no harm. And so for the first time, I think, in our history, we elected not to do our normal April, what we call, business enhancement release where we put new code out into the system. And we do that twice a year, in April and October. We decided to delay that. And making sure that our network continues to run reliably and securely is a top priority. And with 95% of our employees working from home around the world, the reality is that we have been able to make sure our network continues to run well and that our application processing is good. The second thing we're doing is trying to help people with capabilities, and tap to pay is at the top of that list. It's now -- in the second quarter, 60% of face-to-face transactions were tap to pay, excluding the United States, and that's up 40% in terms of transactions a year ago. And as part of that, one of the things we did was we worked with many governments over -- almost 60 governments around the world to raise limits in tap to pay. And we were able to raise limits in about 25 markets in Europe, about 25 markets in Central Europe, Middle East and Africa, and we were able to raise them in Australia, New Zealand and Canada. And so by way of example, in the U.K., we raised it from GBP 30 to GBP 45, and that 50% increase resulted in a reduction of 50% of the transactions actually requiring somebody to actually interact with a terminal. In Canada, the level raised from CAD 100 to CAD 250, and 40% of the transactions in that range between $100 and $250 went contactless during that period of time, which is quite terrific. The second thing we're working on is Visa Direct, and there's a huge demand for earned wage access at this point in time. And we saw a 70 -- well, in that category of earned wage access, almost 100% increase in terms of transactions. We're working closely with governments as clients. In Guatemala, as an example, we helped them get emergency funds, relief funds out to 2 million people over the course of 3 months. And then, of course, there's a few of our value-added services that are even more important in a time like this. The first is data. We have over 20 governments that we're helping by providing them data, including the U.S. government, on either daily or couple of times a week basis. And then our clients are using our Visa Analytics Platform at levels they've never used it. We have 5,000 active users, and they generated 33% more reports in Q2 than they did in Q1 because, you and I were talking about this earlier, everybody's asking more questions than they ever did before and people are interrogating their portfolios and interrogating their databases at levels that they've never had in the past. Our consulting business continues to do quite well. We saw a 50% increase in consulting projects in this quarter just ended versus the prior quarter last year. And we're doing things like portfolio optimization and analysis. We are doing digital activation, campaign planning and all kinds of other things to help our clients. And then obviously, our risk services are very important. As more transactions have gone online or into e-commerce at this point in time, there's a heck of a lot of interest amongst our clients relative to keeping fraud down because we know, ever since we went to EMV and put chips in the cards, the fraud slid from card present to card-not-present. And now with volume going to card-not-present -- and by the way, the bad guys love times like this because they're looking and hoping that everybody is distracted and they have the ability to come in and cause problems. So we have to be particularly careful, and therefore, our clients are really interested in our fraud prevention capabilities.

That's good summary. So I'm thinking as you're describing things like contactless and Visa Direct, what are some of these trends that you see now that will likely continue or maybe even accelerate in a post-COVID world? Because I get that question a lot, right? Of course, we're all trying to get the short-term numbers, right? But it does feel like there's going to be some pull forward in the secular shift towards electronic forms of payment that obviously you drive on. So how do you see that?

Well, I'll tell you, number one, I want to state for everybody that it was only 90-or-so days ago that we had our Investor Day in San Francisco. It feels like a lifetime ago. But the things we highlighted there in terms of our strategy, the fact that we were going to -- we're committed to core payments, that we're going to get much more involved in new flows and value-added services. And we're doing that on a base of 4 really important things: security, technology, our brand and our people. And we're as committed to those things as we ever have. So let's unpack them a little bit. If I look at consumer payments, there's a number of areas where I think, because of the COVID-19, we might even see accelerated progress. And the first is cash displacement. $18 trillion is spent on cash and check around the world, and I think people are increasingly discovering that cash and currency is a germ-carrying vehicle. And there's all kinds of things you probably have read about how many times a day or a week a form of currency is exchanged and touched by different people. And I have to say, just where I've been hunkered down, I've seen a number of stores put up signs saying no cash. So I think it's a big opportunity. And as we know, there's still a long tail, Tien-Tsin, of merchants that only take cash, and I think that's going to be problematic for them. So that's the first one that comes to mind. The second is just the shift to digital, and that's going to accelerate in so many ways. And that's really good for us because cash isn't a competitor in the digital world, and our share of digital payments is 3x our share of what it is in a face-to-face world. And as much as we've seen e-commerce grow, the reality is that only 14% of retail spending globally is on e-commerce. So there's still tremendous, tremendous upside there. We've also seen, in this COVID world, a number of people being introduced to e-commerce for the first time. So in Latin America, for example, there were 13 million active card members, cards that have been active only in the face-to-face world that, in the course of the second quarter, converted over and had an e-commerce transaction. And that's amazing and really terrific. And even in a developed country like the U.S., we saw big increases in activation in e-commerce in categories that we typically -- people typically, when we look at their past, had not interacted in. So a lot of people, because they're being hunkered down at home, have been required to get familiar with their computer and familiar with shopping in e-comm and really embrace it, and I think that's a trend to stay. Now what happens as things start to reopen is a little bit unclear. But I think if there's a lot of restrictions in terms of spacing and waiting, I think e-commerce will continue to grow at the pace it is. Maybe if the world opens up too much, which has potential other issues, and too quickly, maybe this gets back into a face-to-face or card-present environment. We'll have to see. Growth in wallets is continuing. We developed a lot of great wallet relationships in the past. We've talked about Paytm. We've talked about Toss. We have STC in Saudi Arabia. We got Paga in Nigeria. We've got Kyash in Japan. And all of these wallets represent a great, great opportunity for us to get Visa credentials into them, and we'll probably talk a little bit more about the closed-loop and open-loop networks in a little bit. A fourth thing is that it's becoming easier and easier just to do digital. We've had more success in terms of touch to pay on a phone. And obviously, tap to pay is becoming a big deal. Even in the U.S., we're really starting to see traction because of COVID-19. We now have most of the top 10 issuers issuing cards. We've got 190 million cards out there that are tap to pay enabled in the United States. It's now got -- the United States, even though it's way behind in terms of numbers of transactions, has got the most tap to pay cards of any market in the world. And we're -- we know that in the United States, the vast majority of transactions under $10 are still cash. So there's great opportunity to bring those into the marketplace. And then on the other side, the seller/merchant side, now 9 of the top 10 grocery stores are enabled for tap to pay. 80 of the top 100 merchants are enabled for tap to pay. So I expect to see the United States start to reach new inflection points of growth. The last point I'd make about the opportunity in core payments is governments as clients. I talked to you about Guatemala. We've worked very closely with the government in Dominican Republic to do likewise. We have worked with the -- in the case of the United States, we have relationships with over 2 dozen states where we help them with the distribution of government programs, such as unemployment insurance. Then, we talk about new flows, $185 trillion. That opportunity is still there. It might come slower because of COVID but it's still there. $65 trillion enabled by -- we think, enabled by Visa Direct, and Visa Direct still grew 70% in the second quarter. And then the other $120 trillion in B2B. Now B2B has definitely been hit by the COVID-19 impact in a similar way, that I would say, to consumer credit. There's a lot of overlap between the profiles of those. And then I just -- the last thing is value-added services, where we're seeing we have a lot of opportunity to grow. There's a lot of interest -- renewed interest in CyberSource because CyberSource now with Payworks is providing that omnichannel gateway capability for merchants, and more and more merchants are realizing obviously the importance of e-commerce. In fact, we've seen, in markets where e-commerce is less developed, the impact on payment volumes is much more pronounced than it is in markets that have adapted or had adapted to e-comm in advance of COVID-19. But value-added services provide an ability for us to help a client. It provides an opportunity for us to deepen the relationship with a client and thirdly, it provides a new revenue stream for us. So that is really good. So I see all of those as continuing to be upside for us going forward. Again, the pace at which it happens might not be exactly what it would have been when I talked about this on February 11 and didn't really know much about the coronavirus beyond the impact in China. But I still believe that the opportunities are still there and in the long term, very, very helpful for us. And in some cases, some of them will accelerate. Certainly, the move to digital will -- has and will continue to accelerate.

Yes. No, I agree. So let's drill in on some of the things that you mentioned. You mentioned wallets. And I thought, from the earnings call, something that got lost in all the virus discussion was some partnerships that you guys announced, right, with Tencent, Safaricom which runs M-Pesa. We used to think of those as competitors to Visa, but now you're partnering with them. So what are you doing with names like that? And how does Visa monetize that as part of the strategy you just discussed?

It's an interesting question. I think one of the most interesting and exciting developments in payments globally is what's happening with formerly closed-loop networks. 3, 4, 5 years ago, when we started hearing about emergence of wallets from nonfinancial institutions that worked closed ecosystems, I think there was a lot of concern about, "Wow, what could these guys do? Could they disintermediate, et cetera?" And the reality -- and by the way, they were truly closed. I mean they're proprietary, we couldn't get a Visa card in them. And I can understand why people potentially saw them as a threat at the time. But what's happened over time is these -- as these ecosystems have grown, they've realized that they cap out if they're closed. And so what -- almost all of them have opened up, and they're now either issuing Visa cards or allowing Visa cards issued by somebody else to go into their wallet. They're allowing -- they're opening up their acceptance footprint to Visa, enabling Visa to operate. And basically, it is opening up the world to their formerly closed ecosystem because one of the characteristics of these closed ecosystems that was a negative is that they tended to be domestic oriented. And now with the establishment of a relationship with a company like Visa, with our reach and our scale and our ubiquity and our reliability, they get the opportunity to open up the world to all of our merchant network around the globe, which facilitates obviously cross-border, which today is not -- very little card present cross-border, but it opens it up to cross-border e-commerce, which is good for us and good for them. So that's super exciting. Now you talked about a few of the deals. The Tencent deal is really cool because it is the first co-brand with an international scheme that Tencent took on, and it's going to allow Chinese citizens who are going to travel outside the united -- outside the borders of China to have a Visa credential in their WeChat wallet and then facilitate the ability to use our global footprint anywhere they travel to around the globe. Safaricom, biggest telecom provider in Kenya with -- branching off into other parts of Africa. They are -- along with Vodafone-owned M-Pesa. M-Pesa has 24 million users in Africa and 173,000 merchants. So the ability to -- for us to be able to get into that wallet and their network and opening up that formerly closed-loop network is great. You asked about the financials, Tien-Tsin. The economic model for these wallets and the cards used in those wallets for e-commerce is exactly the same as it is for traditional users. And to the point I was making earlier, to the degree that we open up the world and they're able to now have cross-border transactions enabled by Visa, that's even better for us and better for the user because of the economics of cross-border. So we're really excited about these 2 deals that we just announced, Tencent and Safaricom. But they're adding to this arsenal of wallets with whom we are forging relationships. And today, I -- well, I think we said on the earnings call that we have the potential to get into 2 billion wallets simply based on the relationships we developed already, which is obviously extremely exciting.

Yes. So kind of big numbers. So while you're signing these deals with some of these new digital players, you also announced that you'll be working with Truist and you'll be converting their legacy SunTrust portfolio. So I don't want to forget about the traditional players here. My question now is, how do you balance working with all of these wallets, which are obviously really exciting and we get a lot of questions about them, but also working with your traditional bank partners that Visa was built on? How do you balance those 2?

It's a really good question, Tien-Tsin. First, I have to make a comment or 2 about Truist. We are extremely excited and honored to have developed this win with Truist. The former SunTrust and BB&T guys are great. It's a terrific team of women and men that we enjoy working with. The fact that we're going to be working with them on consumer credit, consumer debits, small business, commercial and EPS really makes for a really deep relationship. And we're particularly excited to help what is now the sixth largest bank in the United States develop this brand that they're really, really excited about. And it's -- one of the things that I've spent a bunch of time talking to Kelly King and Bill Rogers and the team about is how do we help them. It's a company that knows a lot about brand and realize the power of brands. We're really excited about working with them to help them grow their brand. When you ask me about how do we do this balance, first of all, regardless of who the client is or how big or small they are, I think there's 3 things that we immediately bring to the table. One is our brand, a great global brand that by every independent study does better than all of its competitors and most importantly, by number of studies we've done, shows that it generates more growth than our competitor -- the competitor brands do. Secondly is our platform, its scale, its reach, its reliability, its security, its APIs. We're now into 600 APIs. There's 1 billion calls per month against those APIs. And then lastly, our people. We at Visa don't make anything. Our -- we -- it's all intellectual power. And our people, through the relationships as well as the products they conceive of and the solutions they conceive of, are what is a differentiator for us. So obviously, that's a really, really important aspect of how we service them. But when we talk about fintechs, there are a couple of things we have done specific to fintechs. One is we've hired people who are used to working with that kind of player, and we've dedicated people to those clients on a client-by-client basis. The other thing is we learned and we -- and I think you and I have talked about this in the past. Honestly, we were slow to the fintech thing, and we were too bureaucratic when we first came, fintechs first started emerging, and we were getting our butt beat. We were just too slow. I'm really -- I'm not proud of that, but I'm certainly proud of the fact that the company has realized that and we have doubled down, tripled down our efforts and we're going after fintechs with our Fintech Fast Track program. It's made a tremendous difference. We're having great success now. I think we said at Investor Day that we've won 70% of the deals that we pursued in the last year. So we're really, really excited about how we're doing with fintechs, as we are with the big players. And again, I think on Investor Day, we said we have -- we are the network for 19 of the top 25 portfolios in North America. So we're trying to -- we want everybody who's a client of ours to do well, no matter how big or small they are and no matter what they actually do for the payment ecosystem, whether they're on the seller side or the issuer side.

Yes. So another big investment that you're making is in acquiring Plaid, which I think it was a gateway to the fintechs and the digital world, your biggest tech deal since you -- since Visa acquired CyberSource, which I remember kind of writing about that back in the day. So could we see Visa do more tech or software-based deals given what you've learned and everything you've discussed here so far around digital?

Well, a quick comment on Plaid. Obviously, we're as excited about it as ever. We obviously have to await the regulatory process to go through. But we think it's a phenomenal asset. It's a network connecting fintech developers with financial institutions, much like we connect merchants and acquirers with bank issuers. Just a quick reminder, 1 in 4 people in the United States who has a bank account has interacted with Plaid. We see great growth still in the United States. We're going to help them overseas. They're focused on Canada and Spain, France and Ireland at the moment. We think we can help bring value-added services into RTP kind of situations. And certainly, we think it can help us grow our core business as we help fintechs with money movement and payments and value-added services. In terms of our M&A thinking in general, I would say nothing has really changed. We continue to believe that we have 3 options when we look at something -- wanting to do something. We can build it ourselves, we can partner with somebody or we can buy something. And then against that, we analyze 3 things: What's the time to market of the various alternatives? What's the cost of them? And what are the talent implications? Because, obviously, one of the things that when -- I talk about our people, how important they are. And obviously, if we have the opportunity through an acquisition to acquire some great people, which we think we are getting in Plaid, one of the things that was highly valued by us in the Plaid transaction was the quality of the people there. Those are criteria which -- against which we do it. We don't plan for acquisitions. We don't put them into our budget. In terms of specific areas, I wouldn't close my mind to anything, to be honest with you. But I do think capabilities certainly come high to mind for me, things in the risk area, the data area. Authentication and loyalty would be examples of things that I would be interested in.

Okay. No, that's helpful to hear. So staying with digital. I think a lot of people had asked me to ask you about your views on cryptocurrency, right? With Visa bowing out of Libra that's well understood, can you catch us up on Visa's strategy on crypto?

So I think, first, it's important to distinguish between cryptocurrencies and digital currencies. Cryptocurrencies like Bitcoin, I think, continue to be more commodities. And if you look at Bitcoin as an example, many more people are buying Bitcoin and holding it versus actually spending on it. Whereas, digital currency is backed by a fiat currency, I think, are real potential emerging payments technology that could be very interesting. And as it relates to those, we support the case for digital currencies. We actually think that digital currencies could be additive to the payments ecosystem as opposed to being any kind of replacement or negative. And we think they could potentially be really valuable in emerging market areas where you're bringing people out of cash dependence and into more of the financial mainstream and moving unbanked people to become ideally banked people. So I am -- we want to be there and support digital currencies, and we are. We've got a relationship with Coinbase in the U.K. where their cryptocurrency can be converted over to a Visa credential and a fiat currency and used at any of the merchants that -- where Visa is accepted. And we believe, over time, digital currencies could go into wallets as well. And since we have relationships with a lot of wallets, that's a good thing as well. So today, we deal -- every day, we settle in 160 different currencies around the world. And there's no reason why we couldn't take on digital currencies as part of that, if they get accepted as a real way of -- real means of exchanging goods and services for -- by using digital currencies. In the case of Libra, we were intrigued with Libra, whenever that was, months and months ago, and we remain quite intrigued by it. At the time, we elected to not join the association because we didn't see, under that structure, how regulatory requirements were going to be able to be met. And we certainly have very strong relationships with regulators around the world, and we didn't want to do any harm to those relationships. But we remain engaged. We continue to talk to Libra. And I think they continue to advance, and I think they're making progress. So our -- I don't know when it was, 10 days ago time, you can't keep track of time anymore, they hired a CEO. We've remained engaged with them, and one never says never. We continue to be very interested in what Libra is looking to do and as I said, how they potentially could be additive to the payment ecosystem.

Okay. No, great. So we got just about 5 minutes left, Al. I started asking you about what you're doing for clients related to COVID-19. So let's talk about what you're doing for shareholders, with -- your appetite for buybacks and your ability to protect the bottom line. I know that lost revenue comes off at a very high decremental margin. We've talked quite a bit about that. But your willingness and your ability to protect the bottom line here if things persist.

So I'd like to, first, start with a couple of philosophies from my perspective as the CEO of Visa. First is I continue to run this business for the long term. This is a tough period but -- and it may take any number of quarters to get through it, but I still believe that there's a lot of brightness on the other side of COVID-19. And in fact, COVID-19 might generate some things that are really very good for the business, as we talked about earlier. Saying that, I also have a real thoughtful sensitivity to the short term. And we -- a good leader has to make sure that they're not blind to the short term but is keeping the long-term focus of the company in mind all the time. Secondly, I think about managing the company through a series of dials as opposed to on and off switches. And I think a big part of my job is to be able to take that dial and -- or set of dials and tweak them in the right ways as opposed to jerk the organization with on and off switches. And I try to do that. I try to be very balanced in our thinking. We try not to overreact. We're not sitting there feeling sorry for ourselves in the COVID-19 situation. We're simply saying, "Hey, what's the right thing to do in the short and the medium term?" We're going to continue to invest in the business while being thoughtful about expenses. I'm not going to sacrifice the long-term by cutting investments in things that I believe in that will drive that strategy that I talked about earlier, but we do have to be conscious of our expense base. I do think we did a very good job in the second quarter. We had said -- we have guided to well into double digits on expense growth, and we were able to react to COVID-19 and bring our expenses down. But you know the profile of our business in terms of variable versus fixed expenses. And so again, we have to be cognizant of that and careful in terms of what we do. In terms of capital, #1 is build the business. And whether we do that organically or inorganically, it is the first port of call for our capital. Second is dividend, where we look to return 20% to 25% of EPS in the form of a dividend. We are committed to remain with our dividend and pay our dividend on a going-forward basis. As it relates to buybacks, we do not see secular change here in COVID-19, and we continue to have a good liquidity and cash position at Visa. And so we remain completely committed to our share buyback and the commitment we made at the beginning of the year to buy back $9 billion worth of Visa stock. As Vasant Prabhu, our CFO, said, this is no time to chicken out. If we believe the stock is undervalued, which we believe it was in the second quarter, let's buy. And you saw that we bought at a higher rate than we had been buying because we saw the value and believe in the long-term upside of the company and of the stock. So our commitment to our buyback for 2020 remains.

Right. No, that's great. We've got 2.5 minutes, it looks like, here. So I'll let you go on a simple question maybe. I know a lot of the stuff maybe got lost in the earnings call because of the focus on the pandemic, as it should be. What are you most excited about that we haven't talked about yet that maybe the investment community is underappreciating?

Well, whenever somebody even internally asks me that question, I think the 2 things that come to mind are Visa Direct and Visa value-added services. And maybe I'll just -- in the interest of time, just talk about the latter. First of all, value-added services are growing 2x the core business. And we just have a large set of options available that we haven't, over the years, probably packaged enough and talked enough about, but we're trying to do more of that going forward. I mean we have one of the largest debit issuer processors in the world in Visa Debit. We have some great acquirer and seller solutions in terms of CyberSource, account updater, tap to phone. We've got great security and identity capabilities. We've got data capabilities. We've got our Visa consulting and analytics service. And then we've got things in the category of loyalty, in installments, in open banking, in dispute management. And I think that COVID-19 allows us to introduce, where we haven't introduced them in the past, some of these services to our clients because, in particular, right now, they're eating up any data we can talk about. We've been having -- I've had so many client meetings in the last 4 or 5 weeks, and everybody is hungry for data. What are we seeing? How do we benchmark, et cetera? Everybody's hungry to figure out how to build omni capability, where we can really help them. Even security and fraud is obviously becoming a bigger deal, and people are talking much more about adopting tokens. And last year, we had 0.75 billion tokens in the market. We saw 6 billion token transactions. That's going to continue to grow, and that's going to be really good for the ecosystem on a going-forward basis as well. So I think we have built a tremendous suite of value-added services that I think, again, COVID-19 has given us an opportunity to go out and interact with merchant clients, interact with issuer clients, acquirer clients, fintech clients and talk about those various sets of capabilities. And I think they're going to be a tremendous growth engine for us going forward, Tien-Tsin.

Right. No, that's a great summary, Al. Thank you for spending breakfast with us this morning.

My pleasure.

It was very great to see you, and hopefully, I could see you in person very, very soon.

I hope so, too. And I hope too, everybody listening, that you and your families are doing well during this surreal time. And same to you, Tien-Tsin, and your family. So thank you.

Be well.

Thank you.