Visa Inc. (V) Earnings Call Transcript & Summary

Thanks, everyone, for joining today. My name is Dave Koning. I'm a senior research analyst at Baird, covering the payments and business process outsourcing stocks. Very pleased today to have Visa with us with the Head of North America, Oliver Jenkyn. I think everybody's very, very familiar with Visa, so we don't need to do the big overview. But maybe what we could do is just kind of start off by what you see, Oliver, in a market, in an environment like this, obviously something we've ever seen before, maybe you could just kind of review some of the things you've been talking about with volumes and transactions.

Yes. I'll -- well, it's great to be here. Thanks very much for having me. I'm going to -- I'll start by making some reference to stuff that many of you would have seen in the recent 8-K that we filed, but maybe I'll give it a little bit more color because obviously there's pent-up demand for as much information as possible. This is not something we normally do but wanted to sort of share. So I just -- I've got the documents in front of me here. I'm sure, like I said, you guys have read them. But on U.S. payment volume, it's still declining. May was down 5%, but that's 13 percentage points better than April, which is great. From a product point of view, debit continued to significantly outperform credit, which is common in these situations. Maybe we can come back to that later. But debit grew at 12% for the month of May and is being seen -- has seen positive growth since April. Credit is still way down, declining at 21% in May versus same month prior year. But again, that's less negative than it was in April by 9 percentage points. So I guess there's some positivity there. Again, debit tends to outperform credit in times like this. One, there's a shift from discretionary to nondiscretionary spending. There's also an element of consumer psyche, where folks are like, "I don't want to spend someone else's money. I should spend what I've got when we have some of these sort of retrenchments." So that's what's up from a product point of view. From a channel point of view, not surprisingly, card-not-present e-commerce growth, in North America, excluding travel, card-not-present excluding travel, up at elevated levels around 30%, which is great. Card-present continues to improve relative to April, but it's still obviously very depressed. I think it was down almost 50% in the real trough, and now it's negative 20% to 25% exiting May. So we feel good about that. From a segment point of view, we also made some comments on some of the segments, a few segments are outperforming. And again, this wouldn't surprise you just from sort of following the news, but certainly, grocery and drug continue to perform really well, in part due to reduction in restaurant spending and grabbing stuff to eat when you're out and about. Home improvement has done well. Again, presumably, people are hanging around their house. They're looking at both things they want to fix or buying desks and lamps or whatever for their work-from-home situation, chairs, et cetera. And then, of course, there's areas that have hit really hard. Again, this would all make sense to you guys just from following the news, but restaurants are still significantly hit. Within that category, QSR is doing better than restaurant because their infrastructure and their processes are more nimble for takeout and delivery than a normal sit-down restaurant. So you actually can split card not -- sorry, you can split QSR and restaurant, and there's really a spread between -- both are declining, but again, infrastructurally, QSR is in a better spot to deal with it. And obviously, card-not-present is a big piece of that. Entertainment and fuel are obviously way down as well. No surprises there. But if you break apart entertainment, there's a lot within that. Movie theaters and fee, way, way down. Streaming and gaming, way, way up. So even -- it depends what exact niche you're in for how things are performing. And then, of course, travel is significantly down. I've got a couple more things. Maybe I'll take 1 more minute, Dave, here with you on looking outside the U.S. and maybe a second on cross-border, and I'll just cover all of the 8-K related stuff. Outside the U.S., a lot of markets like a lot of Europe, Canada, Australia, Japan are following a similar trend to the U.S. Maybe the exact shape is a little different and the timing is a little different, but they're following similar trend driven by, to some extent, some government stimulus support and the slow relaxation of some of the restrictions. Several markets still have heavy restrictions, and that's obviously impacting their performance. Singapore and India are good examples. And then we have a few markets that are doing really well as they open up. So New Zealand, Denmark, Chile are good examples. But New Zealand in particular, as again you guys all would have read in the news, has really begun to open up. And we've seen growth pop by about 60 percentage points out of the gate and then remain at elevated levels since then. So when things come back, it's looking good. And then finally on cross-border. Constant dollar cross-border, excluding intra-Europe, is down 45% in May, which is a little better than April, about 6 percentage points. Travel is obviously still very weak, shrinking almost 80% in May, a little improvement from April. Card-not-present, excluding travel, is consistent through the month of May, and it's growing 18-ish percent. So obviously, still strong, driven by retail spend. And I will just make sure we're clear. If you look at sort of total cross-border, it declined about 35%, which is 10 percentage points better than what I just quoted, excluding intra-Europe. And the reason we do that, and we're trying to increasingly steer towards that, is our international fees are obviously driven off the volume that excludes intra-Europe, which is why we're steering towards it. And that's -- I mean that's sort of a good sense of everything we're seeing. May is better than April, but we're still in a difficult spot, and that's the situation that we're in.

Yes. Well, thanks for that review. That was great. When we think about the states returning, I'm sure you have data all around the country, can you see pretty clearly places, maybe like -- I think Georgia was early, Arizona, right? So certain areas have recovered, probably I would imagine, quickly. Can you -- and then can you see pockets that haven't and kind of look at that as the playbook that certain states that haven't really come back yet are just going to when that happens?

Yes. We're certainly seeing a meaningful separation and a meaningful pop when states begin to reopen. Again, they're reopening lightly. They're not fully reopening, so they're slowly relaxing their restrictions. But we're certainly -- within a day or 2, we're seeing a pop in spend where there's obviously this pent-up view to get out and make some of these purchases and people want to get their businesses back up and running. So we're certainly seeing it. It does settle down over time. It's not like it stays at the high level and remains there. It does settle back down over time, but it's still at levels above, obviously, ones that are still sheltering in place. But even in the closed states, we're still seeing some improvement. And I think we all feel that personally, you want to get out a little bit. You want to do a little bit of shopping, so you're sort of pushing up against the restrictions. But also the -- and I'll say more about this later, but the muscle memory and habituation of folks who are now getting used to, "Okay. Well, how do I do touchless curbside pickup?" And for folks that are 55-plus, "Okay. How does this internet work, right? How can I do my e-commerce purchases? And how can I get in the habit of that?" So even where it's still shelter in place, we're seeing improvement. But yes, there is a separation when things open up. There's a bit of a pop. It tends to moderate over time, but it still remains at an inflated level versus the shelter-in-place states.

Yes. That's great. Well, and then when we think about revenue types and mix, in an environment like this, could it even drive longer-term changes? Like you already talked about credit and debit and the way that changes a little bit. But what about contact versus contactless or card-present versus e-com? And how does that affect the yield over time, too, as these changes happen?

Yes. It's a great question. There's a lot in there. Let me maybe break it up by like product, channel and then like interface, like tap to pay, for example. So I'll go a little deeper in some of what I said earlier. When I think longer term, even medium term, there will be, we expect, a shift from credit to debit. As I mentioned earlier, there's a discretionary versus nondiscretionary spend. There's a consumer psyche of sort of not spending someone else's money but spending my own money. We saw it before in 2008. We even saw it in late 2018, where there was the government shutdown, the first skirmishes with the trade war with China and the stock market took a big dip at that time. Consumers didn't stop spending, but they pulled back on credit, and they moved it to debit. So there's the sort of psyche in difficult economic times where we'll see a shift from debit to credit (sic) [ credit to debit ]. I'll come to your yield point out to summarize it all at the end. But we also see within credit, there'll be a shift to pragmatic, we believe, and we've seen this in the past, where instead of getting like a high-end high annual fee travel card, I need to get a low or no fee cashback card. So like the rewards I'm getting from still spending on credit, there are going to be pragmatic, tangible things I can put to use as opposed to like saving up for that Bali trip. So I think we'll see -- I think we'll continue to see a shift to -- from credit to debit. And we've done some analysis internally based on the past, which suggests there could be $100 billion annually of credit to debit shift that happens over time. In channel, not surprisingly, e-commerce -- and e-commerce is hardly new. It's hardly the idea that you can buy things online. But if you look at the details, we've seen a 12 -- in the month of April alone, we saw a 12 percentage point increase in the percent of total consumer spending that's done in e-commerce, 12 percentage point increase. And that's not surprising. Stores are largely closed, so people are going to e-commerce. What was notable about that is that's the same percentage point increase of the past 3 years combined. And so situation has forced like almost 3 years' worth of habituation, which is new people coming online, people who were already online going to new categories and people already online and in new categories buying more frequently. And that sort of habituation, that muscle memory, even when things open up, it's not all going to go back to card-present. So we genuinely believe that, well, this shift to digital is happening anyway. It's hardly new news. That kind of catalyst and some of the change that it's hit -- and maybe we can come back to more. I've got some more sort of data and stats on who's going where and what they're doing. But I think that will be a long-term change that we'll see. Some will go back, but some folks like this, including touchless curbside pickup, multichannel, omni-commerce, that stuff happened before, now a lot more is happening. And then you also just mentioned tap to pay. As you know, tap to pay around the world has really become mainstream and the norm. It hasn't in the United States. We've been pushing it for 4 years, and it's been going really, really well. However, this is an incredible catalyst for it. Now you're seeing -- instead of us going out and talking to merchants or issuers, now they're calling us. And then you can go to your local store where they're saying, "Please use contactless." The person behind me in line is tapping me on the shoulder and saying, "Hey, you can tap to pay with that." And that sort of natural ground swell has a huge multiplier effect that we at Visa can't do by ourselves. So we think tap to pay, it's going to be a wonderful accelerant to something that was going to happen anyway. And since we're on the topic, we've got almost 200 million cards in the market in the U.S. right now. We'll have 300 million by the end of the year. 70% of transactions take place at terminals that are contactless-capable. I think the last number I saw was 84 of the top 100 merchants are contactless-enabled. We make contactless marketing and stickers and point-of-sale stuff available. And now we're getting some great merchants calling us saying, "Hey, can you send me some of that? I really want to put it up in every one of my checkout lanes in every store." So we feel really good about it. And the last thing I'll say on tap to pay, the number, I believe, is 55% of all transactions under $10 are made in cash. And to some extent, that's because if you're just doing a small transaction, I don't want to give you my card and swipe it or dip it or what have you. But with tap to pay, it's easier than cash, and so we're expecting a significant displacement and transaction lift that we've seen in other markets as tap to pay takes hold and people really build that muscle memory. So silver linings perhaps from a very, very sad situation that we're in, but there's some elements of positivity, I think, for the business. And then on yield, none of this has a huge impact on our yield. I mean it does have some lift benefits for us in terms of displacing cash, more muscle memory e-commerce where card has a greater share of payments than it is in the physical world. But none of those changes have a material impact on our yield.

Yes. Okay. Well, that's good. And maybe a couple of questions on cross-border. You've seen a big lift in e-com cross-border spend at the same time as you've seen a decline in travel. No surprise there. Does this change the corridors, though, that -- we're so used to certain corridors being bigger or smaller when travel was heavier? But is there a shift now in where that -- all the movements are happening?

Yes. It's a good question. It's actually something that we spent a lot of time thinking about, and the short answer is no, to just put it bluntly, but it took a lot of thinking to get at that. Because while the answer is no, huge swings are happening in cross-border. As you said, travel is way down, e-comm is way up. That impacts corridors a little bit. So we did a lot of thinking on this. And so while there's an enormous amount of change, we think the net impact on us is going to be relatively smaller. Within a margin of error, it's hard to estimate. And part of that is, look, travel is way down, but it's way down everywhere. It's like the tide has gone down everywhere, and so no corridor is stronger than any other corridor. So it sucks because it's way down, but there's no sort of relative mix shift associated with that. On e-commerce being way up, from an inbound point of view, e-commerce disproportionately is U.S.-based e-commerce merchants, to some extent, Western European. And so those inbound will have some lift. If I focus on the U.S. for a second, there is some lift there. But it's a little bit offset by the loss in outbound cross-border because if you think about it from U.S. consumer, they're not traveling anymore. So I'm not getting that outbound U.S. consumer spend. Instead, they're buying things online. But most of the places they're buying them online is domestic because a lot of the e-comm merchants are domestic. So taking a cross-border travel transaction, now it's a domestic e-comm transaction. So we actually sort of play all of those things out, and it kind of washes a little bit. So a lot of motion, a lot of change, but low implication after 4 days of analysis, sort of. So it's pretty straight.

Yes. I think you've said before, if I remember this right, inbound U.S. is usually the highest yielding. If e-comm inbound U.S. is actually taking some share of the mix, it seems like that might be a little bit of a lift.

Yes. I have to be a little careful because I'm not sure how much we've said on specific yields by channel, inbound-outbound. But your characterization is true. I mean all else equal, inbound sort of U.S.-acquired volume is a good trade for us. If it's just a dollar-for-dollar trade, I'll take that trade. But again, we factored that in as well. And again, overall, it's a bit of a balance. But your statement is correct that inbound or U.S. acquired is higher yielding for us.

Yes. Okay. Maybe moving on a little bit to expenses, right? Vasant talked about kind of how you're managing expenses. He talked in a global way, right, in an all-encompassing way. How do you manage it specifically in the U.S.? And maybe what are some differences?

Yes. I'll repeat a little bit of what Vasant said because we spend a lot of time talking about it. Again, at the end of Q1, I believe we were expecting about 14% expense growth for Q2, and then -- I think that's what it was. I'm just checking my notes here. But then as soon as we saw the dynamics change, we took, I believe, close to 10 percentage points of expense out. So we took a lot of actions. And I think Vasant has covered that in other settings. In North America, some of the big expenses like technology are held centrally, and so we make that decision across the whole world. You can't sort of just break out a core platform and North America cut something, and AP not want to cut it. So some of those big line items, we manage centrally. But in North America, there's a range of things we can do. And to some extent, no one likes the cutting of cost, it's tough. But you -- I always like to say, "Don't let a good crisis go to waste." There's always -- it's always good to have pressure to focus the mind, and we know we need to adjust our expenses given the realities of what's happening from a revenue point of view. So we've done that. So clearly, from a personnel point of view, our CEO, Al, has said we're not taking any headcount actions this year, and we all support that decision, but that doesn't mean there's a lot we can do in terms of managing new hires and contractors and other stuff. So we've been very diligent on that and moving people around to cover areas where there's tightness in the line versus areas with a slack in the line as the business changes significantly. Marketing is obviously a big line item for us. We spend a lot of time focused on that. Some of our rights fees that we pay to the NFL and the Olympics, those don't really change, but there's other areas that do. So we do co-marketing with our clients where we work together to do marketing to get messages out there. That's not just Visa, but Visa plus, bank X or merchant X. In those situations, we've had conversations with clients. We've talked about their priorities in these difficult times, and we've jointly agreed that maybe we should do some of those things. We've been very diligent in that. And then our own marketing spend, we've tightened a lot of screws. There's discretionary stuff that might not be the right tone and feel right now to do some of these things. So we've been very diligent in looking at expenses in marketing side of what to do. Certainly, the Olympics being delayed took a lot of expense move out. And so I think in our own marketing, we're just really diligent. And any pet projects or any time you do anything in marketing, it's got a lot of zeros on it. And so we're just really focused on like are we putting it to highest and best use. Certainly, professional services, also we've been very diligent on. Some of those are necessary for specific SME staff augmentation stuff. But a lot of other nice-to-have professional services, we've cut. T&E, obviously travel is way down. But we've thought really differently about how do we do our conferences, like this one. We do these with clients all the time for different business lines. We've changed that significantly, and I think we'll keep changing a lot of that. And then certainly, on the product development front, again, still in the spirit of like -- there's nothing like some pressure to focus the mind. We've had some really thoughtful conversations about what's highest and best use, like what ones do we want to double down on our investment on, and which ones should we just say, "It didn't work. It was a good idea. It didn't work. Let's cut it and move on." And so Jack Forestell, our Chief Product Officer, and I talk every day to make sure dollars are going to highest and best use. So a lot going on, and it's -- look, I think it's good and healthy for our company to make those decisions. We're going to invest in the stuff that's important for the long term, but we've got to clean up and tighten screws, and we're doing exactly that.

Great. Well, one thing there's a lot of investor discussion on is B2B payments, a really nice growth driver. Is that proportional in the U.S.? Like in terms of your total U.S. business, it's about 45% of revenue. Is B2B a higher percentage than that? And maybe talk a little bit about just -- the long-term growth drivers are pretty steady over time.

Yes. So B2B overall, I'm sure we would have given you these numbers. We see it at about $120 trillion market. We break it into 3 categories, which I'll go through. The $120 trillion market, it's U.S., Asia and Europe are the big areas. To answer your specific question, actually, I don't know. I've never looked at it from like what percent comparability would it be, but I imagine it would be relatively close. I mean the North America generally is a huge engine for us, but I actually can't give you a number of how it compares to the 45%. But suffice it to say, it's probably -- it certainly is a big component of the total. But of the 3 components of the $120 trillion, there's a $20 trillion, what I call, card-based, right? And that's traditional P card, T&E card, commercial card, virtual cards, so traditional stuff you think about in the commercial space. We've got a bit over $1 trillion of that. We're the market leader in that space. It's growing at about 10%. And we're keeping at this really hard. Virtual is a key element of that, that we'll keep pushing on. But again, we've got a bit over $1 trillion of $20 trillion. There's still lots of growth in that space, and we're going to keep after it. So that's the first of the 3 categories. The second one is cross-border. And so these are big cross-border payments. This is where we've built B2B Connect, and we're super excited about B2B Connect. It's -- we're building this new network. It's going to take a bit of time. Last numbers I saw, I think we connected to 70 markets around the world. We've got another 30 plus. That will take another 18, 24 months, I think, to sort of build out. And it's a bit of a chicken or egg. When you're building a network, it's hard. But this solution is a great solution. It is better than the alternatives. It's going to take a little time to build through. But this will be a great opportunity. And again, a high-margin, very lucrative, incredibly important part of the B2B space, cross-border. And we're committed to it for the long term. We feel really good about the progress of B2B Connect. And then that leaves about $90 trillion of spend, which is sort of the more domestic AP/AR payments. And that's -- it's a harder market to get after. It's also sort of smaller margin relative to some of the things I mentioned earlier. But we're continuing to experiment and find ways that we can add value in this space. We have PayMate in India, which connects, gosh, 30,000, 35,000 buyers/sellers with good, clear data reconciliation capabilities. We got Billtrust, in partnership with Billtrust here, which we feel really good about in the business payment network. But we'll keep working on the AP/AR space domestically. Again, smaller margin, but good opportunity and something that we'll commit to. But look, we feel really good. You would have heard us say this before, we feel really, really optimistic about the B2B space. We've -- we'll continue to focus on that card-able space, but we're really excited about moving into the other space as well. It's a long-term commitment for us, and we're very optimistic.

Yes. I mean it feels like Visa multi-decade-type trend that's emerging. So it's great.

That's exactly right. It takes a while to build the network. It takes a while to build that network effect, but we'll get there.

Yes. Well, good. Incentives are another just hot topic. They've always been a big topic. The U.S. is where your biggest clients are and probably where the heaviest incentives. But maybe talk a little bit about that structure. Is that right that the U.S. has probably heavier incentives than the rest of the world? Is that right? And how has that developed over time?

Yes. I think -- first of all, the motivation for incentives is consistent around the globe, the idea of aligning growth with our clients, rewarding strong growth, paying as folks do better, like that alignment in incentives is something we think makes a lot of sense and we greatly support. So intellectually and philosophically, the structure is the same and the motivation is the same. It's obviously a little different in the U.S., and there's a few differences in the U.S. One is just it's the most sophisticated market with some of the largest players in the world, which doesn't just mean they want more in incentives, but they're thoughtful in how they want them, protections they get, like how they structure it. So we often do a lot of our hardest thinking and negotiations certainly on incentives in this market. So client size and sophistication is a big deal in North America. But bear in mind also, there's a long, long group of community banks and credit unions and regional banks for which the comments I just made about the difficulty in the negotiation and pressure does not apply to the same extent. But there certainly are some big behemoths, and we think a lot about that. And certainly, there's pressure here that is as strong, if not stronger than other areas in the market. Other nuances on incentives in North America is just, specifically in the United States, is we've got debit routing. There's a lot of competition for debit routing in the United States given how debit works post Senator's Durbin amendment and Dodd-Frank. And so there's incentives that we pay on the acquiring and merchant side in addition to what we pay on the issuing side. So there's incentives on both sides, which is unique to the U.S. market. One other thing I'd say in the U.S. market versus like Asia or our CEMEA markets or even Europe is -- or Latin America as well, frankly, cross-border is such a small percent of total spend for North American clients relative to like Asia, for example, that most of our incentives are paid on total payment volume. In other markets, it might be more cross-border-specific. But just given how much spend there is on core cards, there's a little less cross-border incentive. But overall, it's -- I think it's relatively similar. I'd have to look at the data, but I think it's fair to say the incentive pressure is a little higher here just given the sophistication and the size of some of our issuers. But again, it's variable-based, and we're pleased to put those incentives in place and reward our clients that grow.

That's great. And we have a couple of minutes left. Maybe I'll let you talk a little bit about the other segment and all the kind of cool interesting new products. And is kind of the U.S. the earliest adopter of some of those newer products? And you can kind of see this long tail as that goes to other markets, too.

Yes. It's a good question. The sort of other, what we sort of think of as value-added service, I know we don't have much time, but this is something that we think is a huge growth engine for the long term. Again, we don't sort of break it out as clean. It sort of shows up in different parts of the business. But let me cover the categories, and then I'll give the comment on U.S. versus rest of world. But we certainly got -- this will have to be like the speed dating version in the interest of time. But like Visa consulting and analytics, the capabilities there and the advisory services that we have with hundreds of -- I think we're over 500, 600 consultants that are providing analytic decision science and sort of core consulting on payment, my view, and I came from McKinsey, no -- there is no institution in the world that could provide better advice on payments than Visa given what we see around the world and the knowledge that we've got. So providing that advice to help drive our clients' growth is huge. We've got issuer and consumer solutions, a range of things, including DPS, which is primarily U.S.-based debit processing capability, which is an incredibly important piece of the business. We have acquirer and seller solutions, which includes CyberSource but also has transit and urban mobility programs, security and identity, data solutions, loyalty, installments. Again, if you had 3 more hours, we could go through them. But I think, increasingly, the value-added services, the advice, the enriched consumer experience, the increased protection, the greater security, those are services that increasingly consumers are demanding and our acquirer, issuer, merchant clients are turning to us to be able to provide. And people are willing to pay for value here. And so we think it's a great revenue growth opportunity. We're super excited. To get back to your original question, the vast majority of these services are designed and built to be available globally. But there are some situations just practically that a lot of them grow up in North America. DPS, CyberSource, et cetera, they tend to grow up here. But certainly, everything do, we intend to globalize and add that value wherever we can in markets around the world. But stay tuned for coming attractions in this space. The value-added services is -- already is but increasingly will be a really valuable revenue driver for us, but importantly, a value-add to our clients across the board who want these services. And we're in a unique position in the ecosystem to be able to provide it.

Yes. I mean that's really interesting stuff. And yes, it'd be great to have 3 more hours because that's great stuff, but we should wrap it up there. But thanks for all you do to make our spending so seamless every day. It's safe. It's easy. So thank you for that. And thanks for taking the time today.

Thank you very much. Thanks, everyone. Take care.

Have a great day. Thank you.

Bye.