Visa Inc. (V) Earnings Call Transcript & Summary

All right. We'll go ahead and get started here, fourth day of the Morgan Stanley TMT Conference. Thank you all for joining us. It's been a great week. I know I've been very happy personally to get back in person and see a lot of people face to face again. Hopefully, you all have had a good experience. Before we get started with Vasant and Visa this morning, I do have a quick disclosure. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, reach out to you Morgan Stanley representatives. So I'm here and very pleased today to be talking with Vasant Prabhu, CFO, Vice Chairman of Visa. Thank you for being here. It's always fun to get to catch up.

Thanks for having me, James. Good to see you.

Absolutely. Good to see you in person. We were saying -- I have to confess like I was like, it's 50-50 whether Vasant's going to wear a tie, and I was going to try to wear a tie if I thought he would. But I was like, no, he's not going to. And then he showed up in his tie today. So...

More like 99-1. And I did it for you.

Yes. Well, anyway, next time we'll coordinate better.

So let's start with kind of the question that we've all been leading off with today. And you've talked about Visa's exposure to Russia and Ukraine at around 5% total. I mean can you give us some color around that? And maybe adding to that, more importantly, how do you anticipate the conflict to impact the business in other parts of Europe, and in particular, travel? I know travel is a question you get a lot.

Sure. Yes, I think you all know what the size of the Russian business was. It was about 4% of revenue. Ukraine is another 1%. And yes, we have some expenses. So as the business winds down, we will also not have expenses. So the profit impact will be somewhat lower than that. The situation, of course, is just horrifying in terms of what is going on there. And with the sanctions going in, as they were all falling into place over the next few weeks, there was going to be a substantial impact on our business. And as each day went by, it became more and more apparent that the right thing for us to do would be to have an orderly suspension of the business, which is really what we are doing. And it has been very orderly at this point. And so we expect that the whole thing will essentially come to a halt in a well-organized kind of way, which is essentially what our intent was, just to ensure that all the constituencies that are important here are managed in the best way we can given the terrible circumstances going on there. Now what that means is we will lose revenue that originated within Russia. We will also lose the revenue that originated from Russians traveling outside Russia or others traveling into Russia, and that's the entire element of the business that adds up to that 4% of revenue. So the 4% of revenue is definitely not going to be part of our business once we suspend things. As far as the broader impact on the business goes, it's too early to tell. You saw our numbers in February. The cross-border travel recovery has been very robust. When we talked to you all in January, we were hopeful that the Omicron impact was going to be short. We were hopeful that the borders are going to reopen pretty fast. And we knew that there was a lot of pent-up demand, and all those have proved to be true. Will there be a broader impact? There could be some within Europe, but we'll have to wait and see. It's possible that the broader impact is modest.

Got it. Got it. And just as a reminder on that travel recovery, if I remember correctly, if we rewind to late 2021, you talked about really not getting back to 2019 levels of international travel until mid-2023, but you felt a little more optimistic than that previously. Is that right?

Right.

Got it. So the other big question I'm sure that you get a lot about is macro considerations. We had a very high inflation reading this morning that was put out. How should investors think about what is the benefit or impact to Visa from things like higher inflation, higher interest rates and wage growth? And then how are you balancing or trying to anticipate balancing that with any lingering supply chain impacts?

Yes. As you saw from our February numbers, I think it's fair to say that the U.S. consumer is in very good shape, if you just look at it in terms of spending. And that's true pretty much across the globe. In general, consumer spending has held up extremely well and is very strong. So if you look at the U.S., if you looked at our most recent February numbers, debit was indexing in the high 1 40s to 2019. That's a compounded growth rate of almost low teens. If you take the Visa Direct impact out and you take it out of prepandemic levels, the core debit business ex Visa Direct has almost doubled in its rate of growth and has held there even as credit has returned. If you just looked at our credit numbers in the U.S., I think it was about 1 35 in February. That's a compounding of about 10% -- lower 10%. So credit is effectively back to its pre-COVID trend line. I sort of did this, and it's almost back. So credit is back, debit is holding. Both e-commerce and card-present, both improved relative to 2019 in February. So even as people are back in the store, e-commerce is holding. So all the underlying trends suggest a very strong consumer. So if you look at inflation, our service fees are basis points on dollar volumes or whatever volumes. Our cross-border fees, a big chunk of them are basis points on volumes. And that's about 2/3 of our revenue. So 60%, 65% of our revenue is linked to volumes that would benefit from inflation. 1/3 of our revenue is linked to transactions. And that's our -- what we call our data processing revenue, which is a cents per transaction kind of thing. So in general, inflation is good for our business. To the extent that inflation might reduce a little bit of consumption, that may affect us a bit on the transaction side. Now we have seen ticket sizes go up in the U.S. Now some of it is just the impact of people buying more when they buy because of e-commerce and pandemic-related effects. Some of it could be inflation. And so net-net, inflation generally ends up being good for us. Wage growth implies more spending power. That's generally a good thing. Supply chain issues have not been evident in our business because it's the overall basket. And while supply chain issues may affect a category, people may be switching spending to other categories. So if you look at our business, there's absolutely no evidence of supply chain impacts. Even within like goods businesses like retail, you could have substitution going on. So it's not evident in our business. So all in all, I mean, these trends are generally not negative for us. They tend to be positive.

Right. Yes. I mean -- and that makes sense, right? Like generally, if there's a supply chain impact on the economy as a whole, 1 of 2 things happens, either inflation goes up, which benefits you...

Yes.

Or savings goes up, which generally hasn't been the case, right? So...

Right. Yes. And there's substitution.

Right. And there's substitution, et cetera. That's right, that's right. So I want to spend some time and we'll delve into each of these topics a bit more incrementally. But there have been some headlines around some pricing changes that were made for particular types of merchants at interchange levels, et cetera. Can you just talk through quickly like what those were and then like where the pricing change actually took place and then how that could impact Visa, if at all?

Yes. Interchange is -- as you know, there's a merchant discount rate. The merchant discount rate essentially pays 3 parties. The merchant discount rate is set by acquirers. So the acquirers have their portion of what they take out of the merchant discount rate. Then there's interchange, which really is what the issuing banks get. So all interchange flows directly to issuing banks. And then there's Visa's fee. Visa's fee is the smallest sliver of the whole thing, as most of you know. So interchange is strictly something that Visa as the operator of the network and the owner of the brand, it sets the rate of balancing all the various constituencies. The acquirer takes the interchange, takes our fees and then adds on whatever their markup is, and that is the merchant discount rate. So interchange is not something that affects us in terms of revenues. It is strictly something that goes to the issuing banks. And we periodically look at interchange, but not very often.

No, not really.

Interchange changes are rare. And it's a complicated equation because you have many kinds of merchants out there, many merchant categories. And we try to reflect what is sort of a fair and balanced approach to the value created in different categories, and therefore, what's the right level of interchange. And we had a set of changes planned before the pandemic hit. We went ahead with some of them at that time, and we postponed others. The ones we went ahead with were reductions in interchange for things that became critical categories during the pandemic. We lowered interchange for supermarkets, for example. We lowered interchange for restaurants in QSR and education and categories like that. That went in early. We had other adjustments that are going in now. They include a 10% reduction in interchange for small businesses, and small businesses would be a business that does less than $2 million, $2.5 million in volume. This is a benefit that the vast majority of businesses in America will get because the vast majority of our -- who we serve tend to be small businesses. Now it is up to the acquirer or the payment facilitator who serves the business to reflect that. And we've had some -- we can't speak for all of them, but we've had conversations with quite a few acquirers and payment facilitators who say they're going to pass it on. There's also other changes there that we often put in different rates of interchange for promoting, let's call it, better behavior in the system to improve the integrity of the system. So for example, we have something in this where if you tokenize a transaction with the EMV token, you get a lower interchange; if you don't, you get a higher interchange. Of course, if you do, your fraud levels are a lot lower; if you don't, your fraud levels are higher. So we want to promote -- and people don't have to pay the higher interchange if they just use EMV tokens. So there are those kinds of changes, too. So that's pretty much it. And now embedded in this were some small changes in our own fees, quite small. Those are already incorporated in whatever outlook we provided, but that's a minor portion of the whole thing.

For sure. For sure. So let's move to travel and cross-border. I think for -- at least in my mind, is that, that has been like the one consistent thing really since even mid-2020, right? Like we saw a sharp falloff as the pandemic set in, in the U.S. and in March and April 2020, but then there's a quick rebound in a lot of parts of the country at least. And so by August and September in different parts of the country on total volume, maybe not on mix for sure, but on total volume and bounce back. But this international travel or cross-border component has been the one that has been obviously slowest to recover. Can you remind us specifically of Visa's exposure to international travel or cross-border in 2019 versus where we exited in 2021? And within that, which markets are -- or I call them travel corridors are important for Visa?

Sure. So if you look at our cross-border business, it probably accounts for 35%, a little more than that, of our total revenues when you add in the processing revenues we get. And it breaks down into 2 parts: there's cross-border e-commerce and there's cross-border travel. There's an interesting dynamic there that's also worth talking about, but I'll focus on cross-border travel. Going into the pandemic, cross-border travel was 2/3 of that revenue. Cross-border e-commerce was 1/3. Now that's very different right now. So cross-border travel took a very big hit and essentially bought a shutdown. And so it wasn't as if consumers didn't want to travel, it was that governments had shut borders down, as you know, or imposed quarantines and so on. I would say until May of 2021, things remain fairly depressed, and then things started to open up. So by the time we got to September of 2021, we were indexing at about 60 to 2019. Most other parts of our business had either -- were well past 2019 or were approaching 2019 at that point. So cross-border travel was clearly the most depressed. We started to see a significant change around that time frame. And we were pleasantly surprised in October and November, when there were a significant number of announcements by even governments we didn't expect from like Asian governments about opening borders. And we always knew that pent-up demand for travel was very high. And so we went from being around 60 in September to as high as 80 to 2019 by December, which was much faster than we expected. And that wasn't because we didn't think people wanted to travel. It was because governments started to open borders. Then Omicron hit, and it went all the way back down to 70 by January. But we were optimistic that 2 things had fundamentally changed, which have proven to be true: number one, that governments have essentially decided opening borders is the thing to do, except China and a couple of other countries like maybe Japan; and the second is the pent-up demand for travel is extraordinary. And that pretty much happened in February. So by the end of February, we were back again to where we were in December with some extraordinary momentum. So what we're seeing right now is that the pent-up demand for travel is huge. People want to travel. If I had to bet on the upside, I would bet on travel, both domestic and cross-border. And it certainly appears that governments are on an irreversible track to reopening borders. So unless there is a deadly variant, we think pretty much most of the globe has decided they're done with shutting borders down. So we think the outlook for cross-border travel remains very good. And that has clearly been helpful to us.

So Vasant, you've said a few times here this morning that you feel like that there's substantial pent-up demand for travel. Is there a way that you can quantify whether that's like forward bookings and that kind of thing that you see? And does that figure into the measure at all?

Yes. I mean what we see is people reacting very fast, right, when things happen. When a border opens, things happen very fast. So if you look at the various -- you asked about corridors. If you look at February, outbound travel from almost all regions, except Asia, is almost back to 2019 levels. So people leaving their home countries is almost back there, except Asia, where Asia has always been the laggard. If you look at inbound travel, parts of the globe that stayed open like Latin America and parts of the Middle East, like the Emirates, have always been quite open, are way above where they were in 2019 because people can't go other places, so they're going to the places that they can go. When the U.S. opened its borders, we saw a big jump from the time it opened until the end of November, I think it was 20 points. It has continued to improve. When the U.K. opened its borders post Omicron, we saw a very big jump, 20, 30 points in a few weeks. So it's not just the forward bookings. We see immediate reactions. We see people acting very fast. And given the pent-up element of this, there could even be some overshooting in the short run.

Sure. So -- and it sounds like if I parse your words and things you've said this morning, so you're seeing very quick reactions to travel or people responding to opening borders. But conversely, it doesn't sound like you're seeing people pull back because of the conflict in Ukraine and Russia, other than in -- obviously, in those specific countries. But...

Yes. I would say the Ukraine/Russia impact, it's too early to tell, right? Because you see some peculiar things happen in the early days of these kinds of conflicts. So when a conflict happens, there's a lot of people who leave, right? There's a lot of people who go back. I mean it's very possible during the conflict, a lot of people went back to Russia. And we know that a lot of people had to get out of there, too. So -- and we're only 1.5 weeks into it. So a lot of that hasn't settled down yet. So what we see today is probably not representative of what is really going to happen.

And then just to level set, and I think everybody is aware of, like the differences with Asia and how they're handling things from a policy perspective, et cetera. But...

But Asia is catching up with the rest of the world. They used to be the most restrictive, but even Australia has opened up now. I'd say all that's left is China, and to some degree, Japan. I'd say Japan, Korea, I'd include Hong Kong in the China context, Japan and Korea are probably the only countries that remain more tentative about this in terms of reopening. China certainly is very decisive and not opening. Japan and Korea are somewhere in between. But the rest of Asia is pretty much decided. I mean they're done with this.

Right. And so to level set, if we go back to 2019, what were the important corridors or what were the kind of the movement -- regions that mattered?

Well, I mean, the thing about our cross-border business is that it's very well dispersed, right? There's very few corridors that dominate. I know people think that maybe certain corridors are more important. The U.S. is a very important corridor for us, inbound to the U.S., but the U.S. is a huge market. People like to come here. It also happens to be some -- happen to have somewhat higher yields. So the U.S. opening is a very important thing. Generally, Europe is a big source of travel. So people feeling comfortable leaving Europe is good. In this pandemic period, places like Mexico and the Emirates became very important because many of them stayed open when others were closed. Mexico has been way above 2019 levels for quite a while. The Emirates benefited a lot from for the same reason. So I wouldn't say any one corridor matters a lot. And people are flexible, right? So if they can't go X they go to another place.

Right. Makes sense. So you promised we talked about cross-border e-commerce trends.

Right.

And that's been, I think, a very interesting thing that we've followed closely, and I think that creates an interesting dynamic. Like what are you seeing there? And how do you think about that and its future impact on Visa?

So as I said earlier, going into the pandemic, cross-border e-commerce was 1/3 of our cross-border revenues. And then 2 things happened: travel dropped off, e-commerce actually picked up. And for a while there, it became 2/3 of our revenue.

Wow.

Today, it's about 50-50. It's indexing as of February at about 1 70, 1 69, 1 70 to 2019. So it's been growing in the 20-plus percent range, which is significantly higher than it was prepandemic. What we're noticing is a few things. One, when people get comfortable buying online, they're often not indifferent to where the good originates. So as you would expect, e-commerce -- it's very easy to be global in e-commerce.

Sure.

So if you're a good merchant, you can have a global business. And with more and more people turning to e-commerce in emerging markets and elsewhere, cross-border e-commerce has become a habit. We think it's a permanent habit. We think this is a new trend. There's a lot of merchants who realized that during the pandemic. They were able to build global businesses. And it is very likely that when the dust settles, there's some more travel recovery to happen. E-commerce cross-border will become a larger part of our cross-border mix. It will almost certainly grow faster than the travel business. And so it is possible that structurally, our cross-border business could be at a higher growth level because the portion of the business that can grow faster is now a larger part of the mix. We'll have to wait and see. But what people are mostly buying cross-border, of course, it's not services, it's goods, right? So it's retail goods that people are buying cross-border. And there's a very large community of merchants that have now developed that are very good in this.

Yes. It's crazy. It's like -- I mean you mentioned that is the -- just on a personal note, neighbor of my sister that lives in far Southern Utah, they started building or making just like custom jewelry and sending it out to influencers around the world. And they're doing like hundreds of millions of dollars of custom jewelry sales. Like 70% of it is outside the U.S. Like this massive business that blew up in just literally a matter of a few years. So it's definitely an interesting trend.

Absolutely. And it's something we always said that e-commerce would enable us allow any business to be global. And thanks to people like Visa, someone sitting in Brazil is very comfortable buying from someone sitting in -- selling in Utah. And your friend in Utah is more than happy to accept a customer from Brazil because we provide the guarantee they're going to get paid.

Right. Absolutely, absolutely. So let's talk about long-term growth. So this is kind of the thing that everybody is really focused on, I think, matters a lot for, hey, is it the right timing? And do we have the opportunity to really get fully invested here? Or do we look elsewhere for the time being? But on the long term, as your core U.S. and European markets become more penetrated in terms of electronic card payments, what are the next layers of growth that you're focused on once we get beyond kind of the substitution of cash and check for electronics?

Yes. I think -- I know that there may be a sense that the U.S. and the developed world is getting to the point where there is more cash left to digitize. That just isn't true, right? There's still, in absolute terms, $4 trillion in cash slushing around the U.S. economy and another $3 trillion in Europe. And cash continues to grow. Don't ask me why, but cash continues to grow at a steady 2% or 3% clip. So even as we digitize cash, the cash economy continues to grow with the global economy grows less than PCE because we're eating into it. So there's still a lot of runway even in the developed markets. And the digitization of cash is happening on 3 fronts even in digital -- in developed markets. Number one, through the pandemic, a lot of people just turned away from cash altogether. So many people have essentially moved to a cashless life. So that's habit. The second is all technologies have allowed us to go deeper and deeper into smaller and smaller merchants, right? So there's just -- it's so much easier now to set a merchant up. And through the pandemic, most merchants have realized they have to accept digital forms of payment. So we're going deeper and deeper into smaller and smaller merchants. And then with tap to pay and other technologies like that, they're going deeper and deeper into smaller and smaller transactions, right? Tap to pay took so much friction out of a purchase that there's no reason to open your wallet and take cash out and get change and all that. So there is still a lot of runway in the developed markets. In addition to that, I mean, we're only still getting started in a lot of emerging markets. There's -- cash penetration levels are very low. I'll give you 2 numbers. Our Latin American business grew 66%, if I remember right, from 2019. PCE growth was nowhere close to that. As you can see, the bulk of it was cash digitization. Our CEMEA business grew 60% from 2019. So you see real evidence, and you'd see that in many parts of Asia. There's massive amounts of cash utilization still to come. And then we have 2 other engines of growth, right? We have the new flows business, which digitizes cash in the whole range of new categories. Now this is where money is just slushing around the economy unrelated to consumer payments, right? It's me paying you or an insurance company sending you a check or earned wage access. Our new flows business, last quarter, for example, we told you grew in the mid-20s. And then we have a value-added services business. It sits on top of our money movement business and provides a range of services, and that grew in the 20-plus percent range. So you have a core consumer payments business, we think, has tons of runway still. And you have 2 other businesses that could grow twice as fast as your core business, and they are becoming a larger and larger part of the mix. So we think structurally, we're very well positioned to come out of the pandemic with a variety of vectors at higher levels of growth than they were before. E-commerce, a larger part of the mix, growing faster, both cross-border and domestic; debit, the cash generation -- cash digitization engine growing faster; and 2 new engines, new flows and value-added services, a much larger part of your mix and also growing faster.

So if we look at like, okay, we're going to come out of this, and you've said this before, perhaps at a faster growth rate than we were prepandemic. The other question that I'm sure you get a lot is around incentives and incentive costs, et cetera. How do you expect incentives to change as a percentage of revenue in 2022? And how is that impacted by mix, particularly cross-border, et cetera? Like how should we think about the evolution of the incentives and the cost side?

Yes. I mean what I would say is, in the end, I know there's a lot of focus on the percentage, but what really matters is our net revenue growth, right? Net revenue growth is really the money that goes into the bank. So I'd encourage people to focus on net revenue growth. The incentive is, yes, they give you some indication of what's happening with yields, but there's a dynamic between what we do with pricing and what happens to incentives and so on. So I wouldn't overly focus on the percentage. Net revenue growth is really in the end what counts. The percentage has been noisy. It's been noisy because we had coming into the pandemic 3 years of very hefty renewals. I think between '19, '20 and '21, we renewed 75% of our volume. That has some near-term impacts. And then the pandemic hit and our cross-border business, which is higher yielding, dropped like a rock. And so that incentive number went up. And as you saw last quarter, we've been telling people structurally, nothing has changed in incentives. It's mix. And last quarter, the cross-border recovered -- business recovered faster than we expected, and the incentive percentages dropped back.

Right.

So yes, our outlook this year is 25.5 to 26.5. If you look at the long-term trajectory, it has tended to go up about 0.5 point to 1 point each year. And by the time things settle down, maybe next year, when you look at a 5-year trend, it will look the same. So there's nothing -- there's no news there really. It's the same.

Great. Well, Vasant, we're out of time. We appreciate all your comments this morning. Look forward to getting back to traveling internationally, for sure. Thank you very much.

Thank you.