Visa Inc. (V) Earnings Call Transcript & Summary

All right. We'll go ahead and get started here with Visa. Very pleased to have CFO, Vasant Prabhu. I was just saying it's like is this the kickoff of the farewell stadium tour?

Oh, my god.

And then you're a little too modest for that. That's fine. Before we get started, I do have important disclosures, for those, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley rep.

So Vasant, late last week, Visa provided an update on volumes through, I guess, the beginning of March or very end of February. Things look great. I mean tell us what you're seeing? I mean maybe recap the -- like what your takeaways were from that update.

I think you summarized it. Things look great.

Okay.

Look, I think what's helped us all the way through over the last several years is all the way through the pandemic, we stayed focused on how our business was doing versus 2019. I think that kept us from becoming manic depressive like a lot of other people. And then more recently, we've stayed focused on what does our data tell us -- and if you listen to talking heads, you'd be manic depressive again as you see with the market. So our data as you can see, has been remarkably stable. Shockingly stable in a way. If you look at our numbers starting all through 2022 quarter-by-quarter, it's been stable almost on a day-by-day, week-by-week basis, and that's continued, as you saw all the way through February. January, we had some benefit from Omicron comparisons to last year. But if you look at February, nice double digit growth in the U.S., plus-11%, credit growing double digits, debit growing double digits. eCommerce growing double digits, card-present, almost double digits. You look at the cross-border business, you know that we've been hoping for a steady recovery. And we've had a steady recovery. We gave you some of our assumptions. We're not -- it's not easy to predict this. But surprisingly, through the first quarter, we were generally on track. As you saw January and February, we've seen some more improvement. Now I just want to caution you, when you look at January and February, now it's a 4-year comparison to 2019. We're still providing that. So you have to adjust for that. But even if you look at it on a 3-year basis, at least in January and February, there's some comparability because the pandemic didn't really hit till late Feb, early March. It's still improvement. Cross-border eCommerce, indexed at 180, which is very strong. So as I said, if you just looked at our numbers, you'd say everything is great.

Everything is great. I mean is there anything perhaps within there that you're looking at saying, okay, this is a positive indicator or negative like things that come to mind or a lot of times as people feel -- start to feel more stress, consumers start to feel more stress. They shifted a little bit to debit from credit or vice versa on the other hand, there's been a speculation that, well, people have run through their savings. And so -- they're turning more to credit, especially for nondiscretionary, that kind of thing. Any other like things that aren't as obvious at a high level that would be things to watch.

Yes. I think, first of all, let me repeat what we've been saying for a while that I don't think we're leading indicators, right? We are coincident indicators. It's what's happening today. We don't really know if you're going to change your spending behavior 2 weeks from now because your bank balances are dropping or your credit limits are being hit and all that. If you just look at trends as you saw through February and you dig below those trends, there really are no surprises. It's quite intuitive. It would be what you would expect. So we've said for a while that the goods categories had a big boom in '21. And so in comparisons versus '21 and now versus early '22, the goods categories are -- the growth rates are not that great. But if you look it on an index basis in 2019, actually, they're doing just fine, right? They just had a big bump up in '21 and the comparisons to '21 and early parts of '22 are not flattering. But what's holding up the business is the shift in spending, which is very evident into travel, which is growing extremely fast. Entertainment, growing very fast. Restaurants, various kinds of services. So what the consumer has done is they're spending the same amount of money, and they're just spending it in different places. And they're also adapting to whatever inflation is out there. eCommerce has stayed strong. Cross-border has stayed strong. So there's really no leading indicators of changes of behavior not that we would have a lot of leading indicators, but there's nothing there that you wouldn't say is it's intuitive.

And in terms of this mix shift of spend, where are we in terms of service versus goods spending. I mean I know you made the comment now a couple of quarters ago that pre-pandemic that services spend was greater than goods. But at least at the middle of last year, you still were seeing more goods than spend. Are we back to that pre-COVID level of services versus goods mix?

Yes. It's roughly approaching 50-50, and it's probably headed back to where it used to be. But if you look at travel and once again, the index to 2019 is always useful because you want to look at had the pandemic never happen, where would we have been versus where we are. Travel still has recovery left, both domestic and cross-border. Entertainment has some recovery left. Restaurants, I think, are back to where they might have been. Many of the goods categories are generally doing just fine. So I would -- as we said, which is why we've stopped reporting comparisons to 2019 for the domestic business. We're past the pandemic. We're pretty much steady state at this point. Some recovery left in travel. Cross-border travel is still more to come, which is why we are still providing comparisons to 2019. But in March, without the Omicron effects, we had a little bit of Omicron effect, let's say, in the first week of February. It should be a fairly clean comparison.

Clean comparisons. So one of the questions that we get a lot is like, okay, great. And I repeat or have our own spin on a lot of the same points that you've made here this morning. But one of the questions we often get from investors is like, all right, great, James. That's awesome. But like what about [ Antaria ] recession. And maybe you can help remind us a little bit of how Visa performed during the global financial crisis and how did consumer payments hold up across credit and debit. And maybe more importantly, what's different about the business now versus well 14, 15 years ago?

Yes. First of all, 2008 was a long time ago. 15 years is a long time, number one. Number two, we were just going public and the Visa of today is vastly different than Visa of 2008 on many dimensions. eCommerce is a much bigger phenomenon today than it was then. eCommerce is a much larger component of our mix than it was then. eCommerce is not only a big component of our mix. In general, it's especially a big component of our cross-border mix, which, as you know, prior to eCommerce cross-border was mostly about travel. Now there's a big chunk of eCommerce in cross-border, which is again, a very different thing. Europe didn't exist as part of Visa then. Europe is now almost 20% of our business. The emerging markets have grown a lot in that timeframe. The business is just far more globally diversified than it used to be. Value-added services in new flows is sizable part of our business and growing very fast and growing based on new services we're launching, penetration of new markets, penetration of new clients, penetration of new use cases didn't exist then, right? It was more of a strictly credit and debit business. Our debit business is -- continue to be bigger and bigger. And we do debit in many different ways now, not the traditional way. We're embedded in phones. We're embedded in wallets, et cetera. So you really can't compare the business of today to the business of '08. That's one thing. The second thing is, '08, for good reason it's called the global financial crisis, right? There was a massive event. It was a credit event. And a lot of credit was pulled back. Unemployment shot up. I don't think anybody today is suggesting that whatever we may have is going to be like that. You've gone and looked at 40 years' worth of recessions, and they're all different. None of them are the same. Some have more impact on consumers and others. Some have more impact on personal consumption expenditure than others. We have a very big debit business, which stays resilient. We have an eCommerce business that is growing very fast because of penetration, and we have a higher share of eCommerce than we would have got present. We have some recovery elements still in travel. So potentially travel holds up better because there's a recovery element in travel. So you really can't compare one to the other. Now having said that, the data on '08 for us and definitely for Mastercard is publicly available. So you can see what happened. I would urge you to look at it with caution because that recession and this one are likely to be very, very different, and our businesses are very different.

That's right. That makes sense. So turning to travel. This is one where -- similar to like we've kind of conducted similar exercise. We go back and we look at historical travel trends during recession, et cetera. But where are -- what's your perception of how international travel spend on Visa cards generally is impacted by macroeconomic conditions? And one of the big things that we see people say, well, business travel falls by a lot, but like how much of Visa's volumes on travel really are business-related versus tourism-related, et cetera?

Yes. A lot -- the biggest chunk, as we told you during the pandemic is consumer-related travel, right? Because a lot of business travel often gets charged differently, doesn't necessarily show up on our credentials. So you can assume it's more consumer than business. Now having said that, I mean, again, I have to come back to we're still in a recovery mode in travel. And there's a lot of pent-up demand. There's been capacity constraints in a lot of markets for travel. So travel hasn't been able to meet the level of demand. You see the prices have gone up a lot. So you're going into a situation where employment levels are still very high. Wage rates have been pretty good. The consumer for all intents and purposes seems to be doing fine. You've got pent-up demand for travel. Most of the volume on our credentials is consumer travel. Again, I don't think history is a good predictor. I know the conventional wisdom is that travel is discretionary, and therefore, in a recession, it might be the one to be cut back. I think we'll have to wait and see. It all depends on what kind of recession this is.

That's right. Well, I think it's interesting that you characterized it as the conventional wisdom or for us, I call it like the innate prejudice that people have is that like travel falls by a massive amount in a recession. But like you said, is like as we go back to recessions, even back into the '60s. Does travel, overall has it underperformed GDP? Yes. But a lot of times, it's only by 100 or 200 basis points that's underperforming GDP. And so then like you said, it's like you layer on like, well, we're still below unit volumes and passenger volumes and the like. So to me, that's still an important point. And on that of passenger volumes, I mean, we're still indexing below 2019 obviously, because of Asia Pacific, but also even parts of Europe, et cetera. Can you help us balance or think about what the right relationship is between passenger traffic and volumes, right? Because we're approaching 120% of transaction volumes, but passenger traffic itself is still cumulatively, maybe only 80%, 90% recovered.

Yes. Well, the delta is driven by the fact that prices of travel have gone up, right? So you're paying a lot more for that airline ticket. You're paying a lot more for that hotel. And so while transactions are still indexing lower than what volumes are. Some of that is driven by these kinds of things. In terms of cross-border travel, as you look at where it stands today, we have seen nice improvement in Asian travel. Asia was the laggard and Asia is improving steadily. I think by the time we get to the end of this quarter, maybe Asia will be back to 2019 levels. That's the last region that needed to get back to pre-COVID levels. But then you are just at pre-COVID levels. So it's still a long way to go -- to get back to the pre-COVID trend line. And most regions are equal to or better than the pre-COVID trend line. Among the strongest ones would be -- outbound travel from the U.S. has been very strong indexing probably about the pre-COVID trend line versus 2019, helped by the strong dollar, I would imagine. Inbound travel into Latin America, inbound travel into Europe have been huge beneficiaries of travel out of the Middle East and the U.S. and so on. They're indexing extremely strongly. The sluggish ones have been Asia, which is now recovering. And then the U.S. inbound has been sluggish as you saw. But it's recovering steadily. And I would hope that by the end of this quarter, I mean, that could also be back to pre-COVID or end lines. But again, that means there's still more to go. And there's nothing we've seen that says you won't get back to the pre-COVID trend line or even above it, right? Because if the rates continue to be higher then you would get about the pre-COVID trend line when transactions get back to the pre-COVID trend line.

Right. That makes sense. So back on China specifically, can you remind us how big China travel was for you pre pandemic and more broadly how the reopening there can support ongoing recovery in international travel in and out of APAC.

Yes, I know there were some numbers thrown out by Mastercard and all that, and I don't want to get into all that. All I can tell you is that the future recovery of travel is clearly dependent on China, right? Because China has been the laggard and China is a sizable market. And we told you to be a little patient on Chinese travel recovery because there are some things that make it slower than you might think. Airline capacity if you look at the data was cut back sharply, right? I think, if I remember right, at one point coming out of the shutdown of China, I think the airline capacity and these numbers may be wrong or not accurate precisely. Into London, we're at 10% of pre-COVID levels. So what we're seeing is, first of all, the Chinese had to get new passports in many cases if they had expired. They had to get visas and that wasn't always easy. Some countries have made it easy. So those are the ones benefiting earlier. Prices were very high for travel because there was very little capacity. We've seen a big pickup into the obvious places going into Hong Kong and Macau and so on, then into Southeast Asia, especially Thailand. Travel to Canada has picked up faster than other parts of the world, I guess, because maybe airline slots have opened up more in Canada faster, and so there's more capacity coming online faster. So what you should be watching is how airline capacity built coming out of China. And there will be travel going into China now as the COVID situation there has settled down. We are very bullish on the Chinese travel recovery. We see it happening, but it's going to be more of a second half event. It's not yet happening to Europe and the U.S. because there were initially COVID testing requirements. I think visa issues have to be resolved. And the big roadblock would be slots opening up for airlines to travel to the U.S. and Europe from China. So it will take some time, but it's going to come. And when we said that cross-border travel will recover through the year, it was based on things like China opening up.

Got it. Got it. So I want to look at turn to new flows and new revenue streams for Visa. And there's a list of them that we can talk about, but I want to make sure to hit some of the more important ones. Let's start with Visa Direct. This seems like it's contributing a meaningful amount of -- to growth right now. But for a lot of investors, they may not be completely up to speed up like what are the most recent developments there and growth within Visa Direct? And what are the use cases that are seeing the most traction that at least you're most excited about?

Yes. I mean, you should think of Visa Direct as not a product, but a capability. So Visa Direct is really something that can serve use cases that are not our traditional use cases. So in that sense, Visa Direct, I think, is a platform that you should be watching for the next decade, right? This is the future of Visa outside of our traditional consumer payments business. It is the platform that will allow us to develop use cases that we're already doing like P2P, like cross-border remittances, like the revolutionizing of payroll to on-demand pay, like marketplace payments, like disbursements of all kinds. What Visa Direct is something that allows us to put into effect what we call our network of networks strategy. So it isn't just that you move money on your own network, but we'll get your money where it needs to get to. Visa Direct connects to, I believe, 60-plus ACH networks, 10-plus RTP networks, I think 15 card networks. So essentially, whatever your needs are card-to-account, account-to-account or account-to-card, we can do it. And what it brings is this extraordinary ubiquity, I think there are 7 billion endpoints. Second is it's relatively easy to connect to. People tell us the APIs are easy to use and people can set themselves up pretty fast. We allow a whole bunch of intermediaries who are offering these services to scale by using our network. It offers what our network offers, which is extraordinary reliability, extraordinary security, which you don't normally get. A whole range of value-added services that we can layer on top of it, whether that's dispute resolution, identity, various forms of risk management and so on. It's global in scope. It's real time. You remember that ACH networks and RTP networks are not global. Most ACH networks are not real time. Most RTP and ACH networks are not as secure by a wide margin compared to what we are. So the value of Visa Direct is quite extraordinary. P2P is normally the first use case. We are very, very excited about cross-border remittances, which is a huge, huge market, and we have an incredibly compelling solution. We're excited about marketplaces. These are the businesses where people sitting in Turkey can sell you a service here and then they have to be paid or an Airbnb host has to be paid. Then there's the whole on-demand payroll, which we started with the gig economy and now we're extending to traditional businesses. And we're working with a whole range of partners. We're working with all the remittance providers. We're working with all the new payroll platforms. We're working with insurance companies and disbursements. These are early days but the momentum is great. It is already a meaningful part of our volume that you can see in our debit volumes. It's been growing at a very hefty [ PLIP ]. We give you what the transactions are and what the growth has been. We're expanding it globally. We are going into new use cases and we're deepening penetration of existing use cases. So this is just the first or second inning. In fact, it's the first inning. And we think this is one of the key legs of the long-term growth of Visa.

So there within Visa Direct, you laid out a lot of the impressive capabilities and differentiating capabilities of Visa Direct, say versus traditional ACH networks, et cetera. But I'm sure you get the question as much as we do, which is what about the role or the position, especially as we start to talk about imminent launch of FedNow or real-time payments more generally. How do you play within that space? And what are the implications of FedNow rollout for Visa in terms of potential volumes? Or how are you seeing that ecosystems -- those ecosystems put together?

Well, our view is that everybody is a potential partner. Nobody really is a competitor. Anything that makes payments more ubiquitous. Anything that causes consumers to adopt digital forms of payment. Anything that makes merchants accept digital forms of payment is a good thing because it expands the market. And maybe we have a large share of a market that's 5x as big than a large share of a market that's 1/10 the size. And that's historically proven to be the case. Because once people get used to, let's say, a digital form of payment because they use Pix or RuPay in India -- UPI in India, they get used to digital payments. That means they use digital payments for lots of things. And when it comes to higher value payments, they often come to us for a whole host of reasons, we're more secure, it's more prestigious to use a Visa card. There are lots of reasons that we benefit. And we've seen this in other parts of the world. We saw it in Europe. So -- and then we co-op them right? We don't view these other networks as necessarily competitors. They're open to us. We partner with them. We PEN transactions to them. They send transactions to us. We may offer value-added services to them. We're happy to help them in any way we can. We just think that the rising tide just lifts all boats, and it's a good thing for the industry. And that's how it's played out. If you look at Latin America through the pandemic, payments volumes have doubled, which is much more than consumer first consumption expenditure. In the Middle East and Africa, consumer volumes -- our payment volumes have doubled. In India, they've almost doubled. Brazil has been one of our strongest performing markets. So we actually think these are good things for the digital payments ecosystem in general. And our approach to things has been really -- the philosophy of everybody is a partner. We said that about the Wallets when they came around and they're all our partners right now. And that will be the case with RTP networks. We're already working with most of them. It will be the case with the phone networks in Africa. We're working with many of them. I think it's a win-win for all parties.

Right, right, right. Makes sense. Another common question that we get, I'm sure you also get is like consumer card penetration generally. So outside of newer flows, how much runway is there from your perspective to keep driving growth in the consumer card. And what -- which countries and regions is Visa able to get more aggressive in and particularly as we think about like how much further for the U.S. and how much further for developed markets?

Yes. I think this concern that they're going to run out of room is somewhat premature and misplaced. If you just look at our data, our credential growth has never been stronger. I mean we're growing credential double digits, which is quite astonishing. 60 years after we started doing it, right? I mean, which business can grow like the basic credential amount, right, like we are adding people at a double-digit rate, 60 years into what we're doing. That's because we're now embedding our credentials in normal cards in wallets, in phones, in all kinds of devices. And so there's no evidence whatsoever. Anything credential growth has accelerated. Usage has accelerated, right? Through the pandemic, people are using their digital credentials for just about everything. I mean there are lots of you who probably never use cash. That wasn't true even 5 years ago. We've made the friction of payments dropped dramatically with tap to pay. Tap to pay still has a long way to go in the U.S., for example. Merchants, we have 4 billion credentials today versus 2 billion a decade ago. We have over 100 million merchants accepting and that's growing at a very fast clip. We think there's still extraordinary runway here. Penetration levels in emerging markets are still extremely low. There's still a lot of just dollar volume of cash in developed markets. There's no reason why penetration levels can't go well north of 90%. We've seen that in many markets. We've had more success in building penetration than others have had in coming after these kinds of use cases. We've had more success in doing new use cases than -- and penetrated new areas. There's just many, many more users that people are putting their credentials to. So I don't think we have any risk that we're running on the runway in our consumer payments. And our belief is that our new flows and value-added services businesses can grow much faster than our consumer payments business and just raise our overall growth rate.

Got it. And in the last minute here, let's talk about B2B. You've got Visa's B2B Connect. But what's your assessment of where the opportunity is for that product and service? And are we making progress there? What's -- just like can it start to move the needle?

Yes, it is already big, right? We are -- so I'll do the 1-minute answer. Key parts of B2B, don't underestimate what we call traditional cardable B2B, because it's high yielding. We know how to do it. We have great solutions with virtual cards and other kinds of products. It's growing very fast. We're twice as big as anybody else. It's a sizable business today and growing at a very healthy clip. Cross-border B2B with B2B Connect, Visa Direct and other things is going to be a big business. It's already a big business and high yielding. AR and AP will be down the road. We've always said that. It's harder nut to crack. Maybe big PV, but moving money there isn't where the money is. You have to find more value to add. But there's plenty of room to grow in the traditional areas that we are advantaged in delivering that are very attractive and they're growing extremely fast, as you saw in our numbers last quarter. So we're very excited about B2B. It is a decent-sized price part of the business. It is very much a priority, and there's a lot of growth left there.

Well, that's great. Well, that's all the time we have to chat with you this morning. Vasant, thank you very much for joining us.

Thank you very much. Bye.