Visa Inc. (V) Earnings Call Transcript & Summary

Okay. Great. Welcome, everyone, to the afternoon keynote session here at our 27th Annual Global Technology Conference. I'm Tim Chiodo. I'm the lead payments, processors and fintech analyst here at UBS. We are very, very glad and fortunate to have with us today, from Visa, both Chris Suh, who is the Chief Financial Officer; and also Jennifer Como, who is Head of Investor Relations. So also for Chris, at least for me and I think for Chris as well, this is a special occasion, given this is his first investor conference being on stage being a part of the fireside. So it's an honor to have you here and to be a part of that moment for you, Chris. Thanks for joining us.

Thanks, Tim. I'm super happy to be here.

All right. Excellent. We have a great list of questions here. And if we have time at the end, we'll be able to open it up for some Q&A, either via through the app or via microphone. We will have a runner in the audience. So let's go to the first topic, which is a little bit more of a barbell topic and an opportunity for Chris to expand upon his thoughts on being at Visa. So the barbell there is really the first is the very, very near term, Chris, if you could please maybe give us some updates on some of the more recent trends since you reported earnings in late October. And then on the other end of the barbell, some of the things longer term that you're really excited about.

Yes. No, it's 2 great topics. Let's spend a minute or 2 talking about what we're seeing in the business currently. And then, yes, let's -- I'd love to talk about some of the things that we're excited about longer term. So starting with the here now, I think it's fair to acknowledge, I see headlines like all of you and hear what other companies have to say about the state of their business. So I think it's fair to acknowledge that a certain level of macro uncertainty still persists. But based on our data, and which we have a lot of, we see the consumer as being generally resilient. Specifically, as you look at our business drivers, through the first 3 weeks of November, we've seen our underlying business drivers remain quite stable to what we saw in Q4. Specifically, in the U.S., payment volume, payment transactions have remained pretty consistent, adjusted for fuel and days mix, which is some of the things that I did talk about in our October earnings. And the cross-border recovery continues to recover. Cross-border volumes continue to recover, and we're seeing incremental improvements in travel and cross-border volumes relative to their 2019 index. So all in all, if there's a meta message there, I'd say our underlying business remains quite stable. Now that said, I did want to reiterate a couple of things that I talked about in October as it pertains to our revenue guidance for Q1 and for the fiscal year, because there are some elements that impact the year-over-year growth. I talked about 4 of these things in October. And I think it's worth just sort of reiterating what those are, specifically in Q1 and maybe, more broadly, even half 1. So the first one being cross-border volumes, as we've all seen, post-pandemic travel spiked. It continued to normalize through FY '23, the first half. And in particular in Q1 of '23, we saw cross-border volumes growing 31%. That continued to normalize through the year. We're anticipating it growing at a lower rate. It's a comparable challenge in Q1. The second one is FX volatility. I think we're going to talk about this one more. But as you know, volatility was at its highest point in fiscal '23 in the first quarter of the year. That normalized through the course of the year. We think FY '24 looks slightly like FY -- like, Q4, maybe slightly below throughout the course of FY '24. The third one is some nonrecurring revenues, in particular, other revenue grew 31% a year ago, benefiting from FIFA World Cup-related value-added services revenue that we realized in '23 and the last one being client incentives, which is a broad topic, but suffice to say, we had lower-than-anticipated incentives in the first half of last year and Q1, in particular. We renewed a significant portion of that in FY '23, which increased second half as well as the first half of '24. Those all combined to sort of have a shape of the year that's a little bit different, even though we reinstated our guidance practices, gave a full year guide. I did talk about the fact that Q1 would be the low point in terms of growth, and we'd exit Q4 at a higher point. The second part to your question, what are some of the things that we're excited about long term? We really are excited about the opportunity across all 3 growth pillars. We think about consumer payments, new flows and value-added services. In consumer payments, we continue to have this incredible market-leading position, where we're focused on growing credentials, growing authorization and driving engagement with our customers around the world. New flows, the opportunity to -- the opportunity for money movement beyond core consumer, we think, is 10x the market opportunity that we saw with consumer payments. And so that's a really incredible opportunity for us. And with value-added services, we continue to expand into new geos, we expand -- deepen client relationships and launch new products and services. So across all 3 of those growth pillars, we're very, very excited about the opportunities ahead.

Chris, excellent. All right. Great way to start this off. Let's go into a question we often get, which is around Visa's performance in a potential recession scenario. We've often talked about incentives that have a little bit of flex. We've talked about some of the more discretionary areas of the operating expense base. Maybe you could just expand upon how you think about the business and how it would behave or perform in a recessionary scenario.

Yes. No, it's a great question, appropriate. It's timely. As we've always said, we're not in the business of doing sort of forecasting macro. And hence, our '24 guide didn't assume one way or the other. That said, history has shown that our business is relatively resilient. And I think there are 2 ways to think about it. From a top line perspective, the spend set that we're exposed to is one of the broadest and most diverse anywhere, whether it's credit or debit, discretionary, nondiscretionary, domestic, cross-border, high spend, low spend, travel, et cetera. And so there's a natural diversification. And within that, I think what you've seen historically, debit, which is generally associated with more everyday spend, and nondiscretionary does better, more resilient in a period of economic downturn than credit. And the other thing that I'd maybe point out is on the cross-border side. I think the nature of cross-border has changed. There's a lot more e-commerce in that in the nature -- and e-commerce, again, has a little bit more affiliation with everyday type spend items versus more traditional cross-border travel and tourism. And so we think those have some natural resiliency to them. And then, of course, the incentive line, which you talked about. In the event that we see payment volumes change or vary due to whatever is happening in the macro perspective, there's an offset though, because those incentives are largely variable. On the cost side of the P&L, it's the same decisions that are faced by most CFOs. You have to balance between short-term needs, long-term priorities. We have levers. If we think about personnel, people and staffing, many of those can be slowed. We can certainly take decisions to slow hiring to reduce professional fees, travel of the like. And on the marketing side of the P&L, I'd say about half of our marketing spend is variable. And so then, again, we could, in theory, apply -- we could slow spending there as well. The other half is a little bit more long-term committed. And so there are levers to pull. I mean, we'll just be thoughtful about those things in the event that we have to react to something that happens on a macro basis. But, like I said, we'll be thoughtful and we'll be decisive.

Excellent, Chris. Let's move on to, and you alluded to this earlier, the FX volatility topic. So there are 2 parts to this. Maybe first, we could just talk a little bit about the mechanics there in terms of the FX spread component to the international revenue line.

Yes.

But then also what other things should investors be thinking about related to that line in terms of the yield, if you will, whether it be things like quarter mix or pricing or other factors?

Yes. Great question again. First of all, yes, cross-border, a really important part of our business. It generally has higher yields. But what is it? So as we define cross-border, it's when the issuer is in a different country than the merchant who transacted the transaction. In many of those cases, we also provide currency conversion services given the volumes that we run through our network. We can offer competitive rates. We transact in approximately 160 currencies around the world. We settle in 25. And so from a mechanic standpoint, we have the ability -- on a daily basis, we publish a bid-ask spread and as -- which varies based on the volatility and obviously, more volatility, the spread widens. It has the benefit of increased revenue for us. We saw a lot of volatility in FY '24. That's -- we saw it come down through the course of -- FY '23, I meant. We saw it come down through the course of the year, and we expect it to be roughly at or slightly below the levels that we saw in '24. Now that yield that I talked about, that you referenced is better. We don't publish the yield specifically for international, but it is largely known to be better than the rest of the core business. It does benefit -- pricing does vary by corridor. And then obviously, when there's more volatility, that really helps the yield as well in international. So this will be a year, as I talked about on the earnings call, like, FY '24 likely is to be a more normal year than we've seen in a while. So we're anticipating a little bit more stable environment for volatility. And at the same time, cross-border travel continuing to recover.

Perfect. Thank you, Chris. Let's move on to the next topic, which you also alluded to earlier, which is around incentives. So when we look at incentives on a basis points or percentage of payments volume, when we look at it over time, the incentives have sort of gone up at a pretty measured pace, sort of 0.2 bp to 0.3 to 0.4, 0.5 bp. But the last 2 years, the incentives have gone up a little bit more than that relative to the historical pace. The guidance this year, you're calling for incentives to grow at a slightly slower pace than they grew last year. I believe, 19% was the absolute dollar growth. So something less than 19%. So the question really is, has there been anything that's changed? Is there anything that really drove the last 2 years of maybe slightly elevated increases? And should we exit this year sort of back in a more normal cadence?

There is a lot of interest, as I've learned in my 4 months here, in the incentive line, so it's probably worth spending a few minutes talking about it. At the end of the day, incentives, for us -- what are incentives? For us, they're way to align interest, our interest with that of our clients to drive common outcomes, which, in the simplest sense, is more volume, more share volume and drive more revenue for us and for them. And so to that extent, it can vary significantly with the nature of a renewal. And hence, what you see in our P&L, you've mentioned that in recent periods, it's grown a little bit faster. Well, if you think about our deal flow, both new and renew, a typical deal is, on average, 5 to 7 years. And it's really priced -- the incentives are really priced based on the anticipated volume over that period. And so you will see that lumpiness. You will see it vary depending on the timing of deal flow, the timing of deal expirations, the anticipated volume. And of course, competitive dynamics play a factor in all of that as well. But again, like I said, it's really in service of driving more volume and driving more revenue over a period of time. In '23, I talked about the fact that incentives came in lower in the first half of the year in '23, when I was talking about the year-over-year comp in the first half. But we did renew. In the middle of the year, in the back half of the year, we renewed a pretty significant volume of PV. If you sort of take the 5- to 7-year exploration math, let's say, that translates to about 15% to 20% of payment volume in any given period being available for renewal. And in '23, we renewed a little over 20% of that and so that drove the higher -- the increase that you saw. It impacted half 2 incentives. It flows into the first half of this year. Some of that renewal in '23 was pulling forward from '24 and so what we're seeing -- what we anticipate seeing in '24 is that we'll renew probably closer to the 15% mark of the 15% to 20% range that we typically see, which again translates to a little bit lower year-over-year growth in '24. The important thing, though, from my perspective, is if we look at the yield, we look at every large deal that comes through. I'm part of the discussion and the review and approval, and we're really focused on maintaining and growing yields over time. We're -- and it's variable, like I said, based on what we anticipate the growth to be over the next period of the renewal, and we're really focused on growing net revenue. And hence, you heard me talk about that, a little bit more focused on net revenue growth, which I guided to, inclusive of whatever the impact of incentives would be throughout the course of the year.

Excellent, Chris. And we would agree that when you look at the net revenue yield over time, it's been remarkably stable over, literally, maybe a 10- to 15-year period with a slight upward trend. So to that point, incentives are just one piece of that net revenue puzzle. There are 2 other sides of it, and we can touch on each of those now. The first being pricing and the second being value-added services. So on your earnings call, you recently mentioned -- as you were talking about sort of the revenue lines, you mentioned that there were some pricing benefits, specifically for service fees, for data processing and for other revenue. Maybe you could just add a little bit of context around these price increases, the value that you've added that has allowed you to take this pricing.

Yes, yes. It's a great question. Pricing, again, at the highest level, pricing is a factor of the value we provide to our clients. And then secondarily, obviously, competitive and cost-to-serve dynamics play a role as well. But it's really -- the unlock is really around pricing to value. We've continued -- Visa plays an incredibly important part in the overall payment ecosystem, security, resiliency, integrity, the whole value chain is -- we provide a lot of value into the ecosystem. And so from that standpoint, we believe that we continue to have the ability to price to value. As we introduce more value into the system, we invest a lot in security, we invest a lot in fraud. Further, as we think about our new growth pillars, as we think about value-added services and the ability to bring new innovation to the market, we'll continue to, again, be able to price to value. Our expectation for '24 is that the pricing benefit will be roughly the same as we saw in '23, but it is a lever that we can continue to exercise.

Perfect. Thank you, Chris. The second one there is value-added services, which are now about 20% or maybe a hair more than 20% of your revenue. During COVID, I think it was a little bit easier for us and the investment community to get our head around the increasing value-added services attached. Given generally, there's an understanding that a card not present or an e-commerce transaction has a slightly higher attach rate. Now that we're kind of moving past that, can you just talk a little bit about the remaining and still long runway that you have for value-added services attached?

Yes. It's one of the areas that we're really excited about. You've heard Ryan talk about it. You've heard me talk about it. Jennifer talks about it all the time as well. There's a tremendous TAM opportunity in front of us. I think we all can see it, quite honestly. We're focused on 3 primary approaches to continue to grow our value-added services. One is to expand and deepen our existing client relationships with our existing product portfolio, two is to expand geographically, and three is to bring new product and innovation to the market. And I think we're doing well across all 3 of those dimensions. On the client relationships and existing products, these are some stats that we shared in the earnings call. If we look at our top 265 customers, clients, they, on average, are using 22 -- 20-plus services within their relationship with us. And if you look at the rest of the client portfolio broadly, it's roughly half that. And so you could see our ability to, again, deepen those relationships in a material way. As we expand geographically, there are -- value-add services, it's a whole host of services. Our risk services have been 2 of the more popular one, Visa Advanced Authorization, Visa Risk Manager. Those have been 2 of the more popular services. Together, there's -- we have over 8,000 clients using those services globally. And in Europe alone, over the last 3 years, we've more than doubled. And so again, it's -- you're seeing our expansion geographically. And then from a new product and innovation, I mean, again, this is a very large product portfolio. We continue to -- the cadence of innovation is rapid. We are launching new services literally every quarter. Like, RTP Prevent is one that we've launched recently. It uses deep AI learning models in the space of fraud prevention. And so again, rapid pace of innovation, lots of opportunity, great momentum in the business. We grew high teens throughout FY '23. We anticipate this business to continue to be accretive to our growth in the '24 and beyond.

Great. Thank you, Chris. So we hit incentives. We hit pricing. We hit value-added services. Let's move to another increasingly important growth driver for the business, which is Visa Direct. Oftentimes, investors are looking for great bringing-it-to-life type of concrete examples on the high end of the value/pricing spectrum for Visa Direct. A common example is the cross-border remittances use case. On the other end of maybe the lower priced or lower value end of it would be on the peer-to-peer side domestically. Maybe you could just build upon those 2 ends of the high and the low with maybe some additional examples. I think that would be really helpful.

Okay. Great. Yes, Visa Direct is one of our best growth opportunities that we see in front of us. It's an incredible business, and we're in its early days. I think it might be helpful a little bit just to give a little bit of history of Visa Direct.

Please.

If you think about our core business for many years, we succeeded based on this notion of allowing a consumer to pay a merchant. It was a one-way transaction from consumer to merchant. A handful of years ago, we made some changes in our network that allowed that one-way transaction to become 2 ways. And that was a big unlock for us because it opened up many such use cases, not just consumer to business, but now business to consumer, but you can think about P2P and B2B and many other use cases that really is about every node in the network. And so that's sort of the unlock, and that's why we're so excited about the opportunity. You think about the use cases, as you talked about. So P2P is maybe the most common one, but cross-border P2P is one that we're excited about that has higher yields. That was up 65% in FY '23. But there are many other scenarios. Think about send-to-wallet, send-to-account, many other such scenarios that opens up with Visa Direct, and we're very optimistic about that. Use cases, in addition to P2P, other things that you can think about, this is just sort of examples, you think about gig economy workers, think about waged -- earned wage access, merchant settlement or marketplace. There are just many examples, and it's early days for us with Visa Direct. And like I said, we're really optimistic that we can grow this business outsized growth rate relative to our core business for years to come.

That's great. Moving on from Visa Direct, let's talk a little bit about processing penetration. So on the last earnings call, this was a topic. You talked about expanding processing penetration in certain markets, including Colombia. Maybe just talk a little bit about some of the runway that remains for increasing processing share, and then what it means in terms of your ability to attach more value-added services.

Yes, yes. We process roughly 80% of volume globally today. And that doesn't include -- and that includes, actually, markets -- large markets like China, where we don't process domestically. And so from that standpoint, there's still ample runway as we think about regionalizing and getting very specific about growing our processing penetration. A great example of where we've done this successfully in recent times is in Latin America. We talked about Colombia, which you referenced. But if you sort of zoom out and look at the whole region, outside of Brazil, we've grown penetration by 20 points over this -- over recent -- last 3 years since 2019. Really, as we took on domestic processing in markets like Argentina, Chile, Colombia, Ecuador, Uruguay, I think those are the primary markets that have driven that. In Colombia, we've grown internal processing. We expect that we'll end FY '24 processing roughly 80% of their domestic volume. That's from 0 in 2019, and that really was on the heels of a strategic alliance we did with Credibanco, who is the largest issuer processor and acquirer processor in the market. So there's ample opportunity as we think about localizing our strategies and approaches. And once you -- to your point, once we bring them in, we're obviously -- we're earning data processing fees for authorization, clearing and settlement. But we have the ability, again, to add more value-added services, which is the growth lever that I talked about previously. The Colombia example, if you look at, again, going from 0 to 80% in a matter of a couple of years, we're seeing clients' banks add somewhere between 4 and 5 to 10 to a dozen value-added services in every deal. And so it's opportunity-rich as we continue to expand. It's a virtuous cycle that expands beyond our core processing into value-added services, too.

That's a great example. And the timing as well was also helpful. Okay. Let's move on to another topic that is definitely top of mind for investors given it's kind of something happening/evolving as we speak, which is Reg II for U.S. online debit routing. I think, in general, the investment community is comfortable with the notion that there are sort of 2 sides to the story, right? There's the direct aspect, which is the interchange and network fees associated with some of the secondary networks. But there's also -- compared to Visa's offering, there's relative levels of fraud to consider and also features. Maybe you could expand upon all of that, really.

It's, again, another very sort of timely topic. The first place I'd start is acknowledging that we've operated in a regulated debit environment for a long period of time, and we've done it, I would say, successfully for a decade or more. And from that context, we've built that muscle and we'll continue to operate and manage ourselves as regulations continue to evolve. What is Reg II for those that aren't familiar? It's basically regulations that in the U.S., issuers are required to have 2 unaffiliated debit networks on cards that are issued in the U.S., which, again, gives merchants or acquirers the option to route those transactions, those debit transactions to -- and again, this is card-not-present, sorry, just to be clear, give the ability to route those transactions to a second network. As I said, in October on our earnings call, we've not yet seen meaningful impact of this, and we'll continue to keep you all updated in the event that we do see impact of it. But I think the important point is the one you brought up, which is cost is a variable. It is a factor. But there's many other considerations. You pointed to features and liability, and I think that's the same one that I would anchor on. From a feature perspective, if you think about the capabilities that Visa offers, which are, really, unmatched. One example is Visa is a dual -- supports dual messaging, whereas traditional pin-based debit networks are single message. And what does that mean? Well, it's a scenario -- like, think of the scenario where the initial amount varies from the actual amount. So maybe a hotel bill or a car rental bill or a tipping scenario where those things are different. Those aren't supported by single-message networks, whereas, again, the capabilities in our network are more advanced. And then the third one, which is really important, is liability and fraud. In an e-commerce world, merchants bear the liability for fraud. And Visa has invested significantly in fraud detection, authorization, tokenization, like, all the things that give us a material step function advantage in that particular space to minimize the liability that merchants may incur. And hence, when you sort of look at the totality of things, we're confident that Visa's value prop is very good.

Excellent, Chris. Okay. I think we only have a few minutes here. I think we could maybe attempt to take one question briefly from the audience if anyone wanted to jump in. If not, we have another one that we'll wrap up with. Okay. Let's wrap it up with tokenization. So the number is getting huge now.

It is.

So it's 7.5 billion tokens as of the last earnings call. And I think it's just a nice one that we could wrap up, in terms of the benefits there to authorization rates, but also how the reduced interchange rates work in terms of providing a discount for using this tool that allows for higher authorization.

Yes. It's a great question. It's a technology. It's right in the -- what we were talking about, fraud and fraud prevention, because I think that is one of the incredible value propositions that Visa brings to our clients and to the payments ecosystem. Tokenization, again, for those unfamiliar, it replaces the traditional 16-digit account number with a token that can really only be unlocked by Visa. That then, therefore, provides an extra layer of security and protects the information that underlies that token. As you pointed out, 7.5 billion. It really is a remarkable sort of growth that we've seen as the e-commerce and sort of digital commerce continues to grow. It's become even more -- the value prop has grown higher. To your point, we don't charge for the token. We think there's massive benefits to the ecosystem in exactly the things that you pointed out, which is fraud, reduction of fraud and improval of authorization rates. And if you look at some recent numbers, those that use tokens versus that don't have seen a nearly 5-point improvement in authorization rates and 30% less fraud in those transactions, and so it's pretty compelling. We think there's -- like I said, there's incredible value and it'll increase total volumes in total. And so it's not something that we monetize separately, but again, it's something that we, along with our partners, are really excited about as we think about the future of digital commerce.

Chris, well, that brings us to a close of your first presentation at an investor conference here. It was a pleasure to be up here with you, and we really want to thank you and Jennifer for making the trip to Arizona. Thank you, Chris. Thank you, Jennifer.

Thanks so much, everyone.