Visa Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2023

There are 14 speakers on the call.

Operator

Welcome to Visa's Fiscal First Quarter 2023 Earnings Conference Call. All participants are in a listen only mode until the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Ms.

Operator

Jennifer Comeaux, Senior Vice President and Global Head of Investor Relations. Ms. Comeaux, you may begin.

Speaker 1

Thanks, Jordan. Good afternoon, everyone, and welcome to Visa's fiscal Q1 2023 earnings call. Joining us today are Al Kelly, Visa's Chairman and Chief Executive Officer Prasanth Prabhu, Visa's Vice Chair and Chief Financial Officer and Ryan McInerney, who will become the Chief Executive Officer of Visa next week. This call is being webcast on the Investor Relations section of our website at investor. Visa.com.

Speaker 1

A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward looking statements. These statements are not guarantees of future performance and our actual results could differ materially as the result of many factors. Additional information concerning those factors Is available in our most recent reports on Form 10 ks, which you can find on the SEC's website and the Investor Relations section of our website.

Speaker 1

For non GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today's earnings release. And with that, let me turn the call over to Al.

Speaker 2

Jennifer, thank you, and good afternoon, everybody, and thank you for joining us. Visa's performance in the Q1 of 2023 reflects stable domestic volumes and transactions and a continued recovery of cross border travel. Total Q1 payments volume was up 7% year over year or 135% versus 3 years ago, Flat with Q4. Excluding Russia and China, payments volume was up 12% or 146% of 2019. U.

Speaker 2

S. Q1 payments volume was up 9% year over year or 144% of 2019, down 1 point From Q4. International volume, excluding Russia and China, was up 15% or 147% of 2019, up one point from Q4. Q1 cross border volumes, excluding intra Europe, Grew 31% year over year and 132% versus 3 years ago, up 5 points from Q4. Excluding Russia, cross border year over year growth was higher by 4 points.

Speaker 2

Travel related cross border volumes rose 6 points 112% of 2019 in Q4 to 118% in Q1, driven by Asia Pacific, helped By China lifting restrictions, continued modest improvements inbound into the United States and CEMEA benefiting from the FIFA World Cup. Process transactions were up 10% year over year or 139% versus 2019 And we processed 571,000,000 transactions a day during the quarter. Although, Q1 net revenues grew altogether, I should say, Q1 net revenues grew 12% year over year and non GAAP EPS was 2.18 up 21%. In each of our growth levers, consumer payments, new flows and value added services, we saw strong revenue growth. In our consumer payments business, we made significant progress this quarter through large deals with traditional issuers and co brands.

Speaker 2

And with the pandemic largely behind us, we saw many businesses focused on payments through Visa's new flows capabilities. In addition, we continued to develop and expand our global value added services globally. Now let me explore each of these growth areas. In consumer payments, credentials grew 8% overall, 11% excluding Russia, with strong double digit growth in the United States, India and Brazil. Tap to pay penetration of face to face transactions globally was 72% Excluding Russia and the United States.

Speaker 2

In the United States, we surpassed a notable 30% with San Jose, San Francisco and New York City all above 50%. U. S. Drugstores went above 40% for the first time in the United States and nearly 65% of Costco's face to face Credit transactions were made with attack. In the United States, we had several important renewals.

Speaker 2

First, We renewed our partnership with Bank of America in the United States, maintaining our current debit and credit business, including their cash rewards, Travel Rewards, Premium Rewards and newly launched Premium Rewards Elite Consumer Credit Cards. We're excited to continue to invest together in the growth of our joint business and to innovate with Bank of America to deliver enhanced capabilities and improved experiences for their customers. 2nd, we renewed with Commerce Bank, a top 25 Visa U. S. Issuer In Australia, we renewed our agreement with the country's largest independent payment solutions provider, Costco, with over 4,000,000 cardholders for debit and prepaid and also signed a new agreement for credit issuance.

Speaker 2

Also in the region, we extended our exclusive relationship with Kiwi Bank, The largest New Zealand owned bank. In Latin America, we renewed with ICBC Argentina, 1 of the largest issuers in the country and with Banco de Brasil, 1 of the largest Visa issuers in the region. In addition, we entered into a new agreement with 1 of the largest banks in Panama, Banco Nacional de Panama. Also in Latin America, we reached a new strategic deal with FinTech platform, TIGO Money and parent company Millicom, A leading provider of telecommunications services in the region. Visa and Millicom expect to offer Tigo Money's More than 5,000,000 wallet users, the ability to digitize their cash in an easy and secure way making purchases Wherever Visa is accepted with the Visa TIGO Money Access Card.

Speaker 2

Another strategic FinTech deal is with Neo in India, a fast growing cross border focused NeoBank with 5,000,000 customers. We've extended our relationship from debit into credit To grow cross border spending with affluent as well as corporate customers. We're also happy to share that we renewed and extended our global partnership with HSBC. Our agreement With HSBC, our agreement covers consumer and commercial and it will foster growth and digital acceleration. This deal also cuts across all of Visa's 5 regions.

Speaker 3

As you

Speaker 2

know, Visa is the leader in travel co brands globally, And I'm happy to report that we recently reached agreements with 3 important travel relationships. First, Qatar Airways Privilege Club, Which today has a split portfolio across networks around the world, has signed a new 10 year exclusive partnership with Visa To enhance and expand its portfolio of co branded payment initiatives with key financial partners across key markets worldwide. This expanded partnership creates a new world of opportunities for our Visa customers and Privilege Club members to collect and spend Avios, The rewards currency of Privilege Club. 2nd, with Southwest Airlines in the United States, Visa will continue to be the exclusive payment network for their co brand credit card issued by JPMorgan Chase. It represents 1 of the largest co brand partnerships in the world.

Speaker 2

3rd, with Star Alliance and HSBC in Australia, this is the world's first credit card created with an airline alliance And is issued exclusively on Visa credit. At the time of the launch, it brought together 7 Star Alliance carriers in a single credit card platform. Also, we recently advanced our co brand partnership with Flipkart, one of India's leading digital commerce entities With a registered customer base of 450,000,000. So whether it's with traditional issuers or co brand partners, We are continuing to position Visa well for the future. On to new flows, where this past quarter New flows continue to grow with revenue up more than 20% in constant dollars led by strong growth in B2B payments volume and Visa Direct transactions.

Speaker 2

1st, on the Visa Direct side, Visa Direct had 1,900,000,000 transactions in Q1, up 39% Year over year excluding Russia. We continue to grow globally. Non U. S. Visa direct transactions as a percentage of total transactions Expanded nearly 20 points excluding Russia from Q1 2021 to Q1 2023.

Speaker 2

Building on the success of our remittance program with Standard Chartered Bank in Hong Kong, we recently launched Malaysia as an additional origination market Spending across 6 currency pairs with more currencies to come. We also continue to bring existing use cases to new markets. 1st, in Australia, Visa Direct is now enabling driver payouts with DoorDash. 2nd, we launched our inaugural P2P program In South Africa with FNB, one of the country's largest banks, to enable their 10,000,000 active customers to move money within their mobile app using Visa Direct Rail. 3rd, we launched our wallet cash payout program in Bangladesh with BCash.

Speaker 2

With this launch, the nearly 65,000,000 BCash users can make wallet to money bank transfers 20 fourseven In near real time using Visa Direct. We are enabling several use cases including seller payouts In the United States on Poshmark, a social media marketplace where more than 80,000,000 registered users And card top offs with FinTech GoHenry. As a follow on to the issuance deal we announced last quarter with them, GoHenry is enabling its members to top up their child's prepaid Visa card with Visa Direct, 1st in the UK, With plans to expand this service across Europe in the future. In addition to Visa Direct, we had noteworthy developments for a new commercial credit partnership in addition to renewing customer consumer credit across the 3,000,000 clients in Austria. And in the United States, we renewed with UBS for consumer credit and debit as well as several business credit portfolios And Visa Spend Clarity for Business.

Speaker 2

Another issuing partnership was with Stone, one of the largest acquirers in Brazil Focused on small businesses, Stone has recently become a Visa debit and credit issuer of cards That could be embedded digitally in its wallet. On the virtual card front, for accounts receivable or payable, We completed several agreements. First, Divvy, an expense management platform owned by Bill, Has renewed its agreement to offer Visa virtual cards for small and midsized businesses in the United States as part of its expense And vendor payment solutions. 2nd, ViewPost converts U. S.-based B2B check payments to Visa virtual cards And together, we are expanding card opportunities for issuers and corporates by offering a solution that can be deployed easily To every commercial business that still produces checks.

Speaker 2

3rd, we've reached an agreement with PlateIQ, a leading end to end accounts Payable automation provider in the United States with direct integrations to accounting systems. BladeIQ will be offering A Visa Virtual Card solution to commercial partners across multiple industries, including restaurants and hospitality, retail Accounting and Bookkeeping among others. 4th, in our Asia Pacific region, Sun Rate, A global payment and treasury management platform has launched Visa Virtual Cards as part of its solution for more than 1,000 B2B clients, including global online travel agencies and small business customers. Fleet issuance continues to grow as well. This quarter, We signed with XEMO, a European fleet and mobility solutions provider, to issue Visa Open Loop Fleet And fuel commercial cards as they expand from 3 European markets to 10.

Speaker 2

In the United States, Hynote, A cloud native card issuance and embedded finance platform expanded its relationship with Visa with a 5 year card issuance agreement across credit, Debit, Virtual Solutions and Fleet. In addition, High Note became certified as a fleet Visa Fleet card processor, which provides businesses with more specific product category level controls And more detailed and faster data for real time decisions on new fleet and fuel card programs. B2B It's an active space for FinTechs and Visa continues to partner with new players to drive innovation for businesses. A recent example is Confio, A FinTech in Mexico that has already issued approximately 50,000 Visa Small Business Cards and recently expanded its agreement To issue Visa Business Infinite Cards. In addition, they are positioned to grow acceptance in the market with their newly established acquiring business, Senior Pagal.

Speaker 2

Now moving to value added services, which had about $1,700,000,000 in revenue this first quarter, Up more than 20% in constant dollars. Remember that our focus for value added services is 3 fold. 1, to deepen client penetration of existing products 2, to build and launch new solutions and 3, to expand geographically. CyberSource is a great example on all three areas of focus. First, on deepening client penetration of existing products.

Speaker 2

CyberSource's decision manager offering provides broad capabilities to existing CyberSource clients and has experienced Strong growth throughout the pandemic, more than doubling transactions in the last 3 years. In Q1, transactions utilizing Decision Manager grew in the low Teams year over year demonstrating the continued demand for this solution even as we enter a post pandemic environment. Another area of growth we have mentioned is with acquirers who utilize CyberSources' capabilities to offer them to their merchant clients. In Q1, we signed agreements with several acquirers for gateway services including Elavon in North America. In Saudi Arabia, Saudi British Bank has announced its strategic partnership with our CyberSource payment gateway and risk platform To enhance the overall capabilities of SaaS payment gateway with the aim of fostering the bank's growth In an evolving and dynamic e commerce space.

Speaker 2

On extended geographically, we've continued our efforts to strengthen our global presence. Our non U. S. Cyber source transactions have nearly quadrupled since the Q1 of 2019 and they now comprise the majority of our transactions Led in particular by the Asia Pacific region. CyberSource has also created new offerings.

Speaker 2

While historically CyberSource has been an e commerce capability, Over the past few years, we have accelerated the product development of our card present and omni channel offerings, including with the acquisition of Payworks Back in 2019, in the past quarter, we saw a nearly 50% year over year increase in card present authorized CyberSource transactions. Other value added services highlights this quarter include our innovative dispute capability through VERIFI, We saw nearly 40% growth in cases processed this quarter as we expanded globally with more than 1 third of our cases from outside of North America. This rapid dispute resolution solution automatically resolves disputes between merchants and issuers through the acquirer of rails, Reduce the average time to resolve a dispute from 24 days to typically seconds. And Tink, our open banking platform, continue To deepen and develop relationships across Europe, Tink recently signed a master agreement with BNP Paribas to be their main open banking and money Services provider for millions of customers across Europe. Tink is already live with several businesses in the group.

Speaker 2

3,000,000 customers use Tink's money management, data enrichment and transactions products at BNP Paribas Fortress in Belgium And BNL in Italy. Tink has also renewed and expanded its commitment with ABN AMRO to integrate Tink's money manager And data enrichment products into the bank's app for more than 3,000,000 customers. In conclusion, in the Q1, Visa delivered very strong results and continued to effectively execute our growth strategy. Prasath will go into detail on our thoughts for the rest of the year, but I'd like to make a few other brief closing comments. We will Continue to manage our business for the medium to long term and will invest in initiatives that are compelling and will provide future growth, All while being very mindful of the current environment.

Speaker 2

I continue to see a bright future for these as we look ahead to the rest of this year and beyond, and I believe we have the right As we announced in November, effective February 1, 2023, I'll be stepping down as CEO and assuming the full time role as Executive Chairman. I'm exceedingly grateful to the Board and leadership of Visa in addition to all of our passionate 26,500 employee colleagues who helped make this job so rewarding. I'm proud of all that we have accomplished Together since I started in 2016. Ryan McInerny will become Visa's CEO and I cannot think of a finer leader to continue to position Visa At the center of money movement in increasingly innovative ways. I worked side by side with Brian for almost six and a half years.

Speaker 2

He knows our business, our clients and he is deeply respected by our employees. He and his team will do a great job and I expect this transition to be totally seamless. With that in mind, and as Jennifer alluded to, I've asked Ryan to join the Q and A portion of our call today. But before that, let me hand it over to Vasant

Speaker 4

Thank you, Al. Good afternoon, everyone. Our fiscal Q1 results reflect sustained growth in domestic spending and continued recovery in cross border travel. Net revenues were up 12%, GAAP EPS up 8%, non GAAP EPS was up 21%. The strong dollar dragged down reported net revenue growth by almost 3 points and non GAAP EPS growth by approximately 3.5 points.

Speaker 4

This continuation of operations in Russia Reduced net revenue growth by about 4.5 points. Adjusted for Russia, net revenues were up almost 20% in constant dollars. Net revenue growth exceeded our expectations as value added services and new flows growth were very strong, currency volatility stayed high And client incentives were lower than anticipated. A few key highlights. In constant dollars, global payments volume was up 7% year over year and 35% above 2019.

Speaker 4

Excluding China and adjusted for Russia, global payments volume was up 12% year over year and 46% higher than 2019. U. S. Payments volume was up 9% year over year and 44% over 2019. In constant dollars, international payments volume, excluding China and Russia, Was up 15% year over year and 47% above 2019.

Speaker 4

U. S. Holiday spending growth was in the high single digits on a year over year basis and up more than 41% versus 2019. E Commerce maintained its share of Repulse retail spending versus last year, Up over 5 points since 2019. Spending continues to smooth out over the holiday season with Black Friday and Cyber Monday Still significant shopping days, but less important post pandemic.

Speaker 4

Holiday spending around the globe was generally consistent with U. S. Trends. The cross border travel recovery continues. However, as expected, the pace of recovery has moderated as most borders are now open, Including Japan in October and now China in January.

Speaker 4

As a reminder, we saw a very sharp cross border travel recovery In October November of 2021, which we are lapping, indexed to 2019, cross border travel volume, excluding transactions within Europe, Gross 6 points in the Q1 versus a 20 point gain in the Q3 of fiscal year 'twenty 2 and 10 points in the Q4 of fiscal year 2022. New plans and new flows and value added services revenue sustained robust growth in excess of 20% in constant dollars. In the Q1 of fiscal year 'twenty three, we bought back approximately $3,100,000,000 in stock At an average price of $198.74 Contributions to the litigation escrow account, which have the same effect as a stock buyback, added another $350,000,000 We also distributed $945,000,000 in dividends. Now on to the details. In the U.

Speaker 4

S, credit grew 10% year over year And 35% over 2019, lapping the credit recovery from last year and as compared sequentially to last quarter, impacted by retail spending and fuel prices. U. S. Debit grew 8%, up sequentially over last quarter. Relative to 2019, debit grew 55%, sustaining significantly above the pre COVID trend line even as credit has recovered.

Speaker 4

U. S. Card present spend grew 8% year over year impacted by fuel prices and retail spend As compared sequentially to last quarter, U. S. Card present spend was 26% above 2019.

Speaker 4

U. S. Card not present volume excluding travel grew 9% year over year and was 65% higher than 2019. E commerce spend remains well above the pre COVID trend line even as card present spending has recovered. On the international front in constant dollars, Latin America was up 25% year over year and 107% higher than 2019.

Speaker 4

Our CEMEA region, Excluding Russia, grew 25% year over year and was 108% higher than 2019 as we saw all through FY 'twenty two, Growth in both regions was fueled by client wins, cash digitization and acceptance expansion. Europe was up 10% year over year and 34% higher than 2019, impacted by a portfolio conversion that is now nearly complete in the U. K. Ex U. K, Europe volumes grew 28% year over year and were 71% about 2019, reflecting share gains in multiple markets.

Speaker 4

Ex portfolio conversions, Volume trends in the U. K. Remained stable. Asia Pacific, excluding China, continued to recover, up 16% year over year and 34% above 2019. Global process transactions were up 10% year over year And 39% over 2019 levels.

Speaker 4

Constant dollar cross border volumes, excluding transactions within Europe, but including Russia in prior periods were up 31% year over year and 32% over 2019. Excluding Russia, Year over year growth was higher by about 4 points. Cross border card not present volume growth, excluding travel And excluding intra Europe grew 3% year over year and was 55% above 2019. Adjusted for cryptocurrency purchases and Russia, cross border e commerce spending grew in the low double digits. Cross border card not present, excluding travel, represented over 40% of total cross border volume in the Q1.

Speaker 4

Cross border travel spend, excluding intra Europe, grew 63% year over year and is now 18% above 2019. The cross border travel, excluding Europe Index to 2019, went from 114 in September to 121 in December. Travel in and out of Asia recovered sharply in the quarter by more than 12 points from the mid-70s indexed to 2019 to 85 for outbound and more than 90 for inbound helped by Japan. Japan alone improved by about 50 points Since opening its borders in October. With China lifting restrictions on January 8, we expect more recovery to come.

Speaker 4

Europe inbound and outbound remained strong with the travel index for 2019 in the 120s for outbound and 130s for inbound, both up slightly from the Q4. Travel outbound from the U. S. To all geographies continue to be strong in the low 140s Indexed to 2019, up 6 points from the 4th quarter. Travel inbound to the U.

Speaker 4

S. Approached 2019 levels and improved 4 points in the quarter, likely due to the weakening dollar. Traveling to Latin America and the Caribbean remained very strong and stable, Indexing around 150 to 2019 levels. Travel in and out of CEMEA indexed in the 130s and mid-120s, respectively, Relative to 2019, with outbound up more than 10 points in the quarter and inbound by more than 15, helped by the FIFA World Cup. Finally, some color on Mainland China post the removal of COVID-zero policies.

Speaker 4

The 40 day spring festival season is underway in Mainland China, the world's largest travel event. Domestic travel is rising sharply. From a revenue standpoint, this will not contribute much. In terms of outbound Mainland Chinese travel, this will pick up steam As more flight capacity is available, ticket prices moderate, new passports and visas are obtained And restrictions are lifted in some corridors. The initial destinations for Mainland Chinese visitors look to be Hong Kong and Southeast Asia, In particular, Thailand, Singapore and Malaysia.

Speaker 4

Inbound travel to Mainland China has not increased much and may not until the COVID situation settles down. Moving now to a quick review of Q1 financial results. Service revenues grew 10% versus the 10% growth in 4th quarter constant dollar payments volume. Exchange rate drag was offset by growth from business mix, pricing and card benefits. Data processing revenues grew 6% versus the 10% process transactions growth.

Speaker 4

The primary reason Is that our data processing revenues are impacted by Russia. However, our transactions growth is not. Adjusted for Russia, Data processing revenues were up 10%. International transaction revenues were up 29% versus the 31% increase dollar cross border volumes, excluding intra Europe. Revenue growth was helped by high currency volatility, although lower than the Q4 and pricing actions, which were offset by exchange rate shifts.

Speaker 4

Other revenues grew 31%, led by marketing and consulting services, pricing actions and acquisitions. Client incentives were 26% of gross revenues, below expectations due to some adjustments based on client performance and other items. For the year, we expect to renew about 20% of our payments volume with a good amount already completed in the Q1. Revenue growth was robust across our 3 growth engines. Consumer Payments growth was led by the recovery in cross border volumes, high currency volatility and continued strong domestic volumes and transactions.

Speaker 4

New flows revenue growth was over 20% in constant dollars. Commercial card volumes grew 15% year over year and are up 45% versus 2019. Excluding Russia, Visa Direct transactions grew 39%. Value added services revenue was also up over 20% in constant dollars, Driven by higher volume, increased client penetration and select pricing actions, currency cloud and pink added about 0.5 point to revenue growth. GAAP operating expenses grew 25%.

Speaker 4

Non GAAP operating expenses grew 15%. Non GAAP operating expense growth Was higher than expected primarily due to a smaller exchange rate benefit. The primary drivers of expense growth were personnel costs From hiring activity in the second half of last year and into the first quarter as well as G and A expenses driven by lower exchange rate benefits, higher travel and expenses from new acquisitions. Marketing increased 18%, primarily driven by the FIFA World Cup spend and client marketing. We recorded losses from our equity investments of $106,000,000 Excluding investment losses, non GAAP non operating expense $7,000,000 benefiting from higher interest income due to rising rates and some other items.

Speaker 4

Our tax rate was lower than expected Due to the resolution of a tax initiative coming in at 16% GAAP and 16.5% non GAAP. GAAP EPS was $1.99 Non GAAP EPS was $2.18 up 21% over last year, inclusive of an approximately 3.5 point drag from the stronger dollar. Through the 1st 3 weeks of February, business trends have remained strong and stable. On a year over year basis, U. S.

Speaker 4

Payments volume was up 14% with debit up 13% and credit up 14%. Lapping of Omicron related weakness from last year has contributed to strong January month to date growth. The Omicron related uptick will fade as we get into February. These trends are generally consistent with performance in major markets around the world. Process transactions grew 14% year over year.

Speaker 4

Constant dollar cross border volume, excluding transactions within Europe, grew 36% year over year and was 42% over 2019 and 32% over 2020. Card not present non travel growth was 75% above 2019 and 52% about 2020. Travel related cross border volumes were 25% about 2019 20% about 2020. We are now past the pandemic recovery stage on domestic volumes and transactions. As such, starting next quarter, We will no longer provide comparisons to 2019 for payments volumes and process transactions.

Speaker 4

Since the cross border recovery is still ongoing, We will continue to provide comparisons through 2019 for cross border volumes through this calendar year. Moving now to our outlook for the Q2. For the Q2, we are assuming that trends in domestic payments volumes and process transactions are sustained with some benefit from lapping Omicron in January last year. As a reminder, discontinuation of operations in Russia will impact reported payments volume growth rates in the Q2. Russia will not impact reported process transactions growth.

Speaker 4

Cross border e commerce trends have been stable too, especially when you adjust for Russia and crypto related volatility. We're resuming cross border e commerce growth rates sustained through the Q2 ex Russia and crypto. The cross border travel recovery continued generally in line with our expectations in the Q1. We are assuming recent trends to sustain into the 2nd quarter. We expect most of the Mainland China travel recovery in the second half and beyond for reasons I outlined earlier.

Speaker 4

We expect outbound travel from Mainland China to recover first. The pace of inbound travel recovery will depend on the COVID situation. Discontinuation of operations in Russia will reduce 2nd quarter net revenue growth by almost 5 points Since we recorded nearly 2 quarters' worth of service fees in the Q2 of fiscal year 'twenty two. Based on where the dollar is today and the forward curve, Exchange rates will reduce reported net revenue growth in the 2nd quarter by about 2 points. When you put all this together, Our planning assumptions get us to mid teens constant dollar net revenue growth in the second quarter on a run rate basis, I.

Speaker 4

E. Adjusted for Russia. With an almost 5 point Russia impact and a 2 point exchange rate headwind, Reported nominal dollar Q2 net revenue growth would be in the high single digits. Client incentives were below our 26.5% to 27.5% range of gross revenues in the Q1. 2nd quarter client incentives are expected to run higher At the upper end of the range, finishing the first half in the middle of the range.

Speaker 4

As we indicated in October, Operating expenses growth rates will moderate through the year as we reduce the rate of increase as well as lap higher levels from last year. In the Q2, non GAAP operating expense growth in nominal dollars is expected to be 2 to 3 points lower Then the Q1 expense growth. Our 3rd quarter non GAAP operating expense growth rate is expected to decline an additional 2 to 3 points With a further 2 to 3 point reduction in the 4th quarter. Non GAAP results exclude certain acquisition related items and the litigation provision from the Q3 last year. We currently expect non GAAP, non operating expense To be in the $40,000,000 to $50,000,000 range in the second quarter, driven largely by higher interest income from our cash balances.

Speaker 4

Our tax rate is expected to be at the upper end of the 19% to 19.5% range for the rest of the year. With a non GAAP 16.5 percent rate in the Q1, the full year non GAAP tax rate is now expected to range between 18.5% to 19%. As we said last quarter, Should there be a recession or a geopolitical shock that impacts our business, slowing revenue growth below our planning assumptions in the second half, We will of course adjust our spending plans by reprioritizing investments, scaling back or delaying programs and pulling back as appropriate in personnel expenses, marketing spend, travel and other controllable categories. In a business like ours, this always requires a careful balance between short term short and long term considerations. We have contingency plans in place and we'll activate them should we need to.

Speaker 4

Our business has been resilient so far this year. Our Q1 performance has demonstrated strong consumer payments growth from cash digitization and client wins. New flows and value added services momentum remains very strong. There is still much uncertainty from an economic standpoint In the months ahead, we will remain vigilant and ready to act. As we look past fiscal year 'twenty three, we remain as optimistic as we've ever been Before I finish, this is a sad day for me personally.

Speaker 4

It's Al last week as CEO. Al has been the best CEO I've worked for and I've worked for many in my career. Al is a wonderful human being, an exceptional leader with extraordinary business judgment. It has been an eventful 6 years. Despite a 3 year global pandemic, revenues have almost doubled, non GAAP EPS is up over 2.5 times And our stock price has tripled during Al's tenure.

Speaker 4

I will miss you as CEO Al along with 26,500 or so others at Visa. With that, I'll turn this back to Jennifer.

Speaker 1

Thanks, Prasanth. And with that, we're ready to take questions,

Operator

To ensure all questioners are heard, we ask that you please limit yourself to one question. Our first question comes from Sanjay Sakhrani with KBW. Your line is open.

Speaker 5

Thanks and congratulations to Al and Ryan as well. Vasant, as we think about your baseline plan forecasts, how are you factoring in the economy? I mean, are we assuming Resilient consumer, stable economy? Or are you assuming some mild downturn?

Speaker 4

Well, we went through what we called our planning assumptions Last on the last call for the full year, and we told you we had assumed no recession. As you can see, business trends have been remarkably stable. The spend levels just around the world, They've indexed in the mid-140s for almost 4 quarters right now, and there's no evidence of a change in trend. That's reflected in our Q2 outlook. At this point, we're not changing any expectations for the second half.

Speaker 4

I mean, clearly, the dollar has weakened a bit, so that will change The exchange rate impact in the second half, but they're not changing any of our views in the second half. I mean, they are planning assumptions. And if there is a slowdown, then we will react accordingly.

Speaker 2

Great. Thank you. Have a good

Speaker 1

question, Jordan.

Operator

Our next question comes from Darrin Peller with Wolfe Research. Your line is open.

Speaker 3

Hey, guys. So it's nice to see that. It seems like from the trends you're seeing in Q1 and Q10, what you're guiding for Q2, it's an element of conservatism Based on the trends so far relative to what we could see in the second half, which I think is what the Street probably wanted. But when we we'll just think about the underlying trends for a moment. I mean, some of the strength

Speaker 6

that we're seeing

Speaker 3

like debit being up still high single digits, Constant currency in the U. S. On really tough comps combined with other services. Maybe you could just touch on what's the driving forces of both of those metrics Because they were a little better than we thought. And I don't know if it's Visa Direct in the debit side helping or it's other factors and share.

Speaker 3

And then if you can comment on other Revenue also strength. Thanks again, guys.

Speaker 4

Yes. On Debit, it's what we told you earlier. In general, If you look at the looking at 2019 has kept us honest, so to speak. It's a good view of what's going on. And there's In total spend, it's remarkable stability.

Speaker 4

What's happening is as good spending slowed down a bit, services spending really took up all the slack. And so consumers have just shifted their spending, but they're spending the same amount. And that's why debit has stayed resilient. Debit has been the biggest beneficiary of The move to digitization that happened globally and including in the U. S, more e commerce, more tap to pay, more people using Digital credentials, just about in any payment occasion.

Speaker 4

So some people were worried that when Yes. Things settle down that debit might start to see some slowdown. But as you've seen, debit has stayed resilient even as credit has recovered, services and consulting revenue, a fair amount of that linked to the FIFA World Cup. There was a lot of client related marketing And spending related to the World Cup, client asked us to activate a variety of programs and that certainly helped other revenues.

Speaker 7

Next question, Jordan.

Operator

Our next question comes from Will Nance with Goldman Sachs. Your line is open.

Speaker 6

Hey guys, thanks for taking the question. I wanted to kind of double click on some of the comments you made around China. It sounds like you guys are looking towards that region as being a fairly big driver of continued recovery and cross border travel. I think we heard this morning from your competitor that those volumes in aggregate Seem to only be something like 1% to 2% of overall cross border volumes pre COVID. So I was wondering given how much of a focus this is for investors as A driver of continued strong growth, can you put some guardrails around how we should be thinking about the magnitude of impact of China once it's fully reopened relative to kind of what we saw in the most recent quarter.

Speaker 6

Thanks.

Speaker 2

Well, a couple of things. First, our numbers are Fairly close to those of our competitor. We are as Vasant said, We really think that first we're going to see the travel being outbound from China to Southeast Asia. I think it's going to be Still a bit of time before we're going to see a Chinese traveler back in Europe and at the level of pre pandemic or back in the United States at the level of pre pandemic.

Speaker 8

And I think it's going

Speaker 2

to people are going to wait and see what's happening, with COVID within China. So Vasant talked about The fact that we're not counting on any kind of recovery back inbound into China into the second half of the year. But My personal expectation is that, we'll see probably a spread of 3 to 5 quarters before Starting in the second half before China gets back to a level of pre pandemic or 20 19. So it is for us, it's we have built our plan around Pretty much what Dusan said in his remarks and what I just said. And if China comes back faster than what We're saying then obviously that will help us if it comes back slower, it will have that the opposite impact.

Speaker 4

In terms of thinking about the impact, you all and we all have been tracking how is our cross border recovering relative to COVID levels and I'll be back on the trend line and so on as you know. And we've told you now for a few quarters that many corridors and I've been through a lot of that Are well above the 2019 level. The 3 that were not and are still not, U. S. Is approaching U.

Speaker 4

S. Inbound is approaching 2019 levels I was held back by the strong dollar, but Asia is still and I went through the numbers quite a bit below 2019 levels. Most of Asia is open, only China isn't. So if Asia is going to get back to pre COVID levels and back to the original trend line, that's where the China impact is going to be visible. And then you expect and we expect cross border that cross border travel index to keep improving through the year.

Speaker 4

For that to happen,

Operator

question comes from Lisa Ellis with SVB MoffettNathanson. Your line is open.

Speaker 1

Hey, good afternoon. Thanks for taking my question. I had a question about the evolution of Visa Direct. You highlighted the plus 39% year on year growth ex Russia in the quarter. Over the last few years, you've been talking a lot with tap to pay and contactless about there being sort of this inflection point dynamic Where you reach a certain level of critical mass and then growth really accelerates.

Speaker 1

Is a similar dynamic true for Visa Direct? And Can you give us a sense for sort of how we should think about that evolve over the next couple of years?

Speaker 2

Well, I think Lisa, You're absolutely right. We're focused in Visa Direct at this point on extending into new geographies, New use cases and more cross border. I would say those are our focuses. Initially, out of the chute, these direct in a country goes Through Phase 1, which tends to be P2P before you then get into things like gig economy payouts and transactions like Remittances or insurance payments, those kinds of things. So in the United States And every country is going to go through this kind of evolution where they'll start with P2P, get into Kings like Gig Economy Pass and then Get into more sophistic and remittances and then more sophisticated use cases.

Speaker 2

And the United States is much further along that Continuum. In other countries, we have made some good progress kind of in that first Phase or 2, but haven't gotten into more sophisticated use cases. And then in other geographies, frankly, we're still not there. So I think there's a tremendous amount of gas left in the tank in Visa Direct when I look at the opportunities to Take use cases to more sophisticated levels in more markets, to open up more markets and to put a real focus on cross border Visa Direct transactions, which will have better yields to them as well. So I think your bottom line theory of your question Is I had some real legitimacy to it, Although I would say that it will be probably a bit longer elevation a bit longer period of time before you reach maturity Simply because of the different amount of use cases whereas tap to pay is really kind of a single type of initiative.

Speaker 7

Next question, Jordan?

Operator

Our next question comes from Dave Koning with Baird. Your line is open.

Speaker 9

Yes. Hey, guys. Thanks and good job. I guess my question, rest of world debit is the one place where I guess numbers were a little weaker than we had thought, negative 2% Constant currency, is that just a function of portfolio deconversions, Russia, some of the one off things? And when does that kind of inflect back Into positive territory.

Speaker 2

Well, I think, Dave, when you look at it ex China and ex Russia, It grew over 10%. And then, yes, the U. K. Migrations in particular are happening at a faster pace than we thought. And as said in his remarks, they're almost fully migrated.

Speaker 2

So certainly that is having a dragging impact on the growth as well.

Speaker 1

Next question, Jordan.

Operator

Our next question comes from Ramsey El Assal with Barclays. Your line is open.

Speaker 6

Hi. Thank you for taking my question tonight. Al, could you give us your latest thoughts on sort of balance sheet deployment, M and A strategy, What you might be looking for whether this environment is yielding more potential opportunities or deals or is it time maybe to not Pursue additional deals as the macro environment remains volatile?

Speaker 2

Nothing has changed in Our strategy, we're focused 1st and foremost on organic growth and then growing through M and A and then from there, Dividend and share buybacks in that order. Clearly, there's been a Little bit of a burst of the balloon in terms of some of the valuations in particular in the FinTech world. That is a helpful characteristic of the environment right now. But I think we will continue to look for capabilities and management teams that would Bring more value to Visa than we could bring to ourselves organically. And We're in constant evaluation of options.

Speaker 2

We have a very good corporate development team. It's something that Ryan and Sasan, in particular, spent a good deal of time on. And when we see something that we think will make us better as a

Operator

Our next question comes from James Faucette with Morgan Stanley. Your line is open.

Speaker 10

Thank you very much and Thanks for all the work and effort out over time. And I wanted to address kind of a bigger picture question for you and maybe for Ryan Is that one of the questions we get a lot from investors is how do we think about, kind of the challenges As we eventually reach some level of maturation of card penetration, especially in the U. S. And developed markets, and especially Given some of the preferences we've seen in other countries for them to develop domestic schemes, or at least favor domestic schemes. So just wondering if you can provide a little bit of reflection on what we've seen thus far and maybe, Ryan, some ideas on how we should think about Kind of maturation and expansion issues, going forward.

Speaker 2

So I'll start and then certainly Ryan can, to add. First, I would say that I believe deeply that there is tremendous opportunity in the card traditional card world, both in the consumer Space as well as in the B2B space. There are still 100 and 100 of millions of people to bring it to the financial Mainstream, there are still 1,000,000,000,000 of dollars bent on cash and check. And when you look in the B2B space, We see a total addressable market of about $120,000,000,000 across carded opportunities, cross border and payables and receivables, where I talked a bunch about a number of examples that we have worked on over the course of the last quarter. RTP systems are helping to digitize money movement.

Speaker 2

That's a good thing. If you look at The disruption caused by monetization in India had ended up being extraordinarily positive in terms of What it's done in terms of growth in card credentials as well as acceptance, which by the way, I also should have said In the traditional world, there's still a tremendous opportunity to grow our acceptance footprint from the level that it's at today. These RTP systems are also helping us and we're leaning into them. They're helping us extend the reach of Visa Direct as We utilize them as part of our network of network strategies. They're helping us with open banking through Think, where we can facilitate Greater access to more developers on one end and more financial institutions.

Speaker 2

On the other end, I think RTPs represent an opportunity for us to sell value added services. And I still think the advantages of and the capabilities associated with the card in space are still far superior Account to account the consumer protections and etcetera. And if you look at PIX in Brazil, you look at UPI In India, these things developed and we're putting in the marketplace and we're seeing a Fair amount of hearing a lot from clients in terms of fraud associated with these networks. And in many ways that makes sense. They haven't spent the decades And 100 of 1,000,000 of dollars that Visa has to build security, fraud capability, risk management capabilities That help keep the ecosystem secure and trusted by consumers.

Speaker 2

And I think we have the opportunity over time in the A2A space to bring some of those capabilities And earn some good revenue and yield from them. So Ryan, what would you add or delete? You have a lot to add to that, Al. Great.

Speaker 11

And I mean, James, just in short, we still see a ton of runway. We love our products. We love our people. We love our brand. We love our position in All these markets whether they're mature or emerging around the world, so tons of runway.

Speaker 7

Next question?

Operator

Our next question comes from Dan Perlin with RBC Capital

Speaker 8

Thanks. Hey, Al, I just wanted to ask

Speaker 2

a question about how when you

Speaker 8

look at the new business that you've won, let's say, in the past 12, maybe even 18 months or so. How that kind of sets Visa up as we think about the next, I would say the next 2 years, not really much beyond that. But And the question really here is, is it tilting to take advantage more of debit trends, credit trends, global hospitality? And I'm kind of asking because Mastercard kind of called it out this morning as their positioning in travel. And it sounds like you were also kind of hinting At some positioning, for your business.

Speaker 8

So I would just be interested to know what that new business pipeline that you brought in suggests over the course of the next 2 years for your company. Thank you.

Speaker 2

I'll tell you a couple of things, Dan. Number 1, on the travel front, it's been a focus for us for a long time. And I think we have about 650 co brands around the world. Many of them are travel co brands and I think we're the leading co brand player on the planet. I think that when I look around the world, there's certainly opportunities with traditional issuers.

Speaker 2

We've made a lot of inroads in markets like Brazil and Chile, the Netherlands, Germany, Japan, Over the past year, we've had some great renewals in the United States over the last Couple of years from JPMorgan Chase to Wells to the ones I talked about today in terms of Bank of America, Cap One Commerce Bank. But we've also made great inroads with FinTechs and NeoBanks. We have had a great track record of wins in the last 24 to 36 months. And a lot of these people are getting to be to scale in their particular markets. And I think for us, we have to have a wider lens in terms of who can provide services.

Speaker 2

We're Try to get our make sure we get Visa cards and as many wallets as we can around the world. And then I'm going to come back to acceptance. One of the great ways to continue to grow our business is to grow our acceptance footprint, which still requires a lot of growth around the world. One of the places we've concentrated on that in the last year and a half is Latin America. And if you look at the ratio of Spending in Latin America that went from moved from cash to PD In the last couple of years, back in full year 2020, only 46% of Latin America's volume was PV with 54% being cash.

Speaker 2

This past quarter, we just finished 59% Of their PV, 69% of their volume was purchased by. So there was a 13 point swing In the Latin America region in the last not even quite 3 years. And that's a combination of Winning with traditional FIs, winning with FinTechs, having a localized market by market approach With a lot of good really good progress in countries that's out in Latin America, like Brazil and Chile.

Speaker 1

Next question, Jordan.

Operator

Our next question comes from Archita Rawat with Bernstein. Your line is open.

Speaker 7

Thank you. Best wishes to you and we'll miss hearing from you on this call. Ryan, congratulations. Can you talk about how this growth strategy and organization will evolve under your leadership? Are you Planning to focus more or less on certain things or do some things differently.

Speaker 7

And Vasanth, very quickly, can you comment on the And from your fiscal quarter Q1, Q, you talked about some of the dynamics, but how is that relative to your initial expectations? Thank you.

Speaker 2

Harshita, I don't think we got the second half of your question because maybe we can knock that off and then Ryan can start. So you did. Okay.

Speaker 4

I think you were asking about you said decel. I'm assuming you meant deceleration between the first and the second. Yes. I mean, just a couple of things. The Russia impact is a little larger in the Q2 because we had almost 2 quarters' worth of service fees last year.

Speaker 4

Remember, we recognize service fees with a lag. So the service fees recognized in the Q1 were based on Q4 growth rates. Sequentially, Q1 was a little lower, so Q2 service fees will be impacted by that. Also currency volatility is moderating as we speak. It has been moderating for a few weeks.

Speaker 4

And incentive growth is a little higher as you So we put it all together. We were a little better than we expected. As you know, we thought we would be high single digits in the Q1. We were higher for the reasons I mentioned. We'll be high single digits in the Q2.

Speaker 4

That's our expectation right now.

Speaker 2

Brian? Yes. On the first part

Speaker 11

of your question, I've been our President now for close to 10 years. So I've been shoulder to shoulder with Al and Vasant and the rest of our team as we've made all of our key decisions, As we've developed our strategy, as we've executed our strategy, so it probably won't or shouldn't surprise you. I'm going to continue to focus on the 3 growth pillars that we've laid out consumer payments, new payment flows and value added services. And My priorities are going to be focused on doing everything that we can to accelerate our progress and accelerate our momentum. So how do we go to market?

Speaker 11

How do we work clients, how do we ship product faster? How do we sell solutions more effectively to our clients? And to part of your question, how do we organize? So earlier this month, I announced a new organizational structure that really reflects Our strategy that we talk with all of you about all the time and we believe it's going to help us accelerate our progress in all three of those growth factors. To give you a quick sketch of that, Oliver Jenkin, a long time Visa veteran who many of you know is going to Lead a new global markets organization that includes driving our consumer payments growth in all of our markets around the world.

Speaker 11

So our 5 regional presidents will report to Oliver. Chris Newkirk, who formerly led our strategy organization, He's going to lead our new flows business unit reporting directly to me. Anthony Cahill, Who is our former Deputy CEO of Europe is going to lead our value added services business unit reporting directly to me. So Our Global Markets team, our Value Added Services business unit, our New Flows business unit, all will report directly to me. And then just to round that out a little bit, Jack Forrestal, who also many of you know will become our Chief Product and Strategy Officer And we'll partner closely with our President of Technology, Rajat Taneja.

Speaker 11

And the 2 of them are focused on delivering a robust product and innovation roadmap, Shipping world class products and services that help our clients grow their businesses and deepen their relationships with their customers. So that gives you a Sense of where we are with strategy and the organization. Next question, Jordan?

Speaker 7

Great. Thank you.

Operator

Our next question comes from

Speaker 12

Congrats to Alan and Ryan. I think you Mentioned earlier that you're keeping the second half guidance unchanged. Could you just remind us what that guidance was from either a volume or net revenue standpoint just because I think we have only the prior kind of full year guidance and I know there's FX That's becoming less of a headwind as you get into the second half. Thank you.

Speaker 4

Yes. When we talked to you last quarter, we said For the full year, revenue growth would be somewhere in the mid teens on a constant dollar basis adjusted for Russia. And then when you adjust for Russia And you adjust for a full year impact at that time of about 2 points on FX. It was going to be high single digits in nominal dollars. And so you know sort of where we are in Q1 and Q2, and exchange rates have moved around some.

Speaker 4

So you can do some of the math. We're basically not changing any views on the second half right now because trends have been still fairly stable. The only thing You might want to change is what the exchange rate impact in the second half might be based on where you are right now. I also gave you fairly clear Operating expense expectations, we were at about 15% growth in the Q1. We said growth will be 2 to 3 points lower In nominal dollar terms in the 2nd quarter, another 2 points to 3 points lower in the 3rd quarter and another 2 points to 3 points lower in the 4th quarter.

Speaker 4

And that reflects what we Last quarter that is expense growth will moderate through the year, both as we moderate the rate of increase, but also as we lap higher levels of expenses from last year. So those pretty much are the sort of the broad outlines of what we said last quarter. And then we'll update you once again on our next call With any changes we might have based on trends.

Speaker 1

Last question, Jordan?

Operator

Our final question comes from Tien Tsin Huang with JPMorgan. Your line is

Speaker 13

Hey, thanks so much and congrats to Al and Ryan. Excited for both of you. On the renewal front and new deal front, I'll ask on that if you don't mind. Callouts on pricing, contract requirements, that kind of thing. I know you named a bunch of big names on the renewal front.

Speaker 13

Mastercard talked about the citizens When they're just curious what's happening in the whole balance of trade area? Thanks.

Speaker 2

It's competitive world out there, Tien Tsin, as you well know. I think that there's a price that you Need to get to and then a lot of it has to do with the combination of incumbency or not, your the capabilities you have, What's your lineup of customers, clients are In that market, what kind of experience you've had, what kind of innovative ideas you bring to the table, The other kinds of capabilities that we have in terms of services and new flows. So, yes, every deal It's different and potentially hinges on different things depending upon the needs of a particular client. And we tried to be very bespoke when we look at deals and talk to clients Because their needs and their situation, will always tend to be a bit different.

Speaker 1

And with that, we'd like to thank you for joining us today. If you have additional questions,

Operator

Thank you for your participation in today's conference. You may disconnect at this

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Earnings Conference Call
Visa Q1 2023
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