Visa Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 18 speakers on the call.

Operator

Welcome to Visa's Fiscal Third 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 Q3 2023 earnings call. Joining us today are Ryan McInerney, Visa's Chief Executive Officer Prabhu, Visa's Vice Chair and Chief Financial Officer and Chris Suh, Visa's Chief Financial Officer designate. 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 a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10 ks and any subsequent reports on Forms 10 Q and 8 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 Ryan.

Speaker 2

Good afternoon

Speaker 3

and thank you for joining us. Our financial performance in the Q3 of 2023 was strong With net revenues up 12% year over year. Non GAAP earnings per share was $2.16 up 9%. Overall, our global quarterly payments volume was up 9% year over year. In the U.

Speaker 3

S, quarterly payments volume was up 6% as expected, primarily due to moderating inflation. Outside the U. S, international payments volume was up 12%. Excluding intra Europe, Total cross border volume remains strong, up 22% with cross border travel volume At 136 percent of 2019. Process transactions grew 10% year over year.

Speaker 3

As I mentioned on our previous earnings call, my priorities are focused on doing everything that we can to accelerate our growth By executing our strategy, including supporting our go to market teams, delivering for our clients, Shipping innovative products even faster and selling our solutions even more effectively. With those priorities in mind, I would like to review our progress across our 3 growth levers: consumer payments, new flows and value added services. We continue to make great strides growing and expanding our consumer payments business, winning with new and existing clients And shifting volume to Visa from a wide array of local, regional and global competitors around the world. Our clients tell us they're choosing to deepen and expand their partnerships with us for a number of reasons, including our people, Our products, our value added services, our new flows and our brand. I'll share a few examples.

Speaker 3

First, our people. We consistently hear from our clients that they deeply value the advice, Local support and partnership they receive day in and day out from our outstanding team members around the world. They also appreciate our thoughtful industry leadership on important and complicated issues across the ecosystem. In fact, in our latest global net promoter score survey, our clients rated us a 73. In the U.

Speaker 3

S, we retained our position of serving 8 of the top 10 credit unions By recently renewing one of the largest players in the space, Pentagon Federal Credit Union. While there are many reasons for our success with PenFed, our people and our local market relationship model made the difference. Just like it has for over 350 U. S. Community Bank and Credit Union Renewals this year to date.

Speaker 3

Payance is a local business and our priority to invest locally with great talent has paid off. For example, Across Eastern Europe, Intesa Sanpaolo will issue Visa Debit in Croatia, Hungary, Romania, Slovakia and Slovenia, representing over 3,000,000 visa credentials. 2nd, our payment products and innovations consistently help us win. Our clients tell us they choose Visa because our innovative products help ensure they are delivering leading edge payment solutions to their customers. For example, in Korea, We recently renewed our partnership with Hyundai Card.

Speaker 3

As part of our new partnership, Hyundai will be taking advantage of our digital payment solutions Like data and analytics services to launch a series of new innovations. Hyundai will grow their share of Visa cards in credit and debit for consumer and business. Our innovation also comes from targeted value propositions in traditional products, And we are very pleased to have signed a new long term partnership with the NatWest Group, a consumer debit and credit. 3rd, our value added services are helping us win in consumer payments. Our value added services such as consulting and analytics, AI driven data solutions, risk solutions and processing Are a critical differentiator that helps our clients innovate and grow often without having to use their most scarce resources, Technology and Engineering.

Speaker 3

For example, Rakuten Card, a subsidiary of Rakuten Group, which operates the largest E commerce marketplace in Japan has signed a new credit deal with Visa to further their strategy to become a top global player. As part of our partnership, Rakuten Card will utilize Visa's processing capabilities And dedicated Visa Consulting, Data Science and Analytics teams to support them on strategic initiatives. 4th, our new flows capabilities. Increasingly, our new flows capabilities such as Visa Direct Are an important differentiator to our clients when they're making consumer payments decisions. A great example is Cash App.

Speaker 3

With 53,000,000 monthly transacting actives, Pash App has renewed and expanded its agreement globally, Encompassing card issuance, Visa Direct and value added services. And last, but certainly not least, our brand. In many cases, our clients ask their customers, which brand do you prefer? Would you spend more if we issued this brand or that brand? And our clients consistently Tell us that consumers overwhelmingly prefer Visa.

Speaker 3

We see this particularly play out with co brands. For example, for many of the largest airline co brands in the world, we remain a partner of choice. And we recently renewed with Korean Air and signed a new agreement with Breeze Airways. We also won the co brand portfolio with Allegiant Travel Company, the parent company of Allegiant Air. In addition, in Latin America, we expanded our relationship with LifeMiles, Avianca's frequent flyer program From our existing portfolios in 9 countries with 18 issuing banks to an additional 4 countries in the Caribbean region.

Speaker 3

And finally, we signed a co brand agreement with Indian conglomerate Adani, serving 400,000,000 customers Let me now turn to new flows, again with a focus on how effectively we are delivering on our priorities. Total Newflows revenue was up 20% in constant dollars. Commercial volumes increased 9% in constant dollars To total $405,000,000,000 In terms of how we go to market, we are focused on adding commercial products To our existing consumer relationships, PayBank, a leading bank in Thailand, has renewed its relationship across debit and co brand as well as signing a new deal to launch a new business debit card to serve SMEs and micro businesses. Hog Seguro, a key Brazilian FinTech client already leveraging our consumer credit and prepaid and commercial prepaid products, We'll expand in the commercial space with the launch of Visa Business Credit for their base of 28,000,000 clients. As we do in the consumer space, we are also constantly working with commercial clients as a strategic partner to develop and deploy unique and innovative solutions.

Speaker 3

A recent example is with SAP, The global market leader in enterprise application software, which has signed a deal with us across multiple countries in Asia Pacific. We will integrate Visa's virtual card and business solution payment provider capabilities into SAP's business technology platform. SAP serves more than 46,000 customers across Asia Pacific. This deal will create an embedded finance solution for their customers To make B2B payments, helping to improve their working capital positions and enhance their supply chains. For Visa Direct, 3rd quarter transactions grew 20% and were $1,800,000,000 In Latin America, We had a bank client transition its on us domestic P2P transactions to an internal ledger system.

Speaker 3

And while it could be impactful to our transactions over the next several quarters, the impact to revenue is expected to be minimal. At the same time, for their other transactions, this client will continue to utilize our interoperability capabilities provided by Yellow Pepper. I am very excited about Visa Direct, particularly as we enter new markets and increase our cross border presence. Recently, we have expanded or entered several key markets, including in France with Lidya, The leading P2P provider with over 7,000,000 users. We renewed our issuance relationship and we have signed a Visa Direct deal To enable their users to top up their wallets using an eligible card.

Speaker 3

In Bolivia, with FinTech Libula's new app called Lula, Visa Direct will be enabling domestic P2P transactions within the app And Yellow Pepper will be providing Ilias directory services. In Mexico, With FinTech Alkemia Pay, Visa Direct will enable B2B cross border supplier payments For thousands of SME clients in industries including textiles, software, hardware and electronics Across multiple corridors. And we've also continued to expand corridors with important cross border partners. For example, Revolut with over 30,000,000 users has expanded its remittance service with Visa Direct to 89 markets after just launching in July of 2022. Similarly, TransferGo, a cross border provider in the UK Serving 6,000,000 customers have expanded its Visa Direct enabled corridors from 32 in 2020 to over 160.

Speaker 3

New flows continue to be an important part of Visa's growth story and our teams are effectively selling and activating our solutions. Now I will touch on value added services. Our go to market approach remains focused on 3 growth areas: deepening client penetration of existing products, expanding geographically and building and launching new solutions. Unlike our core business, our growth in value added services is often driven by selling a larger number of smaller solutions. This quarter, we succeeded in selling more than 300 new issuing services, 600 new acceptance services And almost 500 new risk and identity services, in some cases, even within the same client.

Speaker 3

Our sales teams continue to work day in and day out with our clients to understand and resolve their pain points and realize new growth opportunities. Altogether in the Q3, we generated $1,800,000,000 in value added services revenue, Up 19% in constant dollars. A couple of examples of new value added services to highlight this quarter. First, our partnership with PayUK. The account to account payments operator in the UK was recently announced.

Speaker 3

We will be piloting our new fraud capability, RTP Prevent, which is uniquely built for instant payments with deep learning AI models. Using RTP Prevent, we can provide a risk score in real time, so banks can decide whether to approve or reject a transaction on an OTP network. This is a great example of building and deploying entirely new solutions and our network of network strategy. 2nd, our recent announcement of our definitive agreement to acquire Cloud native issuer processing and core banking platform, Pismo. We believe that Pismo will allow us to strategically serve our clients Through additional capabilities with core banking ledger and issuer processing through cloud native APIs, Additional geographies with operations in Latin America, Asia Pacific and Europe And additional products with credit, debit, prepaid and commercial cards as well as connections to local networks, including PIX In Brazil.

Speaker 3

From a network perspective, issuer processing and core banking have become important elements to support issuers, activate card credentials and distribute value added services. The transaction is subject to customary closing conditions, including applicable regulatory reviews and approvals and is expected to close by the end of 2023. To wrap up, over the last few months, I have traveled across the globe, meeting with clients, partners and regulators, And I continue to see enormous opportunity and momentum. Our brand, capabilities, Innovation and partnership approach continue to position us well for Visa's future growth, but the most important aspect is our people. And with that in mind, I would like to welcome the newest member of our executive team, Chris So, who will become Visa's Chief Financial Officer on August 1.

Speaker 3

Chris brings to Visa more than 25 years of finance leadership experience from global high growth companies. His deep experience in finance and technology, plus His leadership in growing and scaling businesses will be extraordinarily valuable to us as we continue to drive growth and better serve our clients and customers around the world. Plus, as I'm sure you will soon learn, Chris is a real hands on business builder With a passion for technology and an intense focus on people who will fit in well with the culture of Visa. I've asked Chris to join the Q and A portion of our call today, but please remember he isn't our CFO for a few more days. Before the Q and A, Let me hand it over to Vasant to provide financial highlights for the quarter and our thoughts on the rest of the year.

Speaker 3

But first, Hassant, I know I speak on behalf of all of Visa and our investors that we are deeply grateful to you for your Standing strategic and financial leadership. I have worked shoulder to shoulder with Vasant for the past 8 years and I continue to be in awe of him. He is a world class CFO and if there is a CFO Hall of Fame, I am confident he will be a first ballot inductee. Vasant, we wish you all the best. So for likely the last time on an earnings call in your career, Over to you, Vasant.

Speaker 4

Thank you, Ryan. Good afternoon, everyone. Fiscal third quarter net revenues were up 12% And GAAP EPS up 25%. Non GAAP EPS was up 9%. In constant dollars, net revenues grew 13% And non GAAP EPS grew 11%.

Speaker 4

We have now lapped the impact of Russia. A few key highlights. In constant dollars, global payments volume was up 9%. Index to 2019, global payments volume was up 48%. U.

Speaker 4

S. Payments volume was up 6% year over year consistent with expectations and stable since March. Transactions growth has remained steady at pre COVID levels of 8%. Average ticket size is down 2%, largely due to declining fuel prices and the general moderation of inflation across multiple categories. Relative to 2019, U.

Speaker 4

S. Payments volume was up 54%. International payments volume growth was up 12%. The uptick in international payments volume Since the last quarter, is the result of lapping the discontinuation of Russian operations. Relative to 2019, international payments volume was up 43%.

Speaker 4

The cross border travel recovery continues at the pace we expected with volume ex intra Europe Indexing at 136 versus 4 years ago, a 6 point improvement from the Q2. Summer travel across most regions picked up, With travel in and out of Asia seeing strong gains, along with travel inbound to CEMEA and outbound from Europe. Travel into the U. S. Is still hovering at 2019 levels.

Speaker 4

Our new flows and value added services businesses Continue to grow at almost 20% in constant dollars. In the Q3, we bought back approximately $3,000,000,000 in stock At an average cost of $229.19 and distributed $937,000,000 in dividends. We also added $500,000,000 to the litigation escrow account, which has the same effect as a stock buyback. Now on to the details. In the U.

Speaker 4

S, credit grew 5% year over year, debit grew 6%, Generally in line with March growth rates post the uptick in January February due to lapping of Omicron in 2022. U. S. Card present spend grew 3%. Adjusted for fuel, we saw a significant price increase last year.

Speaker 4

U. S. Card present spend was up 5%. U. S.

Speaker 4

Card not present volume, excluding travel, grew 8%. U. S. Process transactions growth was stable at 8%. The step down in U.

Speaker 4

S. Payments volume growth since March was driven by a 2% decline in average ticket size. When we look at spend by category, Ticket sizes are declining most significantly in fuel and to a lesser extent in retail goods, travel and food and drug. As you know, fuel prices spiked last year due to the Ukraine war, travel prices spiked as the world reopened post Omicron, Goods prices spiked due to supply chain bottlenecks and commodity inflation. Excluding these four categories, Average ticket size growth is positive.

Speaker 4

Consumer spend across all spend bands from affluent to low spend remained stable since March. Our data did not indicate any behavior change across consumer segments. Putting all this together, we continue to believe that the primary driver of the step down in U. S. Payments volume growth since March is moderating inflation and that the consumer has remained resilient so far.

Speaker 4

Moving on to international markets. In constant dollars, International Payments volume growth rates were strong through the quarter in the major markets. Latin America was up 20%. Our CEMEA region grew 28%. We are now lapping the impact of Russia.

Speaker 4

Europe was up 10%. Excluding the UK, Europe volumes grew 23%. Asia Pacific, excluding China, grew 12%. Global process transactions were up 10%. Constant dollar cross border volumes, excluding transactions within Europe, We're up 22% year over year, up 49% versus 4 years ago.

Speaker 4

Cross border cars not present volume growth, excluding travel and excluding intra Europe grew 9% year over year and 74% above 2019. Adjusted for cryptocurrency purchases, cross border e commerce spending grew year over year in the low double digits, in line with pre COVID growth rates. Cross border travel related spend, excluding intra Europe, grew 34% year over year. The cross border travel, Excluding intra Europe index to 4 years ago went from 134 in March to 139 in June. Travel into Asia continued to improve, indexing at 118 for the quarter, up more than 10 points from Q2, while travel out of Asia was up almost 10 points to 107.

Speaker 4

Looking at Mainland China specifically, Cross border travel continued to improve but remains well below 2019 levels. Travel outbound from the U. S. To all geographies Continue to be strong in the mid-1.50s indexed to 2019. The inbound travel recovery remains sluggish, Still just under 2019 levels.

Speaker 4

While some of the mitigating factors eased this quarter, the dollar remains quite strong Relative to pre COVID levels. In Europe, excluding intra Europe, inbound and outbound travel remains robust, With the index for 2019 in the low 140s for outbound, improving 10 points from the 2nd quarter and in the low 150s For inbound, travel into Latin America and the Caribbean also remained very strong, indexing in the low 160s to 2019 levels. Travel out of CEMEA indexed in the 140s versus 4 years ago and inbound improved more than 10 points to the low 160s. Moving now to a quick review of 3rd quarter financial results. Service revenues grew 15% versus the 10% growth In 2nd quarter constant dollar payments volume, exchange rate drag was more than offset by business mix and pricing.

Speaker 4

As a reminder, 3rd quarter service fees reflect 2nd quarter payments volume growth, which was helped by lapping Omicron in fiscal year 2022. Data processing revenues grew 15% versus 10% process transactions growth. They have fully lapped the Russia impact and the key drivers of performance were value added services and pricing. International transaction revenues were up 14% versus a 22% increase in constant dollar cross border volumes excluding intra Europe. Revenue growth lagged volume growth, primarily due to declining currency volatility and exchange rate shifts.

Speaker 4

Other revenues grew 15%, led by pricing, consulting services and card benefits. Client incentives With 28.1 percent of gross revenues, in line with our expectations. Revenue growth was robust across our 3 growth engines. Consumer Payments growth was driven by stability in domestic volume growth and transactions as well as growth in cross border volumes. New flows revenue grew 20% in constant dollars.

Speaker 4

Commercial volumes were up 9% in constant dollars and 58% over 4 years ago. Visa Direct transactions grew 20%, and as Ryan mentioned, were impacted by a bank client that transitioned its domestic P2P transactions to an internal ledger system. While it could be impactful to transactions over the next several quarters, The impact of revenue is expected to be minimal. Value added services revenue grew 19% in constant dollars, driven by higher volume, strong advisory services and select pricing actions. GAAP operating expenses decreased 1%.

Speaker 4

Non GAAP operating expenses grew 10%, driven primarily by personnel expenses from headcount additions over the past year. Excluding gains from our equity investments of $85,000,000 non GAAP, non operating income was 37,000,000 benefiting from higher interest income due to rising rates. Our GAAP tax rate was 19.2% and non GAAP was 19.4%. GAAP EPS was $2 Non GAAP EPS was $2.16 Up 9% over last year, inclusive of a nearly 1.5. Drag from the strong dollar.

Speaker 4

We have signed a definitive agreement to acquire Pismo for $1,000,000,000 in cash subject to customary closing conditions. We will keep you posted on closing timing and financial impact. In May, we upsized our revolving credit facility to $7,000,000,000 and renewed it for 5 years. Through the 1st 3 weeks of July, U. S.

Speaker 4

Payments volume was up 6%, with debit up 6% and credit up 6%. Compared to 4 years ago, They are up 56%, 65% and 47%, respectively. Reg II has not measurably impacted volumes so far. In several key markets around the world, growth was in line with the 3rd quarter. Process transactions grew 10% year over year and up 54% about 4 years ago.

Speaker 4

Constant dollar cross border volume, Excluding transactions within Europe, grew 20% and was 51% about 4 years ago. Card not present non travel growth Was 72% about 4 years ago. Travel related cross border volumes were 41% over 4 years ago. Moving now to our outlook for the Q4. Growth in domestic payments volumes remained stable around the globe.

Speaker 4

As such, we're assuming recent trends will sustain in the U. S. And key international markets for the rest of the quarter. On the cross border front, The travel recovery trend has been steady and generally in line with our expectations so far for fiscal year 2023. The cross border travel index to 2019, excluding intra Europe, has been improving at a rate of 5 to 6 points each quarter.

Speaker 4

We are assuming this pace of recovery continues into the Q4. The region to monitor closely is Asia, especially travel In and out of Mainland China. On the cross border e commerce front, we're also assuming recent trends continue Adjusted for crypto related volatility. It is important to note that just as we saw in the 3rd quarter, Even as the cross border business continues to recover relative to 2019, the year over year growth rate will continue to slow down. Also, currency volatility is moderating, and we are now lapping very high currency volatility from the Q4 last year.

Speaker 4

Our value added services and new flows businesses have grown much faster than our consumer payments business. Sustaining faster growth rates for these businesses remains a critical priority. In the 4th quarter, We expect incentives as a percent of gross revenues to be between 27.5% to 20.5% To finish the year at the high end of the 26.5% to 27.5% range. When you pull all this together, we expect 4th quarter net revenue growth of around 10% in nominal dollars With minimal impact from exchange rate shifts. The sequential slowdown is driven by 3 factors: the quarter lag in recognizing service fees, The expected slowdown in cross border growth and moderating currency volatility lapping very high levels reached last year.

Speaker 4

As we indicated previously, non GAAP operating expense growth in Q4 will likely be another 2 to 3 points lower than Q3. Non GAAP results exclude certain acquisition related items from the Q4 last year. Non operating income will continue to benefit from the attractive rates we're earning on our cash balances. Interest income from cash will more than offset interest expense from debt by around $30,000,000 in the 4th quarter. Our tax rate is expected to remain in the 19% to 19.5% range in Q4.

Speaker 4

Assuming we perform as expected in the Q4, we will deliver low double digit net revenue growth and mid teens EPS growth in fiscal year 2023 despite concerns about a slowdown and an exchange rate drag. This once again demonstrates the resilience of our business, the large opportunity that remains available to digitize cash globally And the opportunity to accelerate our growth by developing vast new use cases while layering on additional value added services. To finish, this will be my last earnings call as CFO of Visa. I want to thank all of you for your trust and support. At all times, You've kept us on our toes with our nose to the grindstone.

Speaker 4

Hopefully, we've delivered for you. This is also my last call as a public company CFO. I started this journey in September 2000, almost exactly 23 years ago. To use a cricketing term some of you will understand, I did not hit a century of earnings calls. I fell as I entered the 90s.

Speaker 4

On October 1, I will be switching over to your side As a shareholder of Visa, cheering from the stands as Ryan, Chris and the team lead Visa to another double and triple. Thank you, Ryan. We've had a great run together. It's over to you, Chris. I'm going to miss my finance team and the wonderful people of Visa.

Speaker 4

And as far as the CFO Hall of Fame goes, I'm sure no CFO would invest in that business proposition. And now, Jennifer, it's time for some Q and A.

Speaker 1

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

Operator

You will be announced prior to asking your question. To ensure all questioners are heard, we ask that you please limit yourself to one question. Our first question comes from

Speaker 5

They have been close partners for yours and also issuers of Cash App, Visa cards on which they also benefit from interchange. And Ryan, you talked about the current partnership there. Any comments you have on the lawsuit will be helpful? And also just broadly, how should we think about the relationships with FinTech and TechChart? Thank you.

Speaker 2

Yes. Thanks for the question. We have a wonderful relationship with Block, a deep partnership across many different elements as I mentioned. As it relates to the lawsuit, There was some confusion in the market by the lawsuit. There's really nothing new here.

Speaker 2

The lawsuit is included in the MDL-seventeen twenty And thus the lawsuit itself is covered litigation under our share class structure. So I would really put it in the category of nothing new here. And all the way back to the beginning of your question, we deeply value our relationship with Block and feel great about the deep and extended partnership we have with them.

Speaker 5

Next question, Jordan.

Operator

Our next question comes from Dan Perlin with RBC Capital Markets. Your line

Speaker 6

is open. Thanks. Good evening. I wanted to just touch base real quickly on value added services from the standpoint of penetration for a second. I think it's around 20% or so of the company's net revenues.

Speaker 6

It's clearly yield enhancing. So it seems like a pretty large business, but Ryan, every time you talk about it, it sounds like there's so much room for growth. Hard for us to kind of pinpoint where you are in terms of penetration within your existing business. So any way you could frame that either anecdotally or quantitatively would be great. Thank you.

Speaker 2

Yes, thanks for the question. I mean the truth is we are at the beginning of the journey across all of our value added services businesses. They all have enormous TAM. We all have they have enormous runway in terms of the opportunity to continue to penetrate our Acceptance Solutions business, whether it's CyberSource or Verify or Visa Acceptance Cloud, I mean, enormous amounts of runway there. In issuing, We've talked about the opportunity we have now with Pismo when we close on that deal and the same thing with DPS, Risk and Identity Advisory.

Speaker 2

I mean, It really is they're all businesses that have enormous TAM. We're in the very early innings of our penetration and we don't see in any of those businesses Anywhere close to running out of runway anytime.

Speaker 6

Thank you.

Operator

Next question, Jordan. Our next question comes from Craig Maurer with Feet Partners. Your line is open.

Speaker 7

Craig, are you there?

Speaker 8

Yes. Thanks for taking the question. Sorry, I wasn't quick enough on the unmute button. So I wanted to ask about the loss of what I think I heard was a Visa Direct client In LatAm and why the transition to an internal system for them and that leads to my follow on, which is, Can you discuss the trends you're seeing globally in terms of domestic payments Moving away from or back to domestic networks, your comments in the beginning of the call seem to indicate that there might be an acceleration Toward the global networks to take advantage of what has clearly been greater investment levels into the capabilities. Thanks.

Speaker 2

Hey, Craig. Thanks for the two questions. I'll take the second one first. We are continuing to see the benefits of our investment all around the world. As I mentioned in my prepared remarks, we're seeing issuers, consumers shift share to Visa, shift their preference to Visa.

Speaker 2

And It happens in different ways in different countries versus the domestic schemes, but it is coming back to what you said, which is our ability to consistently invest In security features and tokenization and new digital use cases, we believe is what's helping us, win in that space. If you go back to the first part of your question, these types of things are going to happen when you're building out a new platform like we are in Visa Direct. It's still the very early days of building out Visa Direct. We're expanding in geographies and use cases. And as different partners Use Visa Direct and they start to try it for different use cases.

Speaker 2

They'll find some of them work great and other ones They'll find opportunities to use it differently. In the case of the situation in Latin America that I mentioned, they Started the journey of what they were working on using Visa Direct. They found it to be a more efficient way to get going in their journey and then they found that they built an internal ledger that they didn't have originally. But as I mentioned, they're going to continue to use our services for a number of things that they do. And listen, I think as we all talk over the quarters years as we build out this platform, there's going to be ebbs and flows.

Speaker 2

There's going to be use cases that grow faster than others and things that stick and others that don't. And That's what building a new global business that has the reach of our platform is going to have.

Speaker 5

Next question, Jordan. Our

Operator

next question comes from Sanjay Sakhrani with KBW. Your line is open.

Speaker 9

Thank you and congratulations, Vasant. Despite the concerns of choppy economy and disinflation, Vasant, you mentioned when we look at the July Trends and obviously the trends in general over the course of the year, they've been very encouraging. And you mentioned the different categories. But as we look across the next 12 months, Anything to parse out or think about in terms of the comps or how you see things playing out as we get maybe even preliminary views on 2024?

Speaker 4

Thanks, Sanjay. Yes, I mean the general term we've used all along is stability. And we think things are still very stable. You look at transactions growth, it's been very stable in the U. S, Around 8%, if you just adjust for the Omicron uptick we had last quarter and you go back to Pre COVID trends or 1st quarter trends, transactions growth has been very stable.

Speaker 4

Clearly, some of the change in trends we pointed to ticket size, I don't think I want to get into talking about Next year, we'll leave that to Ryan and Chris in October, which is when we normally do talk about next year. But more in the more near term, the Q4, the biggest hit to ticket size has been fuel and fuel Comparisons are going to moderate and so that should help us a bit in the Q4 and that's reflected in our expectations. In general, I would say the trends we are seeing across the board Are unchanged from where they've been for the past several months.

Speaker 5

Next question, Jordan?

Operator

Our next question comes from Jason Kupferberg with Bank of America. Your line is open.

Speaker 10

Thanks, Vincent. Vasant, best of luck to you. I wanted to actually ask about surcharging. I know Visa recently lowered the cap on the credit card surcharging to 3% from 4%. Just wanted to know, is this In response to a trend of more merchants employing surcharges, whether that might be in a compliant or a non compliant manner, if so, are there any

Speaker 2

Feel great that consumers get surcharge, but of course, in certain jurisdictions in the U. S. And around the world, merchants have the ability to do that and some choose to do it. Many choose to do it and then they choose to pull back on it because it's not a great customer experience. The small adjustment that we made that you referenced was 1.

Speaker 2

We're just making sure that when consumers do get surcharge, it's something that's fair and equitable and that was the purpose of the change.

Speaker 5

Next question, Jordan.

Operator

Our next question comes from Bryan Keane with Deutsche Bank. Your line is open.

Speaker 10

Hi, guys. And Vasant, since it's your last earnings call, I got to ask you about incentives. You got to go out on an incentives question at least. So As incentives look like they're going to be towards the higher end of the range, just the puts and takes that pushed it towards the high end, was there more Deal activity this fiscal year or different volumes that changed the incentives towards the high end?

Speaker 4

Yes, I mean it's well, thanks for saying those nice things. In general on incentives, They were in line with what we expected. So there were no surprises there. And incentives, everybody focuses on the percentage. If you look at what really counts, which is net revenue growth, we had healthy net revenue growth in the quarter.

Speaker 4

Even with the exchange rate drag, we were almost 12% And the exchange rate drag would have added another point. If you look at yields, Net revenue yields are higher than they were a year ago. We did have some renewals happen earlier than we expected. So We did have some renewals come into this year and Q3 that we might have thought would happen next year, but we're happy about that. We're always happy to renew clients even if we have to do it a little earlier.

Speaker 4

So all in all, no surprises there.

Speaker 5

Next question, Jordan.

Operator

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

Speaker 7

Good afternoon. Thanks for taking my question and welcome Chris and Vasant will be missed. I wanted to follow-up on the prepared remarks out on the partnership with Pay UK around RTP Prevent. Can you elaborate a bit more on that? These are the types of value added services.

Speaker 7

I know we've all Been eagerly waiting to see. So can you talk a little more about sort of what the scope is of the pilot and Exactly how that service works and how you'll be monetizing it, if not in the pilot, then over the longer term? Thank you.

Speaker 2

Hi, Lisa. Yes, thanks. So it is one of the things we've been talking about is how we can build Value added services for new networks specifically for RTP as it starts to grow and expand around the world. So I guess how it works to the core of your question. So first of all, what we've done is we've built a real time risk score.

Speaker 2

We've built it uniquely for instant payments Where there's often unique cases of fraud in terms of how they work. We built it using deep learning AI models. And what it does is it enables banks to be able to decide whether to approve or reject a transaction in real time, Which is a capability that most banks and most real time payments networks around the world have been very hungry for. It's Yes, it's a score from 1 to 99. It comes with an instant real time code that explains the score.

Speaker 2

What it does is it leverages our proprietary data that kind of we have used to enhance our own risk algorithms as well as the data that we see on a lot of our Payment platforms, including Visa Direct. And one of the benefits of us bringing that to market is It integrates with the bank's existing fraud and risk tools because we're often providing these types of risk scores to banks and they're ingesting them from us. It directly integrates into their fraud and risk tool. So the real time information, their systems know how to use it. It can be automated into their decisioning algorithms and those types of things.

Speaker 2

So, you think about it, if you want to if you back way up, you think about it, it's similar to our Visa advanced authorization service that we offer on VisaNet. But we've built from the bottoms up clean sheet of paper, a customized solution, leveraging deep learning AI models And integrated that directly into the bank system so that they can ingest that in real time. The pilot is just getting going. It's very early days, so we'll report back as we learn more and hopefully we'll have more examples like this to talk about around the world.

Speaker 1

Next question, Jordan.

Operator

Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.

Speaker 11

Thank you and congratulations gentlemen. Also Chris welcome and Vasant thank you for your help and partnership over the years. I wanted to ask about value add services. Revenue yield there was quite solid, and I want to ask what's Leading to that, would you call it sort of structural at this point or is it more episodic Like in the past, you had benefits from say FX volatility or incentives, things like that. So that's the question.

Speaker 4

Yes, FX volatility would not affect value added services. We don't count our Treasury revenues in value added services. So value added services are benefiting from structural and secular things. First, it's deepening our penetration of existing clients. So it's a concerted effort to Sell more services to existing clients.

Speaker 4

2nd is some of the services were not operating globally. We are now making these services available around the world, so it allows us to clearly increase the scope of the market. And then 3rd, as you know, we've been adding services over time. So this is a long term growth engine for us. Our goal is to continue to grow it at a very hefty clip.

Speaker 4

And think about it as to get a transaction And the more services you can layer on and the more value you can add to the transaction, the more yield you can get on it. So it's very much a growth engine, 1 of 3. And we think it can grow for a very long time.

Speaker 5

Next question, Jordan.

Operator

Our next question comes from Ken Skowalski with Autonomous Research. Your line is open.

Speaker 12

Hi, good evening, everyone. Thanks for taking the question. I just wanted to ask about cross border. Obviously, Visa is facing some headwinds on the yield side in this business. Can you just talk about

Speaker 11

how much more of a

Speaker 12

headwind you think this is going to be in fiscal 4Q and fiscal 1Q of next year compared to What we saw this past quarter. Thanks.

Speaker 4

Yes. So just to correct this, the way to think about value added services yield and I know you're looking at the revenue and dividing it by the volume. Is there the yield on the transaction and then there's the yield on The exchange rate translation services we provide, where the yield has gone down Because it was very high last year is on the exchange rate translation service, what we call our treasury revenues Because currency volatility last year was 30% to 40% higher than it is right now. Currency volatility right now is a little higher than the long term average, But last year, it was at extraordinary highs. In fact, in the Q4, we will lap some of the highest levels of currency volatility reached Last year, and based on where volatilities are today versus last year, volatilities are down almost 40%.

Speaker 4

So it's a sizable move. So any yield difference you see in that line is because of treasury revenues. It's not from our core Cross border yields, which remain very steady. It's going to fluctuate based on currency volatility And really it's still decent. It's just that it was very high last year.

Speaker 5

Next question, Jordan?

Operator

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

Speaker 13

Guys, thank Visa right now is net cash for the first time, I think since 2016, since pre the Visa Europe deal and gross debt below one time. I know your target generally is 1 to 1.5 times and the buyback frankly was a little bit light also tracking at about 76%. Last year, you paid out about 76% of net income in buybacks. So I think you need to do a pretty big catch up in this quarter. So just curious to hear how you're thinking about capital allocation.

Speaker 13

I guess, Ryan, the multiples lower versus the market than it's been in a while. Do you see this as a good opportunity for buybacks to pick up pace? Or are there other reasons why you'd want to allocate capital different ways guys? Thanks again.

Speaker 4

Yes, I'll start and maybe Ryan can add. There is no change in capital allocation strategy which is pay a dividend. The dividend has a certain set of Criteria we use between to certain percentage range of our EPS, it gets to a certain yield And it's almost $1,000,000,000 a quarter now. We do buybacks generally out of free cash flow. We have historically not borrowed To do buybacks and clearly our first priority is to invest in the core business and to do acquisitions that make sense and as you can see We've been doing both.

Speaker 4

In terms of the volume of buybacks, remember that we did contribute $850,000,000 to the escrow account, Which is also equivalent to a buyback. So if you count that in, we are probably around 9,000,000,000 or so in buybacks, if I remember right, so far this year. Clearly, we have more capacity if we want to do buybacks. We've always said that if we felt that there was a disruption in the market and stock was trading at levels that did not reflect Intrinsic value, we would be willing to step up our buybacks and borrow money if that made sense. So obviously, we'll keep you posted if any of our plans change.

Speaker 4

Ryan, you may want to add some things.

Speaker 2

Nothing to add. Your very well said comments, Prashant.

Speaker 5

Next question, Jordan.

Operator

Our next question comes from Andrew Jeffrey with Truist Securities. Your line is open.

Speaker 14

I appreciate you taking the And, Vasant, best of luck to you. It's been a pleasure. Ryan, I wanted to ask about Some of the commercial efforts that Visa is making, I know it's a pretty important driver of sort of new flows, the non consumer part of your business growth. And this quarter, it was Little bit slower than overall volume. Can you just comment on the pipeline and what you see as the opportunities in Commercial and how we should think about that business growing over the next few years?

Speaker 2

Sure. Thanks for the question. We remain very excited about B2B in general. It's an enormous TAM and we're just kind of scratching the surface. And we're very excited about commercial specifically.

Speaker 2

We have The largest commercial business on the planet as we've talked about in the past, I think it's in the neighborhood of $1,500,000,000,000 of payment volume. And we've been releasing numbers of innovations into the market in that space. We've released Visa Spend Clarity, which helps Our clients with expense management, Visa Commercial Pay, which helps with control, there's a lot of things we've done around enabling acceptance around the world. So we feel good about it. As it relates to the volume, Some of the dynamics that we're seeing in the commercial space are similar to what we're seeing in the consumer space.

Speaker 2

You have an impact from fuel and those types of things. But As we think over the next 1, 2, 3, 4, 5 years, we've never been more excited about the opportunities that we've got and we've never felt better about that we're putting into market and we're getting great feedback from our clients as well.

Speaker 5

Next question, Jordan? Thank you.

Operator

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

Speaker 15

Hi, thanks for taking my question and congratulations to you, Vasant. I wanted to ask for a follow-up on Reg II. You mentioned not seeing any impact yet. I'm just wondering from your vantage point whether You're now seeing that routing choice more broadly available to kind of all merchants or are we still in the midst of an implementation and rollout? And then just quickly and separately, your tax rate guidance would imply no impact from the recent Brazil tax flow changes that did impact Mastercard, but I'm just double checking that that's the case.

Speaker 2

Why don't I I'll take the first part and let Hassan take the second part. It's early days with Reg AI. There's been a lot of work that happened ahead of The July one date, but there's also work still happening. As it relates to our views on our ability to Compete in the space where we continue to be very excited and confident about our ability to compete. We think that many merchants are going to still choose to route to Visa.

Speaker 2

As you all know, merchants bear liability for fraud in the e commerce space. So when they're making decisions, it's not just a cost based decision. And We bring a lot to merchants in terms of the way we help them with managed risk. We have advanced fraud tools, Advanced risk scoring capabilities. And as you know, we also have the product functionality enabled by dual messaging to enable a lot of use cases that are key in the e commerce space.

Speaker 2

So We are we feel very good about our ability to compete and there's been a lot that's going to happen over the course of the next many months quarters and we'll keep you posted on how it evolves.

Speaker 4

Yes. On the Brazil topic, Uchnot and Mastercard, what was unique to them, really no change From our standpoint as it relates to Brazil.

Speaker 5

Next question, Jordan?

Operator

Our next question comes from Timothy Chiodo with Credit Suisse. Your line is

Speaker 16

Great. Thank you for taking the question, Vasant. Thank you for always being a gentleman for all the help over the years. I want to dig a little bit. Actually, this question is for you, Vasant, on the gap between nominal cross border volumes ex Inter Europe and international revenue on a nominal basis.

Speaker 16

You talked about the FX volatility part plenty. I was just hoping you could dig into a little bit about the other factors that drive that gap, meaning

Speaker 4

volatility driven because of the very high volatilities we had last year and more normal volatilities we're getting to now. Beyond that, there's some FX impact obviously. That line is always affected by FX more than any other line in the P and L. And other than that, there are always mix factors. It depends on corridors and all that.

Speaker 4

There's always some impact from that, but I would say the bulk of it is the 2 we talked about volatility and exchange rates.

Speaker 1

Last question, Jason.

Speaker 4

Thank you.

Operator

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

Speaker 17

Hey, thanks so much. Last question. So I won't ask you for Vazante. That's my gift and way to thank you. So I'll spare you A macro question.

Speaker 17

I'll ask Ryan instead on Pismo, if that's okay. Ryan, you mentioned I think you mentioned shipping products faster in your upfront remarks. That made me think about Pismo a little bit. Is buying Pismo an indication in any way that Visa is more Interested in owning tech and infrastructure that touches products, the consumer and that gives you a chance to develop products faster. Just I'm curious to get your thoughts on that.

Speaker 17

It feels like you're widening the swim lane a little bit here. Is that fair to say? Would love your thoughts. Thanks.

Speaker 2

Hey, Tien Tsin. What we're trying to do is serve our clients. I mean, that's what it all starts with. And what our clients are looking for is they're looking for Innovative processing solutions that are increasingly looking for cloud native API based services. Processing is certainly one of those.

Speaker 2

We've heard from clients around the world that many of them are embarking on digital transformations of their processing platforms. And so when we hear that from our clients, We immediately get to work on how we can help them, how we can serve them. We went through a global process looking at All the different players around the world, and we identified Pismo as the best. We literally studied hundreds of companies. We met with dozens of them.

Speaker 2

And after a deep thorough scan, we identified Pismo. And yes, Pismo is the kind of tech platform, that you were alluding to, that is the type of tech that our clients are increasingly looking for. And in this example, it was an opportunity for us to buy The leading player that can help clients serve their customers, expand globally and deliver a lot of new leading edge use cases

Speaker 1

e mail our Investor Relations team. Thanks again and have a great day and please join me in wishing Vasant the best.

Operator

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

Powered by Quartr
Earnings Conference Call
Visa Q3 2023
00:00 / 00:00