Visa Inc. (V) Q4 2012 Earnings Report, Transcript and Summary

Jack Carsky - Global Head of Investor Relations Joseph W. Saunders - Executive Chairman Byron H. Pollitt - Chief Financial Officer and Principal Accounting Officer

Robert P. Napoli - William Blair & Company L.L.C., Research Division Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division Gregory Smith - Sterne Agee & Leach Inc., Research Division Jason Kupferberg - Jefferies & Company, Inc., Research Division Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division Julio C. Quinteros - Goldman Sachs Group Inc., Research Division Bill Carcache - Nomura Securities Co. Ltd., Research Division Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division Bryan Keane - Deutsche Bank AG, Research Division David S. Hochstim - The Buckingham Research Group Incorporated Kenneth Bruce - BofA Merrill Lynch, Research Division Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

Welcome to Visa Inc.'s Fiscal Q4 and Full Year 2012 Earnings Conference Call. [Operator Instructions] 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 to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.

Good afternoon, and welcome, everyone, to Visa Inc.'s Fourth Fiscal Quarter and Full Year 2012 Earnings Conference Call. With us today are Joe Saunders, Visa's Chairman and Chief Executive Officer; and Byron Pollitt, Visa's Chief Financial Officer. This call is currently being webcast over the Internet. It can be accessed on the Investor Relations section of our website at investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. A PowerPoint deck containing highlights of today's commentary was posted to our website prior to this call. Let me also remind you that this presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are not guarantees of future performance. And as a result of a variety of factors, actual results could differ materially from such statements. These include setbacks in the global economy and the impact of new financial reform regulations. Additional information concerning those factors is available in the company's filings with the SEC, which can be accessed through the SEC's website and the Investor Relations section of the Visa website. For historical non-GAAP or pro forma related financial information disclosed in this call, the related GAAP measures and other information required by Regulation G of the SEC are available on the financial and statistical summary accompanying our fiscal fourth quarter and full year earnings press release. This release can also be accessed through the IR section of our website. And with that, I turn the call over to Joe.

Thanks, Jack. And as always, thank you all for joining us today. Let me begin by saying that our hearts and thoughts are with the people on the East Coast of the United States who are now recovering from Hurricane Sandy. Many of our clients, our employees, our partners and investors like you live in affected areas. And we hope that you, your families and your neighbors are all safe and moving toward a full and speedy recovery. Visa closed out fiscal 2012 with a solid fourth quarter, delivering net operating revenues of $2.7 billion, a 15% increase over the same period last year. Adjusted diluted earnings per share for the fourth quarter were $1.54, an increase of 21% over the prior year quarter. The adjustment in diluted earnings reflects the impact of a $627 million increase in net income during the fourth quarter from the reversal of tax reserves and accrued interest associated with our covered litigation. This was due to the withdrawal of the notice of proposed adjustment by the IRS during the quarter. Byron will provide additional commentary. Revenue gains for the quarter were driven by particularly strong payments volume growth for credit products in the United States, as well as continued expansion of our core business and growth of processed transactions in international markets. Visa also delivered strong performance for the full fiscal year. Net operating revenue in 2012 was a record $10.4 billion, a 13% increase over 2011. Adjusted net income was $4.2 billion, a 19% increase over the prior year. Full year adjusted diluted earnings per share came in at $6.20, 24% ahead of last year. Now let's turn the discussion to what's ahead in 2013. Byron will get into specifics on broad guidance for fiscal 2013, but we are reaffirming our commitment to…

Thank you, Joe. I'll begin with some observations and callouts. First, as Joe mentioned at the outset, we reported the quarter on an adjusted basis. We were recently notified by the IRS that the NOPA, or Notice of Proposed Adjustment, in connection with the deductibility of our litigation payments made in 2008, had been withdrawn. As a result, we reevaluated and reversed all previously recorded tax reserves and accrued interest associated with all covered litigation expense previously recorded. This increased net income for the quarter by $627 million. Second, U.S. revenue growth continues to be supported by solid credit payment volume growth, although our 6 consecutive quarters of double-digit growth were interrupted as the September quarter clocked in at 9%. Through the 28th of October, however, credit payment volume growth has comped at an 11% rate, a notable rebound, reflecting a month-to-month volatility dynamic we've seen more of recently. Third, with 4 quarters of lower U.S. debit interchange and 2 quarters of the new debit routing rule behind us, the impacts have been manageable. Aggregate U.S. debit posted a negative 6% growth rate in the fourth quarter versus a negative 9% in the third quarter led by Interlink payment volume, which was off 48% versus 54% in the third quarter. While we are pleased our mitigation strategies are working as planned and are consistent with our expectations, we would caution that the U.S. debit environment is still evolving. Finally, as was the case last quarter, the all-in impact from U.S. debit regulation, which includes restructured pricing, incentives, other mitigation strategies and volume loss, cost us about $0.04 in EPS for the quarter. Management's view of the future effects have been incorporated into our guidance. Now let's turn to the numbers. As is our practice, I will cover our global payment…

[Operator Instructions] Our first question comes from Bob Napoli of William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: I had a question on your new CEO starting tomorrow, Charlie. I guess why -- what led you to Charlie Scharf? I mean, this is a dynamic time technology business, international growth. Charlie's, everything we can tell, is a very strong executive but more of a U.S. Bank guy. What were the key choices in selecting Charlie and going outside the company today versus internal?

Well, as I mentioned in my comments today, he's a dynamic executive, he has done well. He understands our business. He's been a client. He has been on our board. And if you remember, he was on the board of this company for 3 years. He has more than a fleeting familiarity with Visa. He is very familiar with the staff at Visa, having interacted with many of them for a number of years. He has run large global operations in the past. And while he's not a technologist, per se, he's run large organizations that depend very significantly on technology. We also, as you remember, have parsed our company in a way where we have focused on technology simultaneous to what we do in our core business. And there has to be a recognition that our core business is the -- is what's feeding this engine and what's creating the revenue and the cash flow that allows us to invest. We have an extremely strong technology organization. We've hired a number of extraordinary individuals over the last 2 or 3 years. We're very, very confident that, that organization has the ability to take -- to continue to take us forward. And, in fact, I think you'd have to admit that vis-à-vis other companies in our space, we're way out front, and we don't intend to lose that. So thanks for asking the question.

Our next question will come from Sanjay Sakhrani of KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: Just one of the beauties of Visa's business model is kind of the scalability. And just in looking at your operating margin guidance, it seems like we have another year in 2013 of relatively modest operating margin expansion. Could you just talk about the dynamics that kind of preclude that from happening? And then specific -- one just callout or clarification. I was wondering if there was a callout on the other revenue line, because that was up a little bit?

The -- with regards to operating margin leverage, we have been kicking up the pace of reinvesting, particularly in our growth initiatives that are -- that really won't begin to drive revenue in a meaningful way until 3 and 4 and 5 years out. And you can look at mobile, V.me. And so what we have done up to this point is invest aggressively in new office expansions and deploying more account executives serving clients in country, all of which drive margin expansion, which, as you've noticed, has moved from 46%, which seems like a lifetime ago, up to 60%. And as more of our investment or acquisitions are much more forward-looking, there will be more of a lag between when that'll show up in operating leverage expansion versus pure investment in the core that leverages the -- completely the VisaNet platform. With regards to other revenue, the reserves associated with the release of the FIN 48 expenses that we had recorded associated with the NOPA, a part of that was -- part of those reserves were recorded in other income. And as we released those reserves, they showed up in that column.

Our next question will come from Greg Smith of Sterne Agee. Gregory Smith - Sterne Agee & Leach Inc., Research Division: Byron, just 2 quick questions on the 2013 guidance. Is there any pricing -- are there any pricing increase assumptions in there? And the second one is just, can you reiterate what you said on marketing? Will we actually see the first half heavier than the second half or just more of a skew compared to 2012, please?

Can you repeat the last question again? Gregory Smith - Sterne Agee & Leach Inc., Research Division: Just the total marketing spend, you called out that the -- you said there would be more of a skew to the first half. Were you talking just total absolute dollars heavier in the first half than the second half? I just wasn't clear on that.

Yes. So -- yes, let me deal with that one first. There was a -- if you look at the total amount of marketing spend that we incurred in the fourth quarter, it was $271 million. That was 31% of our entire year's marketing budget. And what we have in marketing is a -- this year, is a percentage and dollar weighted much higher to the fourth quarter or to the second half. And on a percentage basis for next year, we expect to see a better balance, a more even -- it won't be 50-50, but there -- it'll be much more in balance between what is spent in the first half and second half. And even though you asked that question in the context of marketing, let me broaden that and say that, that should hold true for our entire operating expenses. We were much more second half weighted this past year than we expect to be in the year to come. And I'm sorry, your first question was? Gregory Smith - Sterne Agee & Leach Inc., Research Division: In price increases.

Price increases. I would say that there is very little in the way of pricing built into the coming year. And in fact, we are giving back some effective pricing as a part of our response in the U.S. debit arena. So the revenue growth for next year is going to be delivered the good old-fashioned way, by driving hard against payment volume, not only in the U.S. but in the Rest of World in particular.

Our next question will come from Jason Kupferberg of Jefferies. Jason Kupferberg - Jefferies & Company, Inc., Research Division: Just wanted to get a general update on the e-commerce business in terms of either your percent of volume or percent of revenue or growth or whatever metrics you can provide? And some color on to what extent V.me can accelerate this and perhaps in which time frame? And then just a quick clarification for Byron. What caused the jump up in other income here in Q4?

You go first.

Okay. So with regards to other income, this was -- it was principally driven by 2 things. The release of reserves, which are related to the reversal of the NOPA reserves on the IRS situation that clarified itself this past quarter. A part of the -- the vast majority of those reserves are taxes. But when you are put into a situation where you potentially have to pay back taxes, then you have an interest charge. And that's -- that interest charge was the source of the release in reserves that hit that column. In addition, we had some insurance recoveries that occurred that quarter, and that's why those popped up. On the e-commerce, with regards to the percentage of our business, we don't have an update on that for the moment. But this is our fastest-growing channel across the company globally. And within that e-commerce channel, the fastest-growing form factor is mobile. And this is why we have put such emphasis on V.me, which is particularly suited for the mobile form factor, and why we have put such strong focus on mobile strategies that go far beyond NFC and are global in scope.

Our next question will come from Tien-Tsin Huang from JPMorgan. Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division: I got 2 quick ones maybe. Just on the rebate line, that was nicely lower than we expected for the quarter. I'm curious for next year, the line of sight into the 18%, 18.5%, how much of that step-up is sort of signed based on your deals that you've already renewed or recently won versus anticipated deals? Just trying to get a better sense of conservatism versus reality there. And then secondarily on debit, I know there's a little bit of improvement in October. How much of that is paved in -- from the other mitigation strategies versus just macro or new wins? That would be great.

Okay. So on the incentive side, I would say, first of all, that the drivers are almost as much Rest of World contracts that a number of which -- a meaningful increment of which have already been signed and will begin annualizing at a higher incentive rate going into next year. And we've already -- and so that's one major driver of the incentive increase. The other major driver is that we're only 2 quarters into the routing rule changes in U.S. debit. And as a result of that, we've got a building momentum of agreements that we are signing with merchants and acquirers. And that also will -- has yet to annualize in the coming year.

Our next question will come from Thomas McCrohan of Janney.

Can you expand a little bit about the routing agreements that are still being signed with the merchant community? Just give us a sense of how those are going to be structured and how they're going to be flowing through the income statement?

Well, what I would say is 2 things. These agreements are very much performance-oriented agreements. They -- for the most part, they only pay out incentives if the volume is delivered. Now I think it's important to emphasize that the agreements, themselves, don't guarantee volume. They incent it. If the volume is there, the incentives will be paid. And if they aren't, they aren't. And so there is -- to a certain extent, there is a degree of variability with regards to how much incentives will be paid out and it will be completely tied to the volume delivered. And then we are still, as I said before, on a path of signing additional merchants with these agreements, so we do expect them to be not only performance-based but to grow in number as the year unfolds. The way these are booked into the income statement is virtually 100% contra-revenue incentives.

Our next question comes from Julio Quinteros of Goldman Sachs.

Just a quick question on kind of decomposing the EPS growth rate. I'm understanding where the revenue growth is and the target for the margins. If you think about the buyback that you guys have currently coupled with your lower tax rate, is there some proportions that we should be thinking about in terms of how much of the buyback is built into the EPS growth? And then also the tax rate, I think you say was in the 30% to 32% range, is that correct?

Yes. So, Julio, I'm going to let you do the math. What we've done is given you the -- given you all the metrics that we typically give you at this point of time. The -- clearly, there is a dynamic with the double -- low-double-digit revenue growth and the operating margin is -- will be the major contributor. Tax, once again, will allow us to add a little octane to the EPS growth. And then as you have noticed, we're very disciplined repurchases -- repurchasers of our stock over the course of the year. We also have a habit of readdressing the opportunity for buyback at every single board meeting. So today, as we enter into the fiscal -- new fiscal year, we have $865 million of previously authorized but unspent open to buy on share repurchase. We have $1.5 billion new program that was just announced. So that gives us a little over $2.3 billion of open to buy. And then, of course, later in the year, should circumstances warrant, we have the opportunity to go back to the board and ask for additional share repurchase opportunity. Recognize, however, that the later in the year that the share repurchases occur, the corresponding lower impact they will have on a given year's EPS.

Our next question will come from Bill Carcache of Nomura.

Joe, some of the U.S. data that we've seen shows a clear consumer preference for PIN over Signature. I wonder if you could comment on whether that's, in fact, what you're seeing as well; and if so, what you attribute that to? And then if you could just kind of share your thoughts on how strategic you see the role of U.S. debit in the context of your suite of payment products, now that it isn't the growth driver that it once was?

So we're -- I suppose we're in a bit of a odd position to comment on this in one sense because with regards to PIN, thanks to a regulatory change, a substantial part of our PIN market share was gifted to our competition. And so it's a little hard for us on the margin to comment on the PIN. However, on the Signature debit, or what we refer to as Visa Debit, I can tell you that our business has, since the implementation of the rules, I think in prior quarters, we have experienced solid mid-single digit growth. And that growth rate is on balance, drifting a little north in the most recent quarter.

Our next question will come from Rod Bourgeois of Bernstein. Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division: Okay, great. Yes, in terms of the way growth trends are generally playing out in the month of October, MasterCard today indicated growth improvement outside of the U.S., and generally, stability in the U.S. Are you taking somewhat of a more cautious stance on the recent growth trends, or is your view fairly consistent with the way MasterCard characterized it earlier today?

Well, they have an eloquent way of stating things, as you've mentioned before. But I wouldn't say we're copying MasterCard. I'd say our growth in the United States, particularly in the credit business, which is our highest-yielding business, is significantly stronger than any of our competition, and it continues to grow. And I mentioned that in my remarks earlier. We have strong growth outside of the United States as well. MasterCard deals in Europe, and we don't. They have quite a bit of strength in Europe, but our Asian and Latin American businesses are growing at very robust rates. We continue to believe that we'll have more than 50% of our revenue coming from outside the United States in a very short period of time. I think that there is tough competition to deal with. I mean, I don't think there's any question about that, but we're doing very well. And in the parts of the world in which we do business, we are competitively advantaged, and we intend to maintain that.

Our next question comes from Bryan Keane of Deutsche Bank.

Just looking at the Rest of World, it was a little bit lower than we expected. I think you mentioned maybe Asia was -- and obviously looking at the numbers, it looked like Asia was a little bit slower. But can you talk about the Rest of World? Was that all economy that's causing the deceleration? Is there any contract losses we should know about? And then secondly, on the international revenue growth, it was a little lower than we expected. Byron, maybe you can just help me through that again because I know cross-border was up 7%, so it's a little bit below cross-border growth. And usually, international revenue growth sometimes is above cross-border.

Okay. So I would say in looking over the Rest of World that there were no contract losses material to speak of. In fact, I can't even think of one. So it's much more economic. And as we look at kind of the cross-border as well as the domestic spend inside the Rest of World countries, both of them put on the brakes a bit. Now recognize, Brian, these are still, for the most part, robust growth rates with that we would love to aspire to here in the United States. But in terms of feeling light there, at least in the fourth quarter, there was a bit of a downshift that's -- I think it's economically driven. And with regards to just -- I know 4 weeks does not a trend make, but October was a bit encouraging as it looks like there was a bit of a bounce back in the month of October as it relates to Rest of World cross-border, as well as Rest of World processed transactions, both of which we have real-time visibility too. With regards to international revenue. Let's see. We had nominal cross-border growth of 7%, and we had international fee growth of 5%. And if I look back over the last 3 or 4 quarters, there is always kind of plus or minus 2 or 3 percentage points of noise. I don't think there is any particular callout as I look at the drivers of international fees. It's just -- so I think we're pretty close to the nominal cross-border growth and no real callouts.

Our next question is from David Hochstim of Buckingham Research.

I wondered can you just maybe put a little more color on what you're seeing in the way of spending in Asia and the U.S.? Any changes in behavior, consumers or corporate customers in terms of the spending mix plus T&E?

There has been a clear increase over the year credit spending of more affluent people. A lot of what's going on even in the U.S. economy is driven by consumer spending, as I'm sure you know as well or better than I do. And I think that most of these things have exhibited some sustainability. There are different blips in a few countries around the world and in Asia in particular that are associated with specific events. Some of the noise between China and Japan has hurt some of the volume between those 2 countries in the cross-border volume and the payment volume in particular. And there have been other examples of similar situations. On the bias, though, things are proceeding as well as we expected given the overriding macroeconomic situation. And we're very happy where we wound up in 2012, including the fourth quarter, and we'll have to go from there. As Byron said earlier and as I said, we can't totally avoid what's going on in the global economy. But I think that the -- we're certainly positioned to do well next year.

Our next question is from Ken Bruce of Bank of America Merrill Lynch.

My question relates specifically to V.me, and I recognize that it's early days. You gave some very encouraging information earlier. I was wondering if you could maybe provide some insight as to what you think it will take to close the gap on the remaining top 10 issuers? And separately, if you think that either 2013 guidance already incorporates some of the pickup in spending on V.me, or if you think that's really more of a 2014 and forward event, please.

Well, the answer to the last part of the question first, I think, is more of a 2014 event. I mean, going back to the Internet, there were $327 billion spent on the -- or, excuse me, there was $226 billion spent in 2012. People expect that to move to $327 billion by 2016, which I mentioned in my earlier comments. We have a extraordinarily significant share of that volume. It is the fastest-growing category we have without V.me. And I think V.me will enable us to increase our share of the transactions. So not only are we going to be dealing in a category that's increasing, and even though that category may be taking some sales away from in-store sales, I think we will get a larger share of those sales than we have in the past. Any time you do something like we're doing with V.me, it's a chicken-and-egg kind of a thing. What comes first, all the merchants or all the customers? We're running at a pretty rapid rate as it relates to putting both on, and I think we'll have a successful start-up this holiday season. I think that by the middle of the year, we will have a much more robust environment. And by the -- and by a year from now, we'll be poised to take significant advantage of what we've done. As it relates to closing the gap in the top 10, I don't like to speak for my customers before they speak for themselves. But I am looking forward to and I think you could legitimately look forward to hearing a lot more about new additions in the very near future.

Our final question will be from Craig Maurer of CLSA. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: Couple of questions. One, are there any unique or specific profit aspirations for V.me other than gaining share in e-commerce? And secondly, decoupled debit, TSYS commented that their fastest-growing debit customer now is a decoupled debit customer. And it's pretty clear to us that the MCX merchants are going to launch with decoupled debits. So my question is, has something changed in decoupled debits since Capital One failed at that attempt 2 years ago that would make you a bit more nervous of that product?

Well, I don't think anything that I'm aware of has happened that should precipitate that. And, of course, that failed because they couldn't bundle transactions. They had to have specific -- they had to be able to specifically list each transaction, which they were unable to do. As it relates to MCX, I mean, I think they have lofty aspirations, and they probably have a lot of horsepower to work with. I think we're aware of what we're doing, and -- I mean, we're aware of what they're doing, and they're aware of what we're doing. And we're working hard to compete. And I don't think that, that in itself is going to define who Visa is or isn't in the near- or the moderate-term.

And with that, ladies and gentlemen, thank you, all, for your participation today. If you have any follow-up questions, feel free to call Investor Relations.

Thank you for your participation on the conference call today. At this time, all parties may disconnect.