Welcome to Visa Incorporated's Fiscal Q2 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.

Thanks, Shania. Good afternoon, everyone and welcome to Visa Inc' s fiscal second quarter earnings conference call. With us today are Charlie Scharf, Visa's Chief Executive Officer; and Vasant Prabhu, Visa's Chief Financial Officer. This call is currently being webcast over the internet and is accessible on the investor relations section of our website, at www.investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. A PowerPoint deck containing financial and statistical 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. These statements aren't guarantees of future performance and our actual results could materially differ as the result of a variety of factors. Additional information concerning those factors is available on our most recent reports on forms 10-K and Q which you can find on the SEC's website and the Investor Relations section of our 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 in the financial and statistical summary accompanying today's press release. And with that I will now turn the call over to Vasant.

Thank you, Jack. In keeping with prior practice let me begin my remarks by highlighting some key call-outs from the quarter. First, we reported a solid quarter of financial results despite a backdrop of continued domestic and international economic cross currents. Importantly, revenue growth of 8% was a couple of percentage points better than we had expected and telegraphed last quarter. The up side was driven by lower incentive levels than previously assumed and a higher currency volatility benefit. Our flat EPS growth for the period year over year was a direct result of the favorable tax impact we enjoyed in the second quarter of FY '14. Second, the overall strengthening of the dollar continued to exert pressure on revenue growth. Exchange rate headwinds this quarter reduced reported revenue growth by approximately two and a half percentage points. We expect dollar strengthening and its associated impacts, to continue for the balance of the year. Third, for the second consecutive quarter, our client incentive rate came in below expectations. This was once again due to the timing of certain contractual obligations, as well as moderately lower payouts associated with lower payment volumes in several challenged geographies like Russia and Brazil. We expect line incentives to be higher in the second half of the year. Fourth, our effective tax rate was 32% in the second quarter, 10 points higher than Q2 last year, when we recorded an IRS section 199 tax benefit related to multiple years. Our tax rate will fluctuate from quarter to quarter this year, as I will discuss later. Overall, the underlying drivers of our business remain stable and healthy, as evidenced by payment volumes and transactions growth. However, the strong dollar impacts us negatively this year not only on currency translation, but also in our cross-border business. Despite…

Thank you very much, Vasant. An official public welcome from all of us. First of all, let me start with commenting that we're very pleased with the quarterly results. We think of them as solid and consistent and certainly gratifying in the face of some of the more challenging economic conditions and geopolitical concerns that we see around the world. Net revenue grew 9% nominally. FX impact hurt growth by two and a half points. Operating income growth of 11%, payments volume increased 11% on a constant dollar basis and cross-border volume growing at 8% on constant dollar basis, are all very solid numbers. We see very little change in the overall global economy, with some exceptions and we see more short-term risk than we see up side. Consumer spend in the U.S. specifically continues at reasonable levels but is not accelerating. Gasoline prices continue to negatively impact both credit and debit. Outside the U.S., we see continued weakness in Russia and Brazil, but we do see strength in China and our Middle East and North Africa region. And the effect of the strong U.S. dollar, as Vasant pointed out, is meaningful. We see this through the FX translation impact, but additionally, the benefit of that we see of U.S. spenders outside of the U.S. is outweighed by the negative impact on the non-U.S. spenders spending less in the United States. Away from the economic growth environment, we continue to feel terrific about our activities to drive growth which I will talk more about. We continue to make excellent progress on our evolving technology initiatives which include everything we're doing in the digital space, mobile specifically, Visa Checkout and the work we're doing in our global merchant services and solutions groups. We continue to have a strong flow of significant…

Okay, Shania, we're ready for the Q&A.

[Operator Instructions]. Our first question is coming from Darrin Peller of Barclays. Your line is open.

Just trying to square a little more of the discussion on EPS growth being at the low end of the mid-teens guidance range, given your unchanged revenue growth guidance. Was it primarily tax rate assumptions in the second half of the year? And then just to further add to that, are you incorporating further volatility benefits, FX volatility benefits in your outlook and guidance? Because it clearly helped your cross-border revenue growth this quarter. Thanks, guys.

Darrin, just a couple of things. I think the two things you should take away from what we said was there's a certain amount of moving around going on between the third quarter and the fourth quarter. We said that the revenue growth in the third quarter will be the low point of the year in terms of growth and then it will pick up in the fourth quarter, approaching double digits. So that's one thing. The second is expense growth will step up a bit in the third quarter. Still in the mid-single digits level for the full year, but step up in the third quarter as some expense is shifting between the first half and the second half in marketing and technology. And then if you look at our personnel expenses, you should be looking more at what the first quarter level was and a little bit of growth with some of the initiatives we have underway. And the last piece that shifts things, mostly between the third and the fourth quarter, was the tax rate. The main take away from all this is, as we said, $0.06 to $0.08 shift out of the third quarter. For the full year all we're saying is we still feel good about the range we provided, but we're at the lower end of the range. Really in line with where the street is right now. Your other component of the question was currency volatility. We did tell you that it was at five-year highs in the second quarter. So in terms of what we're expecting going forward, as you know, we benefit when there's volatility because FX spreads widen. It does offset a little bit the translation impact of currencies. We're not assuming they stay at five-year highs. We're assuming that there's some amount of regression to the mean, but we're not assuming they go to the kinds of lows we saw last year. So it's anybody's guess really. So we're just assuming that it's not going to stay at this level, but nor is it going to be as calm as it was last year.

Next question is Moshe Orenbuch of Credit Suisse.

Could you talk a little bit about how you will be trying to protect the volume from Costco, together with Citi, from American Express trying to win it back? And maybe just as a corollary, talk a little bit about your thoughts about what's going to happen when existing co-brands come up for renewal and the competitive environment, there?

Let me take the second one first. Co-brands are in the market certainly all the time. It's been a competitive marketplace. And all the things that I talked about in terms of the advantages that we think we brought to Costco, we think we can provide to almost all co-brand partners out there. In this case, it's certainly helpful to be the incumbent and the leader in the space. We've got deep relationships with the largest co-brand providers, certainly here in the United States and others across the world. And those relationships, where we believe if you treat the partner properly, you prove to them over a period of time you help them grow, there's got to be a reason for them to want to do something else, other than be with you. And so we feel very good about our positioning there. On the Costco front, I think when you take a look at what we bring to equation, you can assume that Costco, who's got the most to lose in this, has thought an awful lot about what risks they have and what opportunities they have. And the reason for them to want to go and take the risk of moving the portfolio is because they think there's more upside doing business with us and Citi in this case. And when we think about and they think about the brand preference that their customers have, as I said in my remarks, the things that specifically the affluent and millennials think about our brand versus the competing brands out there, we're very confident that we'll be able to do a better job for Costco than the incumbent. And that will start day one, as we work extremely closely with Citi and Costco and that work has begun already.

Next is Jason Kupferberg of Jefferies.

So can you just confirm whether or not some of your planned pricing actions for April got implemented as expected? And then can you also just clarify related to Costco, do the incentives there hit in FY '15 or in FY '16, when the contract actually begins?

So Costco will be 2016.

And the pricing is in. Just to clarify, the pricing -- there were two changes, both of which happened in April. The first was U.S. acquirer service fees on all credit products and the second was U.S. acquirer international service assessments. They went in roughly around the same time, but the impacts are somewhat different. One of them hits a little earlier in terms of impacts on our financials, the other a little later. So we get the full benefit of the pricing in the fourth quarter. We get a little less of a benefit in the third quarter. It's really a small difference.

Yes, Sanjay Sakhrani of KBW.

I guess I have a follow-up question to the Costco. Charlie, you mentioned it's been competitive in co-brand, but is it from an economic standpoint incrementally more competitive and does that then play out further as you renew some of the other co-brands down the line? I guess secondly, how confident are you that Citi will be able to secure the portfolio from American Express? Thanks.

So when you say is it economically more competitive--

Is it getting progressively more competitive, meaning are the economics materially different than they were before?

First let's talk Costco for a second, then we'll talk more broadly about co-brands. And I tried to make this point clearly. So, let me just make sure that I'm even clearer on it. We view Costco as something extremely unique. And so this is an industry where it's amazing, the gossip. And I don't know whether it's the consultants or what it is, but everyone likes to go around and talk about everything that's happening in terms of pricing and who did what to whom on this. What I would tell you is what we and my guess is issuers were willing to do for Costco is very specific to a unique opportunity to gain the kind of credit acceptance that we've talked about and the kind of co-brand that we've talked about, for a partner now that didn't accept our products in the past of this size. We view it as a unique opportunity to capture that volume and then to use the ability to have that acceptance to grow our products elsewhere, regardless of whether they're co-brand or not co-brand, but obviously the co-brand here will bring with it extraordinary benefits. So Costco to us stands on its own, in terms of the way we think economically about what we should be willing to do. In terms of whether the co-brand space is getting more competitive economically, I'm not sure. It's very, very competitive, as is the issuing business. And I think when people lose relationships like this, they need to figure out where they're going to look and so we assume that they'll continue to be competitive. As we think about our future and we think about our ability to continue to deliver the kind of growth that I think you are all expecting from us, we factor that into our assumptions along the way.

Okay. And just the Citi portfolio? AMEX's sales to Citi of the existing portfolio.

Everything that we hear suggests confidence, but we're not a party to it.

Next is Bill Carcache of Nomura.

Apologies for another Costco question, but was wondering if you could speak to whether any of your issuing bank partners have expressed any sort of concern about the interchange rate at which the Costco volume will be coming over? Just in the sense that it could be difficult for them to offer rewards on the Costco spend. Just curious if you think that could be an issue?

Well, I guess I would start with, there were a lot of -- there were more issuers than Citi who wanted to win the co-brand. And so whoever certainly was involved in the process understands the competitive dynamic and what would exist. And again, I think from our perspective, the conversation is exactly what I've said here. It's a unique and strategic opportunity to get access to an extraordinary amount of volume that we and our clients weren't going to have access to and if you think about if we didn't win, the kind of conversation that we were going to have and the kind of conversation we would have to have with our issuers and their clients about not being able to participate in the opening of one of potentially the biggest retailers in the world, is not a conversation that we would have relished. So we feel very good about what we've done here. When we make decisions that affect our clients, we take them extraordinarily seriously and understand that they will look at those decisions in the context with everything else that we do for them and we feel good about what where we've come out and are confident that it's a benefit for them.

Next Craig Maurer of Autonomous.

Question on Brazil, the Itau loss, from what we understand that will be fairly material as a percentage of that business. And with ELO creeping into the market as well, are you concerned at all about Visa's historic market share in Brazil shrinking significantly? And following up on your comment on a Mexican win, do you have any greater visibility on when that market will open for Visa processing? Thanks.

Let me do the first one and then, Jack, you need to remind me about the second question. So in Brazil, listen, losses are losses. You know, I would just make it clear that these types of decisions aren't generally decisions that people make without talking to a series of people. So we were certainly involved in a series of conversations. And again, everyone makes their decisions in terms of what they're willing to do and at what price they're willing to do it at. And when a large issuer says that they're going to move volume away from you, it's going to be hard for us to make that volume up elsewhere. And that's a decision that we chose to make to some extent relative to how aggressive we were willing to be relative to pricing. Because we, as I said in my remarks, it's important for us not just to win volume, not just willing to win incremental revenue, but do it in a way which is smart for us and for the payments industry for the long term. And ELO is -- it is a fact. It is what it is. It's a different kind of network with different kind of capabilities targeted, for the most part, at different types of consumers than we generally target our business. And I'll tell you that I feel great about the relationships that we have with the other large issuers in Brazil and think we have the opportunity to continue taking share from them, albeit that share won't we place what we'll lose from Itau.

Mexico processing.

Yes, Mexico. There is no timetable. We're actively working on some things, there, where we think that we can prove to the issuers that by us processing, it actually becomes a benefit for them and there's nothing imminent there, but it will evolve over time.

Next is Dan Perlin of RBC.

My question is basically this, the step-up in expense growth occurring at the same time that your inventive fees are kind of suggesting that they're also stepping up -- I guess it's two things. One is, kind of alludes to the fact that you obviously see something on the horizon, maybe it's second half of this year or early into next and I would like to get some color on that? Why you had pulled the trigger on both at the same time? Secondly, why the incentive fee slip? Why did the client take so long to convert? What were those conversations like and why are they not taking place?

Let me do the first one first. The first, they are unrelated. There's nothing that we see on the horizon or anything like that. As we said, incentives -- I've been here two-and-a-half years and it seems to me that we talk about this every single quarter which is we do our best to provide insight and we certainly do it for our own planning as to what incentives are going to be, quarter by quarter. But we don't have a lot of control over it. It's hard to know exactly when negotiations will become finalized, contracts will close and it changes the level of incentives. So as we've talked about multiple times, it is the full year that we really think about as something that we feel much better about than quarter to quarter. And on the one hand, we'd love to have things close sooner. It's not something we try and delay, but it happens in the normal course of business. And on the marketing side, there it just relates to some specific things that we're going to be doing in the second half of the year that really relate to the summertime, coming out of the summer into pre-school and then eventually leading into the holiday season. That relates to how we want to time our marketing spend.

I just want to highlight that we're not changing anything in terms of our full year expectations on expense growth. So there's really no change. So it's not like we pulled the trigger to do something different in the third or fourth quarter. As Charlie said, there are some marketing programs, particularly as it relates to Visa Checkout, that we think we can get a lot of traction doing in the back-to-school period. That's money that has been coordinated with merchants and things like that, that this is the best time to spend it. There are some regional marketing programs that are happening in the second half. There's some technology initiatives that are ramping up that may have been a little slower to start than we might have expected earlier, but are ramping up into the year, but it was all expect. And then in terms of the personnel expenses, there's a reasonable predictability in that, it fluctuates from quarter to quarter, sometimes there's some noise, small items here and there. But if you look at our first quarter run rate and you assume there's a certain amount of growth with some of the initiatives we have, all in all, I guess the short answer is -- we're not doing anything specific to ramp up the expense growth and our full year expectation does not change. And as we said in our remarks, if the world changes, we're ready to take a hard look at what remains to be spent and decide whether it needs to be spent.

It's James Friedman of Susquehanna.

I wanted to ask about commercial. Charlie, any perspective about how you are doing on the commercial side? One of your competitors had called out some weakness on the commercial side, at least in North America in the calendar first quarter. Do you think that you're taking share and how are you competing in the commercial market?

Setting aside the share question, commercial payments growth for us in the second quarter was quite healthy at 10%; it's performing well. A lot of interest from non-financial institutions, participants to provide value added services. So there's a lot of non-traditional people coming in, like technology providers, healthcare entities and so on. I don't know if Charlie --

The only thing, commercial -- we all talk about commercial, across all of the different people that participate in this business, as one of the great opportunities. I mean, the two really meaningful opportunities that the industry has that are really meaningful, apart from just the business as we know it, is P2P and commercial. There are large, large sums of money that -- on the commercial space, specifically, we compete in. We've worked really hard on our products, we're doing fine in it. I really don't know about share. It's hard to know about it. But I think the 10% growth has the opportunity to be much, much larger. And that's something that we're working through and hopefully in the coming quarters, we'll have more to talk about specifically about what we're doing there. But it's an important business for us today. And the question is whether or not we can crack a nut and incrementally move it from the something which is incremental to which is more of a step function.

Next is Jim Schneider of Goldman Sachs.

Charlie, relative to the China opportunity, I realize that there's a lot of unwritten rules at this point and there's a lot of things still in the air, but can you maybe talk about your operational readiness from a network perspective to enter China and what you need to get to a level of full functionality, there and kind of the game plan on that front?

Yes. Again, I would say, the devil is going to be in the details in terms of the way the rules are written. I would say it's been our expectation -- well, let me back up. What I said in the remarks is that there was -- what has been said has been what we've expected. And so you should assume that we've been planning for that and working towards that. There are different time periods that are laid out in terms of what the state counsel announced, relative to when things would have to be ready and we have teams of people around the company that are working to be prepared to enter as soon as we possibly can.

David Hochstim of Buckingham.

I wonder, could you just go back to the international transaction revenue growth and help us understand how much of the change really was attributable to -- what the change is attributable to the increase in FX volatility? Because the gap might be even bigger next quarter and do you have a currency adjusted growth rate that would help us get back to that? And I guess also there's mix differences because of changes in cross-border spending?

Yes, I think you should look at -- there are three things going on in that international transactions line. One is, of course, all those transactions are in various currencies, so there is clearly an FX translation impact which is largely negative. The second is the things we talked about which is that strong currency markets have outbound commerce that's improving, but the purchasing power of the currency is greater. So that you don't get the full volume benefit even though transactions are growing and then in weak currency markets you've got inbound -- you've got declining outbound commerce and a weaker currency. The net effect of all this is also negative. Offsetting that, certainly we've benefited from volatility. I don't think we really ever publicly quantified those kinds of benefits. They move around. But clearly there's no question that some of the negative impact of the currency translation has been offset by the widening of the spread. And the two are uncorrelated. You could see the currencies moving the other direction but the volatilities don't have to go along with them. But we'll keep you posted. As I said in the comments or in the question earlier, we're not assuming that volatilities remain at these highs. We're assuming some moderation in volatilities in the second half of the year. We're also not assuming that currency markets will go back to being sort of as calm as they were around this time last year.

Right. So if they stayed close to these levels, we could see higher revenue than you have built in?

It depends on what else it affects.

Exactly, there are other things. As I said, three things going on in that line. Higher volatilities will help us on that particular dimension. On the other hand, a move in currencies which affect the translation line and so on. There are many things going on in that line.

Bryan Keane of Deutsche Bank.

Just wanted to hopefully get some way to quantify the Citi and Itau losses and is it offset by some of the gains that you've had? Just trying to think about future modeling purposes. And then secondly, on tokenization, my understanding is we'll probably suspend charging for any fees even beyond FY '16? Just hoping to get an update on that.

So we don't talk specifically about the volumes of Citi and Itau. As I said in my remarks, not clear to us what the migration looks like. So it is hard to be very, very specific other than things like Costco and the other positive developments that we have make us feel very good about how those things all fit together. Tokenization, what's the question?

Are we going to continue to charge in 2016? Will we charge.

So we have the rate card out there. We've waived it through 2016 and we're continuing to look at exactly what we think the right way -- I would say what the right long term way for people to think about tokenization is, but to me, the important thing is, no one should expect that to be a monetary driver for us.

We have Tien-tsin Huang of JPMorgan.

Just wanted to ask on Europe, with legislation getting closer to being finalized. Does that change the probability of the put in any way? What's the latest there Charlie? And then just on Costco, real quick. Just the exclusive merchant acceptance, how critical is that for Costco, I guess, Visa? I know that's driving a lot of the uniqueness to it. Thanks.

On the first one, listen, I don't think it changes the probabilities at all from our perspective, because we're not inside their board rooms to understand exactly what they're saying and what their drivers are. It's a consistent question that people ask us, in terms of what the probabilities are and we really don't know because they need the 80% vote. Until they get the 80%, then it's not going to happen. So really don't know, really don't understand what the dynamics are and again, what really matters is how the blocking group of people feel about it. So those that don't want to vote for it. That's something that we're not privy to because we're not in those boardroom discussions. But again, to circle back, we work really closely with Visa Europe. Example, whole group of people here today, Nicola, the CEO, is here today, as we're working through all the things that we're doing together to do a great job for our global clients, enable them to be as competitive as they can be versus the competition in Europe. And then the credit acceptance versus MasterCard and American Express, hugely relevant. That's why when you talk about the uniqueness of it, it just doesn't exist for a merchant this size that never accepted our product and now all of a sudden doesn't accept our other major competitors here in the United States. As we think about what that means for all of our clients and for our cardholders, that's certainly factored into our thinking and I'm sure the issuer is thinking in terms of the importance and what it could mean certainly for our brand.

And with that we would like to thank everybody for joining us today. If anybody has any other questions, feel free to give Investor Relations a call.

Thank you.

That concludes today's conference call. Thank you for participating. You may now disconnect.