萬事達 (MA) 2017 Q4 法說會逐字稿

Good morning.

My name is Kim, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Mastercard Q4 Full Year 2017 Earnings Conference Call.

(Operator Instructions) Thank you.

Warren Kneeshaw, Head of Investor Relations, please go ahead, sir.

Thank you, Kim, and good morning, everyone.

Thank you for joining us for our fourth quarter 2017 earnings call.

With me today are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer.

Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q&A session.

It is only then that the queue will open to accept registrations.

You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com.

Additionally, the release was furnished with the SEC earlier this morning.

Our comments today regarding our financial results will be on a currency-neutral basis and exclude special items, unless otherwise noted, but the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents.

Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding Mastercard's future performance.

Actual performance could differ materially from these forward-looking statements.

Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings.

A replay of this call will be posted on our website for 30 days.

With that, I'll now turn the call over to our President and Chief Executive Officer, Ajay Banga.

Thank you, Warren, and good morning, everybody.

So our business continues to perform well.

We are very pleased to have delivered strong results again this quarter.

And I think that's driven by our continued focus on the execution of our strategy that we laid out for you, in fact, as recently as the Investor Day in September.

For the quarter, we delivered net revenue growth of 18% and an EPS growth of 30%, excluding special items, which are primarily related to the U.S. tax reform and our Venezuela operations.

On that same basis, net revenue growth for the year was 15% and EPS growth of 21%.

The major economies around the world generally improved in 2017, and we expect to see a relatively steady environment again this year, although with some pockets of instability.

In the U.S., consumer confidence has been healthy, unemployment remains low and holiday retail sales was solid, although year-over-year quarterly growth was slightly lower in Q4 than in the previous quarter, according to our SpendingPulse estimates.

In Europe, the economy has been relatively stable.

Germany and France are driving some mild growth.

Retail sales growth in the U.K., however, slowed in the fourth quarter, again according to SpendingPulse.

And about the U.K., we remain concerned about the potential impacts of Brexit over the medium and longer term.

Latin America.

There, the region has been recovering from its economic recession.

And while Brazil and Mexico both have presidential elections coming up, and of course, Mexico has the added uncertainty of NAFTA negotiation, we are cautiously optimistic that economic growth in that region in 2018 will be similar to 2017.

The political and economic crisis in Venezuela continues to worsen, and Martina is going to discuss that in some detail when she comes on to her section.

Now in Asia, we've seen improvement in consumer and business sentiment in Australia, and the ASEAN countries continue to be bright spots.

So overall, although we know that the world is not without geopolitical and trade-related risks, absent any major impacts from these, we expect 2018 to be similar to 2017 from an economic standpoint.

And with that backdrop, we've got to focus on continuing to execute our strategy that's allowing us to grow share across all of our product lines in 2017.

And let me give you a few examples of how we are doing this.

So in the U.S., you heard this morning, probably, that we have just announced that we have now got the combined Bass Pro Shops and Cabela's co-brand.

They've chosen Mastercard for their consumer credit co-brand book.

It's one of the largest retail co-brands in the market.

You probably know that we have been the network for the Bass Pro Shops co-brand and we're going to convert the Cabela's CLUB portfolio to Mastercard later this year.

We also renewed our exclusive agreement with KeyBank for their consumer and commercial credit and debit portfolios this quarter.

Now KeyBank actually is a great example of a customer who uses various Mastercard services.

They use artificial intelligence authentication tools, our loyalty platform, processing services, so that's a nice wide spread of services.

Another example is Bank of America.

And as we told you in September, we had won their MasterCard Cash 123 consumer credit card.

We're going to be launching those exclusively by the end of the first quarter.

They leverage many of our capabilities, including fraud products, advisors and are also one of our largest Labs of the service customers.

And that's where we innovate together with our customers using design thinking to rapidly co-create targeted solutions for their business opportunities.

In Europe, we're just pleased to announce that later this year, we will be launching the new Virgin Atlantic consumer credit card, and that's issued by Virgin Money in the U.K. We're continuing to make progress with European banks.

We've signed a number of new deals with large issuers in France this quarter, including moving market share with the flip of Crédit Mutuel's debit business.

In addition, we're shifting share to us in credit and debit from local competitors with ING Bank in Italy as one example.

ING is also launching new prepaid issuance with Mastercard, and they're leveraging added benefits such as MasterCard Instalments, which gives consumers financial flexibility to split their payments over monthly installments.

Now the interesting aspect beyond this is that ING's implementation is entirely managed by our APIs, and of course, it gives their customers an easy way to convert purchase to installments through their mobile banking app.

Now we're also winning debit in other regions, such as in Latin America, where we signed a new deal with Davivienda in Colombia, emphasizing cross-border and digital capabilities.

We launched a new co-brand debit program with Amazon in Mexico.

In the Middle East, the flip of Doha Bank's debit portfolio is giving us portfolio exclusivity in one of the most affluent markets globally.

In China and India, we're making progress.

We signed new deals in China this quarter with customers such as ICBC, China Industrial Bank, the Agricultural Bank of China.

In India, the government has finally published new merchant discount rates, and we think that's going to spur merchant acceptance and continued transaction growth over the next few years.

And we're making progress with VocaLink.

Since the acquisition in May, we have launched real-time payments with The Clearing House in the U.S. We have further scaled the person-to-merchant Pay By Bank app, and we went live with an image-based clearing system for the Cheque and Credit Clearing Company in the U.K. In the fourth quarter, we expanded our analytics capabilities at VocaLink.

We've successfully launched a corporate fraud alert product with RBS as our first customer.

They're using analysis of corporate payment history and machine learning to help protect companies who are their clients against various types of corporate fraud, invoice redirection being an example.

On the infrastructure side, we are participating in a number of RFPs around the globe, and we believe these will position us well in the real-time payments space over time.

And in parallel, we're developing apps and value-added services that can be deployed across this infrastructure.

So a few comments on the digital space.

We have expanded the rollout of tokenization, which, as you know, is the foundational technology for secure digital payments.

We've added 500 new issuers and 21 markets over the course of 2017, and we now have a total of 1,200 issuers in 46 markets.

For the year, we saw tokenized transaction growth over 500%.

Now that's from a small base, but it reflects this momentum that I'm speaking to.

And last year, we've continued to see how important the seamless digital purchasing experience is to our merchant partners, as we grew Masterpass acceptance with Dunkin' Donuts, Walgreens, Verizon Wireless, many others.

And this quarter, we're pleased to add several more partners, including in the grocery category such as BJ's and Giant Eagle in the U.S.

With McDonald's, we are going beyond a simple implementation and helping them develop a food delivery app with exclusive Masterpass acceptance in multiple markets across Latin America.

So now let me wrap up by saying a few things about U.S. tax reform.

We see this as a very positive development for the country, particularly in the near term, as businesses will have an increased capacity to invest and many consumers will have more disposable income.

What we're taking in -- taking of opportunity -- taking the opportunity, is to make several focused investments that build on our long-standing commitment to strengthen our business, support our people and make a positive contribution to the communities where we operate, while of course continuing to provide strong capital returns to our shareholders.

And so I'm going to lay out a couple of steps we are going to take.

The first one is we will make additional investments in our Center for Inclusive Growth, which we launched back in 2014 as a way to focus on data, expertise, technology and philanthropic investments to support inclusive growth.

You know that we believe that enables more people to become financially empowered and therefore good for our business as well.

Over the next several years, we plan to invest an additional $0.5 billion to fuel their philanthropic contributions into the community.

And among our initial efforts will be training programs for U.S. workers to help create the workforce for tomorrow.

Now these additional investments in this center go beyond the impact we already deliver through other existing initiatives across the company as well as the Mastercard Foundation, which, you will recall, is one of the world's largest private philanthropic funds.

And of course, our public-private partnerships with governments, which today are in over 60 countries.

We've got 1,300 programs, and that's taken us more than 2/3 of the way to our goal of bringing 500 million more people into the financial system.

Our second area of focus with this opportunity around the U.S. tax reform is our employees and their retirement planning.

And while we've always been an active and generous contributor to our employee benefits, we're going to take this opportunity to enhance our employer match to 10% for defined contribution retirement plans.

Now this will be an opportunity for the majority of our employees, including those across the United States, to benefit from this change.

And finally, we will absolutely accelerate investments, both on an organic and inorganic basis, in areas that are aligned with our business strategy: Digital infrastructure, Fast ACH, data analytics, those spaces.

Now just to put this in context.

Yes, we will be making all of these additional investments, but the majority of the tax savings will be used to invest in the growth of our business and also to return excess capital to our shareholders.

Now with that, let me turn the call over to Martina for an update on our financial results and our operational metrics.

Martina?

Thanks, Ajay, and good morning, everyone.

As you can see in the highlights on Page 3, we have delivered another strong quarter.

Foreign exchange was a tailwind of about 2.5 ppt to net revenue and 3 ppt to net income, primarily due to the strengthening of the euro.

I will now highlight the numbers on a currency-neutral basis, excluding the impact of special items, which I will explain in more detail on the next slide.

Net revenue grew 18%, driven by solid momentum in our core business and includes a 3 ppt benefit from acquisitions.

Operating expenses increased by 15% and includes an 8 ppt impact from acquisitions, primarily for VocaLink.

Operating income grew by 20%, while net income was up 25%, resulting from our strong underlying performance and a lower tax rate.

EPS was $1.14, up by 30% year-over-year, with share repurchases contributing $0.03 per share.

During the quarter, we repurchased about $1 billion worth of stock and an additional $287 million through January 30, 2018.

So let me turn to Page 4, and here, I'm going to touch on the special items we had taken this quarter.

The U.S. tax reform resulted in 3 impacts to the tax line in our P&L in the fourth quarter.

This is our best estimate based on our current interpretation of the new tax laws and could still change during 2018.

The first item is a $629 million charge related to deemed repatriation on accumulated foreign earnings and is payable over 8 years.

The second item is related to the revaluation of our deferred tax assets and liabilities at the new corporate tax rate of 21%.

Since we are in a net deferred tax asset position, we have recorded a $157 million charge this quarter.

Finally, we had an 88 -- $87 million impact due to the loss of certain foreign tax credits and a change in policy regarding foreign earnings.

The total of all tax impacts related to the U.S. tax reform bill was $873 million or $0.82 per share.

In addition, the economic and political conditions in Venezuela continue to deteriorate, and therefore, similar to what other companies have already done, we have decided to exclude the financial results of those operations from our consolidated financial statements for future periods.

This has resulted in a pretax charge of $167 million or $108 million after tax.

However, we will continue to provide switching and other services in the country.

As a result of these special charges -- these special items, we have combined after-tax impact of $981 million or $0.92 per share this quarter.

So let me now continue to explain our underlying business performance for the quarter.

Here on Page 5, you can see the operational metrics for the fourth quarter.

Worldwide gross dollar volume, or GDV, growth was 13% on a local currency basis, and that's up 2 ppt from last quarter.

We saw a solid double-digit growth in all regions outside of the U.S.

U.S. GDV grew 9%, up 3 ppt from last quarter and was made up of credit and debit growth of 10% and 8%, respectively.

Outside of the U.S., volume growth was 15%.

That's up 2 ppt from last quarter, led by Europe and Asia.

And cross-border volume grew at a healthy 17% on a local currency basis, with strong double-digit growth across all regions, again led by the U.S. and Europe.

Turning to Page 6. Here, you see switched transactions continue to show strong growth at 17% globally, with U.S. growth up sequentially.

Similar to last -- for the last few quarters, we saw healthy double-digit growth in all regions outside of the U.S. Globally, there are 2.4 billion MasterCard and Maestro-branded cards issued.

Now let's turn to Page 7 for highlights on a few of the revenue line items, again described on a currency-neutral basis, unless otherwise noted.

As already mentioned, net revenue increased by 18%, including approximately a 3 ppt benefit from acquisitions, and was driven by strong transaction and volume growth as well as growth in services.

Rebates and incentives grew 23%, reflecting higher volumes and incentives for new and renewed deals.

Let me quickly go through the individual revenue line items.

As we've commented on throughout the year, the difference between fees charged and volumes in the domestic assessment and cross-border categories were mainly due to pricing, which was essentially offset in rebates and incentives as well as some mix.

This continues to be the case this quarter.

The domestic assessments grew 19%, while worldwide GDV grew 13%.

Cross-border volume fees grew 19%, while cross-border volume was up 17%.

Transaction processing fees grew 22%, primarily driven by the 17% growth in switched transactions as well as revenues from our various services offerings.

And finally, other revenues grew 15%.

As a reminder, most of the VocaLink revenues show up in this line.

Advisors and safety and security revenues were also up.

These items more than offset the 4 ppt impact from the changes we made to our loyalty business in Asia that I've called out previously.

Moving on to Page 8. Here, you can see that total operating expenses increased 15%, excluding special items, on a currency-neutral basis.

And that was higher than our expectations due to foreign exchange hedging losses.

Similar to last quarter, this includes an 8 ppt impact from acquisitions, primarily from VocaLink, including the impact of purchase accounting and integrated relation -- related costs -- integration-related costs.

The remainder was due to our continued investment in geographic expansion and digital capabilities.

I'm going to move on to Slide 9, and here, we're going to discuss what we have seen so far on the drivers for January, and the numbers are through the 28th of January.

Starting with switched volume.

Global growth is at 14%, up 2 ppt from what we saw in the fourth quarter, with healthy growth in all regions.

In the U.S., our switched volume grew 10%, up 2 ppt, with higher growth in both credit and debit programs.

And switched volume outside the U.S. grew 18%, up 2 ppt, too, driven by higher growth in Europe, with slower growth in APMEA as we lapped difficult year-ago comps related to the demonetization effort in India.

Globally, switched transaction growth was 16%, down 1 ppt from what we saw in the fourth quarter.

This decrease is the result of the exclusion of Venezuelan transactions as we will no longer be recognizing the related revenue in 2018.

Ex Venezuela, our growth was similar to the fourth quarter.

With respect to cross-border volumes, our volumes grew 22%, up 5 ppt, with double-digit growth in all regions.

So let me explain this a little bit more.

About 3 ppt of this was driven by higher growth in Europe resulting from both increased intra- and inter-Europe travel as well as holidays extending further into January this year in certain markets.

APMEA also contributed about 1 ppt to this growth.

The remaining 1 ppt was driven by cardholders' funding accounts at cryptocurrency exchanges, which was then used to purchase these digital currencies.

You should note that these accounts can be funded from a number of sources, such as bank accounts, wire transfers, et cetera.

With the recent interest in and the price volatility of cryptocurrencies, we have seen an increase in this activity.

Just to be clear, we do not switch or settle cryptocurrency transactions over our network.

Our plans do not assume this type of activity will continue, as we have no line of sight as to how cardholders will view cryptocurrencies in the future and given that we've already seen some declines in our recent weekly trends.

So now I'm going to turn to our thoughts about 2018 on Slide 10.

And let me start by talking about the numbers on the same basis, as we always have, that is, before the impact of the new revenue recognition rules on a currency-neutral basis and excluding acquisitions and special items.

On this basis, our business fundamentals remain strong, and we continue to grow through the combination of new and renewed agreements in our expanded set of service offerings.

We expect the global economic environment to be similar to what we saw last year, with a few areas to monitor, as Ajay mentioned.

With this backdrop, we expect to deliver strong organic growth again this year, with net revenue growing towards the high end of the low double-digit range.

This is in line with our recent trajectory, though we will be absorbing a slight headwind as a result of the deconsolidation of our Venezuelan entity.

On the expense front, we continue to invest in key long-term growth areas such as digital, security solutions and geographic expansion, in addition to the incremental employee and technology investments Ajay just highlighted.

Overall, we expect operating expenses will grow at a mid-single-digit rate year-over-year, reflecting our ongoing cost management efforts.

So as you can see, we are well-positioned to deliver strong operating performance again in 2018, slightly ahead of where we had previously expected.

Turning to Slide 11.

Now let me add to those growth numbers the impact of acquisitions, the new revenue recognition rules and the investment in the Center for Inclusive Growth that Ajay talked about.

All of these items are very important when you try to model our results for 2018, so please bear with me as we're going through this.

So let me walk down the chart.

First, with respect to acquisitions, we estimate that having the acquisitions for a full year in 2018 rather than just a partial year in 2017 will contribute about 0.5 ppt to revenue growth and approximately 2 ppt to OpEx growth for the year.

Second, the new revenue recognition rules will contribute approximately 2.5 ppt, or $300 million, to revenue growth and 4 ppt, or $200 million, to expense growth, based on our current estimates.

These amounts are driven by 2 factors.

First, we have recently determined that certain market development programs will now flow through the P&L on a gross basis, resulting in about a $200 million in increased revenues and offsetting expenses.

The remaining $100 million relates to a change in the timing of when particular deal incentives are recognized.

These amounts, which are also detailed in the appendix, are estimated based on our current and assumed commitments and are thus subject to change.

We will be disclosing the impact of the new revenue recognition rules on a quarterly basis throughout 2018 so you will be able to follow the effects each year -- each quarter.

Can have fun with that one.

Just as a reminder, the new rules have no impact on the underlying economics of the business.

And finally, we will be expanding our Center for Inclusive Growth.

The initial contribution will be $100 million to a new not-for-profit entity to enable a variety of workforce training, financial inclusion and digital infrastructure initiatives, which will add another 2 ppt to operating expense growth for the year.

We expect to take this charge in the first quarter.

So overall, with these adjustments, we estimate 2018 year-over-year growth net revenue will grow at a mid-teens rate, and operating expenses will grow low double digits, both on a currency-neutral basis and excluding special items.

I have a few other items for you to consider for 2018.

We expect operating expense growth in the first quarter to be $250 million higher than what our annual growth rate of low double digit would imply, due to the timing of the market development programs which I just referred to as part of the new revenue recognition rules; the impact of the acquisitions, which occurred after Q1 last year; and the charge for the Center for Inclusive Growth.

When modeling as-reported numbers, foreign exchange is expected to be a 1 to 2 ppt benefit to the top line and about a 2 ppt benefit to net income for the year, based on our planned exchange rates.

And finally, we expect a tax rate of approximately 20% in 2018, primarily due to the impact of the tax reform here in the U.S.

So turning to Slide 12.

I would like to move to our long-term performance objectives for the 2016 to '18 period.

As a reminder, these objectives are on a currency-neutral basis.

They do exclude acquisitions and special items and are normalized for tax.

They do, however, incorporate the impact of the U.S. tax reform in 2018.

For revenue, given our expectations for 2018 that I just discussed, including the new revenue recognition rules, we now believe that net revenue will grow in the low teens on a 3-year CAGR basis.

We remain committed to a minimum annual operating margin of at least 50%, and we now expect EPS CAGR over the 3-year period to be in the mid-20s, up from the approximately 20% we last commented on.

This reflects our continued strong business performance and expense management initiatives, as well as a 4 ppt benefit from lower taxes in 2018.

The new revenue recognition rules to be implemented in 2018 are expected to have a minimal impact on the 3-year EPS CAGR.

With that, let me turn the call back to Warren to begin the Q&A session.

Thanks, Martina.

Kim, we're now ready to start the question-and-answer session.

(Operator Instructions) And your first question comes from the line of James Schneider with Goldman Sachs.

I was wondering if you could maybe start out on the healthy trends you've seen across the globe, but particularly in international debit, which I think accelerated, as you mentioned, quite a bit.

There's particular pickup in Europe.

Can you maybe talk about how much of that is market share?

How much of that is improving economy?

And maybe you can kind of talk about the impact going forward on your yields, given it seems like there was a substantial decrease again in the number of Maestro cards as you convert those to standard debit.

Yes, James, and let me just take this for a minute.

In Europe, where we are seeing really good drivers in Italy and Germany and France, number of these kind of countries.

And those are good economic environments.

I called out that the holidays in January lasted a little longer in some of these countries.

In terms of what -- where we added to market share was really in the Nordics.

So we actually have flipped a deal in Sweden.

That is coming in over this year, and that will actually benefit these kind of numbers.

From a Maestro point of view, yes, you're absolutely right.

We have been talking about that in a number of countries.

We're actually flipping our Maestro portfolios into Debit MasterCard portfolios.

We are very well on our way in many of those countries.

And what we are actually seeing is when we do these kind of flips, that on the new Debit MasterCards, we see about 2x the volume that we used to see on the Maestro cards.

So we are not just seeing cross-border volume, but we're also seeing local volume.

And that will continue to benefit, and it will improve our yield over time.

You have actually been seeing that our yields have been improving over the last many years, both on the core business, where you're seeing it predominantly because of the additional processing that was coming in.

By the way, we are now processing about 54% of the transactions that are done on Mastercard versus when you just looked 2 years ago, it was just shy of 50%.

And secondly, of course, the healthy cross-border trends.

When you look at our total yield, that is where, obviously, our growing services offerings are really benefiting us, and that's why you're seeing very healthy yields across the whole company.

And your next question comes from the line of Don Fandetti with Wells Fargo.

The cross-border number, even if you sort of strip out cryptocurrency, was notably better.

And I know the dollar's been generally weakening.

Do you expect, as you think about guidance for '18 and just look out, have we sort of stepped up into a structurally higher cross-border rate?

And then lastly, can you talk about volume into the U.S. cross-border?

Don, I am so glad you're asking this question because, of course, when you see for the first 4 weeks in the year, a 22% cross-border, you're asking exactly the right question, in my opinion.

What we always say is 4 quarters do not make a year.

In fact, the guidance that we're giving...

4 weeks for me.

4 weeks don't make a year.

4 quarters do.

Yes, 4 quarters do.

At least last I heard.

Yes, you're right, Ajay, as usual.

So 4 weeks don't make a year.

But in particular, all of the guidance that we're giving you for the top line of 2018, we are not planning on those kind of cross-border numbers, growth numbers.

We are planning much more to what we have been seeing over the last couple of years.

And even with the weaker dollar, I don't think that trend will change much.

So I don't think it's prudent to be planning on this kind of number.

And I would like to point you back to the guidance that we have from a new revenue point of view.

Okay.

And then the volume into the U.S.?

Volume into the U.S., we actually do see as kind of mid-single digits, volume into the U.S. What we do see is volume outside -- ex -- outbound of the U.S. is picking up.

And your next question comes from the line of Darrin Peller with Barclays.

Just want to touch on when you look at your guidance for 13% revenue growth at the -- or 15%, including the accounting change, just versus the 18% run rate, just make sure we have the right variables that would cause the deceleration being, I guess, Venezuela, M&A grow over, lower pricing.

Anything else we're missing there?

And just lower pricing benefits.

And then just quickly, Martina, on the -- when you look at the tax investments, I just wanted to squeeze in, what will be the steady state of investment beyond '18?

Some of this feels that it could be onetime, or should we expect that to continue?

Yes, okay.

On the first question, first of all, you need to take into account the 0.5 ppt on Venezuela.

That's the impact on revenue.

And then in particular, you also need to take into account the acquisitions that you called out.

We had 8 months of acquisitions built into 2017 numbers.

And so you only get the lapping effect from the 4 months.

So when you actually look at the total results of 2017, we are basically saying that 2018 is just going to be slightly better, in part because, of course, what we're expecting in the United States, even though we are very watchful on the number of more potential risk countries around the world, right?

Middle East, Africa is a risk country, but we are watching very carefully Brazil.

We're watching very carefully Mexico, as well as the impact -- potential impact from a Brexit point of view.

So overall, while the U.S. is a little better, we are actually believing that the economic environment in 2018 will be very similar to 2017.

So all of this is baked in, just slightly better than 2017 on the net revenue side.

That's where we are.

Okay.

On the tax savings?

Yes.

On the tax impact, just your second question, so what we're doing, in terms of the Center for Inclusive Growth, as Ajay said, we're planning over several years to put $0.5 billion into that center.

The first chunk is going to go in, in Q1 with $100 million, and then we're going to see how we're going to lay out -- lay it out for the next several of years.

So you are going to have to expect that we are going to continue to do some contribution to that, not in 2018, but likely '19, '20, et cetera.

The employee benefits, that is a permanent adjustment, of course.

That's not just a onetime thing.

We really want to make sure that our employees are focused on making sure that they are well-situated from a pension benefit point of view.

So this is going to go in this year, sometime this year.

We haven't given a date yet, and that's going to continue.

The other investments are also in our baseline and I would suggest to you that both organically as well as inorganically, we're going to continue to look at that and make more investments.

Particularly in those areas that we're talking about, from digital technology and data and Fast ACH, the kind of things we talked about in September.

Very focused on the strategy.

And your next question comes from the line of David Togut with Evercore.

Europe continues to accelerate nicely, and clearly, a lot of that's due to some solid market share gains.

But I'm wondering, Ajay, if you could comment on the merchant acceptance footprint in Europe for electronic payments, especially post interchange caps a couple of years ago.

And then my follow-up is on PSD2 and any update you could give us on bringing VocaLink's capability to the European continent in advance of PSD2.

So the first part, the merchant acceptance, there is growth across the European region on merchant acceptance, from large outlets that earlier used to prefer to take either local payment systems only or cash.

That changes that, all the way to small ones.

What you do see really changing also is the reduction in suppression.

So even if the outlet said we accept, in actual fact, when you showed up for a small ticket charge or a low-value payment, they would encourage you to kind of lay off the idea of producing electronic payment, I think all that has changed quite dramatically.

It's helpful.

It's part of the secular change in the way cash is used in the European economy.

I wouldn't declare we kill that right now because I think a year or 2 in Europe is a relatively small time in a set of complicated countries with lots of local dynamics vis-a-vis local schemes, local players and the like.

So I will tell you, keep your eye on that space and we'll keep working into the acquiring community.

You're talking about a full 5-year transition in a continent like Europe.

It's good signs.

It's helpful.

It's a nice tailwind, but I'm not running with it to the bank yet.

That's kind of the first part.

Your second question was about -- remind me what the second question was?

PSD2.

PSD2, oh, favorite topic.

So we're coming up to the time frame of when all this starts to go live in so many ways in different aspects of implementation in Europe.

We have been working both internally as well as with the help of our largest clients, as well as in conversations with regulators, about the implications of PSD2 and the things we can do around PSD2 with these European merchants and European banks and the new European entities that will get created as a part of PSD2, the PSPs and the various acronyms that are being created in PSD2.

Your question was around VocaLink and PSD2.

So to get VocaLink onto the ground in different European countries beyond the software status, which is kind of what it is today in the Nordics and some other markets around the world, will require us to actually participate in the RFP process of different ACH systems being opened up in Europe.

We are participating, you heard me in my opening comments, we are participating in those RFPs.

These take a year or 2 to get resolved and settled.

After they get settled, it'll take a while to get invested in and implemented.

Well, we are very active in all of those.

And one of the reasons why I think you will see us using some of the tax reform money in a sensible way in our business is to keep on focusing on the opportunity with Fast ACH, thanks to VocaLink's capabilities in Europe, but also outside of Europe, even in the United States and other markets, not just in infrastructure, but it could be in the application, it could be in the scheme rules and it could, of course, be in different aspects of the range of things we can do with Fast ACH.

And your next question comes from the line of Andrew Jeffrey with SunTrust.

Ajay, kind of a big picture strategic question for you, especially in the wake last night of a pretty meaningful shift in the PayPal-eBay relationship.

One of the things that PayPal has asserted is its value prop to large marketplaces, especially next-gen marketplaces.

And I see Mastercard building a pretty comprehensive value proposition of its own, and I just wonder how you think about the sort of so-called commodity nature of Visa, Mastercard versus sort of the value-add of a provider like PayPal and whether or not the lines perhaps are beginning to blur a bit in terms of go-to-market value proposition.

So I think in the world of e- and m-commerce space, there's so much going on, Andrew, in that whole space.

And I think if you go back in time when essentially Visa and Mastercard in those places and other brands like us, the other card -- what were called card network brands.

We got into a position where we became part of a drop-down on a merchant's checkout site.

Drop-down, you've got one brand or the other, and you enter a lot of details, you enter a lot of addresses, and that created its own friction and its own lack of branding at the checkout point, even though the consumer was aware of the brand because they were looking at their card and entering the data.

I think that's moving and PayPal is one way of that movement.

But our own efforts with branded checkout points is moving, and we will continue to do that.

I think PayPal itself, its relationship with eBay, I would look at the IPO time, it's something for Dan to answer, but I'm pretty certain that all of you thought about one day that relationship will come up for reassessment, and it's come up for reassessment and eBay has chosen what it wants to do.

I think Dan's done some interesting work of building out his partnerships in the meanwhile.

So he's kind of consolidated his own position today with their second and third leg of the stool.

And I think we are a key beneficiary of that because, as you know, we've got a great partnership with PayPal, which includes all their co-branded cards and their corporate cards and all the understanding around how their wallet is used, including the visibility of the brand and the non-steering towards ACH and the data flow and basically the pass-through angle compared to the stage angle, blah, blah.

So my general net take of all this is this is still a wide-open field.

It's going to be years before you can figure out who's playing what game here.

All I'm trying to do with our company and all of us are doing is we want to be very much a part of that game.

So we are going to keep investing in tokenization and secure checkout.

We're going to keep investing in an enhanced consumer experience in digital.

You'll find us doing all kinds of things with banks, with merchants in that space.

We're going to keep investing and align the developer community to access our capabilities with digital and core payments through the simplest form of APIs and SDKs so we can get embedded in more and more locations.

We're going to keep investing and creating good R&D with our Labs and making sure that we are capable of working with our clients, with Labs as a service.

You heard me talk about that with specific reference to Bank of America, but frankly, it applies to many other clients as well.

So we've got a whole series of strategies in digital to make us not be anywhere other than at the forefront of what's going on here, with simple transparent standards.

And standards are important, because they enable merchants and banks to connect one time, not multiple times.

So you'll see us over this period of years to come, that's the focus: Simple experience, simple standards, focus on security, secure every transaction, make sure we do good stuff with Labs, make sure the open APIs and SDKs are available and well-used and make sure that we focus on all forms of payment, not just card rails, but ACH, Fast ACH, all those so that you enable banks and merchants to do the best thing for their consumer.

That's our digital strategy, not changed.

PayPal, eBay, other issues will come and go.

We're doing what we need to do.

And your next question comes from the line of Jason Kupferberg with Bank of America.

Just 2 quick ones.

First, on your rebate and incentive expectations for 2018.

And then can you just give us the latest update on what you're thinking in terms of what might happen in Europe with European Commission looking at some of the inter-European cross-border interchange fees, some of the potential fines?

I know you've disclosed this in your 10-Q.

Is there any way you can kind of frame up what percent of your cross-border business is actually inbound into Europe, just so we have some sense of reference in case we get some headlines on this soon?

All right, Jason.

First of all, on your first question, I'm not going to give you any guidance on rebates and incentives for 2018.

And it is because of the new revenue recognition rules coming in.

There are so many moving parts between growth -- gross revenue and contra revenue, that I just feel, given all of the work that we were able internally to do, I just feel that the net revenue number is just the best guidance that I can give you.

But I do want to take the opportunity to deep dive into that just a little bit more.

As you know, I called out $300 million of benefit on the net revenue line due to the new revenue recognition rule.

$100 million of that is really in relation to customer business agreements and through -- to incentives.

And there are a number of effects that we had to be estimating in this.

So first of all, as you know, we had amortization of incentives in previous deals that have been previously expensed.

So in prior years, we expensed those and they will be now expensed over the life of the deal.

And that will be a negative, right?

We estimate actually that roughly about $0.5 billion of incentives will need to be re-recognized as contra revenue under the new rules starting 2018.

And we will -- the average life of this recognition is approximately 7 years.

So it's not -- so it's a headwind.

It's not really material in the context of our size.

But then in addition to that, we would have had some incentives in 2018 or later that will now have to be carried back to prior years, to the original deal inception or carried forward.

So that will actually reduce the amount of incentives recognized in 2018.

So you can see these 2 things are toggling with each other.

And then the last, the third thing is that, obviously, we will be having new deals coming in, and that could impact this calculation, too, depending on the terms and conditions in these kind of deals.

So when you put all of this together, we do estimate the net benefit of that $100 million that I just referenced, but obviously, that could change over time.

And then, beyond 2019, we will continue to amortize the remainder of that $0.5 billion, of that roughly $500 million that we have to re-recognize as contra revenues under the new rules.

So you can see this is a relatively complex area, and that's why we're staying with net revenue guidance, and we're not going to split it up in gross and into contra.

With respect to your second question, there's really not much more that we can say to you.

And quite frankly, what our cross-border business, inbound business in Europe is has actually no relationship in terms of how the European Commission would be looking at fining us, if they fine us.

But we have, at this point in time, really no new news.

So I'm still going to point you back to the last Q that we filed.

That is a pretty accurate statement in there.

And unless something happens between now and when we file the 10-K on, what, Feb 14 or 15, if we have an update, obviously, the K will be updated by that time.

Martina is in accounting heaven for the last few weeks and months.

Yes, between rev rec and tax, I'm sure it's been a party.

Yes.

And you also got Venezuela, which she's done an outstanding job of and trying to put her arms around how to manage that through the next period of time.

In Venezuela, we're still very much on the ground doing all the right things.

We've got a great team.

We're supporting a lot of our clients there.

We're not pulling out of the business on the ground.

That would be a very unfortunate thing to do.

And I think it would spark all kinds of humanitarian issues, given the role we play in that economy.

In fact, we are trying to work with other players, including multilateral institutions, trying to find a way to make this a sensible outcome, because there will be an outcome one day in Venezuela.

So this is not a -- you've got to think out long term on what we're doing in all of these things, whether it's European cross-border or Venezuela or these rules.

At the end of the day, we're trying to give you guys some thought of what we are thinking in terms of what the impact could be.

But Martina's laid out a pretty good estimate of where we think our '18 revenues and expenses and EPS and our combined '16 to '18 goals will go.

And I'll say you, over '16 to '18, we've had a good run.

We gave you an update in September when we raised our guidance.

Now what we are doing basically is making sure the accounting flows through.

Yes, there's a small improvement in '18 that she pointed out.

Some of it gets eaten up by Venezuela, some of it gets eaten up by the lapping of the acquisitions.

That's kind of where we are.

We're driving our business to win share and keep taking advantage of the secular trend in the business.

That's what we're trying to do and not getting ourselves tied up between rebates and incentives and gross revenue and net revenue at a time when there are so many moving parts that asking someone to estimate that accurately would be asking for the moon.

And your next question comes from the line of Bryan Keane with Deutsche Bank.

Just wanted to talk or ask about 2 things.

One, just the strength in U.S. credit and debit.

Is that just some lapping of some of the headwinds?

Obviously, USAA, but the numbers are obviously picking up there, maybe strengthened?

It is.

Okay.

So there's nothing else to call out there?

No.

No, most of it is just that.

And then all the other things you heard about is pending.

They're all coming on board.

So you'll see some benefit in the Bank of America when it starts issuing.

It'll take time.

You'll see some benefit from the Kroger co-brand, the Cabela's co-brand.

But these things take time.

Meanwhile, there's the natural spending pattern that SpendingPulse shows up and there, as I said, fourth quarter growth was actually lower year-over-year than third quarter, just to be clear.

Yes, yes.

And it doesn't seem -- there's no clips going the other way like -- that created a headwind like USAA.

Don't go there.

You're giving me nightmares.

Don't go there.

Yes.

And then my follow-up is just on tax reform.

I just was trying to quantify total tax reform investments.

I got the $100 million for the inclusive growth.

And then just thinking about employee retirement and then some of the accelerated investments that you talked about, Ajay, just in all, it seems like maybe we're getting to 20% to 25%.

I'm just trying to get to a number of what we're reinvesting total of the tax benefit.

Okay.

Just to let you know, the total cash tax benefit as a result of the tax reform on an annual basis is in the zip code of $450 million, right?

And we're doing then 2 things.

One, we're taking the $100 million in order to invest into the Center for Inclusive Growth.

And the other part that Ajay was mentioning in terms of the employee benefits as well as the additional investments we're doing, we have that embedded in the baseline of the operating expenses, okay?

And that's -- it's all embedded in the low double-digit guidance that I have been giving to you for 2018, based on the new revenue recognition rules.

I don't want to run a business in which I'm paying employees for their retirement long term, because this is not a 1-year, $1,000 contribution kind.

This is we're adding to our already good 401(k) and defined contribution plans around the world.

And second, we are investing in data and digital and Fast ACH.

We don't want to run a business where that stuff is kept as a separate item.

So Martina has got those embedded in the way we'd look at the future of our business.

The only thing that's not embedded in that is these lumpy contributions that are going to the Center for Inclusive Growth because, honestly, $100 million going into that center being directed for workforce training and financial inclusion in the U.S. and elsewhere, that kind of lumpy contribution is the one that we've not got embedded in our guidance.

We're telling you about it, but it's embedded in the total, but not in the net that we're looking at.

Right, Martina?

Well, it's in the low double-digit operating expense guidance.

We put 2 ppt for that particular contribution.

In the total.

In the total.

But not in the organic growth?

No.

And your next question comes from the line of Craig Maurer with Autonomous Research.

I wanted to ask you on Brazil, considering recent IPO drawing attention there, plus you're seeing the recovery finally seeming to be on firmer ground.

You've gained a fairly enormous market share against Visa there over the last few years.

And I believe last summer, you're now the biggest new issuance brand in Brazil.

I was wondering if you expect to see, a, Visa be able to rebound against you there; and b, how you look at that market going forward, considering the big gains you've had recently.

First of all, I would always expect my competitors to make every effort possible there.

They've got a strong company.

They've got good people on the ground.

They're going to make efforts to win back share.

And that's the reality, and it's the -- I believe that we survived by being competitively paranoid about all our competitors.

So that, to me, it just is, I take it as a given that they'll attempt.

There's a lot of competition on the ground, it's not just Visa.

It's Cielo.

It's the local methods of doing a lot of work.

There's a lot of competition on the ground locally.

There's also a lot of regulatory changes that are going on in Brazil, including with the bankers' association attempting to look at the idea of the way installments are paid and the whole installment method is managed, including the settlement time.

There's a ton of things going on in the market in which we are today, a very large market share player there.

The political environment in Brazil, yes, this year '17 showed an improvement, but you got to remember, you're comparing '17 to '16, which was not a particularly, let's say, delightful year in Brazil.

It was a hard year.

And they got some political stability; '17 turned out to be better.

Good economic policies were getting put in place.

Remember that '18 has an election, and that election has currently identified 2 players to come there, none of whom is in the current government.

And so it's a little unclear to me what instability that could cause in the economic environment.

That's why Martina pointed out, and I pointed out, that there are pockets of instability across the world that we're careful of, and Brazil is one of those for this reason of the political circumstance and the longevity of their economic reforms.

I've been around a long time with working with Latin America, and I've learned that you cannot take for granted what happens for a couple of years because it does find its way through change on where politics goes.

So that's where we are.

I'm relatively constructive about Brazil.

We're investing on the ground.

The number of people we have in our office have increased.

Our capabilities on the ground have increased.

Our technological investments on the ground have increased.

And we're going to keep seeing growth there is what I'm hopeful for, but I -- 2018 is a year to watch out for.

Your last question comes from Tien-tsin Huang with JPMorgan.

I won't ask an accounting question.

This is -- just want to ask a bit about deal activity maybe, because based on Craig and Bryan's questions, how would you characterize, guys, the pipeline for new deals and renewals this year in '18 versus '17?

It seems like you've got a good backlog going, so I'm curious what the pipeline might look like for this year, especially in things like B2B.

If you can talk -- comment on that.

Yes, so Tien-tsin, obviously, the numbers in Q4 that you saw in the rebates and incentives and we had given you a little bit of a heads-up on our November call that, that number might be coming in a little bit higher than what we had forecasted before, that should show you that we have actually terrific deal activity in Q4, and those deals will be rolling in over the next 6 to 18 months.

It depends which deal you're looking at.

I, quite frankly, with everything that I'm seeing from the pipeline from our reach -- from our regions around the world, I think that we are going to have a similarly robust deal activity in 2018.

I don't think there's any letting up.

I think there is a lot of players in the market that are looking to do things with us as a network, and it will be similarly robust.

And on B2B, Tien-tsin, the global travel deals that we did over the last couple of years, they're actually helping us in our cross-border, as an example, back to somebody's question, I forget, on cross-border.

But there's all this work we're trying to do with the B2B hub.

We've announced the one partner had signed up.

There's a bunch of partners in the pipeline.

Hopefully, a few of them will come into locking on.

There's all the work we're trying to do with Fast ACH and Send in different parts of the world.

So B2B is pretty active for us right now.

We consider ourselves to have good assets in place.

So we are working our pipeline hard.

So I'm sorry, we're going to have to cut you off, Tien-tsin.

We can chat another time, but thank you all for your questions.

And I'd like to wrap up with some closing thoughts.

We're pleased with 2017 financial results.

We think it's all driven by strong operating performance and execution of our strategy.

Overall economic trends are positive.

And as we said a couple of times on this call, we're going to monitor some risks and uncertainties that Martina and I have spoken to.

But overall, we expect 2018 growth to be similar to 2017.

Meanwhile, we expect tax reform will benefit the U.S. economy and have a positive impact on our company.

We see this as an opportune time to further invest in our employees and communities and continue to strengthen our business with strategic investments in those key growth areas while continuing to return excess capital back to our shareholders.

And so thank you for your continued support of all of us and our company, and thank you very much for joining us on the call today.

Thank you.

Ladies and gentlemen, this concludes today's conference call and you may now disconnect.