Visa Inc (V) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

I will be your conference operator today.

At this time, we would like to welcome everyone to Visa Incorporated fiscal second quarter 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

I would now like to turn the call over to Mr.

Jack Carsky, Head of Global Investor Relations for Visa, Incorporated.

Sir, you may begin your conference.

Thank you.

Good afternoon, everyone, and welcome to Visa Inc.'s fiscal second quarter earnings conference call.

Speaking today are Joe Saunders, Visa's Chairman and Chief Executive Officer and Byron Pollitt, our Chief Financial Officer.

This call is currently being webcast live over the Internet.

It can be accessed on the Investor Relations' section of our website at www.corporate.Visa.com.

A replay of the webcast will also be archived on our site for 30 days.

The PowerPoint deck containing highlights of today's commentary is also posted to our website.

Let me please 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.

Additional information concerning those factors is available in the Company's filings with the SEC, which can be accessed through the SEC website and on 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 in the financial and statistical summary accompanying our fiscal second quarter earnings press release.

This release can also be accessed through the Investor Relations' section of our website.

With that said, I'll turn the call over to Joe.

Thank you, Jack.

And thanks everyone for joining us this afternoon.

Before I get into a discussion of the quarter's financial results, I wanted to spend a moment reviewing what has been accomplished thus far to take the Company public.

Everyone in the organization has worked extremely hard over the past two years to form what is today Visa Inc.

From the initial merger that brought together the five autonomous payment organizations, to putting in place the systems, mechanics, policies and processes to allow the Corporation to work as one entity, all of which required an extraordinary effort for which I thank everyone and I'm extremely proud.

Significantly, all of this was done while successfully continuing to grow the business and its revenue and profitability which are reflected in our earnings results this quarter.

Every member of the organization is to be commended for an outstanding job and I am grateful for their hard work.

With that, let me go over the inaugural public quarterly results.

Earlier today in our press release we announced our fiscal second quarter 2008 financial results on both a GAAP and adjusted basis.

For the purposes of this afternoon's conversations with all of you, we are going to refer to our results on an adjusted basis which management believes is much more indicative of the true operating earnings power of the franchise.

We'll also provide a clearer understanding of the one time items related to our reimbursable litigation, restructuring and initial public offering expenses that have had an important impact on our total expenses and taxes.

Recognizing that we have a very complicated share structure involving multiple classes of stock, we have also provided our fully diluted A common shares outstanding on an adjusted basis which reflects the shares outstanding figure for October 2008 when the full redemption of the Class C series two and partial redemption of the Class C series three for Visa Europe occurs.

As e move through the balance of this year it is our intention to continue to offer you this perspective and updates where applicable in addition to the GAAP equivalents.

With that, let's discuss the quarter's performance.

Visa, Inc.

is off to a great start.

Despite a challenging economic environment, we delivered strong financial results and recorded strong product growth in our inaugural quarter as a public Company.

For the fiscal second quarter, net income on an adjusted basis was $401 million or $0.52 per diluted Class A common share on an adjusted basis of 779 million shares outstanding.

This represents a 44% increase over adjusted pro forma net income of $278 million in the comparable 2007 period.

There's no appropriate diluted earnings per share comparison for 2007 as in the prior year, under the association model we were a non stock Corporation.

On a sequential quarter basis, these results were ahead of our internal budget projections made at the outset of our fiscal 2008 year, due to stronger payments volume and transaction growth.

While we continue to see some softness in the traditional U.S.

credit card growth as we have all year, as we anticipated, it is largely but not entirely being offset by debit and rewards card growth in the U.S.

and robust growth internationally.

At this time we see no discernible trend of a softer U.S.

economy meaningfully affecting our payment volumes.

In that regard, during the quarter we experienced strong growth worldwide and across our diverse product set, credit, debit and commercial.

Notably, payments volume, which is the primary driver of our revenue increased 19% to $681 billion in the first fiscal quarter ending December 31, 2007.

Total volume, which includes cash volume, increased 21% to 1.1 trillion.

Cash volume primarily represents debit and credit cards used at ATMs rather than a point of sale and although we do not view cash volume per se as a profit driver of the business, it is a metric we focus on as it offers an enormous opportunity to further migrate our card holders away from cash transaction, point of sale, credit and debit transaction.

As you know, we report these metrics -- all of these metrics, above metrics on a one quarter lag basis.

On a current quarter basis, for our fiscal third quarter, we expect a similar rate of payment volume growth.

Long-term, we expect that the secular shift towards plastic and away from cash and check, augmented by further product enhancements and new product development will continue to further drive growth.

Year-over-year, card growth was 16% with more than 1.6 billion cards carrying the Visa brand.

Credit grew 12% to 796 million cards while debit rose 21% to 820 million.

Net operating revenues were strong in the fiscal second quarter at $1.5 billion or an increase of 22% over the second quarter of 2007 on a pro forma basis.

As we saw solid growth across all categories.

Price adjustments made last year, ahead of our transition to a public Company, which were in full effect by the third quarter of 2007, had an impact on the second quarter's results year-over-year.

Partially for this reason, net operating revenues will be modestly lower than our volume growth rates in the next two quarters.

Our current expectation for revenue growth over the next quarter is at the higher end of the range of our long-term annual revenue guidance of 11 to 15% and is ahead of what we had planned coming into the year.

Having said that, we recognize that the economic backdrop is increasingly challenging for many businesses here in the U.S.

and could still impact our fiscal fourth quarter.

Globally, we should continue to benefit from the overall secular shifts in the payments space, as well as increases in the amount of non-discretionary purchases on both credit and debit products and cross border transactions.

Before I turn the call over to Byron, let me quickly discuss one legal matter.

As far as our covered litigation is concerned, there is little incremental to report.

As disclosed in our prospectus in conjunction with our IPO, we took an additional FAS 5 reserve of $285 million for covered litigation in the fiscal second quarter.

We made our first payment to American Express at the end of the quarter which Byron will discuss further.

Our $3 billion escrow and the mechanism we established to address the outstanding covered litigation cases, protects our public shareholders from liabilities associated with these cases and ensures that the related expense is fully reimbursable.

With that, let me turn the call over to Byron who will take you through the financial results.

Thank you, Joe.

Before I discuss our financial performance, I would like to share with everyone our philosophy around earnings guidance so that you can put current quarter performance in perspective.

Our approach will be to provide a medium term outlook covering a three-year period for the following key metrics.

First, annual net revenue growth of 11 to 15%.

Annual adjusted operating margin in the low 40% range.

Annual adjusted diluted Class A common earnings per share growth of 20% or more.

Annual free cash flow in excess of 1 billion annually and we define free cash flow as cash from operations, plus cash reimbursements from the litigation escrow, less capital spending.

These metrics will be supplemented by updates and additional insights where and when appropriate.

Payment volume growth was very strong in the second quarter, compared to the prior year, as we posted double-digit increases in each of our regions.

While the international regions are our fastest growing, the U.S.

continues to represent the greatest portion of our revenue and offers significant opportunity as we continue to build out credit and debit and expand into new payment categories.

Continued strong growth and revenue performance out of Asia Pacific, Latin America, and Central Europe, Middle East and Africa will be driven by growth in new cards, usage and acceptance.

Process transactions or those that we define as being processed on the Visa network, totaled $8.8 billion in the fiscal second quarter, an increase of 15% over the similar period a year ago.

Not only do we generate higher revenue from the transactions we process, we can also offer value-added products and services to our clients as a result of the information we are able to capture at the point of sale.

One key focus area in the near term is building out these processing capabilities internationally.

Gross revenues of 1.8 billion were up 30% over the $1.4 billion reported in the comparable quarter of 2007.

Volume and support incentives increased by $151 million to $338 million, from the prior year and by $88 million from the first quarter.

While new acceptance contracts and multi-year bank agreements resulted in higher incentives, it is important to note that 2007 also included certain accounting adjustments which resulted in an unusually low level of incentives during that fiscal year.

Total net operating revenues were approximately $1.5 billion, a 22% increase over the pro forma operating revenues of $1.2 billion reported for the second quarter of 2007.

As Joe mentioned, this quarter benefited from price adjustments primarily in non-U.S.

regions, that were fully implemented in the fiscal third quarter of 2007 which we do not expect to continue in future quarters.

In our core business, we saw excellent results across all of our key fee categories.

Service fees, which reflect payments volume from the prior quarter, were $792 million, up 29% over the pro forma results of that -- of the prior period, reflective of higher volume and pricing adjustments instituted in the third fiscal quarter of 2007.

Data processing fees rose 34% over pro forma results to $494 million, and were driven by a 15% increase in process transactions as well as pricing changes initiated in April of 2007.

International transactions or cross-border fees were up 35% to $379 million, and continue to benefit from higher multi-currency payments, volumes across all regions.

Our adjusted operating margin was approximately 46% in the quarter, a little ahead of our stated long-term guidance of low 40s, as we benefited from continued strong revenues in the period and a lower than anticipated marketing spend level in the quarter.

Despite our results year-to-date, we expect a lower adjusted operating margin in the second half of the year due to higher expense levels, primarily associated with Olympic related marketing and increasing investment in new product initiatives.

On a full year basis, this puts us in the range of a low 40s adjusted operating margin.

Total expenses increased $307 million or 39%, driven primarily by a $285 million litigation provision in the quarter, related to our retrospective responsibility plan.

Sequentially, expenses were relatively flat after adjusting for the provision.

Year-over-year, advertising, marketing, and promotional costs increased $33 million, or 18% to $215 million, tied primarily to the upcoming Olympic games.

Professional and consulting fees declined $40 million to $96 million over the prior year, and this category will increase in the second half of 2008, driven by supportive new product initiatives.

Capital expenditures were $166 million in the quarter.

We expect capital expenditures to remain at an elevated level through the end of fiscal 2009 as we complete our new East Coast data processing center.

After this, we expect capital expenditures to run at around 3 to 4% of gross revenue on an annualized basis.

As a result of the IPO, we were the beneficiary of a one-time tax adjustment in the second quarter, totaling $107 million, due to a change in our state tax apportionment that resulted in a remeasurement of our deferred taxes.

While our full year effective tax rate is expected to be approximately 37%, we expect our effective tax rate for future quarters in 2008 to be approximately 41%.

Our goal is to reduce this 41% rate to a level around 35 to 36% over the next five years.

We ended the second quarter with cash, cash equivalents, available for sale investments and restricted cash of $8 billion.

Restricted cash of approximately $2.1 billion represented the balance of the $3 billion litigation escrow established at the IPO after making the initial payment to American Express of $945 million as part of our legal settlement.

Unencumbered cash and cash equivalents of $5 billion includes $2.7 billion we intend to use to redeem all of the series 2 and a portion of the series 3 Class C shares this October that are held by Visa Europe.

Management is very focused on not allowing excess cash to build up on our balance sheet and to that end is currently considering a share repurchase program in fiscal 2009.

Goodwill increased by $1.1 billion from the prior quarter, primarily as a result of the true-up of regional ownership which occurred shortly before the IPO.

In this process, ownership was reallocated between regional owners based on each region's financial performance in the four quarters ended December 31, 2007.

As a result of the true-up, on a net basis, approximately 26 million additional shares of Class C were issued, resulting in a 4 percentage point reduction in the ownership interest of the Visa USA member group with a corresponding increase in the collective ownership interest of the other stockholders.

As Visa USA was deemed to be the accounting acquirer in the reorganization, these shares constituted additional purchase consideration Visa USA paid to you acquire the regional businesses.

We have valued these shares at the IPO price of $44 per share, resulting in an increase of $1.1 billion in goodwill and shareholders' equity.

Turning to our cash flow schedule, please note that the $945 million payment to American Express is reflected under operating activity, resulting in a negative cash flow for the period, while the reimbursement is reflected under financing activities.

Subject to that adjustment, we expect to throw off over $1 billion in operating cash flow this year.

Now let me comment on what we see over the balance of 2008.

As I mentioned a moment ago, we entered 2008 with the expectation that a softer U.S.

economy would have an effect on our payment volume and revenue growth over the next several quarters.

What we have seen to date, however, is continued solid payment growth.

We also have a pretty clear view into our U.S.

payment volume for January through March, which will be reflected in service fee revenue in our third fiscal quarter.

Based on this early view, we are running at the higher end of our stated revenue guidance range of 11 to 15%.

Nevertheless, at some point the softening economy will likely impact our business in the U.S.

Although we remain confident in our growth projections, we will continue to monitor and provide updates as necessary.

As noted earlier, expect our annual adjusted operating margin to be in the low 40% range for fiscal 2008.

Adjusted diluted earnings per share growth is on track to meet our current goal of greater than 20% and lastly, subject to declaration by the Board, we plan on paying our initial dividend in the third calendar quarter.

That concludes my comments so I'll turn the call back over to Joe.

Thanks, Byron.

In closing, let me quickly sum up the initiatives we are most focused on over the coming quarters and a little further out.

As we shared with many of you on our IPO road show, we have a number of exciting opportunities in front of us, domestically and internationally.

First and foremost, our focus lies in our continuing to build and expand our suite of products here in the U.S.

Personal consumption expenditures on cash and check in this country totaled $4.7 trillion last year, which provides us with a lot of runway for growth.

Secondarily, we want to -- secondarily but I might add as importantly, we want to export these same products around the globe.

Moving over the $1.4 trillion of cash volume on Visa branded cards to credit and debit at the point of the sale is an enormous opportunity.

So building out usage and acceptance globally is job one.

Our debit processing position is second to none in the U.S.

and applying this internationally would serve our clients, consumers and businesses around the world.

Other opportunities include prepaid products, money transfer, increased Internet penetration and mobile technology.

Prepaid cards are already in the marketplace, are gaining traction and will represent a rapidly growing piece of our business.

Money transfer represents an area of the payment business that is new to Visa but which would fit seamlessly into our payment network.

We are are equally excited about our plans to continue to expand access channels for card users, both in Internet and mobile technology.

While we are the payments leader in the Internet space, we are continuing to focus on security, convenience and enhancing the checkout process to increase our market share.

On the mobile technology front, we are focused on enabling the mobile device to support Visa payments, including money transfer and person-to-person payments, and to serve as a Visa acceptance device in emerging markets.

As the payments industry leader and innovator we believe that we are best positioned to capture these product opportunities.

We will continue to update you on these initiatives as events unfold.

With that, we are ready to take questions.

Given the large audience on the call we ask that you limit yourself to one question.

Operator?

At this time, all lines are in listen-only.

(OPERATOR INSTRUCTIONS) Tien-tsin Huang from JPMorgan you may ask your questions.

I'll try and do one question.

I guess on the economy, the obligatory question, glad to hear that the volume growth sounds like it's running at stable levels.

Maybe can you give us more detail on U.S.

volume trends and how it tracked month to month in the second quarter.

Secondly, get a lot of questions about the economic stimulus and what the rebate checks, given what you've seen in the past, what kind of near term impact could that have on volumes?

Well, our volumes in the U.S.

have been -- remain fairly constant.

They're down modestly as the year has gone on.

But we continue to get, as I mentioned in the talk, we continue to get a lot of support from our international volume and from our -- and particularly from our debit volume in the United States which is growing at mid-double-digit rates and actually from our rewards and signature credit products.

So while this could have an impact on -- in the fourth quarter, that remains -- that really remains to be seen.

We've kind of been looking for it and it hasn't substantially occurred yet.

As I mentioned on the call, our growth rates in the -- in our third quarter or this current quarter will be very similar to what they were in the second quarter.

As it relates to the tax rebates, I can't answer that question.

I'm not an economist,.

I would hope that it would boost our volume but I -- but I'll reserve judgment on that.

Okay.

Sounds like it could be some potential upside.

If I could ask a quick follow-up to Byron, the impact of currency on revenue growth in the quarter.

With regards to FX, recognizing that over 70% of our revenues are denominated in U.S.

dollars, the FX impact in the quarter was about 3 percentage points of growth.

3 points.

Got it.

Thanks.

Liz Grausam from Goldman Sachs, you may ask your question.

Thanks, just continuing on from Tien-tsin's question, we did notice that volumes not only were stable in the U.S.

but actually accelerated across both debit and credit across the prior four quarters.

Also, card growth was extremely strong at over 13% in the quarter.

Could you give us some perspective on whether or not you're seeing any market share gain or portfolio movements into the Visa brand and how your card growth is that strong in the U.S.

currently.

Well, our card growth is as strong as it is primarily due to the debit product.

That would take -- that takes the growth clearly into the double-digit range.

As it relates to market share, the only thing I can say is -- well, I can remind you that we resigned a couple of large clients in the first quarter and tell you that we are very aggressive, from a competitive point of view and we're comfortable with where we are and what's going on.

Byron, on the rebates and incentives that you had in the quarter, obviously ticked up from a year-over-year basis but a little bit below our expectations actually.

How should we think about going forward into the rest of 2008 and 2009, the incentive line as a percentage of gross revenue?

Yes, so as a reminder to the group and as I mentioned in the opening remarks, the incentive levels for fiscal year 2007 were unusually low as we prepared for our IPO, we standardized our accounting for this element and we had some accounting adjustments that lowered the -- kind of the normalized run rate of incentives.

So looking forward into 2008, if you were to combine the first six months of incentives as a percent of gross revenue, we view that as a much more normalized rate of incentive composition, recognizing that there are a lot of factors that go into the incentive calculation, but we think that the level of incentives in the first six months of fiscal year 2008 is representative of what you might expect for the full year.

Great.

Thank you.

Adam Frisch from UBS, you may ask your question.

Thanks, guys.

Congrats on the deal in the quarter.

Wanted to ask you a different question, first for Joe and then Byron, I had a question for you.

Joe, there obviously was a lot of time and resources spent on the deal, not only in the past month on the road but also the several quarters before that from your management team.

Do you feel now that the deal is done, everyone is back in their seats doing their regular jobs, that you kind of -- you made up maybe some of the lost time that was spent on the transaction itself or do you feel you still have some stuff to do there to get back up to speed or back to where you want to be and what would those issues be?

Well, I can assure you that we're back to work on a full-time -- actually on an overtime basis.

I'm very happy with the progress that we're making.

We have a great management team and we're all focused on going in the same direction and we're continuing to do the things that we have indicated publicly that we're going to do and I'm very confident we're going to get where we said we were going and that things will work out well.

Okay.

And then Byron, a follow-up.

You said the three-year target for operating margins is in the low 40s but you're there already.

Where do you expect, if that were to change two things, one, which line items would you expect the most divergence from your prior expectations and what time of year would you address them?

Would they be as you go or would you only update those three-year guidance metrics at certain times of the year like fiscal year-end calls or something like that.

Let me respond to the first part of your statement which is that you're already there.

I just want to remind the group that yes, in the first and second quarter our adjusted operating margins are above the level that we've been guiding to, namely low 40s.

But the level of spending in the first and second quarter of the fiscal year is lower than what we expect in the second half, both in the third and fourth quarter.

And so when we guide to low 40s, we have in mind a full year perspective with a higher spend level, particularly in the marketing area and in what we designate as professional fees, which is the category in which we booked a lot of the cost associated with new product initiatives, which we will be intensifying that focus in the second year now that everybody is back in their seats, so-to-speak.

And as we think about the margin going forward, again, I would just remind the group that Visa did not exist as a global entity prior to October 3, 2007.

And so we still have a lot of work to do to evaluate the appropriate levels of marketing, which we intend to put under a very thoughtful return on investment set of criteria.

The second line that we will be looking very hard at is the professional fees.

In order to sustain longer term, double-digit revenue growth, we are very committed to launching new product and the development of those new product initiatives, a lot of that cost will be in the professional fee line.

And then also, as you can imagine with the merging of the businesses, there's a lot of rationalization still to take place as we integrate all the different regions into a streamlined, cost effective global enterprise and so we would expect over time to have adjustments in the personnel line.

So I would say those are the three lines to focus on and our guidance today reflects in part that we still need some thoughtful time together to engineer those to an appropriate level, at which time if our margin guidance changed, we will update all of you.

Okay.

Does Antonio have any update or do you have any update on Antonio's analysis of the marketing expense, or what kind of time frame are we looking at on that?

Later this calendar year we will be able to talk about that, recognizing, again, that Antonio has only been with us -- Antonio, for those on the phone, is our Chief Marketing Officer has only been with us several months and has well under way a review globally of all our marketing and promotional programs and so much more to come later in the year.

Okay.

Thanks, guys.

Craig Maurer from Calyon, you may ask your question.

Good afternoon.

Two questions, one on marketing.

If you strip out what you're doing around the Olympics, would the U.S.

-- would you be seeing less opportunity in the U.S.

right now?

So would your domestic budget on marketing be shrinking?

And two, are there any pricing changes that we should expect to see coming down the pike, whether it be on cross-border or whatnot in coming quarters?

Thanks.

Well, the answer to the question is that we get some of our strongest return on investments in advertising that we do in the United States.

And particularly that advertising that is associated with expanding the usage parameters of the card.

We've moved with the debit card and the credit card into a lot of payment categories, fast food, utilities, and a number of things and it's been helped, aided by our advertising.

But I don't want to get -- I don't think I should get too involved in that at this particular point in time, other than to say from a budgeting point of view and what we anticipate our marketing spending is very consistent with everything that we planned for the year.

And so, by the way, is our budget for the third and the fourth quarter.

We are probably in a position to slightly overdeliver on what we had as an initial budget, but basically we're really quite on track and we are on track on a quarter by quarter basis as it relates to margins and everything else.

On the pricing front, as you may recall, most of the pricing adjustments we made were done in 2007 and in fact we're beginning to annualize some of those expenses, some of those adjustments, many of which were initiated in the -- and became effective at the beginning of the third fiscal quarter of 2007.

So the primary adjustments we made to bring us to a much more comparable level to MasterCard were done in '07.

We have some much more modest price increases that -- or adjustments that are being made effective this month.

They relate to U.S.

ISA fees and so that the level of price adjustment in '08 is much more modest.

We feel that our pricing levels now are very comparable, maybe slightly lower, but pretty comparable to MasterCard.

Okay.

Thanks, gentlemen.

Dan Perlin from Wachovia Securities, you may ask your question.

I just want to make sure I heard one of the things correctly.

Byron, you said January to March data is trending kind of right in line with what we've seen and then you threw out revenue numbers at the high end, 11 to 15%.

So are you saying that the January to March domestic numbers are running at 15%?

Yes, so the--.

Would that compare to the 12% that you just--?

Let me clarify.

What we said was the January -- we have very clear visibility to our payment volume numbers for January, February and March, which are the primary driver of our service fee income for the next quarter.

So January, February and March payment volume informs service fee income, in this case in fiscal Q3.

Based on our visibility to that purchase volume and how it translates into our net revenue, we are guiding or we are forecasting that our revenue should be in the upper end of 11 to 15% range that we have guided for the enterprise globally, recognizing that that service fees represent around 40% of our total net revenue.

Right.

And this compares to what maybe you had originally thought which would have been somewhere in the 11% range?

What we had originally anticipated at the beginning of the fiscal year, so this would have been back in that September, October time frame, was that the looming specter of a U.S.

downturn would start to impact us by the third and fourth quarter, fiscal quarter, so our original expectation was that we would have purchase volume in the U.S.

that would have been lower than what we actually saw in the January through March time period.

Good.

So that's a notable pickup.

Can you just remind us the incremental Olympic spend expected in the second half?

I don't think we can remind what we didn't--.

I'll try it again.

But we appreciate you asking.

Very good.

I'll hop off.

Thank you.

Sanjay Sakhrani from KBW you may ask your question.

You guys had talked about a framework around the restructuring.

I just was wondering sort of where you guys were in the process.

I think, Byron, you mentioned that the synergy number that you guys have talked about is still a moving target.

Again, as you all can appreciate, we have done a preliminary analysis of the synergy or cost reduction or cost improvement opportunities associated with bringing together the five regions that merged on October 3.

On a preliminary basis, management has identified approximately $300 million worth of cost opportunity, which it believes is attainable over the next two years.

So that's where we currently stand with regards to expense opportunity, but I'll just remind the group at the same time that it is our intent to reinvest aggressively into new product initiatives and much of that reinvestment does take the form of expense.

So in the coming quarters, we will talk more about our progress on this front, but that gives you our initial view of what the cost opportunity was as it relates to the merger.

Okay.

And just one follow-up.

On the volume numbers just so I'm clear, you guys mentioned January through March being pretty solid, but is there any color on April and May?

I would assume you guys saying there's no discernible impact means April and May are pretty okay too?

Well, Byron can discuss that further but May isn't here yet and we're--.

I'm sorry, April.

Byron, go ahead.

Yes.

So if -- this is a little bit like reading tea leaves, but if you take a look at March and April as opposed to January and February, we are starting to see some potential softening, particularly in traditional credit, but at the same time there is no discernible trend yet that we can call out and what is adding to the difficulty in reading it is the Easter shift, which last year Easter was in April, this year it was in March and that's, given the retail impact that that has, it muddies the waters.

But so possibly, but no clear discernible trend yet, but stepping back, we do expect to still see strong double-digit year-over-year growth and sequentially we still expect to see lift in both payment volume and net revenue quarter-to-quarter.

Okay.

Great.

Thank you.

Patrick Burton from CitiGroup, you may ask your question.

Yes, hi, congratulations on a very solid quarter, guys.

My question is for Byron, and that is the international transaction fee revenue, the actual dollar amount was down from the first quarter, which is the first time that's happened in the last five quarters.

Can you talk about what's underlying international transaction fees?

Yes, so on the -- what I would say, this one is -- has not normalized yet because, number one, we did have some pricing adjustments to that line in the previous year.

It is also one that is seasonal and so it's got to be careful at looking at it from quarter-to-quarter.

At the moment, we've got strong year-over-year growth and I think once this year runs out and we annualize the pricing adjustments, it will be easier to read what the underlying activity -- what the underlying activity is that's driving it.

This is clearly one of the more volatile lines in the revenue component, because it's so directly related to travel, currency impact is another factor that influences the amount we ultimately book at revenue.

And as I indicated earlier, this is an area where we took some pricing adjustment outside the U.S.

last year.

We're doing it modestly inside the U.S.

this year.

So this line will take a a year before it normalizes.

In terms of the underlying level of travel, however you want to define it, you're not seeing any slowdown there yet with the economy?

No.

What we're seeing, we're seeing strong growth, both in the U.S.

as well as outside the U.S.

So if it's a slowdown, it's not discernible to us yet.

Okay.

Thank you.

Chris Brendler from Stifel Nicolaus, you may ask your question.

Thanks.

Good afternoon.

Can you talk at all about -- I'm a little confused a lot of it hasn't been asked already.

But the transaction growth of 15% in March, is a pretty material acceleration from recent quarters.

Any additional color on what drove the bump in transaction growth?

Well, I don't think we've talked about transaction growth.

We've talked about dollar volume growth and revenue growth.

This is a March number too.

It's sort of the opposite of what we'd think.

You saw actual pick-up in transactions in March quarter.

It's the quarter ended March.

So recognizing that the prime -- that a major driver of our growth over the past quarter has been debit and that debit typically has a lower average ticket than credit does, for a given payment volume that has a higher mix of debit, you would expect to see some acceleration in the growth of transaction versus the mix of a year ago, which would have been somewhat less in debit.

Okay.

So it's a function of just the math of the average ticket?

It's a -- yes, it's a function of debit usage, is more transaction intensive per dollar of spend than credit.

Okay.

And then have you discussed or disclosed at all what percentage of your revenues are transaction based rather than volume based?

No, we haven't.

It's not as simple as just service fees or volumes, the rest is transactions?

What we -- well, we haven't disclosed that at this point yet, but we'll take that thought under advisement.

Okay.

Thank you.

Tim Willi from Avondale Partners, you may ask your question.

Thanks, good afternoon.

A question about the emerging markets, I would expect that in the coming years you'll have lots of press releases about new technologies and payments tools, et cetera.

I guess my curiosity is that some of the stuff you're working on and incubating and you look at the global payments marketplace, are there any types of payments where you're going to develop something that you think could actually have a significant impact on adoption of electronic payments and subsequently volume and transaction growth or should we expect that as you announce new products and technologies, that these really just are tools that support sort of sustainable growth rate of volumes and transactions that you've articulated?

Well, the answer to that is a little bit of both, I guess.

I think if you look at our primary initiatives, we've separated them into -- well, actually six categories, so if you look at globalizing our debit product, that's transferring our current technology.

But pretty much as it exists today.

If you look at prepaid cards, that is a relatively new platform, so we're -- we're initiating a relatively different processing capability into the market.

If you look at the money transfer, that's an entirely new business that we are trying to get into, so that would be new technology.

If you look on the other side of the coin at the Internet and mobile technology, those are initiatives that we use to both generate more volume by getting a greater share of the volume that is out there, and it's of course in a space, the Internet, which is growing in and of itself.

And at the same time, since Internet is growing and since mobile technology will probably appear, we need to do those things to sustain our day-to-day volume.

But it's a combination of sustaining your day-to-day volume and doing it in a way that allows you to capture a larger part of the market than we currently have.

Just to make sure I understand, the answer there is that it is possible, I guess, to maybe not one single product or press release announcement could change the way we think about the growth rate of the Company, but there is a possibility here that whether it be a geographic region or international versus domestic, that you do see things in development or just taking existing platforms and moving them overseas where we could say hey, growth rates here actually could accelerate for a couple years because we've made something much more widely available, or it's hitting a point of critical mass rather than sort of just a trend line kind of growth rate that will never really accelerate and deviate from where it's at?

Well, obviously, we have a huge opportunity to move technology out of the U.S.

and move products out of the U.S.

and into the rest of the world and simply by doing that, we create an enormous opportunity.

But we're also, as I said, developing new technologies and new products and I think that the answer lies in the nexus of all of those things and how they come together over the next few years, but I think it will result in phenomenal growth opportunities for us.

Great.

Thank you very much.

Chris Mammone from Deutsche Bank, you may ask your question.

Hi, thanks.

First, just to confirm, related to the Olympics that the bulk of advertising spending will occur in the quarter that the Olympics occur, I guess that would be your fiscal fourth quarter, not the quarter leading into the Olympics?

Your fiscal third quarter.

And then also, is there anything else on the marketing front this fiscal year besides the Olympics that could be -- could cause a discernible increase in marketing spend?

Well, I mean, the Olympic advertising is going to be initiated on May 15, and it will run through the Olympics, obviously it will stop when the Olympics are over.

The primary thrust of it will be from the middle of May until August, when the Olympics end.

Was there a second point to the question?

Yes, just I guess besides the Olympics, are there any other one-off events through the course of the rest of the fiscal year that could cause a discernible lift in the marketing expenditure?

I think that when we've talked about our marketing budget in the past or when we were on the road show, we talked about the marketing budget being in the neighborhood of $1 billion or a little bit -- or just a little bit more.

And that's where we expect our marketing spend to be at this point in time.

Okay.

Thanks.

Greg Smith from Merrill Lynch, you may ask your question.

Hi, guys.

In the S1 you guys talked about some revenues paid by Visa Europe that could possibly go away as Visa Europe builds some of their own processing engines.

Is that in fact still the case and is there any way to size that or give us timing on when those revenues could possibly go away?

We, on an ongoing basis, provide certain services to Visa Europe, mostly in the form of programming capability type service fees.

This is pretty much a fee for labor incurred so -- and these amounts are not material.

The only real material amount is the licensing fee, which is roughly $142 million a year and so while there is clearly some possibility that some of those services may decline over time, they're just not going to be -- they're not going to be material to our revenue.

Okay.

Perfect.

That clears it up.

Then just lastly, MasterCard obviously launched a new debit processing platform.

What kind of competitive threat do you view that as and anything that they're offering that you are not currently offering?

Well, we did it 10 years ago and we think that we've refined it over that period of time to where we have a world class and the best debit processing platform in the world and we don't -- while we're mindful of what MasterCard has done and we are respectful of what they have done, we consider them to be significant competitors and terrific people who have done a terrific job, we're very, very comfortable with our debit platform.

Okay.

Thanks a lot.

Appreciate it.

Operator at this time we probably have one more question, time for one more question.

Howard Shapiro, you may ask your question.

Thank you very much.

Congratulations for a great start out of the gate.

You guys have talked from a number of perspectives about what's driving growth in the U.S.

and overseas.

Wondering if you can help us decompose the volume growth in the U.S., just a little more precisely and tell us what the breakdown is between discretionary and non-discretionary spend, how non-discretionary spend is holding up or maybe even growing and contributing to the better than expected growth in the U.S.

Thanks very much.

So the -- when you look at the -- when you deconstruct the growth in the U.S., I think as Joe mentioned earlier, the debit -- the growth in debit, both in cards issued and in spend is very, very solid and a significant increment above credit at this time.

So that's the primary driver of growth, although both are experiencing -- are in fact growing.

When it comes to non-discretionary versus discretionary, this is, again, more of a debit story in the sense that if you deconstruct our debit spend and look at the discretionary, non discretionary, non-discretionary would be a little over 50%, whereas non discretionary on credit is more in the range of 30%.

So as debit continues to pick up share of U.S.

payment volume for Visa, the component that is non-discretionary is naturally rising and so today it would be in the 40% range, non-discretionary for the combination of consumer debit and consumer credit.

There are also a lot of power ticket items that would be considered discretionary that go through debit cards as we have expanded the (inaudible) parking lots, movie theaters, fast food restaurants, laundry mats, things that while they may not be non-discretionary, they tend to in this type of economy anyway, so we're very bullish on what's going on with our debit product now and it is fueling significant growth in the U.S.

Great.

Thank you very much.

And thank you all for joining us today.

If anybody has follow-up questions, please feel free to call Investor Relations.