Visa Inc (V) 2008 Q3 法說會逐字稿

Welcome to Visa, Inc.'s third quarter earnings conference call.

All participants are in a listen only mode.

Today's conference is being recorded.

If you have any objections you may disconnect at this time.

I would like to turn the call to your host, Mr.

Jack Carsky, head of Investor Relations for Visa Incorporated.

Sir, you may begin.

Thanks, Kelly.

Good afternoon, everyone, and welcome to Visa, Inc.'s, fiscal third 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 investor relations section on our website at www.investor.visa.com.

A replay of the website cost be archived on our site.

A PowerPoint deck containing highlights of the commentary was posted to the website prior to this call.

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 may 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 the investor relation section of the Visa website.

For historical nonGAAP or pro forma related financial information disclosed in this call, the related GAAP measures and other regulation required by Regulation G of the SEC are available in the financial and statistical summary accompanying our fiscal third quarter earnings press release.

This release can be also accessed through the investor relations section of our website.

With that, I will turn the call over to Joe.

Thanks, Jack.

And thanks to all of you for joining us this afternoon.

For some time now we have been saying that Visa, while not immune to economic downturn does have a high degree of resiliency embedded in this business model.

The proof of this resiliency can be seen in our latest earnings results.

For fiscal third quarter 2008 Visa's net income on an adjusted basis was $457 million which is a 40% increase over the prior year's third quarter on a pro forma basis.

This equates to adjusted diluted earnings of $0.59 per share.

Net operating revenues in fiscal third quarter were strong at $1.6 billion or an increase of 18% over the third quarter of 2007 on a pro forma basis as we again saw strong growth across all fee categories.

As anticipated, we are seeing operating revenues running more in line with our long-term guidance and volume growth rates and we expect this dynamic to continue.

Last year's price adjustments which were in full effect by Q3 of 2007 had a much more muted impact than the third quarter's results this year.

Byron will discuss the individual revenue line items in a moment.

We have also begun to realize the positive impact of our operating scale and our efforts in reorganizing Visa as a publicly traded company.

Revenue growth is strong and our expense base is currently growing at a very modest rate.

We delivered operating margins ahead of our internal expectations and external guidance over the span of our short public life.

Given the opportunities to continue to leverage the scale and effectively manage our expenses, we are increasing our longer term adjusted operating margin guidance to the mid to high 40% range.

Byron will get into the additional detail in a moment.

From a broader economic perspective the financial markets in the economy, particularly here in the US, have clearly seen their share of turmoil since we last reported earnings at the end of April.

Our expectation going into our fiscal 2008 year was for a tougher economic times in the back half of the year and our revenue guidance contemplated this.

During the first three fiscal quarters we have exceeded our guidance and although the tougher climate is now here and will likely continue, we expect the fourth quarter -- the fourth fiscal quarter to be at the upper end of our revenue guidance range.

For the calendar quarter ending June 2008 on which are fourth fiscal quarter's US fee service revenue will be based, payment volume in the US though softening has held up pretty well.

So what does this mean for Visa?

As we have publicly stated our business model remains resilient though not totally immune to the tough economic environment in the US and to some extent globally.

We continue to see secular shift to plastic, particularly in our debit products in the US and international volumes including cross boarder transactions are posting solid double digit growth.

We continue to see increases in consumer driven nondiscretionary spending on cards.

Through the end of June US consumer nondiscretionary spend as a percentage of total spend is up two percentage points over the end of 2007, and now represents 44% of overall Visa consumer payments volume in the United States.

The 2% increase is represented by increased debit and credit card usage.

So while we were maintaining a cautious posture, we were optimistic about the future.

On the legislative front we had a busy quarter as well.

As we were no longer subject to the IPO restrictions while speaking our company, we were able to make good headway in Washington on the issue of interchange and Visa's part in the process.

This involved a significant amount of outreach committees and their members, as well as testimony from our management team.

While there is no way of knowing for certain what the final outcome will be, we feel better knowing that the issues are being appropriately debated.

We would also note that there has been opposition to the Conyers bill on both sides of the aisle as well as from consumer groups, credit union coalitions and the Department of Justice.

We will continue to actively participate in legislative and regulatory activities which affect our industry.

On the litigation front, there are a few developments to report in the Discover action which is a covered case on Visa's retrospective responsibility plan.

We recently entered into a judgment sharing agreement which allocates payment responsibilities between Visa and MasterCard for judgments or settlements in the Discover case, with Visa's share being larger primarily based on relevant volumes.

At the same time we entered into a mutual release agreement in which Visa and MasterCard release any claims each may have against the other in connection to prior business practices.

This includes MasterCard's claims recording Visa settlement service fee which is references in the SEC filings is not a covered claim under our retrospective responsibility plan.

As a result of these agreements, we increased our litigation reserve for the quarter by $31 million on an after tax basis.

Because the Discover litigation and related claims are nonrecurring legacy items, we have not included these reserves in our adjusted income figures.

With that let me turn the call to Byron who will take you through the financial results, and I will be back to provide more detail around some of the newer initiatives we have recently saw.

Thank you, Joe.

If we are discussing the P&L, let me highlight some of the business and revenue driver from the quarter.

Payment volume which is the key driver of revenue grew 19% to $652 billion over the same quarter of 2007, as we continued to see strong results across all of our regions.

Credit growth which was just under 19% worldwide while growing here in the US at a little over 8%, compared to debit in aggregate which grew closer to 20%, made up of a solid 16% growth domestically and a strong 44% internationally.

We continued to view the secular migration to debit and the opening up of additional payment categories as very attractive near-term opportunities.

For the calendar quarter through the end of June we have experienced continued solid payment volume growth in the US up 10%.

Though moderating a bit from the 12% we recorded for the March quarter, we have seen a fairly consistent monthly rate through the end of June and continuing into July.

Cross border volume growth which is currently growing at a robust mid to high teens rate has trended lower as well from the mid-20% range we experienced through March.

The exception to this has been our CEMEA region which continues to grow in the mid-30%s range.

From an overall payment volume perspective we believe the combination of US debit and international growth will continue to provide growth momentum to our business in spite of the increasingly challenging economic backdrop.

Total transactions including payment and cash transactions were up 15% to $13.2 billion in the quarter ending March 2008 versus the prior year.

While the US grew approximately 12% during the period, we saw very strong gains across the globe highlighted by our CEMEA region by 24% and Asia/Pacific and Latin America at 20% and 18% representatively.

Process transactions for those that we define as being processed over Visa's network totaled $9.5 billion in the fiscal third quarter, an increase of 13% over the similar period a year ago.

This transaction growth drove strong gains in data processing fees which rose 20% over the prior year to $539 million.

Card growth for the period ending March was up 14% excluding Europe with over 1.6 billion cards now carrying the Visa brand.

Credit grew 14% to 814 million cards, while debit rose 15% to 850 million cards.

On an international basis, credit card growth was very strong growing 19% year-over-year while international debit cards grew 16%.

Moving on to the income statement.

Gross revenues of $1.9 billion were up 23% from the year ago period's $1.5 billion.

Volume and support incentives increased by $99 million to $274 million, representing 15% of gross revenue.

For the fourth fiscal quarter we see volume and support incentives running at around 16% of gross revenue.

Total net operating revenues were just over $1.6 billion and 18% increase over the pro forma operating revenues of $1.4 billion reported for the third quarter of 2007.

As we stated on last quarter's earnings call, price adjustments made in nonUS regions that were fully implemented in the fiscal third quarter of 2007 are no longer influencing year-over-year comparables to as large degree as they have in previous quarters, though the impact is still positive.

During the quarter we observed certain dynamics across all of our key fee categories that continue to re-enforce our belief that our business model can sustain attractive growth despite a weakened US economy.

Globally, service fees were $749 million, up 13% over the pro forma results of the prior year period reflective of higher year-over-year payment volumes in all regions.

Data protesting fees posted strong gains rising 20% over the year to $539 million.

We continue to benefit from the greater transaction volumes domestically while continuing our focus on increasing the number of transactions we processed internationally.

International transaction fees were up 44% to $449 million and continue to benefit from higher multicurrency payment volumes across all regions, as well as from pricing adjustments we made in April this year to cross border transactions involving US issued cards.

As mentioned earlier, cross border transactions remain strong although we are starting to observe a moderation in the growth rate.

Our adjusted operating margin was approximately 45% this quarter an increase of approximately seven percentage points over the similar period last year.

The combination of 18% net revenue growth with 4% expense growth drove this margin expansion and resulted in a 42% increase in operating income.

Given our performance through the third fiscal quarter and despite our expectation for modest margin compression in the fourth quarter, we now expect to deliver an adjusted mid-40%s margin for all of fiscal 2008, ahead of our initial long-term guidance of the low 40%s.

As we look out to 2009 and beyond, the resilience of our business model combined with opportunities for additional operating leverage make us comfortable raising our adjusted operating margin guidance to the mid to high 40% range as part of our outlook through fiscal 2010.

On an adjusted basis, operating expenses for the quarter increased $31 million or 3.6% year-over-year to $883 million, as modest increases in personnel, network and marketing costs were offset by lower professional and consulting fee expenses.

On a sequential quarter basis adjusted expenses increased by $100 million primarily as a result of stepped up marketing and advertising costs, to measure it with mid May kick-off of our Olympic programs and modestly higher professional fees tied to our new product initiatives.

In the fourth quarter we anticipate further increases in marketing and advertising spend tied both to the Olympics and marketing programs ahead of the fourth fourth calendar quarter holiday season.

All totaled marking and advertising spend should total about $1 billion in fiscal 2008.

We also expect a step up in professional fees tied to supporting the new product and channel initiatives which Joe will speak about in a moment.

Capital expenditures were $86 million in the quarter, over half of which are dedicated to the build-out of our new data center.

Full year capital spending is expected in the range of $425 million and $450 million.

As we had previously stated, we expect capital expenditures to remain at an elevated level through the end of fiscal 2009, as we complete our new data processing center.

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

Moving on to balance sheet we ended the third quarter with cash, cash equivalent, available for sale investments and restricted cash of $8.4 billion, an increase of approximately $400 million over the prior quarter.

Of this total there is restricted cash of approximately $2 billion which represent the balance of the $3 billion litigation escrow established at the IPO less the initial payment to American Express of $945 million last quarter and their first quarterly payment of $70 million.

In addition we intend to use $2.7 billion of cash to redeem all of the series II and the portion of the series III class-C shares this October that are held by Visa Europe.

As mentioned previously given our sizable and growing cash balances, we are very focused on not allowing excess cash to build up on our balance sheet.

And to that end we will be considering a share repurchase program as early as the first fiscal quarter of 2009.

Now I would like to 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 US economy would have an effect on our payment volume and revenue growth over the next several quarters, and we are now starting to see that impact.

We also have a pretty clear view into our US payment volumes from April through June which will be reflected in our service fee revenue in our fourth fiscal quarter.

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

As noted earlier, we are increasing adjusted operating margin guidance from the low 40% range to the mid-40% range for fiscal 2008, and over the longer term, 2009 to 2010 to the mid to high 40% range.

We also remain on track to deliver adjusted diluted earnings per share growth of greater than 20% and to annual free cash flow exceeding $1 billion.

That concludes my comments.

So I will turn the call back over to Joe.

Thanks, Byron.

Before we begin the question and answer period, let me touch on some of the longer term initiatives and progress we have seen over the past several months.

As many of you know on our IPO road show we outlined a series of near term and longer term strategic priorities that we would be investing in to support our growth.

Near term we talked about the opportunity to export many of the successful programs we established here in the US like our affluent credit programs, Visa signature and Visa infinite and our debit card product.

Executing on these initiatives continues to represent a significant opportunity and will have an influence of our 2009 plan.

Longer term opportunities we have identified include money transfer, prepaid, mobile payments and eCommerce.

Many of these innovations are already operational in Visa regions worldwide and under Visa's new structure can be scaled more easily on a global basis.

Though these initiatives are relatively small today in relation to our total volume.

We see opportunity to invest in these programs and use our brand and business scale and drive incremental transactions on the Visa network over the longer term.

Of note is Visa's money transfer service where we continue to build momentum.

Today we are announcing the extension of Visa's card base money transfer service to millions of additional card holders with the launch of new services in Indonesia and expansion of a program in Singapore.

Specifically Bank Mandiri, Indonesia's largest bank, is making Visa money transfer available to approximately eight million debit card holders.

The service will allow Bank Mandiri's card holder to send money through any of the banks 3,000 ATMs to any other Visa card holder in Indonesia.

Recipients are able to use the money to make purchases, pay bills or withdraw cash from any Visa or Plus ATM anywhere Visa is accepted in the world.

Additionally, Singapore Post Limited plans to expand its recently launched money transfer service to automated machines that will be available to card holders 24 hours a day.

The service facilitates money transfer from customers in Singapore to Visa card holders in nine countries including China, Indonesia and the United Kingdom.

Today's announcement builds on our existing stable of 46 Visa money transfer programs that have been rolled out in 13 countries.

We believe the scale and reach of Visa's global network ideally positions us to capitalize on the money transfer opportunities in the long term.

Another important area of investment for Visa is prepaid, which we believe is critical to unlocking new opportunities worldwide.

By offering consumers the option to pay ahead, Visa is able to reach new demographics such as unbanked or underbanked and expand relationships with clients including: governments, businesses, health care providers and merchants.

One of our best success stories to date is government benefits.

In the US, 35 states participate in 58 Visa prepaid programs to disburse funds including child support, unemployment insurance, workers comp and other assistance instead of checks.

Last month the state of Michigan launches a prepaid program to deliver unemployment insurance funds which will provide consumers with safe and convenient option for checks and bring cost savings to the state.

Around the globe Visa prepaid products are bringing significant value to consumers who rely heavily on cash and checks.

Last week Visa and Absa Bank, a subsidiary of Barclays, introduced the first reloadable prepaid cards in South Africa.

In June Visa in Taiwan Cooperative Bank launched Taiwan's first general purpose reloadable prepaid card, further extending the reach Visa's prepaid programs to underserved consumers.

Mobile payments are a great opportunity but also a great complexity as multiple wireless standards and operating systems exist around the globe.

To address these challenges we launched the Visa mobile platform last year, a suite of technologies that enables Visa, it's clients and mobile operators to engage in trial activities and more rapidly developed commercially scalable mobile services.

While more work must be done Visa has successfully launched a range of mobile services that are in market or being tested today with card holders in 14 countries around the world including the US, Australia, Canada, Taiwan and Brazil.

With more than 3.5 billion mobile devices in the market around the world, 80% of world's population living within range of a cellular network, we believe Visa has a significant opportunity to build on our leadership, extend our products and services to new geographies and drive more electronic transactions to VisaNet.

As we have stated in the past our focus on the eCommerce base was designed to increase our industry leading 47% payment penetration here in the United States.

We are developing enhanced checkout, gateway and online authentication services to improve merchant and card holder experiences.

In fact we expect to bring to market the next upgrade of online authentication later this year.

We are also in the process of further advancing cross border functionality especially between the U.S.

and Latin America and U.S.

and Asia.

More recently in India we launched emarketplace in association with ICICI Bank, one of the largest financial institutions in that country, enabling end to end execution of procurement and payment over the internet using their Visa purchasing card.

This is the first Visa emarketplace service to be launched in Asia/Pacific.

As always, we will continue to update on these initiatives as they progress.

With that, we're ready to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS) The first question is from Bob Napoli of Piper Jaffray.

Thank you.

Good afternoon, and congratulations on a very good quarter.

Question -- I think it would have been a bigger surprise if you had not raised your operating income margin guidance.

But I wondered if you could break it down on what drove the income guidance -- the increase.

Is it lower volume and support agreements, or general better efficiency than what you expected?

What drove that increase?

So -- this is Byron.

The math of it is, as we continue to drive strong double digit gains in revenue above our initial expectations this year so we delivered 18% this quarter and on that a four -- only a 4% increase in expenses and we were able to sustain higher levels of revenue growth for this year compared to our original expectations.

We became more confident that we could sustain a margin higher than with a we had originally anticipated and therefore felt confident in adjusting the margin guidance.

Just a followup.

Do you think there is a natural cap on your guidance driven by volume support agreement demands from customers, or -- I just wondered if you could comment?

The way we have chosen to respond to margin expectations is with our guidance, and so over the next two years we believe that we can sustain margins operating margins in the mid to high 40%s.

And that is as far out as we are looking at margins today.

Thank you very much.

The next question is from Tien-Tsin Huang of JPMorgan.

Thanks.

A couple of quarters, I -- couple questions per quarter.

First, Byron, the cross border volume trends, what is the geographic exposure that you have there and what regions are you seeing growth moderate the most?

What we be -- what would say on the cross border volume is that we are maintaining very, very strong robust growth outside the United States, even though it has moderated a bit, as we said on the call, it is still mid to high teens in terms of growth.

And that growth is very healthy across the globe outside the United States.

The growth rates are still very positive in -- are still positive in the US, but where we are seeing more of the impact in the US than anywhere else in particular.

And CEMEA of course was a call out of maintaining 30% plus growth rates on cross border.

Is your exposure to the US and cross border similar to your overall exposure in the US in terms of purchase volume?

What we say is it's a well diversified portfolio of cross border.

Okay.

Fair enough.

And just wanted to confirm that you expect fourth quarter revenues to be at the high end of your 11% to 15% range?

That's correct.

The annualized guidance is 11% to 15%.

When you apply that to the fourth fiscal quarter what we are suggesting is that our performance consistent with coming in at the higher end of that range net revenue for the fourth quarter.

Okay.

So that's the case, just trying to understand, what would you have to shift from the 18% growth in the third quarter to roughly 15% in the fourth quarter?

We have annualized a number of price adjustments that are having -- really we're coming to the end of their full effect, and we already are informed by the US volume which is consistent with the -- on a month to month basis has been consistently delivering around a 10% payment volume growth from March forward.

And with moderating impact that we eluded to in our cross border volume, we would see a somewhat marginal decline in our revenue growth from 18% which we delivered this quarter to the upper end of our guidance range, 11% to 15%.

Got it.

That's helpful.

Nice work on the expenses.

Pardon?

That's helpful.

Thank you.

I was just saying nice work on the expenses.

Great.

Thank you.

More to come.

The next question is from Adam Frisch of UBS.

Thanks, good afternoon, guys, and congratulations on a great quarter.

In my conversations with investors I get the feeling that most people are focused on a slower consumer but forgetting on the secular trends that are a corner stone to our thesis.

So can you address this with what you are seeing in your payment trends whether a shift from credit to debit or other factors that make us feel good that the model is still holding up and there are secular trends at play here?

And also describe the hedging that your volume support line offers.

I'm assuming it works well in a slow down but a melt down might be a different kind of story if the consumer fell off the cliff.

So if you could address those from those two perspectives.

Let me start with the hedging.

With regards to our FX exposure on revenue, which is one way of looking at this, our revenue lift is roughly 2%.

And with regards to the overall exposure to the cross border volume, I think we have a very well diversified set of strong growth rates cross region.

So in that regard, we feel that if the economy falls in any one particular country or region, we are well diversified, and then an increasing number of our contract are multiyear in nature and therefore have incentive clauses that will vary by volume.

And so if a volume falls in any of these -- or if the growth rate in any of these contracts slows down, we have a natural adjustment as it relates to our -- the way the incentive formulas work.

So while not immune to a slowdown in any part of the world or in any particular economy or client, we do have I think a well diversified set of factors that will help make our business less vulnerable and more resilient.

Okay.

Pricing impact on the quarter you said was more muted.

Should we anticipate any change in the near term there that could get the growth rate up a little bit up than we are expecting?

I would suggest that you go back to our guidance.

We have fully factored in all the factors including pricing adjustments that would impact our net revenue growth.

And we feel very good about high end of that 11% to 15% range for the fourth quarter fiscal quarter.

And we feel very good about delivering in that range within -- over the two years, 2009 and 2010 at this point.

Okay.

Last question here, I was going to ask about cost, but the card-based remittance initiative I have to ask because it's been a long time coming from what we have been writing about.

How is this tracking in the markets?

It's been around in awhile.

And are you gaining new customers or taking share from traditional players?

I'm not sure I understand the question.

On the card base remittance programs that you already have out there, how have they been tracking in terms of growth, and are you gaining new customers or taking share from traditional players?

In other words the new customers being people that never spent money before.

In general we are gaining new customers.

We were offering a new service to our own customers and it's being done on a global basis.

And it's being done between many different and varying countries.

It isn't a US to Latin America or a US to Asia-centric program.

I don't think it's big enough to say we stolen share from anyone.

Okay.

Thanks, guys.

Great job.

Thank you.

The next question is from Dan Perlin of Wachovia.

Thanks.

Just a couple quick questions.

One is if you could maybe decouple your international fee growth was up over 40% I think, Byron, you mentioned your transaction were in the mid to high teens maybe low 20%s, and that affects -- has an impact there.

Can you talk about reconciling the transaction growth that drove that along with FX so we can figure out what the pricing component of that was?

Yes.

So, Dan, the balance -- the primary component of the difference between the two, remember, this is an area where we have probably done the most in terms of price adjustments over the past year or so.

And what you're seeing is the impact of those initially with cards issued outside of the United States.

As recently as April we took some steps that would increase the revenue impact based on cards issued in the United States.

And that's the primary explanation for the difference between what we reported in aggregate and the percentage increase in transaction.

Okay.

And is there another one that we should be think being as we go into 2009?

On the international side, we have not announced anything.

And with regards to pricing in general, all of that has -- let me assure you, we take appropriate steps that make good business sense to our customers and clients, and all of that is reflected in the guidance we have given you for the fourth quarter and for the next two years.

Excellent.

And on the other revenue line, that was up quite a bit as well.

Were there is pricing adjustments that you took advantage of there?

No.

Can you remind us consumer inflation, the impact that you have on your nondiscretionary spending line?

Is that playing a meaningful role in the quarters or not so much?

We haven't looked at that and evaluated.

Our sense would be short of certain commodities that have increased significantly in price that that's generally not so much a factor.

Okay.

Questioning on the marketing and advertising spending you gave us a number of $1 billion for the full year, so that implies somewhere around $300 million.

What is in last year's number because that number would be down pretty significantly year-over-year?

Were there some one-time items?

I just forget.

On a year-over-year basis year over year down pretty significantly.

Good question.

I know that it will be of interest in many to figure out how to seasonally model our marketing.

And it's simply too early or just premature to try and do that at this point.

You have the math right in terms of the $300 million or so, given that we got three quarters of actual.

As we indicated I think on a prior call we still have a relatively new in place Chief Marketing Officer who is rationalizing our marketing spend globally, reprioritizing it based on return on investment and as a result, it is not something to count on as prologue.

And as we develop a more normalized cadence in our marketing then we will highlight that for you and you will be able to model.

Excellent.

Okay.

Thank you very much.

Next question is from Liz Grausam of Goldman Sachs.

Great.

Just wanted to ask another question around your US volume and the comments you made earlier.

You had about 12% total payments volume in the March quarter in the US and I think you said that went to 10% from the March of March through the month of June.

Is that the correct progression to think about?

And also was that dominantly driven by further deceleration in credit from March to June, or did you also see your debit portfolio decelerate in growth?

What we said was the growth in the growth in US volume was about 10% from March through this month.

And so the 12% to 10% is on a quarter to quarter basis and what that would suggest was that the growth was more robust in January and February, but since March it has been very consistent.

So the answer is we don't see a lot of movement in the volume or we haven't seen much movement in volume in the US since February.

And February's growth rate was influenced to some extent by the fact that there were 29 days in February.

Okay.

And the deceleration you saw in January and February through to March to June, was that dominantly in credit or in both credit and debit?

Was it blended?

Dominantly it would be more pronounced in credit.

Great.

And another question on your service fees similar to the question Dan asked around your international fees, the service fee growth in the quarter was about 13% revenue growth, but it was on 19% volume.

It's the first time we seen revenue growth actually below the volume growth.

But yet the incentive line was also lighter.

Can you help us understand the balance between thinking pricing in the gross service fees and how that mechanism works with your incentive fees?

Yes.

More to come on this later, Liz.

I think from our perspective it's premature to look for quarter to quarter patterns until we can normalize our operations now that we're in for profit mode.

We have everything from seasonality price adjustments, FX movements.

And until we can get into a more normalized cadence it's hard for us to provide a thoughtful explanation as to both -- particularly the sequential growth.

Year-over-year is easier but the sequential is harder until we can do it better job -- until we can accelerate through the normalization of a for profit company.

Great.

Thank you.

More to come on this one.

But on a sequential basis the previous quarter included December.

Thank you.

The next question is from Craig Moore of [Killian].

Yes.

Good afternoon.

I was hoping you could comment on the spending from your signature customers as we saw big fall off in American Express' numbers and their card holders are viewed to be at the upper tier.

So I was wondering if you could comment if there is any unusual dropoff in your signature cards versus your standard Visa cards.

Thanks.

Actually, our signature volume has held up very, very well.

And as a matter of fact, it's significantly up on a year-over-year basis.

It's our traditional card volume that is down.

I talked about that last quarter.

I -- you're asking me a question about significant cards versus Amex in general.

And while they have a huge component of that and I can't for them and they have gotten into lending a lot of money.

Thanks, Joe.

Next question is from Pat Burton with Citi.

Hi, congratulations on the quarter and taking the targets up.

I guess I will ask about the tax rate.

Byron, it looks like you are looking for a higher tax rate this year and progressing lower from the 41% level?

That's correct.

So just to repeat expectations, so as we came in -- as we completed our restructuring in October and for the first time assembled our five businesses we had no corporate tax planning and as a result we find ourselves unenviably at about a 41% rate.

And we are engaging in what we would describe as kind of classic global tax planning, and over the next five years expect to get down into the 36% range, and would expect in the year to come to fiscal year 2009 to generate at least one to two percentage points reduction in that tax rate.

Okay.

And would you expect 41% in the fourth quarter?

Yes.

Note that we apply a -- when we do our adjusted earnings, we apply a 41% tax rate from a book standpoint we actually have some adjustments that we have described in our financial statements that are largely due to purchase accounting, and therefore do not have a cash impact on our tax rate.

So to assume something in the vicinity of 41% as a cash tax rate for the fourth quarter would be fair.

Okay.

Thank you.

Next question is from David Hochstim of Buckingham Research.

Yes.

Hi.

I wonder could you provide more color on what you are seeing so far in terms of marketing spending and where they are some opportunities to shift dollars, and also provide us color on US credit card card spending?

You mentioned that signature volume was up a lot.

But are there any other noteworthy trends graphically and other products?

I think that what we have said is that credit card spending in general is much softer, it's not down, but it's marginally up in the low single digits.

So our debit card spending on the other hand has continued to grow and is very robust.

Signature cards are not the predominant part of our overall volume.

Can you give us an update on terms of what percentage is volume is on signature now?

We don't break that out right now.

And in terms of marketing, I guess looking at expenses overall as it becomes a for profit company have you started your review of expenditures around the world, what kinds of things are you seeing that are opportunities?

We first thought we would have an opportunity to consolidate the way we spend money by consolidating agencies and running the marketing environment out of a single place.

We obviously have marketing people in all of our regions that support our marketing efforts.

But it is more singularly and more effectively driven and it certainly will be in 2009 that's improved over the year of 2008.

As it relates to where we spend money or how we spend money, we spend money predicated on a pretty rigid ROI model.

And we are looking at opportunities in different regions in the world where we think we can make a difference.

Okay.

And then can you tell us -- I think there is an uptick in investment income this quarter.

Was there anything --

We are carrying higher gas balances and that's the principle reason.

We were getting more yield, but it's principally higher cash balances.

Next question is Chris Brentler of Stifel Nicolaus.

Hi.

Thanks.

Good afternoon.

Just to beat down on the pricing a little bit more.

The international fee increase in cross border -- in April, that's the only significant pricing increase in the second quarter?

That is the principal price increase.

And that actually affected the fiscal third quarter revenues you just reported?

Yes, think of that as beginning in the fiscal third quarter.

Okay.

So I guess I'm trying to understand is a couple things.

We talked about the pressure I guess on service fees.

You look at the volume in service fees relative to the revenues, the margin there has got squeezed a little bit, and your guidance for fourth quarter revenues at the high end of your guidance.

What kind of volume are you assuming for the fourth quarter?

Is the margin it continuing to compress a little bit, or is there anything else that we aren't discussing yet in terms of pricing that would cause the service fees to bounce back a little bit in the September quarter?

So obviously there are a lot of factors that go into a projection.

The way that we have tried to be helpful with this is to give you a combination of revenue guidance, 11% to 15% upper end of that range for the fourth quarter, and to do that which reflects all of the initiatives we have underway including anything that we may have done on the pricing front, and then to combine that with a margin expectation, which as you noticed we have moved our margin guidance up for the full year to mid-40%s, although we do expect some margin compression in the fourth quarter.

But that is less about revenue and much more about an increase in marketing spend which we called out as well as professional fees associated with new product initiatives.

So that's much more expense driven, that margin compression.

And then with regards to the impact that any other action we might take with -- in the pricing front, all of that is reflected in the revenue guidance we have given for 2009 and '10, which again we have given all of you with an expectation of operating margins associated with that which gives you the type of operating leverage we expect to deliver.

And of course on this call we have raised that from mid to mid to high 40%s with 11% to 15% annual revenue guidance.

That's how we tried to be helpful on this front.

Okay.

Let me ask just one more way.

I don't quite understand your answer to Liz's question on the service fees as well.

What are the quarter to quarter variances?

How does FX impact that line?

One thing I was thinking about is that you are seeing slower growth in credit and debit may be lower margin on a revenue basis, so that's impacting a little bit.

Anything else you can call out quarter to quarter that would impact?

I wasn't sure you are referring to in your earlier answer on the service fees.

Again, I would just say nothing to call out at this time.

There are just a number of factors that vary from quarter to quarter, and as I mentioned before, seasonality and incentives.

FX is definitely a part, the timing and impact of price adjustments.

All these things in order to be helpful ultimately with an answer that can inform models model so that you can get better projections, we have to sort that out and we are doing it in a year -- in our first year is public company.

And we are simply not at a normalized rate where we are prepared to give a thoughtful point of view on that kind of break down.

So if you will just bear with us a bit longer we will be happy to be more informative as we get it into a more normalized operating mode.

Okay.

One final just clarification repeat.

The deceleration in cross border activity, you said that's more pronounced in the US.

How much more pronounced?

Is it relatively stable outside of the US or slowing outside of the US?

We didn't guide to that.

What we was that back in March it was back to mid to high 20%s.

What we are seeing today is mid to high teens.

So it has moderated but is it still very robust at mid to high teens.

And as you would expect, the US given its economic backdrop will be feeling that a bit more than the other region outside the US.

Okay.

Thank you.

Our next question is Sanjay Sakhrani of KBW.

Thank you.

Most of my questions were asked, but a quick question maybe on the supply side.

Have you guys seen noticeable trends from your financial institution and financial institution partners in pulling back account lines or decelerating account growth?

I think it's clear that there is some of that going on, it's a fairly difficult environment.

But remember, our income is driven by activity.

And that means that we are primarily influenced by card holders that are not at the -- pushing the top of their credit and they are not delinquent.

These are not the types of bank consumers that drive much volume through our system.

So it's harder for me to discern those trends, and the data we would have on it would be at least a quarter old.

Okay.

Great.

And clarification on the litigation commentary.

That $31 million, that's all for the Discover litigation?

No.

What we said was that the -- as a result of a review of our litigation portfolio that -- and agreements that we entered into, that it was appropriate for us to take a FAS5 litigation reserve against legacy cases that we do not expect to repeat going forward.

And so as you can appreciate it is not our practice to discuss ongoing litigation.

But the reserve is a FAS5 reserve associated with the case that would not be covered by our retrospective responsibility plan.

Okay.

That is related to the Discover litigation.

Okay, great.

Thank you.

Andrew Jeffrey of SunTrust, you may ask your question.

Hi.

Thanks.

Byron, just to maybe on a more qualitative basis, I look at the volume and support incentives.

Can you comment on how you're issuing customers are performing versus the contractual obligations that were set up when you entered in each of those, just directionally better, worse, in line?

Most of the incentives that we commit to contractually today are in the United States.

So as a backdrop it's the economy is more challenging and if payment volume is growth rates are less than what they have been over the past several years when the U.S.

economy was stronger, then it would be natural for the incentive payouts to -- earn outs to be less than what they would have been a year or two ago.

And these things are difficult to model absent knowing exactly what growth rate each individual client is delivering.

But I would say on average as a US portfolio it is paying out less primarily driven by the economic environment that all of our clients find themselves in today in the US.

Okay.

So any view toward ongoing or maybe accelerated deceleration if you will, a slowdown in volume growth would have probably a commensurate positive effect, if you will, on the contra revenue line.

What we tried to give you to be helpful is first with -- very near term what we indicated that for the fourth quarter of this year we think the incentives -- we think of it as incentives as a percent of gross revenue.

We are suggesting that or guiding that we think it will be around 16% incentive to gross revenue in the fourth quarter, which is in that range -- a much more normalized range of incentives to gross revenue.

So something in that range of 16% to 17% is something that we think is -- would be fair to think about in the near term.

Okay.

And then just a question on the competitive environment.

Anything changing first of all on pricing?

And then second MasterCard's announced a fairly aggressive push into debit, one of the features of which this is option to use any MasterCard signature debit card as a pin debit card, any view how that might sway issuers decisions as to who'd they rather, whose brand they would have predominant on their cards?

We are mindful what MasterCard has done.

And we are respectful of them and what they have done.

But I would -- there is no way in the world that I would guide you to the fact that we are going to lose any significant debit volume in the near future, or the future that I can see.

Alright.

That's pretty definitive.

Thank you very much.

We probably have time for one more question.

Okay.

Thank you, sir.

The next question is from Bruce Harting of Lehman Brothers.

I looks like this is your strongest debit volume growth quarter in the last seven or eight.

Maybe how high can you go and how low do you think the credit growth can go specific to the US?

Joe, you mentioned you have the ability to visit Washington.

Can you -- if you could could you frame the debate as you see it and what the Visa platform is?

Thanks.

Well, I think that we are looking at reasonably steady state growth parameters in the credit and debit right now.

I don't see it changing a lot, even when I -- in the near future, but I don't know.

It's not predictable.

As it relates to Washington, I think what we said earlier was that we have an ability to go there, and we have an ability to talk to them, and we have an ability to lay out the facts, and we are considerably more positive about the end result than we might have been even a couple of months ago.

And we will continue to do that.

And of course I'm talking about interchange.

I'm not talking about fair credit billing practices.

That is not an issue that we are directly involved in.

It is not an issue that we would talk to anybody in Washington about.

That is an issue between financial institutions and the fed and congress.

Thanks.

Is there anything between now and the election that would come forth out of Washington on interchange?

I don't believe so.

Okay.

Thank you.

Okay.

Thank you all very much for joining us today.

If anybody has follow-up questions please feel free to call investor relations.

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