Visa Inc (V) 2008 Q4 法說會逐字稿

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  • Operator

  • Welcome to Visa, Inc.

  • fiscal fourth quarter and full-year 2008 earnings conference call.

  • (OPERATOR INSTRUCTIONS) Today's conference is being recorded.

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

  • Jack Carsky, head of global investor relations for Visa.

  • Sir, you may begin.

  • Thank you, Jose.

  • - Head, Global IR

  • Good afternoon and welcome to Visa, Inc.

  • fourth quarter and full year 2008 earnings conference call.

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

  • This call is currently being webcast live over the internet.

  • It can be accessed on the investor relations section of the web site at www.investor.visa.com.

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

  • A power point deck containing highlights of today's commentary was posted to our 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 could differ materially from such statements.

  • Additional information concerning those factors is available in the company's filing the SEC which can be accessed through the SEC website or investor relations section of the Visa website.

  • For historical non-GAAP or pro forma related financial information disclosed on 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 fourth quarter earnings press release.

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

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

  • - Chairman, CEO

  • Thank you, Jack.

  • Thanks to all of you for joining us this afternoon.

  • Before I is discuss earnings, left me speak to the Discover litigation which, as you know, we settled two days ago.

  • We are obviously very pleased that we were able to put this behind us in a manner quite consistent with our retrospective responsibility plan.

  • An additional component of the Discover settlement is settlement of unasserted claims by MasterCard.

  • With this settlement, I am delighted to tell you that all disputes between Visa, its primary competitors, MasterCard, American Express, [First Data] and Discover have now been resolved.

  • That's an important milestone.

  • Although the expense for the Discover settlement did flow through our income statement this quarter as per the retrospective responsibility plan, there is no direct cost to our public class A shareholds, and there is no delusion to their holdings.

  • With respect to the MasterCard release as previously reported Visa, Inc.

  • had taken a $30 million after tax reserve in the third quarter since this claim is not covered by the retrospective responsibility plan.

  • As the obligation was connected to the ultimate settlement amount, we recognized an additional $18 million after tax reserve this quarter.

  • As a result of the discover settlement we will be taking steps this fiscal first quarter to fund our escrow account with an additional $1.1 million.

  • As per our retrospective responsibility plan, when we fund the escrow our class B shareholders will bear this cost via a reduction in their as converted share count.

  • It is our intention to seek an amendment to our charter to permit us to deposit our own funds into the escrow account and buy down class B ownership directly.

  • This approach reduces the total number of shares outstanding for EPS calculation purposes, effectively operating as a share repurchase program in the amount of $1.1 billion.

  • Now let move on to earnings.

  • In the face of a tough US economic environment and increasingly difficult international economic situation as well, the relative resiliency of Visa's business model is once again reflected in our earnings results.

  • Our adjusted fourth quarter net income was $448 million, this equates to adjusted diluted earnings per share of $0.58.

  • For all of 2008, adjusted net income was $1.7 billion while adjusted diluted earnings per share was $2.25.

  • Net operating revenues in the fourth quarter were strong at $1.7 billion, an increase of 17% over the fourth quarter of 2007 on a pro forma basis as we again saw solid growth across all fee categories.

  • For the full year of 2008, net operating revenues were $6.3 billion, an increase of 21% over 2007 on a pro forma basis.

  • As we had signaled in past earnings calls, we are now seeing operating revenues running more in line with our long-[term guidance as the positive effects of earlier pricing adjustments have generally been reflected on a year-over-year comparative basis.

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

  • We maintain good expense control in our fourth physical quarter and for all of 2008, and we remain committed to managing our expenses prudently without compromising investments in products, technology necessary to fuel future growth.

  • As a result, we delivered strong operating margins this quarter in line with our recently increased external guidance of mid to high 40% range.

  • We expect to continue that to be the case in fiscal 2009 and 2010.

  • The recent past has been relatively positive.

  • What are we seeing for the future.

  • From a broad perspective, we are seeing a further slowdown in consumer spending in the US as well as across border volumes.

  • Here in the US for the calendar quarter ending September 2008, on which our 2009 first fiscal quarter's US service fee revenue will be based, aggregate payment volume growth in the US has continued to trend at the 10% level seen in the June quarter.

  • Deconstructing this further credit volume growth averaged in the low single digits in the quarter trending lower through September.

  • In sharp contrast to credit, debit volume growth was running at low to mid double digits throughout the quarter pointing out not only the resiliency of this product but the fact that the secular shift to plastic continues.

  • Since the beginning of October we have experienced additional moderation in volume growth in the US credit payment volume which was in the 1% to 2% range for most of the quarter, has turned negative through the first three weeks of October.

  • In contrast, debit payment volume has continued to grow at low double digits.

  • While international payment volume growth rates remain stable through September, cross border volumes are off the high teens level seen in the June quarter and were running in the high single digits at the end of September.

  • It is important to remember that despite the current economic head winds, international growth both in credit and debit continues to offer us very attractive longer term opportunities as the economies mature and payment systems evolve around the globe.

  • Visa is in a superior position to benefit from this trend over the long term.

  • So, working in our favor is our industry-leading debit presence here in the US and still positive growth rates in credit and cross border volumes around the globe through September.

  • This should allow us to meet the high end of our 11% to 15% revenue guidance for our fiscal first quarter of 2009 and based on initial observations in October, the middle of the range for our second fiscal quarter.

  • Given the uncertainty over the longer term direction of the economy, however, in the US and around the globe for the full year of 2009, 2010 we are targeting the lower end of that 11% to 15% revenue range, including the possibility of single digit growth in our fiscal third and fourth quarters with low to flat cross border volume growth.

  • But importantly, we remain committed to meeting our guidance of adjusted operating revenue margins in the mid to high 40% range and the 20 plus percent adjusted diluted earnings per share growth for 2009 and 2010.

  • Even in a down scenario that saw only mid to high single digit revenue growth in 2010, we could sustain these targets.

  • Byron will cover additional guidance metrics and other underlying dynamics momentarily.

  • Finally, let me touch on the current wave of bank consolidation and how I see it affecting Visa over the near and longer term.

  • Bank consolidation has accelerated recently.

  • It has been a constant factor in the financial industry for decades.

  • The Visa organization and our strength in both credit and debit has proven to be highly adaptable to changing market conditions.

  • Past mergers in the industry have not had a negative effect on us.

  • To the contrary, our technology scale and product suites make us an attractive partner to our very largest clients as well as to smaller community banks and credit unions.

  • In the current wave of consolidation, we believe that we are in good shape.

  • That does not mean that we are resting on the positive history of these relationships or that we take them for granted.

  • We will remain focused on serving our clients and adding value to those relationships wherever we can.

  • With that, let me turn the call over to Byron who will take you through the financial results and I'll be back to provide updates around some of our newer business initiatives.

  • - CFO

  • Thank you, Joe.

  • Let me begin by highlighting some of the business and revenue drivers from the quarter that are representative of the strength of our business.

  • Payment volume through the end of June, which drives our fourth quarter service fees, grew 15% to $699 billion over the same quarter of 2007 on a pro forma basis with the US growing at 10% and the rest of the world growing at 25%.

  • In the September ending quarter, US payments volume continued in the 10% range.

  • Through the first three weeks of October, US payments volume growth has moved to mid single digits with credit turning negative and debit in the low double digits.

  • Cross border volume growth in the June ending quarter was in the high teens, moderating to the mid teens in the September quarter though trending lower through the period to end the month of September in the high single digits.

  • In October, cross border volume growth continued to trend down in all regions except [Semia].

  • To put cross border payment volume in historical context, in the recessionary period of late 2001 and early 2002, monthly payment volume growth fell to low single digits and there were several months that were slightly negative but the severity differed around the globe and an on annual basis.

  • It remained positive for each of those years and, importantly, upon an economic recovery the rebound was swift and meaningful across all regions.

  • Moving on to transaction growth, payment and cash transactions were up 14% to $14.1 billion in the quarter ending June 2008 versus the prior year.

  • While the US grew approximately 10% during the period, the rest of the world grew at 20%, led by our [Semier] region at 27% and Asia Pacific and Latin America at 19% and 23% respectively.

  • Processed transactions, or those we define as being processed over Visa's network, totaled $9.6 billion in the fiscal fourth quarter, an increase of 11% over the similar period a year ago.

  • Globally, which excludes Europe, card growth for the period ending June was up 12% with over 1.6 billion cards carrying the Visa brand.

  • Credit grew 8% to 798 million cards while debit rose 17% to 847 million cards.

  • Internationally, credit and debit card growth was very strong, each growing 18% year-over-year.

  • While credit in general is a more mature market domestically, you can see that internationally we continue to have a lot of runway.

  • On the debit side, as we have often stated, one of our near-[term goals is moving these debit cards from cash at ATMs to the point of sale.

  • Moving on to the income statement.

  • In the fourth quarter, gross revenues of $2 billion were up 20% from the pro forma prior year.

  • Volume and support incentives increased by $83 million to $299 million representing 15% of gross revenue.

  • For the full year, gross revenues of $7.4 billion were up 26% from the 2007 pro forma period.

  • Volume and support incentives increased by $447 million to $1.2 billion, representing 16% of gross revenue.

  • For 2009, we are expecting volume and support incentives will run in the 16% to 17% range.

  • If we continue to see lower levels of payment volume growth we would expect to see some offsetting benefit in this line item.

  • Total net operating revenues were just over $1.7 billion, a 17% increase over the pro forma operating revenues recorded for the fourth quarter of 2007.

  • For the full year 2008, total net operating revenues were $6.3 billion, a 21% increase over the pro forma operating revenues of $5.2 billion recorded for 2007.

  • Moving on to the individual revenue line items.

  • Service fee revenue was $788 million, up 8% over the pro forma results of the prior year period, reflective of higher year-over-year payment volumes in all regions.

  • For all of 2008, service fees were $3.1 billion, up 19% over 2007 on a pro forma basis.

  • Data processing fee revenue was $548 million, up 18% over the prior year periods pro forma $463 million.

  • For the full year, data processing fees were $2.1 billion, up 25% over 2007.

  • International transaction fees were up 45% to $512 million while for the full year 2008 they were up 44% to $1.7 billion.

  • Both time periods continue to benefit from strong, multi-currency payment volume across all regions as well as from pricing adjustments we made in April of this year to cross border transactions involving US issued cards.

  • As mentioned earlier, cross border transactions are currently moderating across the globe, though we remain cautiously optimistic that they will continue to pose growth and rebound with the economy.

  • Our adjusted operating margin was approximately 45% this quarter and 46% for the full year, consistent with our guidance.

  • On an adjusted basis, operating expenses for the fourth quarter declined $229 million or 20% year-over-year to $943 million driven primarily by lower costs for marketing and personnel.

  • For all of 2008, on an adjusted basis, operating expenses were $3.4 billion, a decline of 4% compared to the 2007 pro forma period again driven by lower costs for advertising and personnel.

  • We expect that advertising and marketing expense in 2009 to be relatively flat to 2008 and we are continuing our focus on driving operating efficiencies across the enterprise.

  • Capital expenditures were $93 million in the quarter, over half of which were dedicated to the buildout of our new data center.

  • Fiscal 2008 capital spending was approximately $415 million.

  • For fiscal 2009, we expect CapEx to be between $300 million and $350 million, lower than the 2008 figure but still elevated as we complete our new data processing center.

  • Post 2009, we expect CapEx to run at around 3% to 4% of gross revenue on an annualized basis.

  • Moving on to the balance sheet.

  • We ended the fourth quarter with cash, cash equivalents, available for sale investments and restricted cash of $7.5 billion, a decline of approximately $900 million over the prior quarter.

  • This variance was the result of our annual $200 million payment for the retailers litigation settlement which runs through 2012 as well as a reclassification of approximately $953 million from the cash line to the other current assets line on our balance sheet.

  • This reclassification was the result of our investment in the reserve primary fund, a previously highly rated money market fund becoming a liquid.

  • This resulted in an impairment charge of $29 million in the fourth quarter.

  • We believe we will receive our net investment of $953 million over the coming months as the fund is liquidated.

  • This charge is reflected in the investment income line on our P&L and is the primary reason we saw a decline in that line this quarter.

  • Of the current $7.5 billion in cash, cash equivalents, available for sale investments, and restricted cash, restricted cash of approximately $1.9 billion represents the balance of the $3 billion litigation escrow established at the IPO less the initial payments to American Express of $1.1 billion.

  • Please also note that of the $7.5 billion in year-end cash, that on October 10 we deployed $2.6 billion to redeem all of the Series 2 and a portion of the Series 3 Class C shares that were held by Visa Europe.

  • Thus, on a pro forma basis, cash and cash equivalents should be reduced by this amount for the current quarter.

  • Let me remind you that the balance of the C class common stock holdings continue to be locked up until March 2011 while the Class B shares are locked up until the later of March 2011 or upon resolution of all of the covered litigation.

  • Our pro forma share count post this redemption stands at 776 million shares.

  • As we have stated since our IPO road show, given our sizable free cash flow, we have always anticipated implementing a share repurchase program in keeping with our strong belief in returning excess cash to stockholders.

  • In this context, the actions Joe discussed earlier to fund the escrow this quarter directly from our cash balances has the same effect as a stock repurchase since Visa will be buying down Class B share holdings and reducing the amount of shares outstanding for EPS calculation purposes.

  • The size of the repurchase is expected to be approximately $1.1 billion.

  • Before I get into our views on 2009 and 2010, let me bring you up to date on how we are viewing our evolving capital structure strategy.

  • Simply stated, the key objectives are to reduce our cost of capital over time, ensure adequate liquidity to cover transaction settlement risks, and provide sufficient financing capacity to fund future contractual or other obligations such as a Visa [Europut], an attractive acquisition.

  • As part of this strategy, management also intends to identify excess cash on the balance sheet and then further enhance total shareholder return by returning cash to shareholders in the form of dividends and share repurchases.

  • Under our preferred approach, the reduction in shares associated with the replenishment of the escrow account will be funded from excess cash.

  • Although we have significant debt capacity today, we have no compelling use of proceeds and, therefore, plan to wait and add debt at an appropriate time.

  • As we enter fiscal year 2009, the Company believes that the combination of its cash reserves, bank collateral, credit revolver, and debt capacity is more than sufficient to cover Visa's liquidity needs from any individual bank disruption or foreseeable financial event.

  • As our capital strategy evolves, we will keep you updated.

  • Now let me comment on what we see over the coming year as far as our operating performance is concerned.

  • As Joe already mentioned, payment volume growth is moderating.

  • As a result, on a full-year basis, we are projecting revenues to come in at the lower end of our 11% to 15% guidance range.

  • While we expect to achieve the high end of the range in our first fiscal quarter and the middle of the range in the second fiscal quarter, the third and fourth quarters could be more challenging with the possibility of single digit growth.

  • We are maintaining our mid to high 40% range for adjusted operating margin in both 2009 and 2010 as we should continue to realize incremental savings from our merger and cost initiatives.

  • We remain on track to deliver annual adjusted diluted earnings per share growth of greater than 20% again for both 2009 and 2010 while annual free cash flow should exceed 2008's figure of $1.7 billion.

  • Our normalized tax rate for fiscal 2009 is projected to be 40% and we continue to take actions that are geared toward driving the rate down into a 35% to 36% range over the next four years.

  • That concludes my comments, so I will turn the call back over to Joe.

  • - Chairman, CEO

  • Thanks, Byron.

  • Before we begin Q&A, let me give you a quick update on some of our longer term initiatives and their progress.

  • Since our IPO road show we have repeatedly talked about a series of longer term strategic priorities that we would be investing in to support our growth.

  • Longer term opportunities we have identified include money transfer, prepaid, mobile payments and e-commerce.

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

  • In late September we hosted a technology and innovation day in New York for members of the media, trade organizations and analysts.

  • In conjunction with that event we announced several new innovative advances in electronic payments and services.

  • First, we announced that we are developing a suite of mobile applications for the Google android platform which will be available for download on android powered handsets and initially available to select Visa card holders.

  • The services will allow Visa card holders to receive notifications to their mobile devices about transaction activity on their accounts, obtain offers from a wide array of merchants and use the built-in location based technology developed by Google to quickly map nearby merchants where they can redeem Visa offers and locate ATMs that accept Visa.

  • We also announced in September that we are working with Nokia, the world as largest mobile handset manufacturer to deliver Visa payment and related services for Nokia's next generation near field communication handsets.

  • The Visa applications will first be made available for trial use by interested financial institutions.

  • In conjunction with US Bank Corp we have launched a mobile money transfer pilot program to allow participating Visa card holders to use their mobile phones and PDAs to securely send funds directly to another Visa card holder.

  • The first phase of the program expected to launch in early 2009 will enable domestic money transfers within the US and will involve key Visa issuers led by US Bank and as many as 6,000 Visa account holders.

  • Lastly, we announced the expansion of Visa ReadyLink, a prepaid reload service, to enable the reload of eligible prepaid products at ATMs across the US.

  • Visa ReadyLink gives consumers a secure and convenient way to purchase and add funds to Visa reloadable prepaid cards, a significant advantage to financially underserved consumers, those without a traditional banking relationship or access to a payment card.

  • Visa estimates that there are more than 80 million financially underserved consumers in the United States.

  • In addition to the above initiative updates, we have landed a number of new pieces of business recently and although they may not be adding meaningfully to revenue in the near term, they speak volumes to our position in the debit markets around the world.

  • First and last quarter we signed a multi-year agreement with the Royal Bank of Scotland under which the bank will begin issuing Visa branded debit cards to all its customers.

  • RBS includes citizens financial group here in the United States.

  • The migration to the Visa brand is expected to take place in the second half of 2009.

  • This is obviously a big win for Visa in a highly competitive marketplace.

  • We appreciate the trust and confidence RBS has placed in Visa and our debit offers.

  • Second, we are announcing today that Visa and HSBC are expanding our global relationship to include new debit card programs in a dozen countries and territories throughout Asia Pacific and the first debit Visa pay wave enabled contactless payment programs in the Middle East.

  • Under the terms of the five-year agreement for Asia Pacific, Visa will become an HSBC partner for consumer debit products with HSBC issuing more than 10 million Visa debit cards in countries including Australia, India, Indonesia and Taiwan.

  • In addition, HSBC Middle East Limited will begin issuing Visa branded debit cards in the region in early 2009.

  • Some of these new cards will be Visa pay wave enabled, allowing consumers to make contactless payment transactions quickly and securely at the point of sale.

  • The HSBC Visa debit card will be available to all HSBC customers in eight countries, including the United Arab Emirates, [Berane] and Egypt.

  • We are obviously delighted with our new arrangement with RBS citizens and HSBC and look forward to working with both partners to help build their respected businesses.

  • Importantly, these agreements deliver on our strategy to expand Visa's global debit leadership as we seek to further the migration from cash to check to Visa payments.

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

  • Operator?

  • Operator

  • Yes, thank you.

  • (OPERATOR INSTRUCTIONS).

  • First question comes from Tien-Tsin Huang, JPMorgan.

  • You may ask your question.

  • - Analyst

  • Thanks.

  • Appreciate all of the disclosures.

  • Really helpful.

  • Let me ask a question about pricing.

  • Has your thinking on pricing and the ability to push through price increases change at all since last quarter given your commentary on the macro?

  • - Chairman, CEO

  • I think our position on pricing remains consistent with where we have been up to now.

  • And I think that we have indicated that we what we do from a prime pricing stand point will be consistent with good business practices and our partnerships around the world.

  • - Analyst

  • Okay.

  • Very good.

  • Maybe if I can ask a quick followup then just on bank consolidation.

  • Joe, I know you gave some comments there, but can you give some additional insight on how and maybe when network brand decisions are made as a result of consolidation and obviously now Visa's positioned given some of the known consolidation that's out there?

  • - Chairman, CEO

  • Well, to say the least with we are in extraordinary environment and some of these transfers take on, they're different and they will happen at different times.

  • We obviously, as I said, are in constant contact with our partners and will don't be so.

  • But I think it is inappropriate to talk about contractual relationships.

  • - Analyst

  • Fair enough.

  • Thank you.

  • Operator

  • The next question comes from Adam Frisch, UBS.

  • You may ask your question.

  • - Analyst

  • Thanks.

  • Good afternoon, great job on the color as well for what you are seeing there.

  • I have two questions on credit.

  • First, can you speak to the quality of the 47% of your transactions in the US that are credit?

  • Any metric or data points that enable us to more appropriately assess the composition of your credit card holders?

  • - Chairman, CEO

  • I'm not -- I'm not sure credit cards are not 47% of our --

  • - Analyst

  • Just talking about the transactions or the GDV, 47% of your GDV, but anything that speaks to the composition of your card holders whether it be FICO scores, what percent of them are revolvers or what percent are maxed out on credit lines or anything that gives us -- .

  • - Chairman, CEO

  • We are seeing a continued shift in both the debit and credit to nondiscretionary purchases.

  • And indeed, when we have gone back and looked at it, it is the more creditworthy card holders that seem to be driving most of the purchases in the environment today.

  • There's a very low percentage of those transactions that are being driven by people that are credit impaired or at the low end of the FICO.

  • - Analyst

  • What percentage of your card holders would be in that minority that are not generating a lot of the spend?

  • - Chairman, CEO

  • About 5%.

  • - Analyst

  • Okay.

  • So that's great.

  • And then, just one other follow up, on the New York Times article today talking about the suggestion of the systemic shrinking of the consumer credit card industry.

  • Obviously more movement than normal we are seeing with different issuers, but do you see the entire supply side getting materially smaller or is it just some shifts going on between issuers and specific geographies?

  • - Chairman, CEO

  • That is a, that's a good question, and I am not sure that I'm in a position to amplify on that right now.

  • I think I would hold the thought for a quarter and let me observe what is happened from all of this movement in the last several weeks.

  • - Analyst

  • Okay.

  • Great.

  • Thanks, guys.

  • Operator

  • The next question comes from Charlie Murphy, Morgan Stanley.

  • You may ask your question.

  • - Analyst

  • Thank you.

  • I was wondering if you can discuss the growth in service fees at 8% this quarter versus the 15% payment volume.

  • Is that an indication of pricing pressure and how do you expect that dynamic to play out over the next few quarters?

  • - CFO

  • This is Byron.

  • Thank you for asking, Charlie.

  • The, as I think many of you can appreciate, in October, at this time last year, we merged together five distinct autonomous regions.

  • And no sooner did we merge them and complete our IPO than we began to standardize all of the regions on a common chart of account.

  • And what we realized, Charlie, as we began this exercise was that not all of our regions classified the revenue components in quite the same way in terms of fee categories as we report externally.

  • So, as a result, in recent months we have begun taking steps to standardize our revenue classifications globally and, therefore, you are beginning to see some of the effects of this common reporting format being applied and, therefore, you all are just going to have to bear with us a bit because our 2008 growth rates by fee category are just not going to normalize until some time next year.

  • In this particular case, some of the early adjustments we are making are shifting some of what have been classified as service fees today at that processing fees and, hence, the difference in the growth rates.

  • I just want to emphasize two things, this has nothing to do with our ability to price or generate strong growth in any of these categories and, secondly, none of these changes impact our reported total revenue.

  • It is getting all of our regions aligned to report their fee categories in a common standardized global format.

  • - Analyst

  • Thanks very much.

  • Operator

  • The next question comes from Craig Maurer with Calyon.

  • You may ask your question.

  • - Analyst

  • Good afternoon.

  • I wanted to ask if the global slowdown was affecting the level of banks in emerging markets that are looking to add your products or if it is having any kind of effect on the secular growth in terms of bringing on new economies?

  • Thanks.

  • - CFO

  • No.

  • It is certainly is not noticeable to us.

  • We continue making progress in emerging countries, some of our biggest successes recently have been and continue to be in that category.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • The next question comes from [Julio Kinteros], Goldman Sachs.

  • You may ask your question.

  • - Analyst

  • Great.

  • Real quickly, Byron, can you just go back through the two largest components of your expense, of your operating expenses looking at personnel, advertising, marketing and promotion and just walk us through how much further or what levels you think you can drive those two as you think about the offsets to slightly lower revenue trajectory over the next two years?

  • - CFO

  • Let me respond in this way.

  • As you all may recall from the road show, management had identified approximately $300 million of expense opportunity across the enterprise that we were committed to achieving as a part of the combination or merger of the five regions.

  • We believe that of that original commitment, we are about two-thirds of the way through.

  • However, we are also confident that there are additional opportunities beyond the $300 originally committed and that conviction is reflected in our guidance for 2009 and 2010 as it relates to our margins.

  • - Analyst

  • Okay.

  • Great.

  • And then just can you just rehash the buy back commentary that you made with regard to the Class B shares, please?

  • - CFO

  • So, the, in the preferred approach that Joe described, what we would --

  • - Analyst

  • I'm sorry.

  • I meant the timing of it.

  • That's all I need to hear.

  • - CFO

  • Later second half of the current quarter.

  • - Analyst

  • Got it.

  • Thank you.

  • Operator

  • Next question comes from Andrew Jeffrey, SunTrust.

  • You may ask your question.

  • - Analyst

  • Hi.

  • Thanks.

  • Can you, Byron, address a little bit the priorities for ad spend and whether you view that as a particular lever, especially given the slowdown in the US.

  • I imagine there's probably a reallocation of advertising and marketing and spending priorities here?

  • - CFO

  • So, on the -- let's refresh the guidance.

  • The guidance was marketing spending about flat 2009 versus 2008.

  • In previous commentary we have indicated that we are reallocating again an increasingly rigorous return on investment model that we are deploying in marketing.

  • And so using that model that is guiding what we have budgeted for 2009, but we will of course pace our expenditures with regards to the economic environment we find ourselves in and the rate of growth we are generating in revenue.

  • - Analyst

  • Okay.

  • - Chairman, CEO

  • I am -- I'd like to add one thing to that.

  • The vast majority of our advertising in 2009 will be targeted at getting people to use plastic when they do whatever they do more frequently than they do today.

  • So in other words, whether the category grows in absolute terms or not, we are dedicated to providing impetus to get people to use the card more.

  • So I want, when you go to Starbucks's, when you to the movie theatre, when you park your car, when you go to the laundromat, when you take a taxi in New York, when you pay your utility bills or any one of a number of bills, I want you to use a Visa debit card and we will have advertising that is directed at doing that.

  • That's not dissimilar to what we did a year ago when we had people running around in a circle and somebody throwing food in the air when an individual took out cash.

  • That was focused on telling people it is okay to be use a debit card for a small or medium size transaction, it is cool.

  • It is the thing to do.

  • It isn't something that is odd.

  • - Analyst

  • Okay.

  • - Chairman, CEO

  • That's how we are are going to direct our advertising.

  • - Analyst

  • Thank you.

  • And just to clarify on the comments you made on the contra revenue, does your second half '09 net revenue guidance contemplate a deceleration or decline in contra revenue in addition to lower volume or is that something that could be an increment to the net revenue guidance?

  • - CFO

  • It is inclusive.

  • So when we guided to the revenue levels in the second half, they were net revenue levels reflective of our associated projections of incentive.

  • - Analyst

  • Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • The next question comes from Pat Burton, Citi.

  • You may ask your question.

  • - Analyst

  • Thank you.

  • First a clarification, Joe.

  • Did you say the US payment for credit card was negative in October, it just had turned negative?

  • - Chairman, CEO

  • Yes, I did.

  • - Analyst

  • Okay.

  • That was a clarification.

  • The second, the question actually is on the international transaction fee, the discussion there, I assume you are just seeing a lot of fall off in airline travel.

  • Would that be a good leading indicator to look at in terms of just physical bodies that are traveling internationally or is there something else driving that number?

  • - Chairman, CEO

  • That's certainly a significant component, but traditionally there's always been a lot of cross border volume between Canada and the United States.

  • That's people in cars going back and forth not necessarily in airplanes.

  • There has been a lot of cross border volume between Mexico and the United States.

  • That may be coming from Tijuana into San Diego.

  • So it isn't all, it isn't by any stretch of the imagination all airplane travel.

  • Cross border activity in Asia given where the countries is not necessarily airplane travel, but it is a big component and it is an indicator.

  • - Analyst

  • Is it falling globally or is it just falling as it relates to people traveling to the United States?

  • - Chairman, CEO

  • I think it is falling globally.

  • All of our guidance contemplates that.

  • Right now it's a troubled global economy and people are not traveling as much.

  • People are not coming to the United States as much as they did with the dollar strengthening.

  • I mean there's, there's a number of things going on.

  • I think it is going to take a little bit of time to get it sorted out.

  • And we are just putting out guidance that embraces an economy that's pretty undefinable at this particular point in time.

  • We don't want to overshoot anything.

  • So, we are try to go be cautious and conservative in what we suggest.

  • - Analyst

  • Thank you.

  • Nice job on the cost side, guys.

  • - CFO

  • Thank you.

  • Operator

  • Next question comes from Chris Mammone, Deutsche bank.

  • You may ask your question.

  • - Analyst

  • Thanks.

  • I guess first just a couple of housekeeping questions on cross border.

  • One, what was the growth in cross border last year and then, two, what is the break down in your cross board wither base between credit and debit?

  • - CFO

  • We will have to, on the growth for last year, let me put it in this context.

  • Cross border volume growth at the beginning of the fiscal year was running in the high 20s globally.

  • As we moved to the third quarter call, we indicated it moved down into the high teens.

  • And then, now you have cross border volume on most recent snapshot now moderating into the high single digits.

  • That gives you a one-year continuum and then cross border for us is primarily credit and roughly three-quarters credit, 25% debit.

  • - Analyst

  • Okay.

  • Thanks.

  • Then I guess, Joe can you just update us with your thoughts on the possibility for interchange regulation in the US next year I guess particularly given the likelihood it will have sweeping legislation from Congress probably early '09.

  • - Chairman, CEO

  • We continue to remain optimistic that things are going well in that regard.

  • That doesn't mean that there won't be some noise about it next year.

  • I can't speak for Congress and so I can't tell you when it is going to come up again.

  • But I would think that it would be relatively benign until about the middle of next year.

  • Now, we have a very unique environment that we are operating in and I'm not sure when this will come up.

  • I continue to believe that it is solvable within the framework of the litigation and that there's no need for legislation, and I think that we are going to work in that direction.

  • - CFO

  • Chris, this is Byron.

  • Let me refine the answer now that we've had a chance to tabulate it.

  • On cross border, roughly a little over 60% credit, 25% debit, a little over 10% ATM cash.

  • - Analyst

  • Okay.

  • Great.

  • Thanks for the color.

  • Operator

  • The next question comes from Dan Perlin, Wachovia.

  • You may ask your question.

  • - Analyst

  • Thanks.

  • It is just two parts.

  • One is with credit turning down in the US and debit volumes still sounding like they're running in the mid teens range, it sounds like it is falling exactly as it did during the last recession, and I am wondering if you can highlight a few attributes to your business today that are different from that last recession that gives you conviction to be able to maintain even a double digit overall growth rate?

  • - Chairman, CEO

  • Well, I mean I think it is clear, that the debit card was in a different part of its evolution in the last recession.

  • We didn't have anywhere near the debit coverage and we continue to expand the merchant categories in which debit cards can be used and we continue to make information as it relates that available to consumers and they seem to embrace it and -- look within all of this guidance that we are giving you we are talking about things predicated on what we see out there in the economy but you can rest assured that in addition to that we are very, very focused on penetrating cash and checks to a greater degree than we have in the past and we will continue to do that.

  • I think that will be a little bit or somewhat of a counterbalance to what is going on in the economy and we are optimistic that that trend is likely to increase rather than decrease.

  • - CFO

  • I would elaborate by saying that because of the debit phenomena that Joe described, if you go back to the last recession period, the nondiscretionary component of US consumer spend on our Visa cards would have been about 30% and today, because of the debit penetration, it is 40, over 40% with debit cards themselves generating about 53, about 53% nondiscretionary mix of their total spend.

  • - Analyst

  • Okay.

  • And then the second part of the question is in the last couple of -- when we go back and look at aggregate data in the last several recessions, one of the things that acted as a secular shift was just net new card issuance.

  • I understand the debit shift.

  • I am wondering what is going be, with net new card issuance certainly 50% of your business not going up next year in the US, what is ultimately going to be that secular shift that supports again that kind of double digit growth?

  • - CFO

  • First of all, we're talking about the double digit growth coming from debit product in this environment and I don't expect that to change in 2009.

  • We have also talked about international.

  • We talked about the fact that that is continuing to grow at robust rates and frankly most of that is credit card business.

  • It is not that we don't have the debit penetration outside the United States that we do inside the United States.

  • That's an opportunity we talked about quite frequently on the IPO road trip, what we call filling out the cube, if you will, taking technology that has worked for us and business practices that have worked for us in the United States and moving them into other parts of the world.

  • I think that what I just tacked about in our relationship with HSBC is an example of moving debit cards into other regions, but the answer is we are growing outside the United States particularly in credit volume.

  • We have an opportunity to grow debit volume outside the United States and we have an opportunity to grow debit volume within the United States and I would assume that at some point in time the credit volume is going stabilize.

  • - Analyst

  • Excellent.

  • Thank you.

  • Operator

  • Next question comes from Greg Smith, Merrill Lynch.

  • You may ask your question.

  • - Analyst

  • Yes.

  • Hi, guys.

  • What kind of foreign currency impact do you expect on foreign revenues in '09?

  • - CFO

  • So let me, this is Byron.

  • Let me give you a preset.

  • If we look back on the year just completed, 2008, we projected about 2 percentage points of our revenue growth came from FX movements, tailwind so to speak.

  • As we look to 2009, recognizing that there has been some significant volatility and we are not in a position to fully predict how it will play out, but on the revenue growth side, that tailwind will turn into a headwind and we are looking at low single digit revenue growth impacts in the coming year 2009 and even smaller impact but still negative on the earnings growth impacts since (inaudible) to get your ultimate impact on the P&L.

  • - Analyst

  • Okay.

  • Then this buy back you would like to do, the $1.1 billion.

  • How will that be priced?

  • Is it just going to be literally be based off the current stock price at some pine in time or is there some liquidity discount that might benefit you?

  • - CFO

  • I would say stay tuned for that, but it is a market-based price and then we will evaluate at that time whether and what level of discount would be appropriate.

  • - Analyst

  • Okay.

  • Hopefully big.

  • Thanks.

  • Operator

  • Your next question comes from Sanjay Sakhrani, KBW.

  • You may ask your question.

  • - Analyst

  • Thank you.

  • I appreciate all of the color on the updated targets but I wanted to make sure I got it all.

  • Byron, can you just rehash the stress case on payment volume and cross border volume to arrive at the low end of that 11% to 15% and then maybe you could also stress the top line to get to that 20% EPS growth?

  • - CFO

  • With regards to the guidance that we gave what we said was that we felt very confident delivering our margins and our earnings growth if the cross border volumes rent as low as what?

  • So the extent that that constitutes a stress case, that's what we mean by that.

  • And could you repeat the second part of your question?

  • - Analyst

  • No, I just wanted to make sure I understood the lowest payment volume could go and cross border could go and then subsequently how low could the top line go to get to the 20%?

  • - CFO

  • That we did not specifically comment on.

  • We took, we have clearly assessed the environment the best we can ahead and we are very focused.

  • The environment has a lot to do with revenue.

  • We are very focused with regards to delivering our margins and delivering the net income growth and EPS growth that we have committed and so management stands ready to take a variety of steps in order to protect the commitment of earnings and EPS growth.

  • - Analyst

  • Okay.

  • Because I thought you mentioned like the payment volume in the second quarter should come at the midpoint or the fiscal second quarter at the midpoint of the range.

  • The second two quarters.

  • - CFO

  • Yes.

  • I think you are confusing something.

  • When we, what we were we referring to was net revenue growth.

  • What we said in the first fiscal quarter is that expect net revenue growth to come in at the upper end of our guidance range.

  • What Joe said about the second quarter, second fiscal quarter, is that we expect to come in in the mid range of our guidance and that the second half of the year, Q3 and 4, could potentially find single digit revenue growth in one or both of those quarters and that collectively that would be consistent with coming in at the lower end of our guidance range on a full-year basis.

  • - Analyst

  • Okay, okay.

  • Great.

  • Thank you.

  • And Joe maybe one question.

  • - Chairman, CEO

  • I want to add one thing, I did, I did say that if you are asking for the stressed case.

  • I did say that even in a down side scenario that saw only mid to high single digit revenue growth in 2010 we can sustain our EPS and our operating.

  • - Analyst

  • Okay.

  • And that applies to 2009 as well?

  • - Chairman, CEO

  • Oh yes.

  • - Analyst

  • Okay.

  • Got it.

  • Joe, maybe one thing on integration, where are we with extracting kind of revenue and expense synergies from the consolidation of all the various regions?

  • Thanks.

  • - Chairman, CEO

  • Where are we?

  • I mean I think it is, I think to get to a point where you wake up and think everything is going pretty well.

  • It is about a three-year process.

  • I think we are probably further along than that kind of benchmark might suggest but we are moving there and I think you can expect to see improvement in our expenses over the course of the year as we suggested.

  • - Analyst

  • Okay.

  • Great.

  • Thank you.

  • - Head, Global IR

  • Jose, at this point we have time for one more question.

  • Operator

  • And for the last question, Bruce Harting, Barclays.

  • You may ask your question.

  • - Analyst

  • Rest of world credit percentage growth in constant dollars stayed reasonably flat quarter-over-quarter while US continued to fall at a fairly rapid rate and you said through October actually turned credit turned negative.

  • As you look forward to the balance or into 2009 and early '10, is it conceivable in terms of your saying that given the quarterly progression where you are saying middle of the range and second quarter lower end of the range and second half next year that rest of world credit and debit stays reasonably flat or are they just really lagging the US in terms of the slowdown?

  • Then just how low has, could US get in terms of credit growth from previous downturns?

  • Thanks.

  • - CFO

  • This is Byron.

  • Let me start by saying the growth rates we gave you for rest of world payment volume growth were nominal not constant.

  • We recorded 25% payment volume growth nominal in the fourth quarter.

  • And so what we have indicated is that those have moderated down and that has been factored into the guidance that we have given and I think Joe's answer to the last question, which outlined our stress case as someone described it is, is how we are trying to be helpful on this subject.

  • US credit has turned negative, but given but just and that has happened very few times in our history even during recession.

  • So, we have, we tried to be helpful without guiding to very specific assumption with regards to payment volume by line item.

  • We have tried to be helpful by saying where we are positioning our revenue growth in each of our quarters, how we expect that, how we expect to end the year and then how we expect to map that into our earnings growth.

  • Okay.

  • - Chairman, CEO

  • Thank you, all, very much.

  • If anyone has any follow up questions, please feel free to call investor relations.

  • Operator

  • Thank you for participating in today's conference call.

  • The call has concluded.

  • You may go ahead and disconnect at this time.