Visa Inc (V) 2014 Q1 法說會逐字稿

Welcome to the Visa Incorporated's fiscal Q1 2014 earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.

Thanks, Marcella. Good morning everyone and welcome to Visa Inc.'s fiscal first-quarter 2014 earnings conference call.

With us today are Charlie Scharf, Visa's Chief Executive Officer, and Byron Pollitt, Visa's Chief Financial Officer. This call is currently being webcast over the Internet and can be accessed on the investor relations section of our website at www.investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. PowerPoint deck containing financial and statistical highlights of today's commentary was posted to our website prior to this call.

Let me also remind you that this presentation may include forward-looking statements. These statements are not guarantees of future performance and our actual results could materially differ as a result of a variety of factors. Additional information concerning these factors is available in our most recent reports on Forms 10-K and 10-Q which you can find on the SEC website and the investor relations section of Visa's 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 today's press release. This release can also be accessed through the IR section of our website.

With that I will now turn the call over to Byron.

Thank you, Jack. We will begin my call with the usual callouts and observations. First, let me start with payment volume and cross-border trends.

The December quarter on a constant dollar basis grew payment volume at 11%, down 2 percentage points from the September quarter. This softening was led by a 2 percentage point drop in the US from 10% to 8% with the holiday spend consistent with a continuing US economic recovery but at a growth rate we would describe as tepid. US results for the first 21 days of January were consistent with the December quarter.

International payment volume growth rates in the December quarter remained healthy in the midteens.

On the cross-border front, growth picked up 1 percentage point from the September quarter with both US and international on the uptick. That said, January appears to be giving back some of the heightened cross-border activity we saw in the month of December.

Second callout. Let me begin by saying that we are affirming all our guidance metrics outlined on our October call. With that as perspective, I would like to elaborate on our net revenue growth guidance.

Our guidance calls for low double digits on a constant dollar basis offset by about 2 percentage points of negative FX. We define low double digits as 10% to 13%. This means on an as recorded or nominal basis, growth is expected to be in the 8% to 11% range after FX impacts. On the FX front after adjusting for hedges, we expect about 2 percentage points of negative impact in all four fiscal quarters.

Given Visa's relevant basket of currencies, the forward rates indicate continued strengthening of the US dollar through the balance of the fiscal year.

Drilling down a bit further, a stronger US dollar versus the currencies for Japan, Brazil, Australia, and Canada and more recently Argentina and Venezuela have driven our headwind. In contrast, while the euro has strengthened versus the US dollar, the absence of Europe from Visa Inc.'s geographic portfolio has muted this potential benefit.

Staying with revenue but switching gears, the quarterly growth rates for the balance of the year are expected to vary with softer growth rates in Q2 and Q3 followed by an uptick in Q4. This cadence is driven by the following, the lapping of particularly strong revenue growth rates in Q2 and Q3 of the prior year which benefited from low levels of client incentives and certain nonrecurring pricing actions all of which were called out in last year's earnings calls.

In contrast, Q4 of last year had a disproportionate share of the fiscal year's client incentives which is a pattern that at this point in the year we do not expect to repeat.

Third callout relates to the quarterly cadence for marketing expense. With the Winter Olympics rapidly approaching and World Cup soon to follow, we expect a significant uptick in marketing spend in Q2 and Q3 versus our spend in Q1 followed by a downshift in Q4. This of course will have an impact on quarterly operating margins.

Fourth callout is the return of litigation escrow funds from those merchants opting out of the recently approved class-action settlement, the dynamics of which we covered at our Investor Day in June and reiterated last quarter. On January 27, $1.1 billion was returned to us and was deposited back into our litigation escrow account. The receipt of the payment increases our current taxable income by $1.1 billion and income tax payable by $387 million.

While it has no direct effect on our income statement, it negatively impacts our free cash flow over the last three quarters of fiscal 2014. This event was fully contemplated and is reflected in our full-year guidance of about $5 billion in free cash flow. To be clear, the return of the actual escrow funds is not included in our free cash flow but the impact of higher cash taxes is included.

Last callout, as always we remain committed to returning excess cash to our shareholders. To this end, we repurchased a total of 5.5 million shares during the quarter at an average price per share of $199 and change. This leaves an outstanding open to buy of 4.2 billion.

Now let's turn to the numbers. I will cover our global payment volume and process transaction trends for the fiscal first quarter followed by our results through January 21. I will then cover the financial highlights of our fiscal first quarter.

Global payment volume growth for the December quarter in constant dollars was 11% modestly below the September quarter's 13%. The US grew 8% and international grew 15%. More recently in the US through January 21, payment volume continued at 8%.

Drilling down further, US credit was 10% in both Q1 and through January 21 compared to 11% in Q4. Similarly, US debit grew at 7% in both Q1 and through January 21 compared to 10% in Q4. Global cross-border volume delivered a solid 12% constant dollar growth rate in the December quarter, up modestly from the 11% rate in the September quarter. The US grew 11% and international 13% in constant dollars.

Through January 21, cross-border volume on a constant dollar basis grew 10% with a US growth rate of 9% and international 11%. Transactions processed over Visa's network totaled $16 billion in the fiscal first quarter, a 13% increase over the prior year period. The US grew 9% while international delivered 26% growth. Through January 21, process transaction growth was 11%.

Now turning to the income statement. Net operating revenue in the quarter was $3.2 billion, an 11% increase year-over-year driven primarily by solid growth globally in both domestic and international transactions and as mentioned earlier, negatively impacted by a 2% FX headwind.

Moving to the individual revenue line items, service revenue was $1.4 billion up 9% over the prior year and was driven by solid global payment volume growth. Data processing revenue, $1.3 billion up 13% over the prior year's quarter based on solid growth rates in Visa process transactions both in the US and internationally.

International transaction revenue was up 11% to $891 million reflecting an ongoing broad-based strength in cross-border volume.

Total operating expenses for the quarter were $1.1 billion, up 3% from the prior year. Given the earlier discussion on the cadence of marketing spend, we expect expense growth in Q2 and Q3 to be somewhat higher versus Q1. Operating margin was 66% for the first quarter, ahead of our yearly guidance of low 60s but consistent with our expectations. We expect Q1 to be our lowest quarter for operating expense in fiscal 2014.

Our effective tax rate for Q1 was 32.4%, capital expenditures were $120 million in the quarter. At the end of the quarter, we had 634 million shares of Class A common stock outstanding on an as converted basis and the weighted average number of fully diluted shares outstanding for the quarter totaled 639 million.

Finally as noted earlier, our full-year guidance metrics for revenue growth, client incentives, operating margin, EPS growth and free cash flow remain unchanged.

With that I will turn the call over to Charlie.

Thank you very much, Byron, and good morning to everyone. First let me just start by saying that we feel very good about the strong financial performance during the quarter as Byron had mentioned, solid revenue growth, solid net income growth and solid earnings per share growth.

Global payment volume as you can see from the numbers is relatively strong. Holiday spend in the US was better than reported as we were going through the holiday season and was certainly impacted by the shorter calendar. It was extremely uneven as we were going through it and the continued movement from face to face to digital purchases was extremely meaningful.

Just give you some updates on the legal and regulatory fronts. As I'm sure you have read on December 13, US District Judge Gleeson granted final approval of the merchant litigation cases. As part of the settlement, Visa and the other defendants received a comprehensive release of liability to the claims in the lawsuit as well as protection against further litigation regarding interchange and other US rules. As expected, a number of objectors to the settlement have appealed.

We at Visa are very focused on concluding these disagreements and on building our efforts to enter into a better relationship with the entire merchant community, identifying new ways to enable them to differentiate themselves and their experience and their customer experiences and competing more effectively.

Also about two weeks ago the US Court of Appeals for the DC District -- I'm sorry for the DC Circuit heard oral arguments in the Fed's appeal of Judge Leon's decision in the challenge to the Durbin regulations. While it is our to make any courtroom predictions as we all know we are pleased with the hearing. We continue to believe that the government has a strong case on appeal.

Let me move on and just talk for a second about some topics of interest and start with the recent industry data breaches.

First of all, we understand that these events are terrible for everyone affected, everyone is the merchant, the issuer, the acquirer, the networks but most importantly, the consumer and while the consumers are generally protected by the network rules of zero liability, meaning they are not responsible for any fraud due to the breach, we have to realize that these compromises are disturbing to them, they are inconvenient and they raise broader data security concerns that the entire industry must solve.

Unfortunately many merchants issuers and both of their lobbyists are attempting to assign blame in the press and not reacting in a particularly constructive manner and it is in all of our best interest that change quickly. Within the payments ecosystem, the impact on the merchant, the acquirer, the issuer and the network are all equally negative, we all share the same customer who is going through this difficult experience and our sales and long-term relationships with that customer will suffer if we don't work together to get to a better place.

The appropriate way to respond to this issue is for all parties to jointly work together towards better data security standards, better payment security standards. Maintaining trust in the electronic payment systems is our highest priority and we are actively exploring new ways to enhance the safety and security of the payment system.

To that end, we do believe it is critical that we make progress toward the implementation of EMV chip in the US. We can't do this on our own, we need merchants, acquirers and issuers to be supportive. We know it is expensive, it means new cards, new terminals and new software development but as we can all see, it is necessary. It is our hope that all issuers and merchants will migrate to EMV but we also understand that it is complex, there are an awful lot of terminals out there, an awful lot of cards that have to be updated and this has to be done in a way that does not disturb commerce.

In 2011, we had announced a plan to migrate the US to EMV technology through a liability shift beginning in October 2015 and we have reaffirmed these dates. EMV to be clear, would potentially eliminate the ability to reproduce the card and thereby reduce if not eliminate counterfeit fraud at the point of sell. But it is also important to note that it is equally imperative that the industry move toward tokenization which should be equally effective at reducing or eliminating card not present fraud.

As we work towards a better solution, we are also redoubling our efforts to make sure that consumers understand that they are protected. We have invested in national advertising to reassure customers of zero liability fraud protection. These important protections shield our consumers in the US from bearing any fraud loss after data compromise as I said before.

We are also focused on making sure that there is clarity affect with the media and in Washington. I'm personally concerned about the amount of misinformation you read in the public domain from confusion around who incurs the cost of fraud losses to the misrepresentative lack of payment system security. This is misleading, inaccurate and not helpful and can have unintended public policy consequences.

We are actively engaged with policymakers in Washington DC along with our partners to ensure that they actually hear the facts and understand the multiple layers of infrastructure that protect the payment system.

Let me just switch topics for a second and just talk for a second about V.me, which we have done in several calls. On the last quarterly call, I spoke about our efforts to simplify what we are building. Since launching it, we have learned valuable lessons as we have talked about to accelerate the success in the marketplace and better meet the needs of what our issuers and merchants actually want in the marketplace. We have been working hard to evolve the product in response to what we have heard from them which is to simplify the merchant integration and focus on the simplicity of consumer card payments for online and mobile transactions.

We are pleased that the work is now coming to market with the first phase of our redesigned platform released last week providing merchants with faster integration and easier time to market. I can share now that Joseph Bank, Ticketmaster, AutoZone, Petco will be some of the first merchants to go live with V.me through this new simplified integration. These new merchants join the strong group of existing merchants and financial institutions already offering V.me to their consumers which represent over $13 billion in spend and approximately 300 million in addressable cards.

We have talked about that our success here at Visa does depend on the strength of our relationships with all parties in the payment system. We value all of those relationships and we continue to work hard to solidify those relationships. As we have talked about, we reorganized the Company last year to strengthen our outreach to all of those constituents. To that end we have made good progress and our track record of winning or renewing issuer in co-brand contracts is excellent.

Let me just talk for a second about our co-brand business because we've gotten a series of questions from that as we have met with you all.

Let me just talk about the US because the US is by far and away the majority of where the co-brand market and just talk about some of the facts for us in our fiscal 2013 year looking backwards. Just remember, we have the leading co-brand market share. Most co-brands do not go to RFP and when we look on a volume weighted basis at our renewals we renewed about 95% of our current co-brand deals that were actually up for renewal. We also won about 60% of new co-brand deals on a volume weighted basis.

As we said at Investor Day, seven of the top US co-brands are majority of Visa. So you look at those numbers, we are very pleased with the business that we have had and the rate of success that we continue to have in the marketplace and our co-brand pipeline is very healthy in fiscal 2014 and beyond as we look ahead.

Let me just change gears for a second and just share with you some facts about our new platform, Everywhere You Want To Be, which is the new integrated campaign that communicates our vision and how our brand is positioned for the future. Those of you who have been covering us for awhile may remember we once used the tag line -- Visa, it's everywhere you want to be -- to reflect the growing presence of Visa in merchant locations across the United States. Today the new global campaign allows us to expand what everywhere means and build upon historical equities of the brand.

We are bringing this new Visa brand and our mark to life gradually starting with Olympic themed advertising in the U.S. and a rollout to more markets and audiences around the world starting in March.

So I'm going to conclude just by reaffirming our view here of how excited we are about the future and the opportunity. We have talked about the secular opportunity to penetrate cash and check and how healthy that opportunity is across the entire globe. We continue to work on innovation, being flexible and adaptive in the world we live in both for our existing customers and continuing to open up the network on the edges to embrace the change that is going on around us.

And with that, I am going to open up the floor to questions for Byron and myself.

(Operator Instructions). Tim Willi, Wells Fargo.

Thank you and again appreciate all of the color and commentary you offered. Wanted to get your thoughts if you could on -- just where your thoughts around bitcoin, obviously that is sort of the new rage. We get a lot of questions from investors I'm sure you do as well. But can you just talk about how you think about it, whether it is something that potentially could be a broad consumer application or if it is more of a niche around cross-border business or just how you might think about that and how Visa might interact or support that or not at all? Thanks.

Sure. I guess I would start with it is early days in terms of what bitcoin is and what it will be. We are certainly paying attention to it. It is very early to understand exactly what all of the implications are for it. We will say when we look at our network and the people that we compete with in terms of what people think of the traditional network, the established network rules we have, the understanding of how things operate, understanding who the participants are, the fact that business that we do has financial institutions on either side of the transaction, the success of our payment system and our primary competitors is that for a reason. And there are certainly some interesting things about bitcoin and other things like it but there are also a great deal of complexities.

People talk about things like frictionless and things like that and when you actually dig through it, it is really not the case, it is far more complex than that. We feel very comfortable with the business that we have here.

Bob Napoli, William Blair.

Good morning. A question on security. I guess -- and I am sure that you don't have all the answers on this but if you had -- if EMV had been in place, would it have prevented some of the recent breaches? And just in line with the trend in security, it seems like there are these dates out there that tend to get pushed back. Do you think that the breach at Target and others is really going to -- do you sense it is going to drive the adoption of EMV and other security faster than it otherwise would have? Are you seeing action taking place that wasn't happening 30 days ago?

Well, on the second part of your question I think the answer is yes. People don't live in a vacuum and when you see the kinds of breaches that have occurred recently, it gets everyone focused on making sure that we are doing all that we can to minimize any potential fraud in the future. And so the dates that we had set out are the dates that we are going to stick with.

Again, it requires people to do a lot of work which we understand but we think it is good for the payment system, for the ultimate end-user which means it will ultimately be good for all of us in the process.

On your first piece, remember first of all in terms of what actually has happened with the breaches that we have read about, not all the facts are out yet so it is a little premature for all of us to talk about what would have solved it. I think it is fair to say that as best we can tell some of the breaches that you have read about don't relate to the payment systems at all, they relate to breaches within companies' server environments for some personal information. So EMV would obviously have nothing to do with that.

To the extent that there were breaches occurring on the point-of-sale device, it is probable that the account number possibly would have been able to be compromised but the ability to reuse that account number to create a new card to use that card at a physical point-of-sale on a fraudulent basis would not be possible. Would still be possible to use that account number potentially at card not present which is why it is important that the industry also continue to push forward with tokenization. Hopefully that helps.

Thank you.

You're welcome.

Tom McCrohan, Janney Capital Markets.

Thanks for taking the question. Is V.me being positioned as a mobile wallet long term or is it more kind of a tender type for e-commerce transactions, something more like a PayPal?

I think of V.me very simply as a way for our customers to have an easy way to make payments online with their general purpose credit card through user name and password. So people like to ask is it a wallet, is that this, is it that? It is really not that complicated. It is when you are buying on your computer, your tablet or on your mobile device, right now it is not easy to get from the beginning of the checkout process to the end of the checkout process using our products and V.me is just an easy way to check out using user name and password and not having to enter your account number, the expiration date, shipping address and all that other kind of stuff.

Whether it is something called V.me or it is with another solution, we are indifferent we just want our cards to be able to help enable commerce in the digital world online.

Tien-Tsin Huang, JPMorgan.

Thanks. I just had a quick follow-up on the breach and then I had a cross-border question. Just on the breach, any risk of indirect impact from consumer confidence changing maybe in terms of usage of card, maybe mix shift to credit or just reissuance risk in general?

On cross-border, I know there's a lot of discussion in the market around emerging markets, FX volatility. Can that have any impact on cross-border activity or profitability? What should we be considering there?

Lastly, cross-border on the World Cup front and with the Olympics, is that big enough to show up in cross-border volumes? Sorry for all the questions. Thanks.

Why don't I start with the first. Consumer confidence in using the cards which we pay very close attention to, continues to still look very, very good. We have actually done our own surveys starting at the time of the breach. One of the reasons why we ran the advertising that we ran to make sure that consumers understand that while again it is unpleasant and not something we want them to go through, they are actually protected. And in terms of what we have seen in our actual payment results and in these surveys, things continue to look pretty good for us.

On the cross-border front, logic would say that the -- depending on how currencies move, it should have an impact on cross-border. The way it tends to materialize and the way we typically think about it is by quarter and yet what we saw this past quarter despite a strengthening, a broad strengthening of the US dollar, there was actually strong traffic to the United States and strong spend, cross-border spend, from countries where the currencies were somewhat weaker relative to the US dollar and that is counterintuitive to what you would normally think.

As a result, our view more broadly on cross-border is that it is economically driven and that how economic growth globally behaves is more likely to have an impact on our overall cross-border volumes.

So if I were to single out an area, emerging markets, there has been a lot of focus on declining values and growth rates in emerging markets. Those areas still have been vibrant sources of growth for us but we have a close watch on that in the year to come.

With regards to World Cup, Brazil has been one of those countries where the currency has weakened which bodes well for incoming traffic to the World Cup this summer in Brazil. The outbound spend from Brazil is one that will be under pressure largely because the government has -- well for two reasons. One, the weakness of the currency. That is often overpowered by an unflagging desire for Brazilians to travel. The government is making it more difficult however by putting on some pretty serious taxes both on the use of credit and debit cards when they are used in cross-border transactions.

So I would say from a World Cup standpoint, hopefully I would expect most of the Brazilians to stay home for the festivities and that outbound travel is probably never much in the cards. Inbound travel if anything should be aided by the weakness in the currency in Brazil and possibly Argentina will benefit as well as their currency has taken a nosedive of late.

Hard to believe that we will see anything in Sochi.

Brian King, Deutsche Bank.

Good morning. Just two quick questions. One I guess, what is behind the slowdown in US debit volumes and any difference between PIN and signature?

Then secondly, I noticed you guys [hide] EMV chip. Just your latest thoughts on EMV chip versus EMV chip and PIN and will you promote one versus the other?

On the debit side, I would say hard to read that. There is pretty tepid growth in personal disposable income which is the primary indicator we look at now that we pretty much lapped the more immediate Durbin effects. Remember debit is disproportionately nondiscretionary. So one of the important drivers of debit spend is the growth in jobs which adds to the overall growth in nondiscretionary and debit spend and we are just not seeing much in the way of growth rates there. What we are seeing is declining growth rates there for the US in that regard.

If we were to take a look at kind of Visa signature versus interlink, I would say the growth rates on the PIN side have been running higher than on the signature side. And as you noticed, we downshifted a bit from where we were in the prior quarter as we begin to move further away from the immediate effects of Durbin and begin to hit a more normalized pattern.

Just on the issue of signature versus PIN as we move toward EMV, just remember, this is a country where people are used to signing with their credit card. Most cards don't even have a PIN attached to them and it is our point of view -- and I made reference to this in my remarks, we think it is very important that we move towards EMV. But it is equally important that we don't disturb the growth in commerce that does exist in this country.

To the extent that we can do things to make that transition as smoothly as possible, that is extremely important. So we think there is a future for a meaningful period of time for signature.

Darrin Peller, Barclays.

We noticed that the service yield was up sequentially. Did anything in pricing or perhaps some lag effects from the (inaudible) drive that? And then just anything -- is there anything unsustainable around the amount you are now generating in service fees per dollar of payment volume?

Just quickly on the topic of pricing, we clearly saw a pretty significant cross-border price change [mass] over the last couple of quarters. While we know you guys want to be careful and surgical on pricing changes especially in emergings, might there be some similar opportunities soon from Visa? Thanks.

On the service fee side, I would say there is no real call out. Remember a lot of our service fee is subject to FX impacts. So if we look at the constant dollar growth in service fees, we are at 13. The FX impact is bringing that down to about 10 nominally and service fee growth was around 9 so I would say that is pretty close. I would say no real call out on the yields. It is well within the ZIP Code of what we have done within the past three or four quarter. So no callouts.

On the pricing question, I would answer it very consistently with what we have been saying is we are not opposed to increasing price, we are not opposed to decreasing price, we are not opposed to keeping price the same as long as there is a reason for all of those things. So I think we have been disciplined. We have been thoughtful and that is what we will continue to do.

I guess the last thing I would say is we are more than willing to sacrifice our short-term performance versus other people if it is the right long-term thing to do for our Company and for our industry. We are very comfortable with what we have done and what we haven't done in pricing.

Jason Kupferberg, Jefferies.

Thanks, guys. So if I heard correctly, I think process transaction growth slowed a little bit in the first three weeks of January, 11% versus the 13% last quarter. So I wanted to get a little bit more color there in terms of US versus international trends.

Then just quickly switching gears, any thoughts in terms of the implications of the data breaches on MCX's potential strategy? I know you guys get a lot of questions around that but to the extent they were looking at private label or a decoupled debit product as a primary funding source in their wallet now the potential for consumers to be more wary about giving their bank account data to a retailer? Would just appreciate any thoughts you have around that. Thanks.

Let me start with the transaction growth. Let me break it down US versus international, give it to you for the first quarter and then for January so that you have the detail.

So as I said on the call, process transaction growth for the first quarter was 13%, US was 9%, and international was 26%; January 21 days, process transaction growth was 11%, 7% for the US, 24% for international. So a downtick in both.

Just to add a touch of color on that because we obviously look at these numbers daily, weekly, we look at all the trends. And the one thing that we talk about over the past several months and it really goes back to the beginning of the last quarter is there is a lot of volatility embedded in the numbers. Week in, week out, it is very hard to pick up trends and so whether they are positive or negative over a several week period of time, we have been unable to discern anything meaningful than this continued tepid recovery that Byron described.

Then on the second question, I guess I would say what we continue to say, I have talked about this fairly consistently as we think about our competitive position understanding that we are continuing to evolve and change and make sure that we open our network up to those who can direct transactions to us and continue to build value on our network. Having said all that, safety, security and soundness is the price of entry in payments. There is no question about that and people can build whatever they want and the moment that consumers start to get nervous about using their own personal information or payment credentials is the moment that people will start to see effects of that.

So what we and our primary competitors have are these established payment networks, known roles, people understand how they are protected and again which is why we think EMV is important because it takes mag stripe to a new standard and we are pushing beyond EMV towards the next thing. So to the extent that other payment methods are not as secure, that is a competitive disadvantage and that is how we think about it.

Sanjay Sakhrani, KBW.

I had a question on the FX hedging practices going forward. How should we think about the relevance of them as currencies move going forward especially if the US dollar were to strengthen more? Thank you.

According to the forwards, the US dollar is strengthening more against the currencies that are most relevant in our portfolio. So the forwards aren't as steep as what we were looking at a year ago but none the less to the extent there has been a headwind I would say looking forward, the headwind continues, it is just not as steep as it was when we looked out six, nine months ago.

We begin hedging a year ahead of time so we hedge 12 months out. We do rolling hedges so begin 12 months out and then our hedges are largely in place I would say five or six months before the period we actually report. We do economic hedges so we don't hedge everything, for a particular currency, we take revenue, subtract the natural hedge of the expenses we incur in that currency and then we hedge not 100% but a meaningful portion of the remainder and we do that for about 15 currencies.

The intent is not to speculate but to simply dampen the impact of currencies and so in the way we approach it, it is not possible to put complete hedges in place. The intent is to put enough in to dampen it within certain predetermined exposures that we calculate. It is a pretty straightforward value at risk analysis.

So when there are large sustained movements, those are going to be reflected in our numbers, they just won't have the amplitude that you would have if we didn't hedge.

We have pretty good visibility to this which is why we can give you a three to four quarter look ahead which is our practice from a guidance standpoint.

Craig Maurer, CLSA

Thanks for taking my questions. First is for Byron. If you could discuss the cadence in marketing spend, will the ramp look similar to what we saw during the last Olympic Games though I do know you have two events coming up?

Secondly, does host card emulation present a good tool for your tokenization project in the card not present world and would you move quickly toward certification there? Thanks.

Let me just do number two first because the answer is yes. Byron?

On the second one, I don't have a comparison but you should expect a significant increase in marketing spend in Q2 and Q3 and then a meaningful downshift in Q4. We have had this combination before and even though the finals of the World Cup are typically in July which is Q4, there is a substantial amount of marketing that occurs prior to the finals in that April, May, June timeframe so that quarter has a substantial component of the World Cup and this quarter is the one that has virtually all of the Winter Olympics spend.

One other callout. The spend for Winter Olympics is significant in terms of the quarterly cadence but it is not at the level of spend that you would see for a Summer Olympics.

Let me just reiterate what Byron said in his opening remarks and make sure that we are as clear as we can be. As we look to our fiscal second and third quarter, in the second and third quarter because of what Byron referred to, our revenue growth numbers will not be as robust as we have seen this quarter and in the fourth quarter. We said that we expect the expense growth to be higher in the second and third quarter because of the marketing numbers that Byron talked about and that obviously then flows through to weaker margins in the second and third quarter. Recovery in the fourth quarter for things that we know are coming which is why we reaffirmed full-year guidance but there will be these variable and lumpy trends as we see the year play itself out.

Ken Bruce, Bank of America Merrill Lynch.

Thank you. Good morning. My question is relatively simple, it may not be quite as simple of an answer but I'm hoping to get a little bit of perspective around the process transactions. Just in terms of the percentage that has basically been migrating slowly higher, I am hoping you might be able to dimensionalize what is driving that share increase in terms of process transactions, what are the contributors to that? And maybe what you think is a reasonable high-end for process transactions?

And then separately if you would provide any color around the merchant relationships that you mentioned in your opening remarks in terms of improving those relationships and what that might entail?

I think that is a pretty straightforward, simple question on the process transactions part for sure. So two dimensions here. First of all, when you look at the relative growth rates between US and international, international is growing at a multiple of the US growth rate. When you break down international, if you took a snapshot of our portfolio today, international for us is still largely a credit business. That is what got established first. When you look at what is driving the transaction growth, it is very clearly debit and that is the huge opportunity that will drive international transaction growth for years to come.

For us debit is still in its infancy internationally relative to the United States. Another dimension, in the United States, we process nearly 100% of our transactions. Outside of the United States, we can process anywhere from 90% to 0% and so the opportunity for us to Visa process transactions is still a wide-open field. And that by the way is particularly true in debit. So you will hear us talk a lot more about that in the quarters to come because it is linked so directly to our growth opportunity.

On the merchant question, we don't have anything that we want to talk publicly about now with any individual merchant but as I said in the opening remarks, our goal is to provide the kind of value added services for merchants that we have done such a good job of providing to the issuing community for a long period of time and we are in the process of having discussions and when we have specifics to talk about we will talk about them.

(Operator Instructions). Smitti Srethapramote, Morgan Stanley.

Can you please give us an update on your government relations efforts in the emerging markets to increase the electronification of payments?

I will take a stab at that, Byron, and you can feel free to chime in. First of all, government relations for us especially when you get outside of the developed world is not a traditional government relations function, meaning it is not a staff function that sits to the side and just goes around and has lobbying type of conversations.

In the emerging markets, government relations is a business for us because the government is our partner in helping electronify the payment systems in these particular markets. Very often when the government leads with trying to move their transactions to the electronic payment systems, that then can help drive the market. That is what we see in places like Rwanda and other places which are really emerging.

So when we look across the world, we think of the government as a client and a partner to helping build the business which is good for them and the reason why it is good for them is it is ultimately good for all of their participants whether it is the merchants or the individuals and obviously we and our competitors will benefit from that as cash exits society.

If I were to reflect back to when we went public in 2008 and if you were to have asked that -- I don't think anyone would have thought to ask that question but today governments of emerging markets have gotten a lot more interested and pay a lot more attention to electronic forms of payment. They are interested in it from a very self-serving standpoint in that you can't tax what you can't see but they are also very focused on this as a way of providing, in Charlie's words, a safer more secure and sound financial system for their citizens.

And so there is a natural tendency to want to regulate and our involvement now is very, very early contact with a broad range of emerging market governments because they can be very well intentioned but also unenlightened with regards to how to think about regulation and what the impacts are. And so we have got government relations people stationed all over the world particularly in emerging markets and their role is largely educational so that governments that have a legitimate interest in regulating this part of their monetary system can do so understanding how best to provide safety, security and soundness and to allow the market to operate so that they get the kind of penetration of electronic payments which will grow and be healthy.

And we have been exceptionally pleased with the reception of most governments to talking with us and partnering with us to develop their electronic payment systems in a way that is healthy and I think will provide a good foundation for growth to come.

Glenn Greene, Oppenheimer.

Thanks and good morning. Just I'll squeak in a couple here. As you renewed your Chase deal, I think the implication or you suggested possibly you would pick up some incremental volume. I was curious if you started to see that and should we be thinking about that as sort of being reflected in the run rate or sort of something that we expect going forward throughout calendar 2014 as sort of incremental volume.

And then just a quick number question in terms of where are you in terms of V.me merchants signed?

I will take the first one. On Chase, we do expect to see incremental volume during the course of the year. We expect some to begin this quarter, not material and we expect it to build through the course of fiscal year 2014. In our guidance, that incremental is contemplated but it will be more second half weighted clearly than first half. Then your question again on V.me merchants?

Just a number of signings at this point.

I don't have the number, I don't have the updated number here to be honest with you.

I was just wondering do we get a step function increase at some point during this year or is it still sort of gradual test mode kind of figuring it out?

I think we will be in a position to answer that question in another month or two because we just rolled out the new platform that I described and we will start to see of the effects of it and have a better understanding of what it means for the ramp up.

Okay, thanks.

Chris Brendler, Stifel.

Thanks. Good morning. Thanks for taking my question. Actually I have two questions that I probably won't get a lot of detail on so hopefully it won't take too long. One is Visa Europe, anything you can say additionally about Visa Europe and what potentially that would look like if it could come back to you, any progress there or any update?

And then similarly on the merchant or the Judge Leon case and the appeal, obviously you can't give us too much there but I was wondering if there was any way you could on a timeline -- it sounded like from that hearing that the timeline could be shorter than I think the original estimates that were somewhere around a year. Is it possible to hear something from the three-judge appeal panel in the next couple of months? Thanks.

Nothing different to talk about on Visa Europe, otherwise I would have mentioned it in my opening remarks and on timing, we don't know.

In terms of the last question, we got the numbers. We have over 300 signed and 80 are currently live on the V.me.

Glenn Fodor, Autonomous.

Good morning. Thanks for taking my question. Byron, just wanted to peel back your comments on emerging markets a little bit more. Can you give us a rough sense of what percent of your volumes come from emerging markets and then within that volume category, can you give us a range of what type of multiples your overall volume growth that this is growing? Is it three times as fast or four times? Thanks.

Good morning, Glenn. I don't actually have those statistics at my command. The emerging markets, I mean these growth rates are midteens and better and --.

And depending on the market could be substantially better than that.

Yes, and could be substantially better. And these growth rates, remember we have a portfolio so even though some of these have had currency issues in terms of weakening currencies, these growth rates have held pretty well even where there has been weaker currencies.

Government intervention where they are trying to limit the outbound can have an effect. You are seeing that in Brazil today, likely to see it in Argentina, Venezuela, countries where there have been more severe locations. But the durability of the growing cross-border in emerging markets has been quite resilient.

Andrew Jeffrey, SunTrust.

Good morning. Thanks for sneaking me in here. A quick question on the CyberSource transaction growth which decelerated in the first fiscal quarter. Any commentary just broadly around that and implications or read throughs to overall e-commerce volume?

So let me separate the two. On e-commerce volume, this was a fantastic holiday spend season for e-commerce and the trend in growth in e-commerce is very, very healthy. So the downshift a bit in the growth in CyberSource has nothing to do with the underlying growth in e-commerce.

What I would say, the CyberSource established an early significant position as a gateway in what has become a much more competitive space and I think what we are going to find in the next few quarters is that we are just going -- one, we're going to need to up our game and that this space is just going to be more competitively intense than it has been in the past couple of years. And that is a direct testament to how attractive the growth prospects are for e-commerce which is the one channel that is particularly suited for electronic payments.

With that we want to thank everybody for joining us this morning and as always if you have any follow-up questions, please feel free to give either Victoria or myself a call. Thanks.

Thanks, everyone.

Thank you.

This does conclude today's conference call. Thank you for joining and all participants may disconnect their lines at this time.