Visa Inc (V) 2017 Q3 法說會逐字稿

Welcome to Visa's Fiscal Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

We'd now like to turn the conference over to your host to Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.

Thanks, Jenny. Good afternoon, everyone, and welcome to Visa Inc.'s Fiscal Third Quarter 2017 Earnings Conference Call. Joining us today are Al Kelly, Visa's Chief Executive Officer; and Vasant Prabhu, Visa's Chief Financial Officer.

This call is currently being webcast over the Internet and is accessible on the Investor Relations section of our website at www.investor.visa.com. A replay of the webcast will be archived on our site for 90 days. PowerPoint decks containing the financial and statistical highlights of today's call have been posted to our IR website.

Let me also remind you that this presentation may include forward-looking statements. These statements aren't guarantees of future performance, and our actual results could materially differ as a result of a variety of factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and Q, which you can find on the SEC's website and the Investor Relations section of Visa's website.

For historical non-GAAP or pro forma-related financial information disclosed in this call, the related GAAP measures and other information required by Reg G of the SEC are available in the financial and statistical summary accompanying today's press release.

And with that, I'll turn the call over to Al.

Jack, thank you. Good afternoon to everybody, and thanks for joining us today. We had another strong quarter of business results. Much like the first half of our fiscal year, we saw consistently solid trends in our operating metrics with very good growth in payments volume, processed transactions and cross-border revenue. Our global business benefited from an overall healthy economy as payments volume grew in every major region. In the United States, we saw strong consumer confidence continued to drive spending growth.

After 3 quarters here at Visa, I'm quite pleased with our business progress and our high level of execution. It's a real testament to our talented and dedicated employees around the world who are creating a strong culture focused on leadership development, operational excellence and driving results.

As I move to the highlights of the quarter, I do want to thank everybody for joining us at our recent Investor Day, both in person and via the webcast. As a leadership team, we enjoyed the opportunity to meet and spend time with our shareholders and the financial community. We hope that you found the information and discussions to be useful. We're pleased to have received quite positive and helpful feedback from the event. Given the fact that we did provide a significant amount of information just a couple of weeks ago, my prepared remarks today will be relatively brief.

In Q3, our business continued to perform well against our operating plan and our strategic priorities for the year. We saw healthy growth in our key metrics for payments, volume and processed transactions. Payment volume was solid across all 5 regions. Growth was particularly strong in India, the United States, Russia, Mexico and Australia. China payments volume growth remained low in the quarter driven by the dual currency, dual badged card runoff, but I should note that China's cross-border volumes growth continued to be strong. This was reflective of the overall trend as cross-border growth was robust around the globe. In addition to China, Latin America, the U.S, Japan, Russia and parts of Europe were among the areas of real strength.

Looking closer at processed transactions, growth was driven by Asia Pacific, Europe and the North America regions. Client incentives came in lower than expected, primarily driven by timing delays and variances relative to our European clients. This translated to financial performance ahead of our expectations for the quarter as we grew both net revenue and EPS by 26% versus last year's comparable results. Vasant will go into greater financial detail and cover some of the normalized comparisons to last year.

As we mentioned during Investor Day, the integration of our European business is progressing well and is on track. More specific to the technology side of the integration, we're focused on migrating the European systems to our global authorization clearing and settlement systems as well as deploying our global data platform and other corporate systems into Europe. We are well underway in that effort, and we have just completed the upgrade of our U.K. data centers on schedule. We expect that client migrations to the new systems will begin by the end of full year '18. In moving our European clients to VisaNet, we can provide enhanced network capabilities, greater scale, resilience and additional levels of cybersecurity that will benefit our clients and certainly be more efficient in the long term.

We are also making significant progress in strengthening our partnerships in building digital capabilities to drive growth. Earlier this week, we extended our partnership with PayPal to include Europe. We were already collaborating with them in the United States and Asia Pacific to provide a better online experience, and this now extends the benefits to European consumers and businesses. Additionally, they are joining the Visa network of clients, financial institutions and will be able to offer Visa accounts in Europe, enabling consumers and businesses to use their PayPal funds to spend wherever Visa is accepted. The partnership makes it easier for financial institutions to offer their Visa account holders the ability to check out anywhere PayPal is accepted online by offering greater consumer choice.

We also announced a strategic investment and planned partnership with Klarna, one of Europe's leading payment providers. Our planned investment is part of a global strategy to open up our ecosystem and support a broad range of new partners who are helping to redefine and enhance the purchase experience for consumers online and in mobile environments. Klarna develops products that address changing consumer preferences, giving them the flexibility and seamless experience that they expect and hope for when shopping online.

In June, we signed 13 new partners to participate in our token service provider program in all major regions. With the expected increase in digital payments embedded in a growing number of devices, we continue to build out a global network of partners to offer secure, digital payment token services in creating a more secure commerce platform.

We launched the Visa Ready program for business solutions. This is a strategic framework and certification program to help technology companies that integrate with our B2B payment services to ensure that they meet standards and are market ready. Five initial partners in the U.S. have become Visa Ready as this program will help accelerate growth and enable new use cases for B2B payments.

Turning to the international markets. Let me first make a couple of comments on China. Yesterday, we filed an application with The People's Bank of China in order to participate in the China domestic market as a bankcard clearing institution. China is one of the world's fastest growing payments markets and is leading the way in payments innovation. Our commitment to this market is long term. We look forward to bringing our capabilities to the industry by stepping up our engagement with all the ecosystem partners through open and constructive collaboration aiming to create added value, introduce innovative products as well as reliable and safe payment experiences for Chinese consumers. We expect that the PBOC will consider our application in line with the publicly released measures and guidelines for [PCCI] applicants.

India represents a large opportunity, and we provided some thoughts during Investor Day on how we're approaching the market. We are seeing steady progress with digital payments despite the recent remonetization of cash. Currency in circulation is stabilizing as remonetization comes to an end. The transition to the digital economy has been broad based across several categories, including everyday spend and suggests wide societal participation.

This past quarter, we saw payments volume increase over 80% and processed transactions more than double versus last year. In a couple of weeks, I'll be in India for the first time since joining Visa, and I look forward to seeing firsthand the opportunity that we have in meeting with local partners, officials and our teammates in India.

Once again, we delivered on our commitment to drive value for our shareholders in the quarter, in maintaining a prudent capital allocation plan. We invested and supported the growth in our core business through capital spending and expenses. In fiscal Q3, we returned approximately $2.1 billion of capital to shareholders consisting of $1.7 billion of share repurchases and nearly $400 million through dividends. We continue to accelerate our share buyback activity to offset the equity dilution from the Visa Europe transaction.

In closing, we continue to see strong momentum in the business, and we're excited about the long-term growth prospects of Visa. As we highlighted during Investor Day, there is a significant opportunity to displace cash and check of $17 trillion in front of us. We will continue to focus on partnering strategically in driving digital innovation to substantially grow our business into the future.

With that, let me now turn the call over to Vasant for some more on the financials.

Thank you, Al. Business momentum stayed strong globally throughout third quarter. Net revenue and EPS once again exceeded our expectations. Fiscal third quarter net revenue of $4.6 million was up 26%. Net income for the quarter was $2.1 billion or $0.86 per share. Adjusting last year's results for several special items related to the acquisition of Visa Europe, both net income and EPS were up 26%. Exchange rate shifts versus the prior year negatively impacted net revenue growth by approximately 1.5 percentage points and EPS by approximately 2 percentage points.

A few points to note. Global growth rates in payment volumes, processed transactions and cross-border volumes remained strong and stable. Exchange rate headwinds moderated though currency volatilities remained below the long-term mean. Timing of client incentives added almost $0.02 to third quarter results due to delays primarily in Europe. More on this later.

We bought back 17.8 million shares of Class A common stock for $1.7 billion in the third quarter at an average price of $93.82. Year-to-date in fiscal 2017, we've bought back 59.2 million shares of Class A common stock at an average price of $86.82 per share.

A quick review of our key business drivers in the third quarter. U.S. payment volumes grew 12% with credit growing 19% and debit 5%. The slowdown in credit growth from the prior quarter reflects the start of Costco and USAA credit conversion in the third quarter of fiscal '16. Excluding Interlink, debit grew 9%. Declining gas prices negatively impacted payment volume by 0.5 point. Adjusted for conversion and gas prices, underlying credit and debit growth rates have been stable all year. As reported, international payment volumes grew 72% in constant dollars. On a comparable and normalized basis, robust payment volume growth continued across the globe. Asia sustained double-digit growth rates, excluding China. Domestic payments volume growth in China was impacted by the decline in active dual-branded cards. Strong growth was sustained across CEMEA and Latin America. Brazil ticked up modestly. In Europe, excluding co-badge payment volumes, growth was 9% with strength across most markets.

On a constant dollar basis, cross-border volumes grew 147%, driven by the inclusion of Europe. Adding Europe to prior year results, constant dollar cross-border growth was up over 11%. Through the quarter, the dollar weakened and the pound strengthened moderately. Despite these shifts, outbound commerce from the U.S. and inbound commerce into the U.K. remained very strong. U.S. cross-border growth accelerated in the third quarter, largely driven by outbound commerce. Across international markets, particularly strong corridors were inbound into Canada, Japan and Australia and outbound from Latin America, the Middle East, South and Southeast Asia.

Reported cross-border volume growth rates were negatively impacted by over 3 percentage points by an e-commerce payments platform shifting acquiring of U.K. cardholder volumes to the U.K. from another EU location. While this shift impacted our reported cross-border growth rates, it has a minor effect on revenues since this is an intra-EU move the platform made to optimize the European business.

As reported, processed transactions grew 44% due to the inclusion of Europe. On a comparable and normalized basis, which includes Europe in prior year results, global processed transactions grew 13%. U.S. growth rates were stable. International growth rates were helped by India and some new business in Europe. India processed transaction growth stayed about 100%.

To July 14, U.S. payment volumes are up 10%. Global constant dollar cross-border volumes grew 12%. Processed transaction growth was 14%.

A brief review of fiscal third quarter financial results. With strong momentum in the key business drivers and helped by some moderation in exchange rate headwinds, growth rates on all key revenue lines stepped up in Q3. Service revenues grew 19%. Data processing revenues grew 29%. International revenues grew 45% even as currency volatility stayed below the long-term mean.

As I mentioned earlier, client incentives came in lower than expected and added almost $0.02 to the third quarter EPS. This was primarily due to delays in Europe. We are making good progress in resetting our commercial terms for key clients post removal of rebates. We are pushing hard to get most of the deals we wanted done before the end of this fiscal year. Our current expectation is we will get 75% to 80% of the way there by September. At this point, we expect the remaining 20% to 25% to shift into fiscal 2018, largely due to client preferences and timetables. This shift in Europe is the primary reason why we now expect client incentives as a percent of gross revenues to come in below the low end of our original outlook range of 20.5% to 21.5%.

After adjusting for various special items in last year's results, expenses grew 31%. As expected, expense growth ramped up from the first half levels as we stepped up technology as well as Europe integration spending. Our tax rate was 29.3%, driven by the geographic mix of our global earnings and the benefits of the legal entity reorganization we completed last quarter.

As we look ahead to the fourth quarter, it's important to remind you of 3 events that occurred in June 2016, which will significantly impact our reported growth rates on key metrics going forward. First and foremost and the most important is the closing of the Visa Europe transaction. Starting with the fourth quarter, reported growth rates will include Visa Europe in all prior year numbers.

Second is the Costco conversion. Starting in the fourth quarter of fiscal '17, our U.S. credit growth rates will include Costco in prior year numbers. In addition, the USAA credit conversion was completed in September, and the debit conversion was finished by October last year.

Third is the 2016 Brexit vote followed by sharp declines in the pound and later, the euro. This will reduce the exchange rate drag we have experienced so far this year. This also drove the sharp increase of cross-border commerce into the U.K.

Also of note, in -- the fourth quarter of fiscal year '16 was the first time cross-border growth rates globally hit double digits in almost 3 years. Starting in the fourth quarter, we will begin to lap the global cross-border recovery.

We have factored all this into our updated outlook for the year. We are raising nominal net revenue growth expectations for the year to approximately 20%. This is a result of the strong growth we have reported to date, lower client incentives at 20% to 20.5% of gross revenues and moderation in the exchange rate drag to approximately 2 percentage points.

With higher revenue growth, we are also raising our nominal adjusted EPS growth outlook to approximately 20% with a 2.5 percentage point exchange rate drag. Included in this outlook is a reduction in European integration cost to $60 million. Margin and tax rate expectation remain unchanged.

Finally, a couple of updates on cash and debt. We return more cash to the U.S. in the third quarter. Year-to-date, we have returned approximately $4 billion back to the U.S. As you know, in December 2016, we issued $16 billion of debt. The first tranche of this debt, $1.7 billion, matures in December this year. Between Labor Day and December, we plan to access debt markets to refinance maturing debt and an additional amount to fund the completion of stock buybacks that neutralize the impact of stock issued in connection with the Visa Europe acquisition.

Before I finish, I have one more topic. A couple of weeks back, Jack informed me of his intention to retire at the end of this year. On behalf of Visa's management, I want to thank Jack for his decade of contributions to Visa. As most of you know, Jack was Visa's first IR leader as a public company. Jack built our Investor Relations department from the ground up, establishing and nurturing relationships with all of you over the years, and he has been a key advocate for Visa. We all wish Jack the best in his future endeavors, which he tells me may include running the town chairlift in Park City next winter. Not surprisingly, he's picked November 30 as his last day. I guess he does not want to miss a single day of skiing.

With that, let me turn this back to Jack.

Thanks, Vasant. And before we start the Q&A, let me just add to Vasant's very nice comments there. It's been a real honor and privilege working for this organization and the people in it for the last 10 years, but it's always good to go out on top. I've known a lot of you for as few as 10 years and some of you for as many as 20. And it's been a great ride, and I've really enjoyed the interactions with each and every one of you.

And so with that, Jenny, we are ready for questions.

(Operator Instructions) First question comes from Bob Napoli from William Blair.

Jack, I knew that Visa stock has gone up too much and you're too rich, so it's not a big surprise here. So I hope to take the ski lift that you'll be running.

I'll let you on it.

He does need a tip.

No, it's great. Congratulations. But just I guess, I mean, the numbers have been very good. Obviously, through Investor Day, I think the company seemed pretty upbeat. I just wondered if there's a way that as you look at your numbers, if you can split out the growth and tell has there been an acceleration in the secular shift away from cash and checks to electronic payments? I know there's a lot going on with market share and Costco and different things. But I just wondered if you look at that, if there's a way -- if you think there's been some acceleration in secular trends.

Yes. If you -- I think as I said in my comments, if you take out the conversions and adjust for gas prices and volatile things like that, the underlying trend of credit growth in the U.S. for the last 3 quarters has been very steady and stable in the high single digits. And debit growth has also been very steady and stable. If you look at our payment volumes through the first 3 quarters of this year, again, strong and stable. We've been converting cash to digital at a pretty hefty clip for the past 5 years, and I would say there's no -- there's really no change in that trend. Global economies recovering have clearly helped us this year. So if you remember on Investor Day, we talked about PCE penetration and PCE growth. The PCE growth component certainly has been helpful. And then the last thing, of course, is the recovery on the cross-border side. And, Al, I don't know if you want to add.

Yes, I think the other aspect -- all of what Vasant said is obviously correct. But I think that while we've seen a real adoption of digital, we're still in the early innings. And I think that, as we pointed out on Investor Day, when we get into e- and m-commerce, we neutralize our largest competitor, which is cash, and I think that's going to continue to be a real engine of growth for us as we look ahead.

Our next question comes from the line of Moshe Katri from Wedbush Securities.

So another quarter of very strong results internationally. It seems that Visa Europe has been exceeding at least our expectations almost every quarter since the transaction kind of took place. Is there any way to kind of get us some color in terms of where you're seeing the upside coming from versus original expectations? And then on top of that, I think you've indicated that the yield from renewing some of that book of business has been better than expected. Maybe some more color on that as well.

I think we've been very pleased with Europe on any number of fronts and especially given the fact that there's been a fair amount of disruption for the people who work in that business between the integration as well as the regulatory requirement to split scheme and processing in the marketplace. Our employees have remained incredibly resilient. And I think, in general, the European economy is -- has been frankly better than we thought. As you know, where -- our largest presence by quite a large measure is in the U.K., and the U.K. has held up well and as Vasant said in his remarks, benefited -- has benefited from the lower value of the pound driving lots of inbound traffic into the U.K. That certainly has helped. And when we look around the rest of Europe, our largest presences are in France and Spain, which have also held up well. And then we're seeing countries like the Nordics continue to do well. In terms of the yield side of it, we're still working our way through redoing of these contracts. As both of us alluded to in our remarks, it's just a bit more of a slog to get there than we might have thought or hoped in the first place. But we are making good progress, and I think we'll continue to make good progress as we proceed through into the fourth quarter. And to the degree that we've got good incentives built in place and we're getting good volume growth, all boats rise, which is a good thing for everybody.

And Vasant indicated -- pointed to some new business in Europe. Is that -- is there anything substantial there?

No. I said that on the processed transaction side, yes, we've been seeing for a couple of quarters that we had some gains in Europe on the processed transaction side. But overall, as Al said, I mean, we're very pleased with the way the -- the vast majority of our business in Europe is under contract, and we have been, for a certain portion of that, working with clients to reset commercial terms once rebates went away. And that's gone well. Longer than we would have liked, but it's going well. So on all fronts, Europe has done, as we've said before, equal to or better than we expected and from an accretion standpoint, certainly has been performing better than we expected. And we'll give you a little more about that once we're through with the year and can give you a full sense of the year.

Our next question comes from the line of Jim Schneider, Goldman Sachs.

Good luck to you, Jack, in your future endeavors. I guess, my question really comes down to the cross border. Obviously, the volume was holding in there, but at least by our calculations, it looks like the cross-border yield improved somewhat. So can you maybe give us a sense of whether that's correct? And if so, what drove it? Was it regional mix? Was there some pricing impact? Or was it one of the wins you just referred to?

No, I don't think you should conclude that there was an improvement in yield necessarily. I mean, clearly, from quarter-to-quarter, there are some changes in mix and so on. Some of it could be as you see the exchange rate headwinds moderating a bit, certainly that helps our reported cross-border dollar numbers. But there was nothing -- there was no real change that would drive a big change in yields in the cross-border business.

And maybe you could also just kind of address the incentive levels, and you talked about being almost 80% of the way there by the time you finish this fiscal year. Can you maybe just address directionally where those incentive levels would go in terms of normalizing as we head into '18?

Yes. We'll talk about that when we talk about '18. We're not -- I mean, if your question was what's the likely range of incentives as a percent of gross revenues and all that next year, I think we can get into all that when we talk about '18. So it's a little too early to talk about all that right now. I think all we were signaling was that there is going to be some shift in Europe of incentives from what we thought we would get done this year into next year. And I want to emphasize that it's driven more by client preferences and timetables and their desires to do things on a certain timetable than ours, and we're adapting to their requirements.

Our next question comes from the line of Tien-tsin Huang from JP Morgan.

Jack, congrats my friend. It's been fun. I guess a question I don't want to ask -- trying to think which one to ask. Okay, so the -- maybe it was just the change in guidance. Can you just walk us through the change in guidance? How much of it is incentives versus some other factors? And the change to the incentive outlook, is that all timing? Or do you anticipate paying a little bit less than what you previously forecast?

There's a little bit of, let's call it, better-than-expected execution, a little bit of it in Europe, but you should think of it as almost all timing and almost all Europe. So that's one contributor. The 3 factors that went into sort of the change in the outlook is the performance we've had to date, some moderation in the exchange rate headwind, some reduction in the original expectation on incentives. And on the EPS side, it reflects the benefits we're getting from the tax rate we now have, which we talked about last quarter as well as the revenue being stronger than we had thought at the beginning of the year. So there's no -- there's nothing unusual other than the actual results and the trends we're seeing.

Our next question comes from Ramsey El-Assal from Jefferies.

Congratulations, Jack. We're going to miss your special sense of humor. I was -- I had a follow-up question also on incentives, kind of building on Tien-tsin's question, which is simply that as we sort of -- as incentives, the expected levels kind of get pushed out, does it increase the chance of sort of incremental volatility in outline? Will be there be a quarter coming up where we get a sort of a snap back there and it catches folks by surprise? Or should you -- does this sort of push-out imply kind of a gradual slope?

Again, I'd just remind anybody that this -- there are at least 3 factors that go into this that make this somewhat difficult to predict, and I think we've shown how difficult it is to predict because we haven't hit the number in the last couple of quarters. But it's the -- when is the deal going to actually come to pass? What are going to be the terms of the deal as you actually get into the last bits of negotiation? And then what actually volumes are you going to get against those negotiated terms? So the reality is, in this particular case, it's just that the period of time to get through over 100 client contracts has just taken longer than we thought. I don't think we want to get into predicting business or forecasting business and what it will look like quarter-by-quarter. But I think this is just simply a matter of a process that we have to get through, and as Vasant said, we're hoping to get through about 80% of it by the end of the fiscal year.

And as we've told you before, I mean, it's not something we think should be focused on to the extent it is on a quarter-by-quarter basis. And as you know, we explicitly don't try to get deals done based on quarterly timetables and so on. So the short answer to your question is, is there a snapback kind of thing? No. But is there likely to be a quarter where incentives run higher than we might have expected? Of course, I mean, just as they've run lower than we expected in some quarters, in some quarters, they could run higher than we expected. But there isn't any snapback kind of reason that you should expect. We typically look ahead and give you our best sense of what might get done in the quarter, the quarter coming up.

Our next question comes from Darrin Peller from Barclays.

Just, first of all, Jack, congrats again. We'll catch up soon, but we're going to miss you obviously. Just on higher level now, if you can just touch again, I mean, on the pricing environment a bit more. Again, you've commented on yields coming in better in Europe since the deal, and we've seen a number of years where obviously incentives and rebates have been higher both as a percentage of gross revenues on a year-over-year basis. It feels like at some point on the gross yield side, it's going higher, but the rebate side is keeping up pace. To some extent that would -- you would see a bit of a divergence between the 2. I mean is there anything you can comment on conceptually and what you're seeing in your conversations with clients? Has there been more of a realization that the value add you guys provide has reached a level where pricing is at a point where we don't need to keep providing higher and higher incentives and rebates, this is about the right point? Just a little more color on that would be great. And then just a quick comment on Q4. I know you're saying some of the European stuff is pushed, and there's been a lot of questions on incentives. But it looks like calculating what you're guiding would be about a $200 million sequential increase in your incentive and rebate line, which is kind of a lot. I mean, it's just hard to envision why that would all be in 1 quarter unless there's -- I think someone else has other things going on. So that's really just the follow-up question.

On the first question, Darrin, we -- when you look at the overall numbers, it's a result of hundreds of deals around the world, and they all take on different flavors. I think, in general, people -- many of our clients, and a testament to that is the longevity of many of our relationships that are very deep and have lasted decades, that people value plenty of aspects of what Visa brings to the table from our global scale to our risk and fraud prevention tools to our brand, et cetera. That said, all that stuff is valued when it comes to negotiations. People negotiate hard as do we and you end up -- everybody ends up compromising, and you end up in a certain place. But I think I haven't seen, nor as I've talked to clients around the world, any view that the value that we're bringing to the table is any less than it's been. In fact, I think as we move into a digital world and we continue to try to be a leader in terms of thinking about digital tools and solutions, that I think that many issuers, particularly when you get beyond the very top issuers, who also had their funds and wherewithal to be investing in some of these kinds of capabilities, that are -- what we bring to the table is very valued. Vasant, do you want to add to that and to (inaudible)?

The only thing was that there's a specific question on why client incentives, if you derive the fourth quarter, might look the way they do. I would say a couple of things. There is the fiscal fourth quarter effect to some degree in that. We have been talking to people, especially in Europe, for several months now in -- and it's back and forth on finalizing agreements and the documentation and so on. And there's a fair amount of that, that is happening in the fourth quarter. And as we get it done in the fourth quarter, since these discussions have been underway for a few months, as happens in many cases, the incentives you pay reflect when the deal was either agreed to or initially discussed. So there's an element of retroactiveness to it, all of which is captured in the incentives you would probably recognize in the fourth quarter. So it's some elements of all that, that flow into it. And then as Al said, I mean, we have a fairly rigorous process, and we do the best we can to give you the best sense. But in the end, we won't sign a deal because a quarterly deadline is approaching, but we'll do our very best to get done everything we are setting out to do right now.

Our next question comes from the line of Craig Maurer from Autonomous.

Jack, it's been a pleasure over the better part of 15 years. Hopefully, we can meet up in Tahoe one day. Regarding the business, can you first comment on what your success rate has been in Asia, in China specifically in converting dual-brand cards into a single-brand companion card for cross border? And secondly, was there any benefit in service fees from the restructuring of contracts around the breakup of scheme and processing in Europe?

On service fees in Europe, really, sort of it's the breakup of scheme and processing. We'll see over time what the impact is. But in the short run, it really has no impact on the fee structure that was in place. But it'll evolve over time, I'm sure. In China...

We -- I think -- well, in China, we have, I think -- we have 55 banks, and 42 of them only issue the single-branded card. The remaining 14, 13 do the dual branded. It's -- we've had some success, frankly, not as good as we would like it to be, and it's going to continue to be a real focus of ours and something that, given the importance of the cross-border volume from China, is something that we're working closely with the banks on. I plan on being in -- I'm going to be in India and China in 3 weeks, and it definitely is something that I will be talking to both our team there as well as our Chinese clients.

Yes. Just in terms of the trend in that business over the last couple of quarters, we highlighted the issue last quarter. Wanted you to know, as we said earlier, that if you adjust for China, Asia was growing double digits. The domestic dual-branded card volumes in China were relatively stable quarter-to-quarter, so we didn't see a sequential decline. And the cross-border business coming out of China, as Al said in his comments, has been strong and stable. How it all plays out in the next few months, we'll have to wait and see.

Our next question comes from the line of Sanjay Sakhrani, KBW.

Congratulations, Jack. It's bittersweet. I guess I have another question on incentives and specific to Europe, sort of the commercialization of the contracts there. Understanding there's some -- the timing-related impacts that are causing lower incentives this year, are there any specific pricing impacts as well that happen in conjunction with the commercialization of those contracts? Or should we expect those to sort of happen at the same time?

We've made -- in the year that we have owned Visa Europe, we have made a few pricing changes, and there are a number of pricing changes that we're continuing to look at in addition to obviously the commercialization of -- as you said, of the contracts do away with rebates and put incentives in place.

But do those happen at the same time at points? Like when you renew them and put in new incentive agreements, does that come with a revised price schedule?

So the price schedule, as you know, we have our price schedule, and then the incentives then are tailored by clients. So when we make price adjustments, we make them for the system as a whole typically. And then the commercial -- the commercialization of some of these contracts is something we do client by client. And just to emphasize, I mean, the vast majority of our business in Europe has been and remains under contract. This is something we're doing ourselves proactively to adjust some of the terms in the contracts to make them more commercial in a world where rebates no longer existed. But the pricing itself is -- that's related to our normal, of course, what we call our rack rates or list prices or whatever you want to call it.

Our next question comes from Dan Perlin from RBC Capital Markets.

And, Jack, I can only say one thing, jealous but congratulations. Well deserved, I'm sure. A lot was said at the Analyst Day around Visa Direct, and I wanted to just kind of hone in on the partnership you have now with PayPal, this collaboration you guys are doing. I guess one is are those cards -- the debit cards that are going to be issued, are you going to actually route those through Visa Direct? And then secondly, do you think that, that partnership will help insulate you guys from some of the risk associated with PSD2?

Well, first of all, we're very pleased to extend our -- the deals that we have with PayPal in North America and Asia into Europe. And particularly the fact that we're offering full consumer choice and obviously, as part of the deal is the ability to use Visa Direct to push PayPal account balance to bank accounts. And it's a fairly extensive deal because there's also an enablement of Visa Checkout relative to the Braintree gateway. And in Europe in particular, given the fact that PayPal has a banking license, we're obviously licensing them as a full-fledged issuer where they'll issue PayPal debit cards in Europe. So it's an extensive agreement that absolutely covers Visa Direct, but it also covers the very important aspects of the prior deals centered around full consumer choice as well as them working closely with us in enabling Visa Checkout as well.

And do you think that helps in that partnership to protect you guys from PSD2 as that regulation rolls in on '18?

I think that everywhere that we can further embed a Visa card into the payment stream and build the loyalty of the consumer certainly helps us. I mean, I think that, at the end of the day, PSD2 is going to generate a requirement that everybody focuses really hard on consumers and trying to make sure that they're providing the best possible consumer value propositions and the best possible consumer experiences. So to the degree that we can help further solidify the relationship that our issuers have with their customers, all that -- that can only go to help fortify the issuers against PSD2 and the competition that could come from these -- their accounts having to be opened.

Our next question comes from the line of Bryan Keane from Deutsche.

Wanted to just ask what percentage of the European contracts are done today. I know you said 75% to 80% is the goal for the end of the year, but just looking for a mark for today. And then secondly, at the time of the Visa Europe acquisition, I think the deal was to be EPS accretive in low single digits for fiscal year '17 and then high single-digit percentage points range by fiscal year '20. There's been a lot of moving pieces here. I'm just looking for an update now on if those goals all stand.

Well, to question #1, Bryan, and I'll let Vasant answer question #2, we don't want to get into a daily tally sheet on this. Again, I -- so we're not -- I'm probably going to disappoint by not quantifying exactly where we are, but I think you can assume that we're somewhere below 80% but above a fairly decent number since that we're confident in being able to say we think we can get to 80% by the end of the fourth quarter. But we don't really want to get into setting a precedent of providing that kind of update. Vasant, in terms of accretion?

Yes. In terms of accretion, as you all know, volumes -- European economies have been stronger than we expected, so our volumes, as you've seen, have been running better than we might have expected at the beginning of the year or when we did the acquisition model that valued Visa Europe. Certainly, the weak pound and the weak euro have helped the cross-border business. Frankly, the weak pound has caused a massive amount of cross border into the U.K. In addition to that, you know that we have taken some pricing, and our yields have run a little better than we expected. And so far, things are going well in terms of renewals and retaining contracts and business and so on. So when you put it all together, clearly, Visa Europe is doing better than we expected this year, and accretion is running ahead of the low single digits we had told you. But the year isn't over yet, so we'll wait until the end of the year and give you an update in October as to where the accretion was in the first year and whether we have a different perspective on the longer-term outlook on accretion. But it's early days, and things are going well.

Congrats, Jack, as well.

Thanks, Bryan.

Our next question comes from the line of James Faucette, Morgan Stanley.

This is Vasu Govil in for James. And, Jack, congratulations.

Thank you.

Just quick question. One -- first one to Vasant. You talked about -- you sort of mentioned the cross-border volumes will kind of lap the double-digit growth rate next quarter, so just want to get a sense for what's baked into guidance. Are we assuming that this double-digit growth rate is sustainable? Or do you think that it could decelerate back into the sort of high single-digit range? And then a question for Al on India. Visa is clearly benefiting from the government push towards noncash form of payments there. But there are also local mobile wallet players that seem to be making a big push, and they're fast gaining traction. So can you just talk about the competitive dynamic and potential for India -- the Indian market to kind of leapfrog card payments and go straight to mobile? And how is Visa positioned on the ground to sort of preserve and grow their share within electronic payments in India?

So on the cross-border growth rates real quick, we like what we see on the cross-border trends. We've seen the pound strengthen a bit, but that didn't change the strength of the cross-border business into the U.K. We saw the dollar weaken a bit, but that didn't seem to change the trend so far of cross-border business outside going -- leaving the U.S. So overall, the cross-border business seems to have pretty good momentum. And yes, the comparisons get tougher, but we feel pretty optimistic about it. So we're going to see how it goes. When you lap big increases, of course, you have to -- it's a little harder to forecast, but we like what we see a lot.

In terms of India, it's such an exciting market, and there's a lot going on obviously. Because it's an exciting market and a lot's going on, there's a number of players trying to get into the market. We've been there for a long time. We believe that as we think about growing our network and, in particular, merchant acceptance, that we have to have different plans in emerging market versus a developed market. And in the case of India, we clearly have to have a way that's low cost, low hassle, low friction to enable merchants to sign up. And that is why we initially went with a QR code and now have worked closely with some of our network colleagues on an interoperable QR code that works with our mVisa application and allows a quick and easy and low-hassle setup for merchants and a relatively easy experience for the India consumer. It is very, very early in the payments maturation curve for India. There is years of -- to still play out here, and we're going to do everything we can to take advantage of our heritage and tradition, our brand, our different product sets, our security, the globality of our network as well as our digital tools to make sure that we're winning at least our fair share, if not more of the business in India as it grows, recognizing clearly that we've got competitors that go beyond the -- just the traditional players that we've competed with over the last number of decades.

Our next question comes from the line of Paulo Ribeiro from BMO Capital Markets.

When you talk about the impact on expenses from tech investing, could you give us some color on where you're investing? I assume part of it is China. And where else in terms of either geography or products have you guys focused your dollars on?

I'm sorry, you're talking about technology?

Yes, your -- because you guys mentioned that is what's driving expenses, technology and Visa Europe integration. What is in technology? Where are you spending the money in terms of (inaudible)?

Well, I'll start, and Vasant can add to what I have to say. Clearly, China is one where we've stated a number of times that we're investing ahead of the process of being able to actually operate there, not knowing exactly when that will be. I would say the other categories that come immediately to mind are open VisaNet. We talked a bit about that in Investor Day that we're looking -- we've begun the process of building a more open architecture and a more modulized version of VisaNet to meet the needs that we have going forward and allow us to have the flexibility to actually, where necessary, put processing right in a country without it being a big deal, where a data center can be in a small closet as opposed to a large facility that has to have all of the accompanying electronics and cooling and et cetera. Clearly, digital and all of the digital tools that we're building is an area that we're spending a lot of time and effort on. Research, we opened up a -- I think we talked about this at some point in the past, that in February, we opened up a new facility in Palo Alto focused on research, and we're doing a whole number of things around looking at applications of blockchain and artificial intelligence and different other ways to build our data and our analytics capabilities. And I guess the fifth category I would say would be security and cybersecurity. Given how important security and trust in the payments ecosystem is, we continue to look at every possible offering that's out there related to physical and cybersecurity and make sure that we're being leading edge and investing appropriately to make sure that given the role that we play in the ecosystem that we're doing everything we possibly can to help make sure that transactions, as they're flowing through the system and transactions as -- when they're at rest, are all protected to the maximum degree possible. So those would be the things I would say. Would you add anything, Vasant?

Yes, I think the other things -- Al went through, I think, a very comprehensive list. I mean, a few other things just to highlight would be: continued investment in the Visa Developer platform; investments in now rolling out Visa Checkout and Visa Token Service and mVisa around the world; a big push on mVisa in places like India and parts of Africa, investments in our innovation centers. You heard about the London innovation center and how significant it's become, investments in co-development around our innovation centers with our clients. So that's a -- there's a lot of areas where the things we have developed are now in the process of being deployed.

Great. Just a quick clarification. PayPal, the rollout of the PayPal partnerships around the world, they're not a big investment. They are not in that number then of the spending?

There's a little bit of work there, but the essence is those agreements are not a major workload for us. It's more a matter of -- actually, more change actually on the part of PayPal than it is on part of us. And they've been -- and I'd add that they've been a really terrific partner.

Our next question comes from the line of Lisa Ellis, Bernstein.

Jack, you'll be missed; one final congrats from me. Visa Checkout-related question for me. One, do you have any updated stats to give us on Visa Checkout? And then a little bit of a more strategic question. You continue to kind of fight head to head with Visa Checkout with these more staged wallets around the world, whether that's with PayPal or with Alipay are now some of the models inside of Amazon. Would you contemplate adding more of that capability within Visa Checkout, meaning via prepaid vehicle, the ability to keep a stored balanced or Visa Direct, using Visa Direct to be able to enable P2P? And why or why not?

Lisa, the -- in answer to your first question, we're nearing 23 million users who have signed -- actually signed up for Visa Checkout. I think we've talked a little bit about this. The whole wallet thing is a bit of a mixed bag of activity around the industry and I think not necessarily the most user-friendly thing for consumers because there are so many options. We think of Visa Checkout more as a platform than we necessarily think about it as a wallet and -- but that said, strategically, I think anything that supports the 4-party model, that makes sense in terms of integration or capability, we're going to be open to look at as we go forward because, ultimately, we want to be part of a solution of coming up with a smaller number of easy, convenient and wallets that have their type of functionality that consumers would want and expect and hope that help brings some of what I think is a bit of confusion around wallets and checkout in the e-commerce world, bring a bit more order to it over time.

And thank you all for joining us today. If anybody has any follow-up, feel free to call myself, Joon or Victoria.

That concludes today's conference. Thank you for your participation. You may now disconnect.