Welcome to Visa’s Fiscal Third Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin..

Thanks, Jordan. Good afternoon, everyone and welcome to Visa’s fiscal third quarter 2023 earnings call. Joining us today are Ryan McInerney, Visa’s Chief Executive Officer; Vasant Prabhu, Visa’s Vice Chair and Chief Financial Officer; and Chris Suh, Visa’s Chief Financial Officer Designate.

This call is being webcast on the Investor Relations section of our website at investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements.

These statements are not guarantees of future performance and our actual results could differ materially as a result of many factors.

Additional information concerning those factors is available in our most recent annual report on Form 10-K and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC’s website and the Investor Relations section of our website.

For non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today’s earnings release. And with that, let me turn the call over to Ryan..

deepening client penetration of existing products, expanding geographically and building and launching new solutions. Unlike our core business, our growth in value-added services is often driven by selling a larger number of smaller solutions.

This quarter, we succeeded in selling more than 300 new issuing services, 600 new acceptance services and almost 500 new risk and identity services, in some cases, even within the same client. Our sales teams continue to work day in and day out with our clients to understand and resolve their pain points and realize new growth opportunities.

Altogether, in the third quarter, we generated $1.8 billion in value-added services revenue, up 19% in constant dollars. A couple of examples of new value-added services to highlight this quarter. First, our partnership with Pay.UK, the account-to-account payments operator in the UK was recently announced.

We will be piloting our new fraud capability, RTP Prevent, which is uniquely built for instant payments with deep learning AI models. Using RTP Prevent, we can provide a risk score in real time so banks can decide whether to approve or reject the transaction on an RTP network.

This is a great example of building and deploying entirely new solutions and our network of network strategy. Second, our recent announcement of our definitive agreement to acquire cloud native issuer processing and core banking platform, Pismo.

We believe that Pismo will allow us to strategically serve our clients through additional capabilities, with core banking ledger and issuer processing through cloud-native APIs; additional geographies with operations in Latin America, Asia Pacific and Europe; and additional products with credit, debit, prepaid and commercial cards as well as connections to local networks, including PICs in Brazil.

From a network perspective, issuer processing and core banking have become important elements to support issuers, activate card credentials and distribute value-added services. The transaction is subject to customary closing conditions, including applicable regulatory reviews and approvals and is expected to close by the end of 2023.

To wrap up, over the last few months, I have traveled across the globe meeting with clients, partners and regulators, and I continue to see enormous opportunity and momentum. Our brand capabilities, innovation and partnership approach continue to position us well for Visa’s future growth, but the most important aspect is our people.

And with that in mind, I would like to welcome the newest member of our executive team, Chris Suh, who will become Visa’s Chief Financial Officer on August 1. Chris brings to Visa more than 25 years of finance leadership experience from global high-growth companies.

His deep experience in finance and technology, plus his leadership in growing and scaling businesses, will be extraordinarily valuable to us as we continue to drive growth and better serve our clients and customers around the world.

Plus, as I am sure you will soon learn, Chris is a real hands-on business builder with a passion for technology and an intense focus on people who will fit in well with the culture of Visa. I’ve asked Chris to join the Q&A portion of our call today, but please remember he isn’t our CFO for a few more days.

Before the Q&A, let me hand it over to Vasant to provide financial highlights for the quarter and our thoughts on the rest of the year. But first, Vasant, I know I speak on behalf of all of Visa and our investors that we are deeply grateful to you for your outstanding strategic and financial leadership.

I have worked shoulder to shoulder with Vasant for the past 8 years, and I continue to be in awe of him. He is a world class CFO. And if there is a CFO Hall of Fame, I am confident he will be a first ballot inductee. Vasant, we wish you all the best. So for likely the last time on an earnings call in your career, over to you, Vasant..

the quarter lag in recognizing service fees, the expected slowdown in cross-border growth and moderating currency volatility lapping very high levels reached last year. As we indicated previously, non-GAAP operating expense growth in Q4 will likely be another 2 to 3 points lower than Q3.

Non-GAAP results exclude certain acquisition-related items from the fourth quarter last year. Non-operating income will continue to benefit from the attractive rates we’re earning on our cash balances. Interest income from cash will more than offset interest expense from debt by around $30 million in the fourth quarter.

Our tax rate is expected to remain in the 19% to 19.5% range in Q4. Assuming the performance expected in the fourth quarter, we will deliver low double-digit net revenue growth and mid-teens EPS growth in fiscal year ‘23 despite concerns about a slowdown and an exchange rate drag.

This once again demonstrates the resilience of our business, the large opportunity that remains available to digitize cash globally and the opportunity to accelerate our growth by developing vast new use cases while layering on additional value-added services. To finish, this will be my last earnings call as CFO of Visa.

I want to thank all of you for your trust and support. At all times, you kept us on our toes with our nose to the grindstone. Hopefully, we’ve delivered for you. This is also my last call as a public company CFO. I started this journey in September 2000, almost exactly 23 years ago.

To use a cricketing term some of you will understand, I did not hit a century of earnings calls. I fell as I entered the ‘90s. On October 1, I will be switching over to your side as a shareholder of Visa, cheering from the stands as Ryan, Chris and the team lead Visa to another double and triple. Thank you, Ryan. We’ve had a great run together.

It’s over to you, Chris. I’m going to miss my finance team and the wonderful people of Visa. And as far as the CFO Hall of Fame goes, I’m sure no CFO would invest in that business proposition. And now, Jennifer, it’s time for some Q&A..

Thanks, Vasant. And with that, we’re ready to take questions, Jordan..

[Operator Instructions] Our first question comes from Harshita Rawat with Bernstein. Your line is open..

Good afternoon, thank you for taking my question. I want to ask about the Block lawsuit. They have been close partner of yours and all the issuers of Cash App, Visa cards on which they ought to benefit from interchange. And Ryan, you talked about the current partnership there. Any comments you have on the lawsuit will be helpful.

And also just broadly, how should we think about the relationships with fin-tech and Cash App. Thank you..

Yes. Thanks for the question. We have a wonderful relationship with Block, a deep partnership across many different elements, as I mentioned. As it relates to the lawsuit, there was some confusion in the market by the lawsuit. There is really nothing new here. The lawsuit is included in the MDL 1720.

And thus, the lawsuit itself is covered litigation under our share class structure. So I would really put it in the category of nothing new here. And all the way back to the beginning of your question, we deeply value our relationship with Block and feel great about the deep and extended partnership we have with them..

Next question, Jordan?.

Our next question comes from Dan Perlin with RBC Capital Markets. Your line is open..

Thanks. Good evening. I wanted to just touch base real quickly on value-added services from the standpoint of penetration for a second. I think it’s around 20% or so of the company’s net revenues. It’s clearly yield enhancing. So it seems like a pretty large business.

But Ryan, every time you talk about it, it sounds like there is so much room for growth, and it’s hard for us to kind of pinpoint where you are in terms of penetration within your existing business. So any way you could frame that either anecdotally or quantitatively would be great. Thank you..

Yes. Thanks for the question. I mean the truth is we are at the beginning of the journey across all of our value-added services businesses. They all have enormous TAM. We all have – they have enormous runway in terms of the opportunity to continue to penetrate.

Our Acceptance Solutions business, whether it’s CyberSource or Verifi or Visa Acceptance Cloud, I mean enormous amount of runway there. In issuing, we’ve talked about the opportunity we have now with Pismo when we close on that deal, and the same thing with DPS risk and identity advisory.

I mean it really is – they are all businesses that have enormous TAM. We’re in the very early innings of our penetration, and we don’t see in any of those businesses anywhere close to running out of runway anytime..

Thank you..

Next question, Jordan?.

Our next question comes from Craig Maurer with FT Partners. Your line is open..

Craig, are you there?.

Yes. Thanks for taking the question. Sorry, wasn’t quick enough on the unmute button. So I wanted to ask about the loss of what I think I heard was a Visa Direct client in LatAm and why the transition to an internal system for them.

And that leads to my follow-on which is, can you discuss the trends you’re seeing globally in terms of domestic payments moving away from or back to domestic networks? Your comments in the beginning of the call seemed to indicate that there might be an acceleration toward the global networks to take advantage of what has clearly been greater investment levels into the capabilities.

Thanks..

Craig, thanks for the two questions. I’ll take the second one first. We are continuing to see the benefits of our investment all around the world. As I mentioned in my prepared remarks, we’re seeing issuers, consumers shift share to Visa, shift their preference to Visa. And it happens in different ways in different countries versus the domestic schemes.

But it is coming back to what you said, which is our ability to consistently invest in security features and tokenization and new digital use cases, we believe, is what’s helping us win in that space.

If you go back to the first part of your question, these types of things are going to happen when you’re building out a new platform like we are in Visa Direct. It’s still the very early days of building out Visa Direct. We’re expanding in geographies and use cases.

And as different partners use Visa Direct and they start to try it for different use cases, they’ll find some of them work great. And other ones, they’ll find opportunities to use it differently. In the case of the situation in Latin America that I mentioned, they started the journey of what they were working on using Visa Direct.

They found it to be a more efficient way to get going in their journey, and then they found that they built an internal ledger system that they didn’t have originally. But as I mentioned, they are going to continue to use our services for a number of things that they do.

And listen, I think as we all talk over the coming quarters and years as we build out this platform, there is going to be ebbs and flows. There is going to be use cases that grow faster than others and things that stick and others that don’t, and that’s what building a new global business that has the reach of our platform is going to have..

Thanks, Ryan..

Next question, Jordan?.

Our next question comes from Sanjay Sakhrani with KBW. Your line is open..

Thank you. And congratulations, Vasant. Despite the concerns of choppy economy and disinflation, Vasant, you mentioned when we look at the July trends, and obviously, the trends in general over the course of the year, they have been very encouraging. And you mentioned the different categories.

But as we look across the next 12 months, anything to parse out or think about in terms of the comps or how you see things playing out as we get maybe preliminary views on 2024?.

Thanks, Sanjay. Yes. I mean the general term we’ve used all along is stability, and we think things are still very stable. You look at transactions growth, it’s been very stable in the U.S., around 8%.

If you just adjust for the Omicron uptick we had last quarter, and you go back to pre-COVID trends or first quarter trends, transactions growth has been very stable. Clearly, some of the change in trends we pointed to ticket size. I don’t think I want to get into talking about next year.

We will leave that to Ryan and Chris in October, which is when we normally do talk about next year. But more – in the more near-term, the fourth quarter, the biggest hit to ticket size has been fuel, and fuel comparisons are going to moderate. And so that should help us a bit in the fourth quarter, and that’s reflected in our expectations.

In general, I would say the trends we’re seeing across the board are unchanged from where they have been for the past several months..

Next question, Jordan?.

Our next question comes from Jason Kupferberg with Bank of America. Your line is open..

Thanks. Vasant, best of luck to you. I wanted to actually ask about surcharging. I know Visa recently lowered the cap on the credit card surcharging to 3% from 4%.

Just wanted to know, is this in response to a trend of more merchants employing surcharges, whether that might be in a compliant or a non-compliant manner? If so, are there any implications for Visa we should be considering from surcharging?.

No implications you should be considering. It won’t surprise you, we don’t feel great that consumers get surcharge. But of course, in certain jurisdictions in the U.S. and around the world, merchants have the ability to do that, and some choose to do it.

Many choose to do it, and then they choose to pull back on it because it’s not a great customer experience. The small adjustment that we made that you referenced was one. Just making sure that when consumers do get surcharge, it’s something that’s fair and equitable, and that was the purpose of the change..

Next question Jordan?.

Our next question comes from Bryan Keane with Deutsche Bank. Your line is open..

Hi, guys. Vasant, since it’s your last earnings call, I got to ask you about incentives. You got to go out on an incentives question, at least. So as incentives look like they are going to be towards the higher end of the range, just the puts and takes that pushed it towards the high end.

Was there more deal activity this fiscal year or different volumes that changed the incentives towards the high end?.

Yes. I mean it’s – well, thanks for saying those nice things. I – in general, on incentives, they were in line with what we expected. So there were no surprises there. And incentives, everybody focuses on the percentage. If you look at what really counts, which is net revenue growth, we had healthy net revenue growth in the quarter.

Even with the exchange rate drag, we were almost 12%, and the exchange rate drag would have added another point. If you look at yields, net revenue yields are higher than they were a year ago. We did have some renewals happen earlier than we expected.

So we did have some renewals come into this year and Q3 that we might have thought would happen next year, but we’re happy about that. We’re always happy to renew clients even if we have to do it a little earlier. So all in all, no surprises there..

Next question, Jordan?.

Our next question comes from Lisa Ellis with MoffettNathanson. Your line is open..

Good afternoon. Thanks for taking my question and welcome, Chris. And Vasant, you will be missed. I wanted to follow-up on the prepared remarks call-out on the partnership with Pay.UK around RTP Prevent. Can you elaborate a bit more on that? These are the types of value-added services I know we have all been eagerly waiting to see.

So, can you talk a little more about sort of what the scope is of the pilot and exactly how that service works and how you will be monetizing it, if not in the pilot, then over the longer term? Thank you..

Hi Lisa. Yes, thanks. So, it is one of the things we have been talking about is how we can build value-added services for new networks, specifically for RTP as it starts to grow and expand around the world. So, I guess how it works to the core of your question. So, first of all, what we have done is we have built a real-time risk score.

We have built it uniquely for instant payments, where there is often unique cases of fraud in terms of how they work. We built it using deep learning AI models.

And what it does is it enables banks to be able to decide whether to approve or reject the transaction in real time, which is the capability that most banks or most real-time payments networks around the world have been very hungry for. It’s a score from 1 to 99. It comes with an instant real-time code that explains the score.

And what it does is it leverages our proprietary data that kind of we have used to enhance our own risk algorithms as well as the data that we see on a lot of our payment platforms, including Visa Direct. And one of the benefits of us bringing that to market is it integrates with the bank’s existing fraud and risk tools.

Because we are often providing these types of risk scores to banks and they are ingesting them from us, it directly integrates into their fraud and risk tools, so the real-time information, their systems know how to use it. It can be automated into their decisioning algorithms and those types of things.

So, think about it – if you back way up, if you think about it, it’s similar to our Visa Advanced Authorization service that we offer on VisaNet.

But we have built from the bottoms up, clean sheet of paper, a customized solution, leveraging deep learning AI models and integrated that directly into the bank system so that they can ingest that in real time. The pilot is just getting going. It’s very early days, so we will report back as we learn more.

And hopefully, we will have more examples like this to talk about around the world..

Next question Jordan..

Our next question comes from Ashwin Shirvaikar with Citi. Your line is open..

Thank you and congratulations, gentlemen. Also Chris, welcome and Vasant, thank you for your help and partnership over the years. I wanted to ask about value-added services. Revenue yield there was quite solid and wanted to ask what’s leading to that.

Would you call it sort of structural at this point, or is it more episodic? Like in the past, you had benefits from, say, FX volatility or incentives, things like that. So, that’s the question..

Yes. FX volatility would not affect value-added services. We don’t count our treasury revenues in value-added services. So, value-added services are benefiting from structural and secular things. First, it’s deepening our penetration of existing clients. So, it’s a concerted effort to sell more services to existing clients.

Second is some of the services were not operating globally. We are now making these services available around the world. So, it allows us to clearly increase the scope of the market. And then third, as you know, we have been adding services over time. So, this is a long-term growth engine for us. Our goal is to continue to grow it at a very hefty clip.

And think about it as, to get a transaction and the more services you can layer on and the more value you can add to the transaction, the more yield you can get on it. So, it’s very much a growth engine, one of three, and we think it can grow for a very long time..

Next question Jordan..

Our next question comes from Ken Suchoski with Autonomous Research. Your line is open..

Hi. Good evening everyone. Thanks for taking the question. I just wanted to ask about cross-border. Obviously, Visa is shaking some headwinds on the yield side in this business. Can you just talk about how much more of a headwind you think this is going to be in fiscal 4Q and fiscal 1Q of next year compared to what we saw this past quarter? Thanks..

Yes. So, just to correct, the way to think about value-added services yield, and I know you are looking at the revenue and dividing it by the volume, is there the yield on the transaction and then there is the yield on the exchange rate translation services we provide.

Where the yield has gone down, because it was very high last year, is on the exchange rate translation service, what we call our treasury revenues, because currency volatility last year was 30% to 40% higher than it is right now. Currency volatility right now is a little higher than the long-term average. But last year, it was at extraordinary highs.

In fact, in the fourth quarter, we will lap some of the highest levels of currency volatility reached last year. And based on where volatilities are today versus last year, volatilities are down almost 40%. So, it’s a sizable move. So, any yield difference you see in that line is because of treasury revenues.

It’s not from our core cross-border yields, which remain very steady. It’s going to fluctuate based on currency volatility. And really, it’s still decent. It’s just that it was very high last year..

Next question Jordan..

Our next question comes from Darrin Peller with Wolfe Research. Your line is open..

Hi guys. Thank you. Visa right now is net cash for the first time, I think since 2016, since pre the Visa Europe deal, and gross debt below 1x. I know your target generally is 1x to 1.5x. And the buyback, frankly, was a little bit light also tracking at about 76%. Last year, you paid out about 76% of net income and buybacks.

So, I think you need to do a pretty big catch-up in this quarter. So, just curious to hear how you are thinking about capital allocation. I guess Ryan, the multiple is lower versus the market has been in a while.

Do you see this as a good opportunity for buybacks to pick up pace, or are there other reasons why you would want to allocate capital different ways, guys? Thanks again..

Yes. I will start and maybe Ryan can add. No, there is no change in capital allocation strategy, which is pay a dividend. The dividend has a certain set of criteria we use between a certain percentage range of our EPS. It gets to a certain yield, and it’s almost $1 billion a quarter now. We do buybacks generally out of free cash flow.

We have historically not borrowed to do buybacks. And clearly, our first priority is to invest in the core business and to do acquisitions that make sense. And as you can see, we have been doing both. In terms of the volume of buybacks, remember that we did contribute $850 million to the escrow account, which is also equivalent to a buyback.

So, if you count that in, we are probably around $9 billion or so in buybacks, if I remember right, so far this year. Clearly, we have more capacity if you want to do buybacks.

We have always said that if we felt there was a disruption in the market and stock was trading at levels that did not reflect intrinsic value, we would be willing to step up our buybacks and borrow money if that made sense. So obviously, we will keep you posted if any of our plans change. Ryan, you may want to add some things..

Nothing to add to your very well-said comments, Vasant..

Next question Jordan..

Our next question comes from Andrew Jeffrey with Truist Securities. Your line is open..

I appreciate you taking the question and Vasant, best of luck to you. It’s been a pleasure. Ryan, I wanted to ask about the – some of the commercial efforts that Visa is making. I know it’s a pretty important driver of sort of new flows, the non-consumer part of your business growth. And this quarter, it was a little bit slower than overall volume.

Can you just comment on the pipeline and what you see as the opportunities in commercial and how we should think about that business growing over the next few years?.

Sure. Thanks for the question. We remain very excited about B2B in general. It’s an enormous TAM, and we are just kind of scratching the surface, and we are very excited about commercial specifically. We have the largest commercial business on the planet, as we have talked about in the past.

I think it’s in the neighborhood of $1.5 trillion of payment volume, and we have been releasing numbers of innovations into the market in that space. we have released Visa Spend Clarity, which helps our clients with expense management, Visa Commercial Pay, which helps with control.

There is a lot of things we have done around enabling acceptance around the world. So, we feel good about it. As it relates to the volume, some of the dynamics that we are seeing in the commercial space are similar to what we are seeing in the consumer space, you have the impact from fuel and those types of things.

But as we think over the next 1 year, 2 years, 3 years, 4 years, 5 years, we have never been more excited about the opportunities that we have got. And we have never felt better about the product that we are putting in the market, and we are getting great feedback from our clients as well..

Next question Jordan..

Our next question comes from Ramsey El-Assal with Barclays. Your line is open..

Hi. Thanks for taking my question and congratulations to you Vasant. I wanted to ask for a follow-up on Reg II. You mentioned not seeing any impact yet. I am just wondering from your vantage point, whether you are now seeing that routing choice more broadly available to kind of all merchants or are we still in the midst of an implementation and rollout.

And then just quickly and separately, your tax rate guidance would imply no impact from the recent Brazil tax law changes that did impact Mastercard, but I am just double checking if that’s the case..

Why don’t I – I will take the first part and let Vasant take the second part. It’s early days with Reg II. There has been a lot of work that happened ahead of the July 1 date, but there is also work still happening.

As it relates to our views on our ability to compete in the space, we are – we continue to be very excited and confident about our ability to compete. We think that many merchants are going to still choose to route to Visa. As you all know, merchants bear liability for fraud in the e-commerce space.

So, when they are making decisions, it’s not just a cost-based decision. And we bring a lot to merchants in terms of the way we help them with managed risk. We have advanced fraud tools, advanced risk scoring capabilities.

And as you know, we also have the product functionality enabled by dual messaging to enable a lot of use cases that are key in the e-commerce space. So, we are – we feel very good about our ability to compete.

And there is still a lot that’s going to happen over the course of the next many months and quarters, and we will keep you posted on how it evolves..

Yes. On the Brazil topic, you should ask Mastercard what was unique to them, really no change from our standpoint as it relates to Brazil..

Next question Jordan..

Our next question comes from Timothy Chiodo with Credit Suisse. Your line is open..

Great. Thank you for taking the question and Vasant, thank you for always being a gentlemen for all the help over the years. I want to dig a little bit, but actually this question is for you, Vasant.

On the gap between nominal cross-border volumes ex inter-Europe and international revenue on a nominal basis, you talked about the FX volatility part plenty.

I was just hoping you could dig into a little bit about the other factors that drive that gap, meaning quarter mix and any pricing and how we should think about those over the coming quarters?.

Yes. Thank you. Yes, it is largely volatility-driven because of the very high volatilities we had last year and more normal volatilities we are getting to now. Beyond that, there is some FX impact, obviously. That line is always affected by FX more than any other line in the P&L. And other than that, there are always mix factors.

It depends on corridors and all that. There is always some impact from that. But I would say the bulk of it is the two we have talked about, volatility and exchange rates..

Vasant, thank you..

Last question Jordan..

Our final question comes from Tien-Tsin Huang with JPMorgan. Your line is open..

Hey. Thanks so much. Last question, so I won’t ask you, for Vasant. That’s my gift and way to thank you, so I will spare you a macro question. I will ask Ryan instead on Pismo if that’s okay. Ryan, you mentioned – I think you mentioned shipping products faster in your upfront remarks that made me think about Pismo a little bit.

Is buying Pismo an indication in any way that Visa is more interested in owning tech and infrastructure that touches products, the consumer and that gives you a chance to develop products faster? Just I am curious to get your thoughts on that. It feels like you are widening the swim lane a little bit here.

Is that fair to say? I would love your thoughts. Thanks..

Hi Tien-tsin. What we are trying to do is serve our clients. I mean that’s where it all starts with. And what our clients are looking for is they are looking for innovative processing solutions. They are increasingly looking for cloud-native API-based services. Processing is certainly one of those.

We have heard from clients around the world that many of them are embarking on digital transformations in their processing platforms. And so when we hear that from our clients, we immediately get to work on how we can help them, how we can serve them.

We went through a global process looking at all the different players around the world, and we identified Pismo as the best. We literally studied hundreds of companies. We met with dozens of them. And after a deep, thorough scan, we identified Pismo. And yes, Pismo is the kind of tech platform, Tien-tsin that you were alluding to.

That is the type of tech that our clients are increasingly looking for. And in this example, it was an opportunity for us to buy the leading player that could help clients serve their customers, expand globally and deliver a lot of new leading edge use cases to their customers. So, we are very excited about it. Thanks for the question..

And with that, we would like to thank you for joining us today. If you have additional questions, please feel free to call or e-mail our Investor Relations team. Thanks again, and have a great day, and please join me in wishing Vasant the best..

Thank you for your participation in today’s conference. You may disconnect at this time..