Visa Inc (V) F4Q 2013 Results Earnings Call October 30, 2013 5:00 PM ET
Jack Carsky - Head, Global Investor Relations
Charlie Scharf - Chief Executive Officer
Byron Pollitt - Chief Financial Officer
Jason Kupferberg - Jefferies
Craig Maurer - CLSA
Tien-Tsin Huang - JPMC
Dan Perlin - RBC Capital
Darrin Peller - Barclays
Glenn Fodor - Autonomous Research
Sanjay Sakhrani - KBW
Rod Bourgeois - Bernstein
Smittipon Srethapramote - Morgan Stanley
David Hochstim - Buckingham Research
Bill Carache - Nomura Securities
Arvind Ramnani - BNP
Welcome to Visa Inc.’s Fiscal Q4 2013 Earnings Conference Call. All participants are in a listen-only mode until the question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
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.
Thank you, Brad. Good afternoon. And welcome to Visa Inc.’s fiscal fourth quarter and full year 2013 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. It can be accessed on the Investor Relations section of our website at investor.visa.com. A replay of the webcast will also be archived on our site for the 30 days. A 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 aren’t guarantees of future performance and are actual results could materially differ as a result of variety of factors. Additional information concerning these factors is available in our most reports on Forms 10-K and Q, which you can find on the SEC's website and the IR section of our website.
For historical non-GAAP or pro forma related financial information disclosed in this call, 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'll now turn the call over to Byron.
Thank you, Jack. Let me begin with my usual call outs and observations. First, some color on the fourth quarter’s net revenue growth. As reported, net revenue grew 9%, three call outs, starting with gross revenue.
For the quarter, we grew at a healthy 11% rate. Turning to the incentive line, during the quarter, we closed 73 major deals, compared to a quarterly average of 53 for the 2013 fiscal year. This resulted in an incentive rate of 18.6% for Q4, which is well within the neighborhood we signaled on our Q3 earnings call. When combined with the first three fiscal quarters, incentives as a percent of gross revenues came in at 16.5%, right in the middle of our 16% to 17% guidance range for the full year.
Finally, the FX headwind, which has accelerated in the second half of the year, reached about 1.5 percentage points of drag on revenue growth in Q4. The full year FX headwind was just under 1% for fiscal 2013. We expect this headwind to continue to grow in fiscal 2014 to about 2 percentage points of drag on reported revenue growth net of our hedges.
Second callout relates to full-year revenue growth. We began fiscal '13 with revenue guidance of low double-digits and refined the guidance to around 13% on the Q3 call. We end the year with revenue growth up 13% after absorbing the impact of heightened deal activity in Q4 and a growing unfavorable FX impact.
Third callout relates to the most recent U.S. payment volume trends. While rest of world payment volume and global cross-border trends remained in double-digit growth territory for the September ending quarter, U.S. domestic payment volume dropped from 11% growth in August to 8% in the month of September. While October's first three weeks have upticked slightly to 9%, there has currently been some constraint in U.S. consumer spend, showing up in our numbers in both debit and credit. Our guidance encompasses what we are seeing in September and October and presumes that a tepid recovery in U.S. economic growth continues.
Fourth callout relates to operating income and EPS, which grew 15% and 20% respectively, versus fiscal 2012 adjusted results. Included in our Q4 results was a restructuring reserve of $44 million, representing about $0.04 of EPS. This restructuring reserve reflects a streamlining of our cost structure, aimed at achieving greater alignment between our costs and our strategic priorities, and capturing organizational efficiencies as we adapt to changes in our management structure.
Finally, fifth callout -- we remain committed to returning excess cash to our shareholders. Three highlights: First, as announced last week, we raised our quarterly dividend per share by 21% to $0.40. Second, during Q4, we repurchased over 7 million shares at an average price of $177 per share, returning $1.3 billion to shareholders.
Finally third, we announced a new $5 billion share repurchase program, our largest ever. Please note this buyback program has no expiration date and is in addition to $251 million, still remaining under our prior authorization. This means purchases could take place throughout fiscal 2014 and in 2015 as well.
Now let's turn to the numbers. As is my practice, I will cover our global payment volume and process transaction trends for the fiscal fourth quarter, followed by our results through October 21. I will then cover the financial highlights of our fiscal fourth quarter and conclude with our guidance outlook for fiscal 2014.
Global payment volume growth for the September quarter in constant dollars was 13% on par with the June quarter's 13%. This was driven by a sustained growth in all of our regions. More recently in the U.S., through October 21, payment volume growth was 9% compared with 10% in the September ending quarter.
Drilling down further, U.S. credit growth was 9% through October 21, compared to 11% in Q4. Similarly, debit growth at 8% in October compared to 10% in Q4. While a decline in U.S. gas prices is part of the story, there is also a modest down shift in other retail segments.
Global cross-border volume delivered a solid 11% constant dollar growth rate in the September quarter on par with the 11% rate in the June quarter. The U.S. grew 10% and the rest of world 11%. Through October 21st, cross-border volume on a constant dollar basis grew 13% with the U.S. growth rate of 10% and the rest of world at 14%.
Transactions processed over Visa's network totaled $15.5 billion in the fiscal fourth quarter, a 14% increase over the prior-year period. U.S. grew 10% while the rest of world delivered 28% growth. Through October 21st, processed transaction growth was 13%.
Now turning to the income statement. Net operating revenue in the quarter was $3 billion, a 9% increase year-over-year driven by solid growth globally in both domestic and international transactions and as mentioned earlier, we strained by a significant increase in incentives tied to deal activity and a growing FX headwind. For the full fiscal year, net operating revenue was $11.8 billion, up 13% over the prior year and at the high end of our beginning of the year guidance of low double digits.
Moving to the individual revenue line items; service revenue was $1.4 billion up 10% over the prior year and was driven by solid global payment volume growth. Data processing revenue was $1.2 billion, up 12% over the prior year's quarter based on solid growth rates in Visa processed transactions inside and outside the U.S. and continuing strong CyberSource transaction growth.
As we signaled last quarter, we have fully lapped the implementation of U.S. debit regulation, resulting in revenue growth that more closely approximates growth in process transactions.
International transaction revenue was up 13% to $899 million reflecting solid strength in cross-border volumes and a continuing benefit from higher currency volatility. Total operating expenses for the quarter were $1.2 billion, up only 1% from the prior year results.
Personnel costs were up 6% for the quarter and 12% year-over-year in support of our gross strategies around the globe, which heavily emphasized the investments in our country teams outside the U.S. along with our newer product initiatives. That said, in Q4, we also took a $44 million restructuring reserves for the reasons discussed earlier. This callout is important when considering a run rate for personnel cost as we move into fiscal year 2014.
Marketing expenses were flat from the prior year and declined 6% sequentially primarily as a result of lower media spend. Operating margin was 59% for the fourth quarter and 61% for the full fiscal year, both in line with our guidance of around 60%. Our effective tax rate for Q4 was 32.5% and well higher than our full-year guidance of 30% to 32%, the full year figure of 31.4% was within our guidance range.
Capital expenditures were $138 million in the quarter and totaled $471 million for the full year. This was at the top end of our expected range going into the year.
At the end of the fiscal quarter, we had 638 million shares of class A common stock outstanding on as converted basis. The weighted average number of fully diluted share is outstanding for the quarter, totaled $644 million and for the year totaled $656 million.
Finally, in terms of guidance, we have previously provided fiscal $2014 metrics around revenues, EPS and free cash flow. Let’s start there. Given our expectation for our significant FX headwind in 2014.
We are reframing our revenue growth guidance going forward, leading with a constant dollar growth rate, which is consistent with the payment volume metrics we provide each quarter and better represents the underlying growth and health of our business. Then we will provide the expected FX impact for the year. So, for fiscal year 2014, we expect constant dollar revenue growth of low-double-digits and an FX headwind of around two percentage points.
A little further color on revenue. Given the continued slow pace of global economic recovery, combined with the growing impact of a strong U.S. dollar, our expectations today are slightly lower than they were in June on Investor Day. That said, our expectations for diluted earnings per share remains the same and continues to be mid to high-teens.
Free cash flow guidance of about $5 billion reflects the partial reversal of a 2013 tax deduction associated with the eventual return of Visa's share of the multi-district litigation cash payment, as a result of merchants opting out of the multi-district litigation class settlement. As I mentioned in June at Investor Day, this event, combined with the non-recurring deduction in fiscal 2013 associated with our multi-district litigation settlement payment, will lower free cash flow from $6.9 billion in fiscal 2013 to about $5 billion in fiscal 2014.
New guidance metrics for the full year 2014 include the following. Client incentive, as a percentage of gross revenue, will move up modestly next year within an expected range of 16.5% to 17.5%. Our annual operating margin is expected to show a very modest improvement over the past couple of years, which means we expect it to remain in the low 60s.
Finally, we have made the decision to discontinue providing quantitative guidance on marketing expense, capital expenditures and tax rate. We are moving in this direction because of the track record we have established since our IPO in 2008. Given the progress we have made with, and now the stability of these metrics, we deem them right for retirement.
However, having said that, and to provide some parting color, we would view marketing and CapEx as likely increasing over time, commensurate with overall growth but at manageable rate. While we'll always seek opportunities to optimize our tax rate, we are not going to see the same magnitude of sustained improvement that we were able to drive in the first five years of our public life. We expect to see more modest incremental improvement only.
And with that, I will turn the call over to Charlie.
Thanks very much, Byron and good afternoon to everyone. I thought I would start with just a few comments about the fourth quarter and then move on to some other topics. First of all, we feel very good about the continued strong financial performance that Visa has exhibited with no surprises to speak of.
As Byron mentioned, our revenue growth of 9% and on a gross basis at 11%, was reflective of heavy incentives during the quarter as we anticipated, and we just think of those as a good thing. That is getting more long-term deals signed with our clients, is clearly a positive for us. Global payment volume growth of 13%, consistent with the prior quarter, expense growth of 1%, as we talked about including $44 million of severance, 50% net income growth while we bought back 7 million shares for about $1.3 billion.
All this contributed to EPS growth of 20%, again including the effect of those incentives during the quarter and restructuring. All that added into the 2013 full year performance of 13% revenue growth, 8% expense growth, translating to 23% EPS growth all in line with the guidance that we've been giving.
Let me turn now and just give a couple of updates on other topics. And I'll start with litigation and regulation. First, I will start here in the United States. As I think most of you are aware, we are waiting final ruling on the MDL, the multi-district litigation case. A decision is expected at anytime. We continue to remain confident that the court will approve the agreement as we’ve said in the past.
Also within the United States, again I think most people do know that U.S. District Court Judge, Richard Leon ruled on July 31st that the Federal Reserve implement certain parts of the Durbin provision of Dodd-Frank in properly, specifically related to the level of interchange and at the networking provisions.
Just a couple of comments on the judge Leon ruling. First of all, we are pleased that the Federal Reserve filed the notice of the appeal in August and that the Fed was granted a stay in July, pending the result of its appeal. Our review of the appeal papers filed by the Federal Reserve leads us to believe that the government has got a strong case on appeal relative to the timing as best as we know there is no timeline proposed for when the case will be argued or decided. However, the briefings are expected to be completed by the December 4th of this year. Over in Europe, we’ve talked about a series of things there. In the past, there is really no new news with anything that we’ve discussed, including the Visa Europe push.
Let move on now and talk about tokenization for a minute. On the last quarterly call I spoke at length about our thoughts on tokenization and where we viewed our role. We made a significant announcement this quarter, which I hope you saw. We, along with our partners in the industry, MasterCard and American Express announced the set of standards to move toward a newly tokenized payment environment. This will serve several purposes.
First of all, as we all know it’s just good for security, removing sensitive information, crossing the payment system is good for every network participant. But probably more importantly for the long-term it creates a framework, as new network participants emerge to ensure the security and the integrity of the payment system is in fact maintained.
And when I talk about the integrity of the payment system, I’m including protecting the position that we have and our clients have in the value chain and that’s something that’s obviously very important to us. It’s early days, they are just standards as they have been defined but we are working both on the technical implementation of this, as well as the practical implications with more to come in the future. But we think this could lead to some exciting things.
Next update, I will turn to V.me for a second. We’ve spoken before about the convergence of physical point-of-sale, e-commerce and mobile. You hear everywhere you go. Our objective is simple with V.me. It’s, people talk about wallet sometimes is if they are very confusing to us and what our goals are, they are very, very simple and straight forward.
We want to replicate the simplicity, the speed and the security of a transaction just like people have today when they swipe, dip or tap a card. It’s that simple. We’ve learned a great deal since I arrived at Visa through discussions with issuers, acquirers and merchants relative to our own development of V.me, and we are in the process of simplifying our product, becoming targeted towards the goal of creating the simple, fast and secure online and mobile acceptance.
The feedback has been hugely valuable. Our product is going to be issuer, acquirer and merchant focused that’s relative to the blending and the data flow. We are working to make it easier to integrate into merchant websites and into mobile applications and we’ve done this in collaboration with our clients and the feedback has been positive and we are optimistic.
Having said that, we have made significant progress, we have over a 150 financial institutions and about 60 e-commerce retailers offering V.me within United States, Canada and Australia today and we have an additional 300 merchants signed and are in various stages of integration.
We move on now and just talk for a second about network security. In my year here as I’ve gotten the opportunity to talk to many of you and read many things that gets sent across about what's going on in our industry, there is a great deal discussed about the potential disintermediation of existing payment systems. And just relative to network security I just -- I want to make clear that I don’t think people should underestimate the value existing payment networks have regarding security.
Criminals across the globe are becoming, they are more of them, they are becoming smarter, they are better funded and they are becoming more vault. Their tax are becoming more frequent and much, much more complex. We as a company and the established people in the marketplace here have been dealing with these risks for years, in our case 40 to 50 years.
We've invested billions of dollars to secure our network. And you just have to remind yourself, people use networks because they trust them and they will use them until they don't trust them anymore. And then when they don't, those networks won't exist. We understand that and work every day to protect our environment and just keep in mind that risk takes several forms. The first is just practical day-to-day fraud. We spend an awful lot of energy working on our data analytics as our clients do despite (inaudible) just a common everyday fraud.
Our transactions are screened by us and our financial partners on a real-time basis. The modeling to do this has been developed over 40 to 50 years and we have driven fraud rates down to historic lows, at the point where they are less than $0.06 for every $100 transacted over our network or actually lost to fraud.
The second risk is the scary one and it's perpetrators getting access to the network. Just remind everyone that we have a centralized processing architecture that allows us to scan, evaluate, protect, and react to any risk that we see as necessary. As a company as I said, huge resources, huge amount of our time as a management team and we have some of the most talented people and sophisticated technology to combat threats and are committed to continue investing in this.
As we think about these risks, again I just wanted to point out these risks are very real. These aren’t things that are people are concerned about that might never come to fruition, they will go to the weakest link in the system. As I think most of you know the White House is directly engaged in this as is the President himself and we certainly feel that having secure environment like our established payments network is a great place to be as these risks continue to increase.
Now let me just turn and just talk for a second about almost a year that I have spent at Visa and just share a few of my thoughts. And some of these -- many of these don't relate to anything that I've done but relate to the broader team at Visa. First of all, this company has delivered growth consistently and delivered on what it said it would do since the IPO. I personally remain confident in our ability to continue to grow the franchise over the long term. The opportunities are hugely significant; they are global, they are technology driven, and they are based on partnerships that we have and we will continue to strengthen across the globe.
First of all on Globality. Again I had the opportunity since I have joined the company to spend a lot of time overseas. I visited over a dozen countries, I probably met with 40 to 50 financial institutions from the very largest to some of the very smallest, met with two dozen acquirers, met with many merchants and government officials in five countries. You all know and I think we talked about this that our business outside the U.S. is growing at a rate much faster than inside the U.S., but the opportunities within both are still hugely significant.
We talked at Investor Day that the displacement of cash is still the big opportunity for us. 41% of transactions in the developed world are still cash and check. 62% in the emerging markets that translates to over 11 trillion of cash and check in our geographies, which excludes Visa Europe and those numbers are growing. What's been most striking to me as I have had the opportunity to travel across the world is the extent to which governments understand the huge benefits of moving payments to electronic means and the desired to partner with us to bring about this change and that's in fact what we're doing.
As I just alluded to technology is also a huge driver of the opportunity we have in front of us. Cash is in fact the enemy. Electronic solutions just are far superior, they are safer, they are more secure. We have some of the best products in the world. Our products are accepted to include mobile point of acceptance between 36 million and 40 million locations across the globe. We have over 2.1 billion cards outstanding, a full set of products and again a tradition of safety, security and soundness.
We all know data and mobile create the opportunity to accelerate that electronification and we have continued and will continue to build out our capabilities here. We've also talked a lot about partnership. Our clients are much more than clients, they are partners. Our issuers have always looked at us that way that we are strategic partner for them in building their business. When we talk to a lot of people on the outside, they like to talk about the price of our network.
When we talk to most of our issuers, absolutely they're concerned about price but they are equally concerned about the ideas and the assets that we can bring to help them grow their client relationships and that’s what we spend our time inside the company working to develop, it’s what we’ve been -- it's what been done for years.
The same is true for the acquirers. And I have said we are building the DNA in these capabilities to create those kinds of merchant partnerships that we do have in some parts of the world but we need certainly here in the United States and elsewhere.
We have a long way to go. We know it’s critical for our success but we do want to be viewed as a partner to grow their business at a fair price, and we will be flexible. We will customize our efforts here as long as we preserve the things that I talked about. They are important to us and the network. And in short, we feel great about the future. So everything we’ve been talking about -- about our future is still in fact the same.
Let me just shift gears now and just talk for a second about capital. Since our IPO, we’ve been consistent about how we have thought about capital management. And since I’ve come on board, I have reaffirmed the same principles that have existed within the company.
To date, the company has repurchased the equivalent of about 151 million shares or about 20% of the company’s shares outstanding. We’ve returned nearly 17 billion of capital for shareholders. Let me just walk through a couple of principles which I laid out on our prior call but let me just do it again.
We believe the highest and best use of our excess capital is reinvesting it first organically in our business, then through acquisitions to further our growth. After supporting that growth, we believe in continuing to grow our dividend and we think about targeting a 20% payout ratio of prior year net income. The final use is buying back our stock, just a few notes for a second.
We treat decisions to invest our capital for both organic and acquisition purposes of series independent discrete decisions. And we conduct vigorous analysis on all of those. And so we get excited when we find investments whether they are organic investments or acquisitions that has those tests and we are constantly searching for ways to grow those things.
We also understand the value of the consistent and fair dividend to our investors. So our goal is to grow the dividend as our net income grows. And our stated goal has been and continues to be to return the majority of excess free cash flow through our investors.
We’ve done this through aggressive buybacks and we will continue to do this always with an eye towards valuation. We understand that when we buy our stock back we are making an investment decision and to the extent that we are buying the stock back that tells you what we believe the future of this company is like.
As you’ve seen, we continued that practice through this quarter. We announced the 21% increase in our dividend from $0.33 per share per quarter to $0.40 per share. This equates to 20% of that prior year net income as I alluded to earlier and that’s the way we think about it.
We also announced our tenth and most significant share repurchase authorization to date, about -- which was $5 billion. Both of these decisions, as I said reflects our belief in returning excess capital to shareholders and in our confidence of our future. And speaking of the future, just a few last words, before we open it up for questions.
Byron commented that through August 21st, we’ve seen solid payment in transaction growth across the world, some weakness here in the U.S. with some strong growth elsewhere. As we said, the recovery had not accelerated and certainly continues as you look across the world and our financial guidance reflects this tepid global growth and volatility in the foreign exchange markets. We do expect one day to benefit from stronger economic growth, we just don’t know when yet.
Looking ahead to 2014 and beyond, I continue to remain excited and energized about Visa and the opportunity that we had to continue growing the business from the topline. We continue to focus on the same initiatives that we outlined at the Investor Day. The secular opportunity to penetrate cash and check, PCE remains healthy across the globe.
We are working hard to expand the value of VisaNet. We are continuing to invest in our future and we continue to think about being more flexible and adapted to the business needs of our customers as we seek to become closer partners with them.
So on closing, I would just like to thank the 9,500 global employees of Visa who are all working hard every single day to build a better company for all of our shareholders. And with that operator, Byron and I would love to take some questions.
Earnings Call Part 2: