Visa Inc. (V) Earnings Call Transcript

Hi. This is James Faucette, the senior payments analyst here at Morgan Stanley, and I want to thank you all for joining us today for this very anticipated conversation, at least anticipated by me, that we're going to have with Visa's CFO and Vice Chairman, Vasant Prabhu. And thank you very much, Vasant, for joining us. Before we get started, I do have a quick disclosure to read. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. Thank you very much.

Vasant, excited to have you with us today. We were talking just before we got officially started here on the open call that it's been an exciting time, certainly a lot more volatility and operational change maybe than we could have imagined even a couple of months ago. And even when things started to kind of decline, we've seen a lot of movement in the like sense. So look, I know that Visa and you specifically updated the trends you were seeing last week, and that included some details through the end of May. Where do you think investors have been surprised but maybe you don't think they should have been? And at the same time, what has surprised you?

Yes. Hello, James, and it's good to talk to you again. And hello to those of you who've joined us on the call. So as you know, we are in unusual times, times that none of us have dealt with before. So the term surprise is an unusual term to use. As you know, everything is a surprise at this point. And coming into this period, we were all sort of speculating on what the trajectory of the recovery would be. We saw what happened with the lockdown in March and into early April. And like most other companies, it was very hard to predict what the trajectory would be, and so we didn't provide any kind of outlook. But like lots of people, we ran a whole range of scenarios. We shared 3 possible trajectories of recovery with our Board. One of them happened to be one where there would be a relatively fast domestic recovery, both in the U.S. and elsewhere, and that seems to be the one that is playing out. As you saw in our numbers through the end of May, for the month of May, if I start with U.S. spending, U.S. payments volume, we were down 5%, and I can even say only 5% because that was a hefty 13 points better than April, and it improved week by week. If I had to sort of highlight something that perhaps was a surprise, and that would be debit growth. Debit actually grew 12% in the month of May and was even better than that in the last few weeks of May, which was, by any stretch, very healthy debit growth even in normal times. And of course, it significantly outperformed credit, which improved by 9 points from April but was still declining 21%. And I think the interesting thing about debit is we're seeing strength just across the board in the U.S. on debit. When you look at it, you see strength across different spend segments. You even see strength across ticket size bands. Debit is gaining share even in larger ticket -- higher-ticket transactions. We see that just about any cut you make, debit is outperforming credit. Now that's not completely a surprise because we do see things like these, these kinds of shifts in times of stress. Debit tends to be used more for essential purchases. The stimulus payments went into people's bank accounts, and so it would be natural to use debit cards and debit credentials for that. So clearly, the growth of debit is one highlight. Another one that I might point out is on the transactions front, once again, we saw process transactions improve. Typically, transactions grow faster than payment volumes partly because we keep penetrating smaller and smaller ticket sizes. But what we've been seeing since April is actually transactions declining somewhat more or improving somewhat less than payments volumes because we're seeing a shift to higher ticket sizes. And that's driven by a variety of things. It's driven by the fact that some of the categories that are really benefiting right now or recovering faster are things like home improvement and automotive, whereas things that are recovering slower tend to be lower-ticket categories like restaurants and entertainment. It also reflects the fact that when people are not going into stores, the impulse purchases or the smaller purchases don't happen. They get clubbed together in larger e-commerce purchases. And then on a normal day, if you're up and about going to work, you take transit, you buy a cup of coffee, you buy your lunch, there's a lot of incidentals that people spend on that tend to be lower-ticket items. So I'd say that's probably something else that's different. And then if you look at cross-border, we did see an improvement. It was about 6 points from April in our cross-border business, excluding intra-Europe. Now the reason we keep highlighting excluding intra-Europe, which shrank 45% in May, is because it's the transactions excluding intra-Europe that really drive our international revenues, and that's the number to watch because intra-Europe transactions are fundamentally like domestic transactions. And what we're seeing on cross-border, not surprisingly, is that travel spending, which is about 2/3 of it, has remained weak and was down about 78%. Now some may say, well, why is that not recovering? The fact is that for there to be a recovery, there has to be a reopening. And as far as travel goes, especially cross-border travel, we really haven't seen much of a reopening. And we will over time. We're hearing talk more about bubbles like Australia, New Zealand, Denmark, Norway and things like that. The other highlight on cross-border is the healthy growth in e-commerce spending excluding travel. That was up 18%, excluding intra-Europe transactions, but it was up 30% if you include intra-Europe transactions. So if you just include all our cross-border transactions, including intra-Europe, and you look at travel x -- look at cross-border x travel, that was up 30%, which is very, very healthy. So again, we're seeing, even in cross-border, some really hefty growth in e-commerce spending. And of course, our cross-border overall was down 35% if you use -- if you include intra-Europe. So that was a big improvement again from April. And you can see that this difference between including and excluding intra-Europe is pretty hefty right now because what you're seeing is a big improvement in intra-Europe cross-border. And the reason we sort of try to leave it out is we want you to focus on what really drives our international revenue. So those are some things that you might consider surprising or unusual, but it's all driven by the fact that we are in unusual times. What we're seeing is a trajectory of a recovery. The recovery is driven by when states and countries are reopening. It's driven by how consumers are reacting to the reopening in terms of how much they've changed their behavior pre and post COVID. So that's the story as it stands.

So Vasant, you said a lot of really interesting things there that I want to dig in on a couple of them. I guess maybe the first is, and maybe a little bit surprising to me, is you mentioned that the transaction counts, if you will, of particularly smaller ones are maybe aren't recovering the same way. And I think your explanation makes a lot of sense, is that if you're not going to the store or you're focused on necessities and you're not doing as much impulse buying, that makes a lot of sense. On the flip side of it, it seems like that that's where the most opportunity for share gains against cash would reside. And so what is your sense of what particularly debit or maybe electronic more generally, but debit in particular, has been able to do versus cash? Has it really been able to accelerate the share gains? And perhaps more importantly, if it has, how do you retain those share gains as the world goes back to a more normal state?

Absolutely. Yes. So this shift in sort of transactions to higher ticket, we don't think that's permanent. We think it's just transient. And as we see card-present transactions come back, we'll start to see the shift back. So let's talk about the question you asked, which is we've seen a massive shift away from cash to digital forms of payment. Some of it was forced because things were shut down and people couldn't go into a store and use cash, but we do believe that this is going to stick for a variety of reasons, which we can go through. So first of all, e-commerce is still only 14% of all transactions. So there's still, on a global basis, a huge amount of room here for penetration of e-commerce. And as you know, any time a transaction goes from being face-to-face to e-commerce, we have a 3x opportunity to capture it, i.e., our share is 3x in e-commerce versus face-to-face because you don't have too many other options. So as it relates to e-commerce, we're seeing a few things that we think will cause the shifts we're seeing, which is accelerating, let's call it, an existing trend and perhaps pulling forward from multiple years of shifts into a few months. The first thing we're seeing is significantly more people using e-commerce for the first time. So for example, in Latin America, 2 in every 10 active e-commerce cardholders in the second quarter were first time users. In Singapore, it was 1 in 5. In the U.S., the number of active cards using e-commerce is up at least 30% versus pre crisis. The second thing is that people are using e-commerce for the first time in categories that many of them typically didn't like food and drug stores, like restaurants and QSR and like many forms of retail. So people are realizing that there are categories that they may have typically gone into the store and getting used to the idea that these were just as well via e-commerce. So what is happening here is that on the e-commerce front, habits are being formed. The longer this goes, the more comfortable people get with using e-commerce in transactions that they haven't used before. In many cases, they are now embedded in card on files at these merchants, which, as you know, makes it a one-click transaction in many cases. We continue to improve click-to-pay and other initiatives. And so even as we've seen card-present recover as things are opening, we're seeing e-commerce growth rates stay pretty high. So we're quite sure that some of the shift is going to stick. Now as it relates to card-present and transactions that will happen once things open, you all know that handling cash is just not very attractive at this point. People don't want to do that. People would prefer to touch and pay and use a digital form of payment rather than cash. So we're very, very optimistic about what contactless will do for us. You know we've been talking about it for years. People used to wonder why are we talking about contactless because we think it is a very powerful digitization mechanism as a physical point of sale. We're seeing big increases in penetration outside the U.S., where there's already critical mass. Many countries -- we're working with governments and regulators to lift the pay caps. In the U.K., it's gone from GBP 30 to GBP 45. We have seen a big jump in transactions in that range through tap to pay. In Canada, the limit has gone from CAD 100 to CAD 150, and already 40% of the transactions in that range are contactless. And we're hoping that this accelerates the shift in the U.S. because there is a real consumer demand right now for tapping, and we have a lot of merchants who already enabled it. We are helping those merchants communicate to consumers by providing signage that tap to pay is available. We're talking to issuers about accelerating issuance of tap-to-pay cards. It's an adoption curve in the U.S. It's the next big frontier for contactless. And we think -- we hope that this will accelerate that and allow us to get to critical mass faster. The other thing that will help us in the face-to-face context is everything we've been doing with wallets around the world. Wallets, whether it's Safaricom, Paytm, all the big wallets, LINE Pay, Gojek, we have worked to put our credentials in. That is helping in emerging markets to enable people to use tap to pay and digital forms of payment. And then finally, I mean, what this crisis has taught everybody, governments, merchants, consumers, et cetera, is that having a digital form of payment was vital during this crisis. So merchants are much more motivated to accept cards right now where they don't. Governments are much more motivated to promote digital forms of payment. And consumers are realizing that this is a great way to pay. Some of them may not have used it in societies where cash is still quite prevalent. And we're going to see some permanent changes in behavior the longer this goes.

That's great. So a couple of quick questions to kind of wrap up the current before we shift to where the real value creation is for shareholders, and that's the long term. But how much difference are you seeing in state-to-state behavior, for example, in the U.S. in terms of volumes, et cetera? Like how much delta in activity is there between "open" versus closed states?

Yes. So in general, there's a reopening trend across the U.S. So if you look across the U.S., every state, if you look at card-present transactions, which is one index we're looking at to see how reopening is working, you're seeing an improvement in card-present transactions, which means that just about everywhere, there's something open, whether it's a state that has fully opened or not opened. Having said that, the states that opened earlier are somewhat further ahead in the recovery. And so there's certainly a difference across states in terms of where they are relative to where they were and how far along they are in the recovery. While there are differences, I mean, every state is recovering. So I wouldn't say the differences are huge, but definitely, there are differences across states where -- depending on when they reopened and how much they reopened. The other interesting statistic, though, is that even as states have reopened and card-present is improving and the rate of decline in card-present transactions is shrinking, card-not-present growth has been strong almost everywhere. What's surprising is how well card-not-present growth is holding up even as things reopen, and you may have seen that in some of the data we released. So these are early days. Often, what we see is as states reopen, there's an early spike in activity within a day or 2 of restrictions being lifted. Then they settle down at a level and then there's some steady improvement as time goes by. One of the big questions here is what's driving all this, right? What's driving the recovery that we've seen? There is definitely an impact from stimulus payments. There's definitely an impact from what's call -- let's call it, pent-up demand. People just stopped buying some things for a few weeks, and now they realize they can buy them even online. And then clearly, I mean, we are benefiting from the shift away from cash. So our numbers are probably reflecting a better picture than what may be the complete picture because we are benefiting for -- from the shift away from cash. So there's multiple factors at play here.

And lastly, just you mentioned travel, and that was going to be gradual to recover. Just quick 10 seconds, are you seeing any indications of at least advanced bookings? And anything to call out there?

Yes. So there's -- for travel to recover, there has to be a reopening. So clearly, traveling across borders is not happening as much until there's clarity around when that is possible. In many cases, you can travel, but then you have to go into quarantine and all that, so it doesn't make it very pleasant. But we are seeing short-haul travel doing better than long-haul travel. We are definitely seeing more interest in travel as you look at forward bookings and so on. Travel, we think, is sort of the next category to recover, but we'll have to wait and see. It's too early to tell you what the trajectory of travel recovery would be. I think what we will see is consumers forming a sense of what their zone of geographic comfort is and things beginning to happen within that zone of comfort. We will begin to see certain travel patterns. So for example, Australia and New Zealand are planning to reopen to each other because they are both sort of doing fine. They've largely reopened within the countries. So if a New Zealander travels to Australia instead of, let's say, going to Fiji for their vacation, that's okay. That's still, for us, a cross-border transaction. So travel patterns may change. And so we may see some of that corridor change happen, but they are still cross-border transactions. So I think we will probably see some different patterns initially in travel. Another point to make in travel is, I think you've heard us say this before, that the vast majority of our travel is not business travel, it's consumer travel, and that's because a lot of business travel doesn't get charged on cards per se. Consumer travel, as you know, is to visit friends, visit relatives and for pleasure and for experiences. And people will not stop doing that, right? They still need to do that. Business travel may move to Zoom and Webex and so on, and people may realize that business can be done without having to travel. But consumer travel has different motivations. The patterns may change, but the motivations, we think, don't change. And so we're quite optimistic about consumer travel coming back.