Visa F3Q09 (Qtr End 6/30/09) Earnings Call Transcript

Jul.29.09 | About: Visa Inc. (V)

Visa Incorporated (NYSE:V)

F3Q09 Earnings Call

July 29, 2009 5:00 pm ET

Executives

Jack Carsky - Investor Relations

Joseph W. Saunders - Chairman of the Board, Chief Executive Officer

Byron H. Pollitt Jr. - Chief Financial Officer

Analysts

Tien-Tsin Huang – J.P. Morgan

Bruce Harding - Barclays Capital

David Hochstem - Buckingham Research

Julio Quinteros - Goldman Sachs

Craig Maurer – Calyon Securities

Dan Perlin – RBC Capital Markets

Jason Kupferberg – UBS Securities

James Kissane - Banc of America Securities

Tim Willi - Wells Fargo

Donald Fendetti – Citigroup

Operator

Welcome to Visa Inc.’s fiscal third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.

Jack Carsky

Thank you, Jose. Good afternoon and welcome to Visa Inc.’s fiscal third quarter 2009 earnings conference call. With us today are Joe Saunders, Visa’s Chairman and 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 www.investor.visa.com. A replay of the web cast will also be archived on our site for 30 days. A PowerPoint deck containing 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 within the meaning of the Private Securities Litigation Reform Act of 1995. By their nature forward-looking statements are not guarantees of future performance and as a result of a variety of factors, actual results could differ materially from such statements. Additional information concerning these factors is available in the company’s filings with the SEC which can be accessed through the SEC website and the Investor Relations section of the Visa website.

For historical non-GAAP or pro forma related financial information disclosed in this call the related GAAP measures and other information required by Regulation G of the SEC are available in the financial and statistical summary accompanying our fiscal third quarter earnings press release. This release can also be accessed through the Investor Relations section of our website.

With that, I’ll turn over the call to Joe.

Joseph W. Saunders

Thanks, Jack and thank you all for joining us. To begin, I am pleased to report that our fiscal third quarter results were once again consistent with the guidance and expectations we provided during our second quarter earnings call. Despite the ongoing challenges in the economy, Visa delivered a solid operational and financial performance as we continued to benefit from our diverse product set, our ongoing commitment to expense management, and of course the underlying worldwide secular shift from cash and checks to electronic forms of payment.

Earnings for the third quarter on an adjusted basis were $0.98 per diluted share, and were positively impacted by the sale of our 10% equity ownership in Visa Net Brazil. On an adjusted pro forma basis that excludes this gain, Visa earned $0.67 per diluted share, a 14% increase over the year-ago period. This puts us on target towards meeting our full-year adjusted EPS guidance of better than 20% growth.

Our net operating revenues in the third quarter were over $1.6 billion, a modest increase over the year-ago period and in line with our previous guidance for low single-digit growth.

Partly, we were able to achieve this result while incurring elevated volume and support incentives which were due to the successful resigning of numerous clients during the quarter, a situation we do not expect to repeat at these levels.

Our adjusted operating margin was 51% for the quarter as we continued to benefit from our ongoing efficiency drive.

Finally, adjusted third quarter net income was $744 million. Absent the gain from Visa Net Brazil sale, it was $507 million, an 11% increase over the year-ago period.

Our fiscal quarter picked up pretty much where we left off in the second quarter. We have seen no signs that a sustained turnaround in the U.S. is occurring. There are, however, positive incremental exceptions which speak to the resiliency of Visa’s business model and the value Visa offers around the globe.

U.S. payment volume growth declined to a 3% negative rate in the quarter. We continue to be encouraged that since the beginning of the calendar year, payment volume growth has remained in a relatively tight range around a negative 2% to 4%.

Of note in the U.S., the more than 30% decline in the year-over-year price of gasoline continues to make for difficult year-over-year comparables. Absent this headwind in the latest quarter, we would have seen slightly positive growth. However, we still expect this headwind to abate as we move into the first quarter of our fiscal 2010.

On the other hand, in spite of the global nature of the recession, aggregate payment volume growth in our international regions, which is primarily driven by credit, was positive on a constant currency basis in the March quarter and has remained positive in the high-single-digits through the end of June, albeit at a lower level than earlier in the year.

Total transactions generating data processing fees were $10.3 billion for the June quarter, an 8% increase over the prior year period as the migration to electronic payments continues on a global basis.

As I did last quarter, let me underscore and reiterate several important themes you should take away from our most recent quarter and this call. Our financial performance in fiscal 2009 continues to unfold consistent with our expectations and more importantly, it reflects the appropriate funding of all of our growth initiatives.

We believe that we are planting the right seeds and making the proper investments in the business to come out of this recession in an even stronger position than we entered it.

Our business model, while not unaffected, has proven resilient in the face of today’s economic challenges. Transaction growth led by debit has continued unabated, in part driven by the secular shift from cash and checks to electronic forms of payment.

Visa is also driving this global shift in spending behavior through its reliability and accessibility, product innovation, expansion of payment categories, and focused global advertising that moves consumers to want to transact at the point of sale with Visa products.

In fact, the early results from our Go campaign first rolled out in April of this year are exceeding our initial expectations in terms of increased consumer awareness and brand [linkage], providing a level of optimism that the campaign is contributing to our strong debit transaction growth.

On the positive side, based on current trends we are now anticipating a slightly better fiscal fourth quarter. We believe that the low-single-digit expectation we previously guided to is more likely to be in the mid-single-digit range. This leaves us quite confident in achieving the high-single-digit revenue range for all of fiscal 2009.

Looking ahead to fiscal 2010, we continue to believe that we can regain our 11% to 15% annual net revenue growth target based on the assumptions we shared with you last quarter. The more favorable year-over-year comparison on gas prices and foreign exchange rates and the start of some recovery in the U.S. economy and cross-border volumes by early 2010.

We also continue to believe that we are able to achieve our adjusted earnings per share and adjusted operating margin targets even if the revenue growth was somewhat below the guidance range.

Now let me touch on some of the recent successes we’ve had on the client front. As we’ve discussed with you for several quarters now, consolidations in the banking industry have changed the landscape and market share of many of our largest customers. Given the strength of our client relationships and our products, we anticipated being a net beneficiary of this consolidation and I can now say with certainty that we have delivered on that expectation.

In our third fiscal quarter, we resigned a significant number of long-term contracts, 11 of which collectively account for 26% of our global volume and 34% of our U.S. volume. Some of these contracts were accelerated renewals and were precipitated by bank consolidation.

With these signings, we now have no major contracts up for renewal in the next two years and have over 75% of our worldwide payment volume under contract. We are obviously pleased about our long-term prospects and are well-positioned to execute on our business objective under various economic scenarios.

We are especially grateful for our clients, for their support and I am personally grateful to our customer sales and support teams around the world for their hard work.

And finally, with respect to our client-facing teams, earlier this week I announced a new streamlined management structure to achieve greater alignment between our sales, customer support, marketing, and product development functions.

By integrating these business units under a single leader, we expect to speed decision-making and increased responsiveness to clients and be better positioned to monitor strategic investment opportunities.

With that, let me turn the call over to Byron who will take you through the detail of our financial results.

Byron H. Pollitt Jr.

Thank you, Joe. As is now our custom, let me begin with the financial highlights of our fiscal third quarter and then I will touch on trends we are seeing for the quarter ending in June, as well as some early results for July.

As Joe previously mentioned, it was a solid fiscal third quarter with strong revenue and earnings growth in line with our guidance in spite of higher-than-anticipated rebates and incentives. And of course, we benefited from the sale of our equity interest in Visa Net Brazil.

Total payment volume growth for Visa Inc. through the end of March 2009 in nominal dollars was a negative 5% over the same quarter in 2008. On a constant dollar basis, however, volume grew 2%.

In the U.S., payment volumes in the March ending quarter declined to a negative 3%, with debit delivering a solid 5% growth while credit growth was a negative 10%. Proportionately, debit payment volume continued to account for a greater percentage of total U.S. volume, although credit still remains the payment vehicle of choice in the rest of our regions.

On a constant dollar basis, rest of world payment volume grew at 10% in the March ending quarter, moderating from the 14% growth exhibited in the December quarter but still solidly positive, a further recognition of the secular resiliency of plastic in many emerging and developing economies.

Cross-border volume growth first turned negative in the March ending quarter, posting a 6% decline on a constant dollar basis. Through the end of the June quarter, the rate of decline moderated and ended the period at a negative 8% growth rate. As in prior quarters, the slow down was broad-based.

Transactions processed over Visa's network, which are reported on a real-time basis, totaled $10.3 billion in the fiscal third quarter, an increase of 8% over the similar period a year ago and an increase from the 6% growth we saw in the previous quarter. Also, revenues from processed transactions, which currently generate approximately 30% of our gross revenue, continued to post solid growth as the underlying secular shift to Visa electronic payments continues. We also saw little variance in average ticket sizes, which are down 10% from the prior year period but on a sequential quarter basis appear to have leveled off.

Turning to the income statement, in the fiscal third quarter, gross revenues of $2 billion were up 5% from the similar periods in 2008. As Joe previously mentioned, volume and support incentives were elevated during the quarter due to the renewals of key customer contracts, several of which were accelerated due to bank consolidation.

All told, volume and support incentives increased on a year-over-year basis by $70 million to $344 million, representing 17% of gross revenue in the period and 15% of gross revenue year-to-date.

Given these results, we are updating our full-year expectation for volume and support incentives to be at the high-end of our 14% to 16% range. We will provide our outlook from 2010 in our fourth quarter earnings call.

Net operating revenues were just over $1.6 billion, a 2% increase over the operating revenues reported for the third fiscal quarter of 2008 and in line with the revenue guidance we provided last quarter.

Moving to the individual revenue line items, service revenue was $769 million, up 3% over the prior year period and reflective of still moderating year-over-year payment volumes in all regions for the quarter ending March.

Data processing revenue, reported on a current basis, was $605 million, up 12% over the prior period as processed transactions continued to post solid growth in the quarter.

International transaction revenues, also reported on a current quarter basis, were up 2% to $458 million, as moderating cross-border volumes in the period were offset by some regional strategic pricing modifications.

Our adjusted operating margin was 51%, in line with our low 50s margin guidance for all of 2009. I’ll provide additional color on our future margin expectations in a moment.

On an adjusted basis, operating expenses for the third quarter declined $79 million, or 9% year over year, driven by lower costs in personnel, marketing and professional fees.

Our focus on expense reduction continues to be broad-based and driven by merger related efficiencies. As expected, there was an up-tick in marketing spend in the quarter on a sequential basis, and we expect to see a similar step up in the fourth fiscal quarter.

Capital expenditures were $69 million in the quarter and included spend on our new data center, which will be completely online by the end of our fiscal year. With year-to-date capital expenditures running a little above $200 million, we now foresee full-year capital expenditures at around $300 million.

Moving on to the balance sheet, we ended the third quarter in excellent shape with negligible debt and cash, cash equivalents, investments, and restricted cash of $6.1 billion. Of this total, $1.6 billion is restricted cash, which represents amounts sufficient to fully pay out the American Express and Discover settlement. It also includes approximately $300 million that is current uncommitted, which was increased to just over $1 billion on the 16th of July in accordance with our previously announced litigation escrow funding event.

As we did last December, this funding was simply another way of buying back our stock while providing the added benefit of reducing the eventual B class overhang when the shares are ultimately unlocked. This latest repurchase will reduce our period end outstanding share count by 11.6 million shares for the fiscal fourth quarter ending this September.

On July 1st, we began the process of unlocking up to 30% of the outstanding Class B shareholdings, which will help alleviate some of the share overhang as we approach the ultimate unlock date of March 25, 2011. Through this point in July, we have already had approximately 41% of the potentially available shares requested to be unlocked.

Now let me comment on the trends we are seeing that will impact our results in the final quarter of fiscal 2009. Specifically here in the U.S., payment volume growth improved slightly from a negative 3% growth rate in the March quarter to a negative 2% growth in the June ending quarter. Deconstructing this further, credit volume growth ended the period at a negative 10% while debit volume growth continued in positive territory, posting a 5% gain.

More recently, through the 26th of July, aggregate U.S. payment volume growth was a negative 3%. Credit growth continues at a negative 10% while debit growth is a positive 4% July month-to-date.

While we still see no signs of a true inflection point, these trends are encouraging. Furthermore, they are consistent with the performance we have seen over the past six months suggesting some level of stability.

Outside the U.S. for the quarter ending June 2009, we expect constant dollar payment volume growth rates to be solidly positive but to have declined modestly from their levels at the end of March.

As mentioned earlier, cross-border volumes in constant dollars were down a negative 6% in the March ending quarter and in the June quarter have declined to negative 8%. Month-to-date in July, the rate of decline has improved slightly to a negative 7%. More importantly, the velocity of the downturn has slowed, which is encouraging but it is still too early to call an inflection point.

Process transaction growth ended the June period at 8%, while month-to-date in July it has increased to 9%. This metric continues to be testament to the strength and resilience of debit as a greater percentage of process transactions are debit based.

Now let me comment on what we see over the coming quarter as far as our operating performance is concerned and how it affects our guidance. Based on our fiscal third quarter results and our improved fourth quarter outlook, we now believe fourth quarter revenue growth is more likely to be in the mid-single-digit range and we are confident in delivering net revenue growth in the high-single-digits for 2009.

And as Joe mentioned, this outlook encompasses a continued negative foreign exchange impact which on a year-over-year basis impacted revenue growth by about five percentage points in the third quarter and will likely be in the 4% to 5% range in the fourth quarter.

Given the strong adjusted operating margin exhibited this quarter, and our current outlook for 2010, we are adjusting up our 2010 guidance to the low 50% range from the prior range of high 40s to low 50s. Given the uncertain economy, it is always possible that we could see a quarter where the margin dips below 50% but on a fiscal year basis, we are comfortable with the low 50s.

Finally and most importantly, as Joe said, we remain on track to deliver 2009 adjusted earnings per share growth of greater than 20%. And looking to fiscal 2010, we remain unchanged in our view that given a scenario that includes some recovery in the U.S. economy and in cross-border travel combined with more favorable comparisons in gas prices and foreign exchange rates, we would expect to exceed 20% earnings per share growth.

Of course, we are excluding the Visa Net Brazil gain in this calculation, which won’t be replicated in 2010.

That concludes my comments so I will turn the call back over to Joe.

Joseph W. Saunders

Thanks, Byron. Let me conclude with a review of some of the newer initiatives we are involved in. Earlier today we jointly announced with U.S. Bank the creation of a joint venture, Syncada, which will provide a global electronic business-to-business financial supply chain network. The joint venture expands our commercial product offerings and increases our participation in the B-to-B payment space as we continue to add services that deliver value to our financial institution clients around the world.

Also, at the end of June, we previously announced that we had entered into a strategic alliance and would be taking an equity stake in [Monetize], the United Kingdom based leader in the mobile financial services. This provides us with a development partner for our comprehensive suite of mobile services and highlights the fact that we are making the proper investments in technologies that we believe will be relevant to the future of electronic payments.

These types of strategic alliances and investments, coupled with the numerous partnerships, pilots, and commercialized programs that we are running around the globe today, will ensure that Visa and Visa Net remain the electronic payment system of choice for issuers, businesses, governments, and consumers the world over.

We also continue to make very nice headway in the prepaid space, not only here in the U.S. but in a number of regions globally. Prepaid, which is a natural extension of our already successful debit presence, is a business that we have been in for quite some time in the U.S. and in which we are seeing enormous opportunity internationally.

Domestically we currently run 66 different programs with 38 states for government disbursements. In the healthcare arena, seven of the top 10 insurance companies offer Visa spending account cards.

Other important categories in which we are active and have been quite successful include gift cards, general purpose reloadable cards, and payroll programs, to name a few.

In the U.S., we believe this is a $1 trillion potential market while globally it could be as high as $3 trillion.

Stacked up against worldwide Visa payment volume for the 12 months through March of $2.7 trillion, it’s easy to see that even a nominal penetration of this market could be needle moving for us.

The largest opportunity globally is penetrating the under-banked segment with general purposed reloadable cards. The under-banked includes both the under-served, those who don’t have access to mainstream financial services, and those that choose for a wide variety of reasons alternative financial services.

In the U.S., about $80 million individuals fall into the under-banked category. Globally the under-banked may be a majority of consumers. Our success in debit in the U.S. should provide key advantages as we further penetrate the prepaid space.

Lastly, we continue to make progress on enhancing our already dominant presence on the Internet. While we have a commanding 48% payment volume share on the net, our ultimate goal is for an ever-increasing number of consumers to recognize that the fastest, safest, and easiest way to transact online is with a Visa branded product.

To that end, among other upgrades, we are on the cusp of rolling out an enhanced consumer platform that will ultimately assist Internet shoppers in three ways. First, pre-purchase activities like a best price search capability; second, check-out activities like aliasing and auto form fill; and third, post-purchase capabilities like tracking and shipping.

We’ll have more to say about this in the coming months and look forward to updating you further on our next quarter’s call.

With that, we are ready to take questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tien-Tsin Huang with J.P. Morgan.

Tien-Tsin Huang – J.P. Morgan

Thanks. Great results. Actually I was hoping to ask two questions, one business and one high level question. Just for some of the incentives, good news on the resignings. A couple of questions here -- any surprises here in terms of the demand that you are getting from the banks, you know, up-front payments or ongoing payments, et cetera? And then secondly, I know you are not going to give us guidance here until fiscal ’10 but directionally, can we assume that we will see some relief in rebates in fiscal ’10 in relation to fiscal ’09, Byron, given the acceleration in the renewals?

Joseph W. Saunders

I think that it’s clear that we’ve achieved the objective that we set out to achieve. I think we’ve done it well within the parameters of our expectations. I think that the transactions that we’ve consummated have been good both for our clients and for ourselves. We said in the script that there was a somewhat elevated level of incentives this quarter as a result of that that we wouldn’t expect to continue, so I think that everything that is going to happen in 2010 is pretty well embraced in the re-affirmation of our guidance that we made earlier in the call.

Byron H. Pollitt Jr.

And I would just add that the incentive levels going forward should be more a function of the growth rates in the client portfolios, which are directly linked to the level of incentives we report.

Tien-Tsin Huang – J.P. Morgan

Okay, got it. I think it’s a good outcome for sure. And Joe, I just wanted to ask, obviously a lot of focus out there on the regulatory risk, specifically around interchange and the possibility of some reductions there. I’m not suggesting that anything is going to happen but I just wanted to ask, under a hypothetical scenario where interchange is regulated and let’s say it’s cut in a meaningful way, what kind of impact would that have on Visa? Specifically, would you expect your fees to indirectly come under some pressure as well? And also, what kind of impact could it have on volumes and the whole idea of the secular growth of card based payments, would there have -- would that have some influence on that as well? We obviously get that question quite a bit from investors.

Joseph W. Saunders

Well, first of all I don’t think that the situation that you describe is going to happen. We are confident that the legislators and the regulators understand that interchange is a pro-competitive structure, that it exists in every payment system around the globe and where there has been governmental intervention, that the consumer is the one that has suffered.

I think that it’s also pretty obvious that merchants get, for a fairly reasonable cost, they get tremendous value. They get guaranteed payments, they get increased speed, they get better security, they get ticket lift -- just to name a few. And our discussions in Washington, D.C. suggest that the legislators now appreciate that there would probably be a significant negative unintended consequence from any congressional action on interchange.

That being said, there are actions that could occur in interchange which I do not believe would substantially affect us as it relates to our guidance or our notion of where Visa is going in the future. I suppose that if they eliminated interchange, which no one has ever even come close to suggesting in any scenario, that it would certainly create a reluctance by financial institutions to support electronic transactions to the extent that they do today.

But our biggest risk, to the extent that there is a risk, lies in the diminution of volume. I mean, if our volume were to go down, then obviously our revenues would go down. But once again, I don’t think that this will happen. Secondly, you are talking about the United States and our volume is growing more outside of the United States than within the United States right now, so there’s a whole number of factors that you would have to get your arms around and I think in the end, you’d feel pretty good about Visa and Visa's prospects.

Tien-Tsin Huang – J.P. Morgan

Very good. Thanks for that, Joe.

Operator

Your next question comes from the line of Bruce Harding with Barclays.

Bruce Harding - Barclays Capital

Is the -- do you still feel as strongly as you did in that previous quarter conference call about the dollar, the currency impact and the gas price impact and when you project the increase from this year to next year in terms of revenue growth, and you mentioned that this year you still expect to achieve high-single-digit despite 500 basis points of currency impact, is the key assumption that the currency impact goes away completely next year and you get a tailwind?

Byron H. Pollitt Jr.

Let me respond to that -- we do have a good measurement of this impact and just to repeat, we feel that it was 500 basis points impact this quarter, this just completed quarter. We estimate 400 to 500 basis points. We hedge 17 currencies so -- and we have been hedging on a rolling basis throughout this past year, so we will -- we are confident that we will be able to bring a level of stability to our -- to FX rates in the coming year which, when compared to the rates that we’ve experience this past year, give us a high degree of confidence that the headwind that we’ve experienced this year will be substantially mitigated.

Second, with regard to gas prices, the June -- the month of June hit the high point in terms of average price per gas, for gallon of gas. We are starting by the first quarter, by November we should have -- actually in October and November, we are tracking to have a much more favorable compare with regard to gas prices and all the forecasts with regard to future gas pricing support that.

So with regard to our guidance going forward on those two factors, we’re pretty comfortable.

Bruce Harding - Barclays Capital

Thanks and Byron, the numbers you gave for July, you said that despite the fact that we are still well into negative territory, you feel encouraged. Is that because -- you say you are encouraged because unemployment keeps going higher and yet these numbers seem to be stabilizing despite that? And do you think the issuing banks have done most of the adjusting that they -- or you know, the process A to the weakening economy and higher unemployment and B, the legislation, do you think from what you’ve seen in terms of looking at your slide on credit cards outstanding that -- you know, where are we in that process by the issuing banks of downsizing their credit card portfolios in favor of perhaps more debit?

Byron H. Pollitt Jr.

Let me focus on the first part of your question -- what’s giving us confidence, and the take here is that we have guided to low-single-digit revenue growth in the third quarter. We have now moved that up to mid-single-digit guidance in the fourth quarter. What’s giving us a little bit more bullish view -- first of all, as you’ll recall, our service fees are booked on a one quarter lag basis and our service fees directly relate to payment volume that -- and in that regard, the payment volume for the June quarter is substantially [known], so 40% of our revenue for the fourth quarter related to service fees, is now highly estimable. What we have seen is that payment volume, the growth rate in payment volume in the U.S. dropped to minus 2, a little bit better than what we thought and the rest of world is holding up a bit better than what we had forecasted. That’s service fees. On cross border, what we have noticed is that not knowing what the trajectory was going to be, we made certain assumptions. The June quarter, ending quarter went to minus 8. We had originally forecasted something that was a bit lower than that and what we are seeing in July, with the month of July nearly complete, we are at minus 7, so a bit better.

And then turning to transactions, if you look at the trajectory, in quarter two we had 6% transaction growth. In quarter three, June ending quarter, we had plus 8 with July just about in the record books, we’re at plus 9.

So when you put those three perspectives together, that’s really the impetus for our change in view and why we’ve moved it from low-single-digits up to mid-single-digits.

Joseph W. Saunders

Yeah, the only thing I would add to that is to continue to remember that a lot of our transactional increases were being driven by our debit volume, not our credit volume. The credit volume is already off substantially and none of our projections suggest that it is going to come back, come roaring back in any way, shape, or form. And then finally, we keep reminding everyone that our international transactions, our international credit volume is growing.

Bruce Harding - Barclays Capital

Thank you. Byron, were you going to comment on that other, about the issuing banks or that’s it?

Byron H. Pollitt Jr.

That’s it.

Bruce Harding - Barclays Capital

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of David Hochstem with Buckingham Research.

David Hochstem - Buckingham Research

Joe, could you just provide a little more color on the operational organizational changes that you announced this week and what benefits you expect to realize in terms of product rollout and interaction with customers, and what Mr. Morris will be doing?

Joseph W. Saunders

So let me start off -- to answer the first part of your question, we are putting the product development function in with the marketing and sales and I think it will make the organization more effective, and I think that Hans would definitely agree with that.

As it relates to Hans, Hans has made a substantial contribution to this organization. I mean, it’s really something else when you think about where we started out and where we are now and his contributions to the IPO, his contributions to our relationship with Visa Europe, his contributions to organizing our international organization. And so I would say that as time went on, his notion of a succession or how that might go changed somewhat and that led to conversations about the organization that we just talked about, that he was fully supportive of and so I think that we both decided that he’d be best served -- or he decided that he’d be best served by pursuing some other opportunities, and so I’m a huge supporter of his and I’m sure that he will be quite successful. He is on our payroll until December. He is contributing on a daily basis and he is sitting right here and I see him shaking his head and I don’t see anything --

Unidentified Participant

Nodding my head.

Joseph W. Saunders

He’s nodding his head, so I would say that that’s what the answer is.

David Hochstem - Buckingham Research

Okay, and in terms of just operations -- I mean, does this speed time to market for new products or --

Joseph W. Saunders

Well, look, I mean, we have a commitment to our investors that we are going to keep refining our model and be -- and that we are going to continually become a better company, that we are going to become quicker to market, we are going to be a little bit more decisive, we are going to be very introspective about what we invest in and what we don’t invest in. We are going to be looking to the future to make sure that we do things appropriately and that we don’t get the rug pulled out from under us two or three years from now.

And so I think -- we’re talking about part of the process here. I mean, this isn’t a revolution, it’s part of an evolution and so far I think it’s gone quite well and I would expect it to continue.

David Hochstem - Buckingham Research

Okay. Thank you.

Operator

Your next question comes from the line of Julio Quinteros with Goldman Sachs.

Julio Quinteros - Goldman Sachs

Great, thanks. Byron, just one point of clarification -- is the guidance for fiscal fourth quarter, is that a gross number or net number for revenues?

Byron H. Pollitt Jr.

Net revenue gross, mid-single-digits.

Julio Quinteros - Goldman Sachs

Got it, and then 400 to 500 basis points of drag, correct? Of currency drag?

Byron H. Pollitt Jr.

Correct.

Julio Quinteros - Goldman Sachs

Got it. And then just in terms of marketing initiatives and spend, looking to the World Cup next year, how do we think about how quickly that has to ramp up in terms of spending, or is that spending behind you? Just as a major initiative next year, how will that ramp through your advertising and marketing numbers?

Byron H. Pollitt Jr.

So to be helpful on this, what we’ve said in our opening remarks is that there is a -- there was a bit of a marketing lift in this quarter, a bit of a marketing lift expected in the fourth quarter. But no call out relative to World Cup because we are lapping an Olympic year and there are natural trade-outs that we make and substitutions as we have premiere events to marquee. And so no call out on World Cup and you’ve got some guidance to finish up the year in marketing.

Julio Quinteros - Goldman Sachs

Okay, got it. And then lastly, if I try to sort of bridge the gap between the volume assumptions that you’ve already shared with us, the currency, any way to get a sense on what the implied pricing would be, either on the cross border side or on the other side of your business, card services or data processing fees?

Byron H. Pollitt Jr.

I think what we’ve said is we are in the later stages of the more step function type pricing adjustment and that this will be a more modest contributor going forward, that we’ll grow this business the old fashioned way, which is through payment volume and transaction growth.

Julio Quinteros - Goldman Sachs

Great. Thanks, guys.

Operator

Your next question comes from the line of Craig Maurer with Calyon Securities.

Craig Maurer – Calyon Securities

Good evening. One question about Visa Europe -- we’re hearing through our contacts in Europe that Visa Europe is really playing up the independence card, you know, we are owned by European banks for European banks, so we’re not associated with the big bad U.S. company, so you should sign with us and oh, by the way, we’ll pay for your conversions. But the European banks are a little concerned that there is the option to sell themselves back to Visa Inc. and that that might be coming quickly if they do a conversion, so I was just wondering if there’s any additional conversations with Visa Europe regarding them becoming part of Visa Inc.

Joseph W. Saunders

Most of the time when I think about them exercising the put, I think about it because somebody asks me about it, but other than that I don’t think about it much.

There is nothing in the relationship between ourselves and Visa Europe that would suggest that they are about ready to exercise the put, or even thinking about it. I think that we are running the company as Visa Inc., which is what we’ve always intended to, and that’s about as far as I can go right now.

Craig Maurer – Calyon Securities

Okay. If I can just follow-up -- have you seen any traction in your money transfer initiatives, as I know the network is capable now of processing money transfers on any Visa card to any terminal?

Joseph W. Saunders

We’ll be talking a lot more about that when we get into our next quarter call and some of our guidance for the future. I mentioned the prepaid cards which fit into the whole notion of money transfer in a big way. It’s part of our plans. I am sure you’ve seen that we have associated ourselves with Moneygram and Western Union and so there are the beginnings of looking at this very carefully and deciding where we want to go. But I’m just not ready to talk about it publicly.

Craig Maurer – Calyon Securities

Okay. Thanks, Joe.

Operator

Your next question comes from Dan Perlin with RBC Capital Markets.

Dan Perlin – RBC Capital Markets

I just have a couple of quick questions, the first of which is as you think about growth in some of the emerging markets where you maybe don’t have as large a market presence and notoriety, have you considered acquiring processors or joint ventures with processors in those markets, and would you be open to that?

Joseph W. Saunders

Well, yes.

Dan Perlin – RBC Capital Markets

Should we expect something in the next couple of quarters?

Joseph W. Saunders

We’ve talked about it and we’ve thought about it and we’ve looked at it.

Dan Perlin – RBC Capital Markets

And it’s something that you would be positively disposed to doing?

Joseph W. Saunders

Well, I wouldn’t think about it and look at it and talk about it if I wasn’t somewhat disposed to doing it.

Dan Perlin – RBC Capital Markets

Okay. Let me ask you another question -- do you think you’ve got to have global consumer credit expansion in order to continue to drive growth there, given it’s such a credit focused rest of world? Or can you continue to kind of penetrate debit in those markets using some of your tricks from the U.S.?

Joseph W. Saunders

I think it is our intention to penetrate markets with the debit product. I also think it’s important though to make sure that everybody understands that the credit market outside the United States is not exactly the same as the credit market in the United States. And in fact, there are many credit products outside the United States that are probably -- that probably have more similarity to a debit product than you might expect. So it’s a little bit different.

But I think we are well-positioned along the entire spectrum, all the way from preloaded cards to premium credit cards as it relates to product offerings and our willingness and ability to start penetrating other markets --

Byron H. Pollitt Jr.

And I would just add to that that with regard to credit outside the United States, that we did have a solid growth rate for the March ending quarter and we expect to have positive growth in credit outside the United States all on a constant dollar basis in the quarter ending in June as well.

Dan Perlin – RBC Capital Markets

And then just lastly and then I’ll be done -- on the incentive fees, around the time of the IPO you had always said that that was a number that actually should trend up because it was primarily a U.S. phenomenon and using that to get contracts and as you went internationally, you were going to start to use is.

But what I’m hearing from you guys today is that that is abating a bit, and I’m wondering if there’s a change of tone to using incentive fees as you go abroad?

Byron H. Pollitt Jr.

As we put more clients under multi-year contracts, which is a strategy that we support, with contracts comes an agreement to offer incentive, and so it is a continuing strategy of ours over time to have more clients under multi-year contract and therefore there would be more client revenue that would be subject to incentives. That strategy was articulated at the time of the IPO and it is still a strategy that we are pursuing today.

Dan Perlin – RBC Capital Markets

Okay. Thank you very much.

Operator

Your next question comes from the line of Jason Kupferberg with UBS Securities.

Jason Kupferberg – UBS Securities

Thanks. I wanted to start with a clarification on the quarter itself -- the $0.67 pro forma EPS number, what tax rate was behind that? Was that a normalized tax rate or -- I think the GAAP tax rate was more in the 43%-ish range related to the gain on sale. Can you clarify that?

Byron H. Pollitt Jr.

Yes, the $0.67 was at a more normalized tax rate because the boost in our tax rate for the quarter was due to the Visa Net Brazil transaction because of some capital gains taxes and the tax environment specific to Brazil, we ended up experiencing about 4 percentage points higher tax rate in the quarter. When you back that out -- so to go from $0.98 on an adjusted basis down to $0.67, when you remove that transaction, you would then go to the more normalized tax rate, which was trending at about 39.5.

Jason Kupferberg – UBS Securities

Okay, and that was the basis for the $0.67?

Byron H. Pollitt Jr.

Yes.

Jason Kupferberg – UBS Securities

Okay, that’s helpful. And then just to pick up on an earlier question as far as confidence and visibility on the low-end of the 11% to 15% net revenue growth range for next year, you talked about the currency and gas components of that. Obviously the two other underlying assumptions you’ve discussed for a while are the broader U.S. economy and cross-border. It seems like those numbers are kind of stable, bouncing around a little bit. Can you just talk about your relative level of comfort with those two variables and how important they might be versus the other two variables in terms of actually getting yourself into this 11% to 12% range or so for next year?

Joseph W. Saunders

Well, I think the specific words that I used in the script were we would start to see some movement, so we don’t expect any significant positive movement in either of the economy or cross border transactions, although we do expect them to stabilize and start to move up very modestly.

And as long as that happens in the first quarter, early second quarter, I’m quite confident we will get to where we are going.

Jason Kupferberg – UBS Securities

Okay, so we don’t really need to see this “positive inflection point” anytime real soon to still get you into this range, it sounds like?

Joseph W. Saunders

No, it doesn’t have to happen [inaudible].

Jason Kupferberg – UBS Securities

Okay, great. Thank you.

Operator

Your next question comes from the line of James Kissane with Banc of America.

James Kissane - Banc of America Securities

Great, thanks. Byron, what portion of the incentives in the quarter were more one-time and what portion is recurring? And maybe on a more normal basis, what portion will be one-time and what portion is recurring?

Byron H. Pollitt Jr.

Jim, as you can appreciate, we don’t discuss that level of granularity on the incentive. We’ve tried to be helpful here by saying it was somewhat elevated given the unusual high level of contract activity that was successfully completed in the quarter and we will look forward to giving more guidance around the incentive levels when we finish up the fourth quarter and we give you an outlook for -- a more informed outlook for fiscal year ’10.

James Kissane - Banc of America Securities

Okay. Any change in the average term of the contracts on the renewals?

Byron H. Pollitt Jr.

I would say at the time of the IPO, I would say the most difficult contract length was five years. I would say we are starting to see some increasing interest going a bit beyond five. To say that it’s actually moved the average might be too strong a term but we are seeing some contracts now that -- substantive contracts that are going beyond five years.

James Kissane - Banc of America Securities

Okay, great. Thanks, Byron.

Operator

Your next question comes from the line of Tim Willi, Wells Fargo.

Tim Willi - Wells Fargo

Thanks. Good afternoon. I was wondering, a question about U.S. debit -- if I look at the last six to seven quarters, sort of boiling it down to the spend and transactions per card, you know, I think the conventional wisdom would have been that as the economy suffered, people would switch spending habits from credit to debit and looking at sort of year-over-year growth in transactions per card, even dollars per card spent, it doesn’t look like that has occurred.

So I’m wondering if there is something regarding inactive or just newer debit cards on the U.S. platform that have not quite matured in terms of the user getting more comfortable with them, and as well if you could talk about any kind of strategies or discussions with your banking partners in the U.S. about trying to drive higher utilization on debit in the face of what you’ve articulated about credit, that it’s essentially probably going nowhere in the U.S.

Joseph W. Saunders

Wow, that’s a loaded question. Let me start with the back-end of that. First of all, we are working to drive debit [both with our clients and that is the entire basis of our media campaign in the United States this year]. I mean, everything that we are doing in the media is debit centric and is predicated on using debit cards.

I would say that you are going to see debit cards be a very, very good story going forward. I think you will see the number of transactions that people use their cards for going up. I think that we continue to see more cards being put into the market and all the right things are happening on the debit front.

And I want to say one other thing -- I didn’t say the credit card market in the United States was [inaudible]. I didn’t say that. I said that we were not anticipating that we were going to get much velocity from the credit card market in the next 12 months. I think that as a result of the Credit Card Act and some of the issues that financial institutions have with the loan quality of their portfolio, that it would just be naïve to think that there wouldn’t be some reflection as it related to that product and how it was going to be issued and how it was going to be used, but I certainly don’t believe, and unless any of my clients are telling me differently, that the credit card is dead.

Tim Willi - Wells Fargo

Okay, and I appreciate that. Just to follow-up on that debit question then, do you think it’s a matter of just more consumer awareness or are there key verticals and other areas of spend in the U.S. where there just needs to be more merchant acceptance to get that spend up on debit, or is this really just more and more advertising and the banks getting to those consumers more effectively that use this card as much as you can?

Joseph W. Saunders

Well, I guess I would have to look at the exact number you are looking at because when I look at the numbers, the transaction -- our transaction volume is up 9% in the last quarter. It is mostly coming from the debit sector.

We have three times as many debit transactions as credit card transactions and have for a little while now, and for the first time in the history of Visa, last quarter the dollar volume of debit card transactions exceeded that of credit card transactions.

So my view into this product is a pretty positive view and I expect that to continue. I think you might want to pick this question up with Jack Carsky because I am just -- you kind of caught me a little bit off-balance here because I’m not sure we are talking the same language.

Tim Willi - Wells Fargo

Okay. I appreciate that, we’ll do that, thanks.

Jack Carsky

At this point, we have time for one more question.

Operator

The last question comes from Donald Fendetti with Citigroup.

Donald Fendetti – Citigroup

Clearly the U.S. seems to have stabilized in terms of credit but it looks like the international growth rates are still positive but moderating. I was just curious sort of what your view is on the insight on the non-U.S. consumer -- are we pretty close to where you think those growth rates will start stabilizing?

Joseph W. Saunders

Well, that’s a little bit difficult to call. The fact of the matter is there have been issues, economic issues all over the world and the fact that the international credit card volume is growing has as much to do with the secular shift from cash and checks to plastic as it does with a consumer’s use of credit as you might think about it in the United States.

So I think that this has a while. I think that this has a while to play out and I think that we are continuing to get traction in different parts of the world and I think that -- you know, I don’t think that’s going to stop so I think we’ll have a pretty positive story as time goes on. And I guess the best I can do is -- to end all of this is to tell you that we are cautiously optimistic that things are getting somewhat better, not somewhat worse.

Donald Fendetti – Citigroup

Okay, thanks.

Jack Carsky

Thank you all for joining us today. If anybody has any follow-up questions, feel free to either call myself or Victoria. Thank you.

Operator

This concludes today’s conference call. You may go ahead and disconnect at this time.

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