Visa, Inc. (NYSE:V) William Blair 2018 Growth Stock Conference Call June 13, 2018 1:00 PM ET
Vasant Prabhu - CFO
Robert Napoli - William Blair & Company
[Call Starts Abruptly] For a complete list of disclosures and potential conflict of interest, please go to www.williamblair.com.
We are very pleased to have with us again this year Visa. We have Vasant Prabhu, the Chief Financial Officer of Visa. We also have the Head of Investor Relations -- the new Head of Investor Relations, Mike Milotich. So, it’s good to have Mike here at the William Blair Growth Stock Conference.
We’re doing a fireside chat format. And so, I’ll kick it off. We’ll give the room. So, be ready to ask questions. We’ll ask a few, and then open it up to the room.
Just maybe Vasant, comment on what do you think could be the largest misconceptions or misunderstandings about Visa today. Obviously, the stock has done very well, so people understand a lot. But, what don’t they understand?
Thank you all for inviting us and good to see you all. We’ve been around a long time and we have a lot of very astute investors and many of you are in the room and some of you owned us ever since the IPO. So, I’m not going to presume that you’re missing something really big or really important. But, what I will do is perhaps highlight something that might be misunderstood, which is what we would call the adaptability and flexibility of the network. So, at our Investor Day last year we laid out the case that we were at an inflection point, and we saw a 10x increase possible in the ways to pay and the ways to be paid, both in the B2C space as well as huge opportunities in the B2B space.
Clearly, our two most valuable assets to capture that opportunity are our brand and our network. I won’t spend much time on our brand. Although I would say that we don’t talk enough about our brand. The overwhelming preference that people have for our brand around the world, both consumers as well as issuers and how important the brand is in times like these when there’s quite a lot of confusion out there, a brand like ours is very helpful to have as both consumers and our partners grapple with a lot of things. But, what I want to talk about today is what I call the demonstrated flexibility and adaptability of our network. So, let me just sort of give you a few points on that.
Our network has gone from being the preferred rails for face-to-face transaction to now being the preferred rails for e-commerce transactions, m-commerce transactions, the backbone for P2P transactions and increasingly, the preferred rails for G2C, government-to-consumer transactions, and a broad set of B2B transactions showing massive flexibility in moving across all of these.
Our rails have gone from something that you could only access with a physical card, to being something that you can access with a digital credential secured by a token that can be embedded in any device. Essentially, what that means is any device can be used as a way to pay or a way to be paid. So, you can see again, the flexibility that we’ve been able to bring to the ecosystem.
Going further, as a way to pay, our rails have been able to continue to take the friction out of the payment experience. In the face-to-face space, we’ve gone from a swipe and the dip to now something that is much faster and easier and soon to come to the U.S., which is the tap, i.e. contactless. And then, in many parts of the world, to the scan, which is the QR code. So, we’re making the whole experience easier and frictionless in the face-to-face world. And in e-commerce world, something we might talk about, the move to a single pay button and better, faster and more frictionless authentication technologies like 3-D Secure.
Similarly, on the other side, as a way to accept payments, our network has substantially reduced cost and speed at which people can accept payments. Gone are the days when in the face-to-face world, you needed a dedicated device and landlines. Any device can be used to pay today or accept payments. And in the e-commerce world, with a single set of standards with tokenization in Cards-on-File and things like that, it is much easier for merchants to become acceptors of payments.
Even further, we’ve had a revolution. Our network for its entire history, sent money one way out of your account. Now, we can send money both ways, into and out of your account, to do account-to-account transfers with Visa Direct service and compared to other rails that can do account-to-account transfers whether that’s Fast ACH or ACH, we offer greater security, we offer the ability to get your money back, if you made a mistake or you didn’t like the product or the service, which those rails don’t offer, charge-backs, dispute resolution et cetera. And more importantly, these rails are already global in scope that has ACH and Fast ACH out of patchwork of national systems that don’t talk to each other.
And then, we’re adding more information capability. And these Visa Direct rails are already the backbone for P2P for a broad range of B2B. They are the basis for most government-to-consumer, G2C payments. And we’re adding greater information capability on some of these transactions, so that a much broader scope of B2B transactions can also be served. So, I can go on. But the point I am trying to make is that the value of our rails and the flexibility and adaptability can often be underestimated. Yes, we have the most ubiquitous rails; we have the scale and scope advantages. But, it’s the adaptability and flexibility that is one of the bigger assets that comes with the rails. And then you add on the brand and the healthy dose of paranoia. And I believe that we are extremely well-positioned to capture this 10x explosion we see coming.
You mentioned the single pay button. And I know, there’s been a little bit of controversy on that. What is the strategy behind the single pay button? You’re working with MasterCard and I think there’s been -- maybe been some pushback from merchants. And how does that affect like your partnership with PayPal to add their own button?
Yes. The single pay -- the so called single pay button, as it’s called, is really a common set of standards that have been issued by EMVCo. And fundamentally, it is no different than what has happened -- what happened in the physical world a long time ago. The industry figured out a long time ago, in the face-to-face world that making it easy for merchants to connect to all networks as a single set of standard is the way to go. Otherwise, there’s a lot of confusion. It’s very hard for merchants. In addition, you had a single device at the point of sale that accepted all cards. Fundamentally, it’s the same concept. So, you have a pay button; it replicates the physical payment experience; you click on it; you either have a preferred card or you can pick the card from your wallet. A merchant on the other hand has one connection to make that can accept all cards. So, fundamentally, this is not anything new. It is something that was solved in the physical world. Perhaps you have to ask why it took us so long to get to this point in the e-commerce space.
Our goal in doing this was really make it easy for merchants, make it more frictionless for consumers to transact in the digital world. And the goal there was that we needed to make sure that we took the [trouble away] [ph] for merchant websites and we increased, completed transactions; we don’t want abandonment, et cetera. And not only is this a single play button, but it also comes with greater securities with tokenization and better authentication technologies. So, it’s a whole package of security as well as taking friction out of the experience. That’s the objective. It is not directed at anybody in particular. And if there are concerns with merchants, certainly we’ll address them. They will still be able to route the way they always could. So, there is going to be no constraints on what they are allowed to or permitted to do. And as it relates to PayPal, I mean, we remain very committed to our partnership with them. And we’re delighted that they don’t steer people away from networks like us and that is going well.
Your closest competitor has -- I mean, your performance has been very good and your growth has been very good. Your closest competitor has -- their growth is somewhat above yours today. Do you think that’s -- does that concern you at all? Do you think -- what do you think is driving, is it their services businesses, and the loyalty or security that’s driving that or do you think that’s a temporary disparity in growth?
Well, I mean, any differences should concern you. And you have to understand why the differences exist. And there is an ebb and flow to these things. There are times when their numbers look better, there are times when our numbers look better. Couple of years ago, our numbers better because we have some share gains in the U.S. and we had Visa Europe coming in all that. This year coming into it, I guess, you have to strip out of their numbers somewhat the accounting rules do, which they had rather substantial accounting benefit from. They also had an acquisition coming in. And once you strip it all out, the gap is not as significant as it might seem on the surface. Then, you get to timing differences. We already signaled coming into this year that the first half was going to be depressed for us in terms of reporting reasons because of what happened last year. Our incentives were unusually low in Europe because there were some delays in getting deals done. So, the comparisons are going to be not favorable to us. Our pricing last year was in the first half; this year, it’s less but it’s in the second half. We had some shifts going on in Europe in the cross-border business. They don’t have much revenue impact. So, there are always going to be those kinds of things. So there’s always going to be periods of time when these things are happening to us, alter them. There are clearly mix differences. The mix differences can cause again things that look different. I mean, we’ve got a much larger U.S. business. We’re much bigger in the UK and France. There are mix differences around the world.
Look, over time, these things even out. And I would expect the gap to narrow. Certainly, we understand the reasons. We understand which reasons will self-correct. We understand other reasons that we need to work on. But, I think there is an ebb and flow to this. And time will even the things out.
Thank you. Any questions from the floor? We have plenty of questions up here to keep going. The regulatory environment has been a key element to the payment space globally. Have there been any changes on the regulatory front or anything as they’ve gotten more -- little more difficult or somewhat soft than in some markets?
I would -- I think, the best description of it is that it’s generally unchanged. I think, you can think about regulation in thee buckets. One bucket is the U.S. because it’s a big country and the big chunk of our business. Debit has already had a things happen to it here. It doesn’t seem like -- there is a lot of movement on other fronts at this point. So, really, I would say this situation looks like, it’s unchanged, potentially stable. Europe is the other theater, where it’s a lot of countries but it’s one regulatory body. So, it’s worth watching because it’s a big geography that has one regulator. They’ve done a ton of regulations in the last few years between exchange rate regulation -- not exchange rate, inter change regulation, scheme and processing separation regulation, PSD2 coming in. We’ve all told you that they are looking at some of the cross-border -- inter-Europe cross-border side of things. Could there be more in Europe? Possibly, but a fair amount has already happened.
Around the world then, regulation is country specific. And there doesn’t seem to be a common theme. Every country has sort of got its own philosophies. They are not all moving in the same direction. So, I think, it’s a mix bag in that sense. Nothing significant going on. And we have teams around the world that work very closely with regulators and governments to make sure they understand how we can achieve their objectives and help them achieve their objectives and do the best we can to help them understand our business and make the regulation whatever there is as informed as it can be.
Europe, acquisition of Visa Europe, it’s been I guess almost two years, getting close to two year. The integration of that I think, you have suggested is going very well and you are going to focus more on growth in that market. Is that right? Is all the heavy lifting on the integration completed at this stage? And what are you going to do on the growth side to accelerate growth?
Yes. I think from an integration standpoint, we are pleased with progress. So, we did the sort of the people integration early on. The technology integration is underway. As we’ve said before, the technology platform that Visa Europe runs is separate from us today. We have integrated them on the clearing and settlement side. The integration of the authorization side is underway. This means, we have to move every one of our issuers and acquirers on to the new platform, and that is one at a time. That is underway. I think we’ve indicated that we expect to finish it by the end of this calendar year. So, starting Jan 1, 2019, we should be in a position, assuming everything is on schedule, to declare pretty much the integration done. And we would be operating Visa Europe out of the global platform.
In the meantime, the other big task that is underway that is pretty much done at this point is to ensure that we moved our business from the association model to the commercial model. That was a very big and very complicated exercise involving over a 100 contracts that had to be redone. We are very pleased with the outcome. It required us in effect to be -- to do all this to be more in defensive mode for the past couple of years, by definition. We expected there would be some leakage as part of that but it was a lot less than we thought could happen. We are happy that’s done. So, now, we can move on to the offensive. And there is lots of growth opportunities in Europe. Historically, for various reasons, the business in Europe evolves where we were very strong in debit and not so strong in credit. So, there are clearly opportunities in credit. There are parts of Europe. Our strength is in the UK and France. There are other parts of Europe where clearly we have opportunities to have much better position than we have today. And this will all play out over time, and we need to do it in a way that is rational and smart.
We are open for business on a whole bunch of fronts to bring our capabilities to Europe, which will become even greater, once the technology platforms are integrated. We just announced that we can fast track FinTechs to do business with us. We have an innovation center in Europe that has been up and running in London that gives people a great flavor for all the things we can do. We have announced that we have $100 million that we would be interested in investing in a variety of innovative things in Europe over the next few years. So, clearly, the track from this point is offense.
The accretion -- I mean, can you remind us what you had suggested would be the accretion for Visa Europe? We kind of thought you had a pretty conservative view when you initially came out with that and how are you tracking relative to that?
Yes. From a financial standpoint, it’s been better than we expected. So, clearly, we had some conservative modeling going into it. We didn’t want to make assumptions unless we felt really good about them. Clearly, financially speaking, the business has performed better than we expected. We have been able to take a couple of rounds of pricing. We will look at any future opportunities. We have been able to do some tax restructuring. So, when you add it all together, we thought we would have low single-digit accretion in the first year of our ownership. It was mid single digits this year; we said our second year that will be in the high single digits. So, clearly, we are well ahead of what we expected, and we’ll see where it goes from here. So, from a financial standpoint, I would declare it at least at this early stage as close to a homerun if you can imagine. Now, I want to caveat that by saying, we are only two years in and there’s a lot of work left to do.
Contactless payments in the United States, I think we’re behind here in the U.S. versus a lot of the world in contactless payments, especially contactless cards. What is -- I think, Visa is very much behind that. And I think there is -- what does -- assuming -- where do you think you U.S. is in adopting contactless card payments? What does that do to the electronic payments market as far -- what have you seen in another markets as far as there is accelerating growth? And what does it take? Is it technology in place? What is it going to take, and what kind of…
Yes. Contactless is not something you’ve all seen in the U.S. but we have now experiences in the UK and Australia. And what contactless does is that consumers have clearly voted. And as soon as contactless is available, it takes off like a rocket ship, because it is an extremely friction-free experience. Essentially, it even takes the phone out of the picture. For a face-to-face transaction, the tap is far more attractive from a consumer standpoint. And we saw it in the UK, we saw it in Australia.
What we see happening here is it’s somewhat slow to take off because there is a chicken and egg problem to solve. Everybody has to be enabled for contactless and cards have to be enabled for contactless. So, the first couple of years -- it takes a couple of years to go from like 0% to 7% penetration, and then it takes off like a rocket ship. So, the UK took about two years to go to 7%, now, it’s I think 60%. Australia is already 90%. 90% of the transactions in Australia face-to-face today are done contactless.
Fundamentally, I mean consumers love this way to pay. And it just increases the use of cards, because people now use their card for everything, for smaller and smaller transactions. It essentially takes cash out of the equation, it takes phones out of the equation, and it’s an increase in transactions, which is great for issuers. And for merchants, it’s the speeding up of lines. In the U.S., we have to solve the chicken and egg problem. So, what that means is having a critical mass of merchants that are enabled for contactless and then getting issuers to send you cards that have chips that are enabled for contactless. And we’ve been working with both sides. I believe as of today, 50 of the 100 largest merchants in the U.S. are actually able to accept contactless payments and they are working with the issuers to persuade them that there’s enough critical mass here that if you send people contactless cards that they will appreciate it, and we’re working with them to get that going. So, I think, we’re moving in the right direction in getting the chicken and egg problem solved. It will take a couple of years like everywhere else for it to go from 0 to 7%, it may move slowly, and then it hits that critical mass and really just takes off.
What do the contactless cards cost a bank or an issuer versus a…
It’s not meaningfully better. I have one. And you should know just so you all know, sort of if it has this little symbol on it, this thing here, it means it is enabled for contactless, the little sound like thing. And you will increasingly -- if you lose your card or have a card expiring to be replaced, you’re more likely than not to get a contactless card. It costs a little bit more but it’s going to be paid for quite easily and that they will get a lot more transactions. That’s demonstrably proven in the UK and Australia that this increases penetration of cash. It drives the use of cards to smaller and smaller transactions and transaction volumes for issuers go up.
Thank you. Visa Direct has I think been one of the more exciting I think new products. It seems to have a lot of traction for Visa. Maybe talk about you know the roll out of Visa Direct globally this year. Are we starting to see these transactions have some material effect on the income statement? And then, how does Visa Direct differentiate itself from like MasterCard Send of VocaLink, I mean, kind of fast payments game if you would.
So, we’re very excited about Visa Direct for a variety of reasons. I mean, it is a real innovation in the network to be able to send money both ways, which then opens up a whole lot of use cases. So, fundamentally today, Visa Direct is the backbone for most of the P2P payments going in the U.S. and elsewhere. So, it is what you can use for Venmo, it is what you power Square Cash, it is what -- you can use it on Facebook Messenger. Fundamentally, this is the backbone for a lot of P2P in the U.S.
So, the coming -- it’s opening up the whole seven new use cases and disbursements. Payments coming to you from your insurance company, from your -- whether it’s your auto insurance or your healthcare insurance, in the gig economy, a variety of small businesses or individuals can now like Uber drivers or whatever, elect to get paid through Visa Direct.
There is also now a use case with merchants. Small merchants can work with their acquirers. And so, waiting a couple of days to get their cash through the normal settlement process for I guess the fee that they negotiate with their acquirer, you can use Visa Direct to get paid every day. So, small businesses can get their cash everyday and manage their cash flows better. There are additional use cases in bill payments. So, there is a broad range of use cases in the P2P, and as I said G2C and in the B2B space that Visa Direct can power. It is moving the needle. It’s still early days. It will move the needle on the debit volume line, because it is using debit credentials. We are a rapidly rolling it around the world. We’ve, I think, enabled about 1 billion cards; we expect to have enabled about 2 billion cards, hopefully by the end of this calendar year. So, you’ll have a credible cross-border capability with Visa Direct, which again is a very valuable capability, because a lot of these ACH and Fast ACH networks are not global in scope, they are national.
Beyond that, I mean when you use debit credentials, as I said earlier, something people don’t realize is they don’t have a Fast ACH or ACH rails as the security you get with debit credentials, as well as the ability to get your money back. You make a mistake, you can get your money back, you don’t like the product, you can get your money back. That doesn’t exist with Fast ACH. Now to the extent that Fast ACH -- speaking about VocaLink, I think there is a lot of misunderstandings about this. So, the important thing to note is that VocaLink is an operator of a network. It is not the owner of a network. To the extent there are use cases that can use the network, it’s open to us too at the same fee that is regulated. It only is an operator of the network in the UK. So, VocaLink does not operate -- VocaLink does not own any networks. VocaLink operates one network, the fast payment network in the UK. The fast payment network in the UK is available to us or anybody else through the banks at the same fee as it’s available to MasterCard. So, to the extent there are use cases that require the use of fast payment networks, we’re able to use it anywhere in the world; and in the UK, VocaLink is the operator. That’s part one.
Part two is, I mean, the network -- the entity that controls the network is asking for a new operator. I mean, there’s an RFP process underway or RFI or whatever, and they want the whole fast payments network rebuilt, and they’re looking for a new operator, maybe VocaLink, may not be VocaLink. We’ll have to wait and see. The important thing to note is that VocaLink doesn’t give MasterCard anything we don’t have. They get a fee stream from being the operator on the relatively low fee that you pay for use of the network. And we have access to the network in the UK or anywhere else in the world. So, if there’re use cases that requires the use of ACH or Fast ACH, we’ll do that too. But there’s a fundamental problem in the VocaLink in the UK, which is one of the first Fast ACH networks has not been able to solve, which has come up in use cases, because consumers have to have a proposition that they want to use that happens to use Fast ACH rails, in fact for 10 years and there hasn’t been one so far.
Thank you. Yes, the question?
Q -Unidentified Analyst
The question was on the gap between the Visa, MasterCard growth and any -- what Visa is looking at?
Well, most of these issues will self correct. So, we know that some of them are timing related, some of them are mix related, in terms of what happens to exchange rates and sizes of our business relative to theirs in some parts of the world. As I said earlier as we were going through the exercise of consolidating our business in Europe, essentially moving people from the membership model to the commercial model, we expected there to be some leakage in Europe, some losses, and we got some of that. It was less that we had thought because we had to make some judgments going into this, and losses are also not surprises, they were predictable as to where it was going to be. But now, we have the opportunity having done the defensive act to go out and be offensive. And there is real opportunities for us there. So, that will correct over time. These things move around. And there are periods of time when they might gain something and there will be periods of time we do. One other area where we’ve probably not done as well has been one where our banks have not grown as fast as their banks in a couple of countries. Some of that is self-correcting, some of that relates to particular situations that the banks that are exclusive banks, have had issues in their markets. And again, some of those things will self correct too. But other than that, I mean these things should narrow over time. And difference in performance is not acceptable. We are very focused on it. And where these things require specific actions on our part, we’ll be taken taking them.
Thank you. Capital allocation, you’re generating about $10 billion of free cash flow. Just remind us of Visa’s allocation, capital allocation and M&A strategy.
Yes. I think it’s not changed. We had said to people for many years that we would add that to our structure when the Visa Europe transaction happened and it did and we added that to our structure and we also committed to step up our buybacks to essentially neutralize the impact of the stock that was issued as part of the transaction. Our priorities are, invest first in our business. It’s a great business. There is no reason not to invest at the right levels in the business. And we try to be disciplined about it. Next is any appropriate M&A. We typically won’t buy anything for the sake of buying it. I mean, you can play a game of buying revenues at five times revenue and the next day it gets the multiple, bigger than that. But there is no point doing that. That games runs its course. We’ve never done it. So, our acquisitions have been largely focused on what can help our core business. And we’ve done no CardinalCommerce last year, Fraedom this year, variety of minority investments. And we will keep doing that with the clear focus on, is it a capability that will enhance our core business. Once we get past that, the free cash flow that’s left is really a dividend policy, 20% to 25% payout ratio. So, we grow our dividends as our earnings have grown and we took it up quite a bit this year. And then, we buy back stock to return cash to shareholders. It’s generally programmatic. We’re happy with our capital structure the way it is. This year, we will finish sort of the additional buyback we’re doing to neutralize the impact of the stock. And to the extent that we need to rethink anything in our capital structure, we’ll think about it. But, at this point, nothing changes.
Last question, you mentioned the acquisition of freedom and the business payments market. What your thoughts? What is Visa’s strategy and business strength? Do you view that as a very large opportunity. Do you have the right tools today to compete in that market.
Here again, I think there has been a certain amount of hike, which I think is being dialed back right now. It is obviously an opportunity. And there is clearly an addressable part of the market, which is in the range of what we said last year, around $20 trillion or so. We already are a very large player. We’re a leader in what I would call the traditional part of the market that has been around a long time, which is the part that we can add the most value to -- we are the largest market share and growing very fast and have always been on the global basis and what I would call the small business part of the market, the commercial cards, the P cards and so on. The virtual card business, big opportunity; we’re very much in the business. Perhaps we -- for various reasons, we weren’t focused on it earlier for specific reasons. We’re well past that; huge opportunities to gain share in that segment as well as the growth. You get past that; Visa Direct is opening up a variety of B2B opportunities for us.
B2B Connect is in pilot phase using distributor ledger technology that will along with Visa Direct open up some cross-border opportunities in B2B. Freedom and enhances are capabilities with what I would call the mid-sized markets. And we will continue to build. We’ve got partnerships with Billtrust and others. So, there will be a lot of building blocks that fall into place. Yes, it’s clearly a big opportunity. We’re clearly pursuing it. Once we get to the very large businesses that are enterprise type systems, there are technological issues, there is a value proposition that has to be created. I think that’s a little further out. But fundamentally, I mean, we are as focused on B2B as we have -- we have a very large -- it is the largest B2B business in our industry, far larger than our competitors. I don’t think we’ve talked publicly about what the size of the business is. But for all of us, it’s a good business but it’s not the kind of business that tomorrow is moving the needle. It’s growing very nicely, it’s a good business. Our B2C is still a very large business with probably as big an opportunity, $20 trillion, $20 trillion, roughly in that range. There is another $100 trillion of B2B payments that over time you have to come up with the value prepositions and technological solutions. And we’re all sort of working on it. But that’s not something that is going to happen tomorrow.
We like all those trillions. We appreciate it. Thank you. Breakout downstairs in LaSalle B. Thank you.
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