Earnings Call: Q4 2017

Feb 1, 2018

Good morning. My name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Q4 Full Year 20 17 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Warren Kneeshaw, Head of Investor Relations. Please go ahead, sir. Thank you, Kim, and good morning, everyone. Thank you for joining us for our 4th quarter 2017 earnings call. With me today are Ajay Banga, our President and Chief Executive Officer and Martina Hunmejian, our Chief Financial Officer. Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q and A session. It is only then that the queue will open to accept registrations. You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a currency neutral basis and exclude special items unless otherwise noted. Both the release and the slide deck include reconciliations of non GAAP measures to their GAAP equivalents. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and on our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I'll now turn the call over to our President and Chief Executive Officer, Ajay Banga. Thank you, Warner, and good morning, everybody. So our business continues to perform well. We are very pleased to have delivered strong results again this quarter. I think that's driven by our continued focus on the execution of our strategy that we laid out for you in fact as recently as the Investor Day in September. For the quarter, we delivered net revenue growth of 18% and an EPS growth of 30% excluding special items, which are primarily related to the U. S. Tax reform and our Venezuela operations. On that same basis, net revenue growth for the year was 15% and EPS growth of 21%. Now major economies around the world generally improved in 2017 and we expect to see a relatively steady environment again this year, although with some pockets of instability. Now in the U. S, consumer confidence has been healthy, unemployment remains low, holiday retail sales were solid, although year over year quarterly growth was slightly lower in Q4 than in the previous quarter according to our spending pulse estimates. In Europe, the economy has been relatively stable. Germany and France are driving some mild growth. Retail sales growth in the U. K, however, slowed in the Q4, again according to SpendingPulse. And about the U. K, we remain concerned about the potential impacts of Brexit over the medium and longer term. Latin America, now there the region has been recovering from its economic recession. And while Brazil and Mexico both have presidential elections coming up and of course Mexico has the added uncertainty of NAFTA renegotiation, we are cautiously optimistic that economic growth in that region in 2018 will be similar to 2017. The political and economic crisis in Venezuela continues to worsen and Martina is going to discuss that in some detail when she comes on to her section. Now in Asia, we've seen improvement in consumer and business sentiment in Australia and the ASEAN countries continue to be bright spots. So overall, although we know that the world is not without geopolitical and trade related risks, absent any major impacts from these, we expect 2018 to be similar to 2017 from an economic standpoint. And with that backdrop, we are kind of focused on continuing to execute our strategy It's allowing us to grow share across all of our product lines in 2017. And let me give you a few examples of how we are doing this. So the U. S, you read this morning probably that we have just announced that we have now got the combined Bass Pro Shops and Cabela's co brand. They've chosen Mastercard for their consumer credit co brand book. It's one of the largest retail co brands in the market. You probably know that we had been the network for the Bass Pro Shops co brand and we're going to convert the Cabela's Club portfolio to Mastercard later this year. We also renewed our exclusive agreement with KeyBanc for their consumer and commercial credit and debit portfolios this quarter. Now KeyBanc actually is a great example of a customer who uses various Mastercard services. They use our decision intelligence authentication tools, our loyalty platform processing services. So that's a nice widespread of services. Another example is Bank of America. And as we told you in September, we had won their Mastercard Cash 1, 2, 3 consumer credit cards. We're going to be launching those exclusively by the end of the Q1. They leverage many of our capabilities including fraud products, advisors and are also one of our largest Labs as a Service customers. And that's where we innovate together with our customers using design thinking to rapidly co create targeted solutions for their business opportunities. In Europe, we're just pleased to announce that later this year we will be launching the new Virgin Atlantic consumer credit card and that's issued by Virgin Money in the UK. We continue to make progress with European banks. We signed a number of new deals with large issuers in France this quarter, including moving market share with a flip of Credit Mutuel's debit business. In addition, we are shifting share to us in credit and debit from local competitors with ING Bank in Italy as one example. ING is also launching new prepaid issuance with Mastercard and they're leveraging added benefits such as Mastercard installments, which gives consumers financial flexibility to split their payments over monthly installments. Now the interesting aspect beyond this is that ING's implementation is entirely managed by our APIs and of course it gives their customers an easy way to convert purchases to installments through their mobile banking app. And we're also winning debit in other regions such as in Latin America where we signed a new deal with Davivienda in Colombia emphasizing cross border and digital capabilities. We launched a new co brand debit program with Amazon in Mexico. In the Middle East, a flip of Doer Bank's debit portfolio is giving us portfolio exclusivity in one of the most affluent markets globally. In China and India, we're making progress. We signed new deals in China this quarter with customers such as ICBC, China Industrial Bank, the Agricultural Bank of China. In India, the government has finally published new merchant discount rates and we think that's going to spur merchant acceptance and continued transactional growth over the next few years. And we're making progress with VocaLink. Since the acquisition in May, we have launched real time payments to the clearinghouse in the U. S. We have further scaled the person to merchant pay by bank app and we went live with an image based clearing system for the check and credit clearing company in the UK. In the Q4, we expanded our analytics capabilities at VocaLink. We've successfully launched a corporate fraud alert product with RBS as our first customer. They're using analysis of corporate payment history and machine learning to help protect companies or their clients against various types of corporate fraud, invoice redirection being an example. On the infrastructure side, we're participating in a number of RFPs around the globe and we believe these will position us well in the real time payment space over time. And in parallel, we're developing apps and value added services that can be deployed across this infrastructure. So a few comments on the digital space. We've expanded the rollout of tokenization, which as you know is the foundational technology for secure digital payments. We've added 500 new issuers and 21 markets over the course of 2017. I mean now a total of 1200 issuers in 46 markets. For the year, we saw tokenized transaction growth of over 500%. Now that's from a small base, but it reflects this momentum that I'm speaking to. And last year, we continued to see how important the seamless digital purchasing experience is to our merchant partners as we grew Masterpass acceptance with Dunkin' Donuts, Walgreens, Verizon Wireless, many others. And this quarter, we're pleased to add several more partners, including in the grocery category such as BJ's and Giant Eagle in the U. S. With McDonald's, we're going beyond the simple implementation helping them develop a food delivery app with exclusive Masterpass acceptance in multiple markets across Latin America. So now let me lap up by saying a few things about U. S. Tax reform. We see this as a very positive development for the country, particularly in the near term, as businesses will have an increased capacity to invest and many consumers will have more disposable income. What we are thinking of taking of opportunity, taking the opportunity is to make several focused investments that build on our long standing commitment to strengthen our business, support our people and make a positive contribution to the communities that we operate, while of course continuing to provide strong capital returns to our shareholders. And so I'm going to lay out a couple of steps we're going to take. The first one is, we will make additional investments in our center for inclusive growth, which we launched back in 2014 as a way to focus our data, expertise, technology and philanthropic investments to support inclusive growth. You know that we believe that enables more people to become financially empowered and therefore good for our business as well. Over the next several years, we plan to invest an additional $500,000,000 to fuel their philanthropic contributions into the community. And among our initial efforts will be training programs for U. S. Workers to help create the workforce for tomorrow. These additional investments in this center go beyond the impact we already delivered through other existing initiatives across the company as well as the Mastercard Foundation, which you will recall is one of the world's largest private philanthropic funds and of course our public private partnerships with governments which today are in over 60 countries. We've got 1300 programs and that's taken us more than 2 thirds of the way to our goal of bringing 500,000,000 more people into the financial system. Our second area of focus with this opportunity around the U. S. Tax reform is our employees and their retirement planning. And while we've always been an active and generous contributor to our employee benefits, we're going to take this opportunity to enhance our employer match to 10% for defined contribution retirement plans. As this will be an opportunity for the majority of our employees, including those across the United States to benefit from this change. And finally, we will absolutely accelerate investments, both on an organic and inorganic basis in areas that are aligned with our business strategy, digital infrastructure, fast ACH, data analytics, those spaces. Just to put this in context, yes, we will be making all these additional investments, but the majority of the tax savings will be used to invest in the growth of our business and also to return excess capital to our shareholders. Now with that, me turn the call over to Martina for an update on our financial results and our operational metrics. Martina? Thanks, Raje, and good morning, everyone. As you can see in the highlights on Page 3, we have delivered another strong quarter. Foreign exchange was a tailwind of about 2.5 ppt to net revenue and 3 ppt to net income, primarily due to the strengthening of the euro. I will now highlight the numbers on a currency neutral basis excluding the impact of special items, which I will explain in more detail on the next slide. Net revenue grew 18% driven by solid momentum in our core business and includes a 3 ppt benefit from acquisitions. Operating expenses increased by 15% and includes an 8 ppt impact from acquisitions primarily for VocaLink. Operating income grew by 20%, while net income was up 25%, resulting from our strong underlying performance and a lower tax rate. EPS was 1 $0.14 up by 30% year over year with share repurchases contributing $0.03 per share. During the quarter, we repurchased about $1,000,000,000 worth of stock and an additional $287,000,000 through January 30, 2018. So let me turn to Page 4 and here I'm going to touch on the special items we had taken this quarter. The U. S. Tax reform resulted in 3 impacts to the tax line in our P and L in the Q4. This is our best estimate based on our current interpretation of the new tax laws and could still change during 2018. The first item is a $629,000,000 charge related to deemed repatriation on accumulated foreign earnings and is payable over 8 years. The second item is related to the revaluation of our deferred tax assets and liabilities at the new corporate tax rate of 21 percent. Since we are in a net deferred tax asset position, we have recorded $157,000,000 charge this quarter. Finally, we had an $87,000,000 impact due to the loss of certain foreign tax credits and a change in policy regarding foreign earnings. The total of all tax impacts related to the U. S. Tax reform bill was $873,000,000 or $0.82 per share. In addition, the economic and political conditions in Venezuela continue to deteriorate and therefore similar to what other companies have already done, we have decided to exclude the financial results of those operations from our consolidated financial statements for future periods. This has resulted in a pre tax charge of $167,000,000 or $108,000,000 after tax. However, we will continue to provide switching and other services in the country. As a result of these special charges these special items, we had combined after tax impact of $981,000,000 or $0.92 per share this quarter. So let me now continue to explain our underlying business performance for the quarter. Here on Page 5, you can see the operational metrics for the Q4. Worldwide gross dollar volume or GDV growth was 13% on a local currency basis and that's up 2 ppt from last quarter. We saw a solid double digit growth in all regions outside of the U. S. U. S. GDV grew 9%, up 3 ppt from last quarter and was made up of credit and debit growth of 10% and 8% respectively. Outside of the U. S. Volume growth was 15% that's up 2 ppt from last quarter led by Europe and Asia. And cross border volume grew at a healthy 17% on a local currency basis with strong double digit growth across all regions, again led by the U. S. And Europe. Turning to Page 6, CUC switch transactions continue to show strong growth at 17% globally with U. S. Growth up sequentially. Similar to last for the last few quarters, we saw healthy double digit growth in all regions outside of the U. S. Globally, there are 2,400,000,000 Mastercard and Maestro branded cards issued. Now let's turn to page 7 for highlights on a few of the revenue line items, again described on a currency neutral basis unless otherwise noted. As already mentioned, net revenue increased by 18%, including approximately a 3 ppt benefit from acquisitions and was driven by strong transaction and volume growth as well as growth in services. Rebates and incentives grew 23%, reflecting higher volumes and incentives for new and renewed deals. Let me quickly go through the individual revenue line items. As we've commented on throughout the year, the difference between fees charged and volumes in the domestic assessment and cross border categories were mainly due to pricing, which was essentially offset in rebates and incentives as well as some mix. This continues to be the case this quarter. The domestic assessments grew 19%, while worldwide GDP grew 13%. Cross border volume fees grew 19%, while cross border volume was up 17%. Transaction processing fees grew 22%, primarily driven by the 17% growth in switch transactions as well as revenues from our various services offerings. And finally, other revenues grew 15%. As a reminder, most of the VolcaLink revenues show up in this line. Advisors and Safety and Security revenues were also up. These items more than offset the 4 ppt impact from the changes remained to our loyalty business in Asia that I've called out previously. Moving on to Page 8. Here you can see that total operating expenses increased 15%, excluding special items on a currency neutral basis and that was higher than our expectations due to foreign exchange hedging losses. Similar to last quarter, this includes an 8 ppt impact from acquisitions primarily from Volker Link including the impact of purchase accounting and integration related costs. The remainder was due to our continued investment in geographic expansion and digital capabilities. I'm going to move on to Slide 9 and here we're going to discuss what we have seen so far on the drivers for January and the numbers are through the 28th January. Starting with switched volume, Global growth is at 14%, up 2 ppt from what we saw in the 4th quarter with healthy growth in all regions. In the U. S, our switched volume grew 10%, up to PPT with higher growth in both credit and debit programs. And switched volume outside the U. S. Grew 18%, up to PP2, driven by higher growth in Europe with slower growth in APMEA as we lap difficult year ago comps related to the demonetization effort in India. Globally, switch transaction growth was 16%, down 1 ppt from what we saw in the 4th quarter. This decrease is the result of the exclusion of Venezuelan transactions as we will no longer be recognizing the related revenue in 2018. Ex Venezuela, our growth was similar to the 4th quarter. With respect to cross border volumes, our volumes grew 22%, up 5 ppt with double digit growth in all regions. So let me explain this a little bit more. About 3 ppt of this was driven by higher growth in Europe, resulting from both increased intra and inter Europe travel as well as holidays extending further into January this year in certain markets. APMEA also contributed about 1 ppt to this growth. The remaining 1 ppt was driven by cardholders funding accounts at cryptocurrency exchanges, which was then used to purchase these digital currencies. You should note that these accounts can be funded from a number of sources such as bank accounts, buyer transfers, etcetera. With the recent interest in and the price volatility of cryptocurrencies, we have seen an increase in this activity. Just to be clear, we do not switch or settle cryptocurrency transactions over our network. Our plans do not assume this type of activity will continue as we have no line of sight as to how cardholders will view cryptocurrencies in the future and given that we've already seen some declines in our recent weekly trends. So now I'm going to turn to our thoughts about 2018 on Slide 10. And let me start by talking about the numbers on the same basis as we always have. That is before the impact of the new revenue recognition rules on a currency neutral basis and excluding acquisitions and special items. On this basis, our business fundamentals remain strong and we continue to grow through the combination of new and renewed agreements in our expanded set of service offerings. We expect the global economic environment to be similar to what we saw last year with a few areas to monitor as Ajay mentioned. With this backdrop, we expect to deliver strong organic growth again this year with net revenue growing towards the high end of the low double digit range. This is in line with our recent trajectory, though we will be absorbing a slight headwind as a result of the deconsolidation of our Venezuelan entity. On the expense front, we continue to invest in key long term growth areas such as digital, security solutions and geographic expansion in addition to the incremental employee and technology investments Ajay just highlighted. Overall, we expect operating expenses will grow at a mid single digit rate year over year, reflecting our ongoing cost management efforts. So as you can see, we are well positioned to deliver strong operating performance again in 2018, slightly ahead of where we had previously expected. Turning to Slide 11. Now let me add to those growth numbers, the impact of acquisitions, the new revenue recognition rules and the investment in the Center For Inclusive Growth that Ajay talked about. All of these items are very important when you try to model our results for 2018. So please bear with me as we're going through this. So let me walk down the chart. 1st, with respect to acquisitions, we estimate that having the acquisitions for a full year in 2018 rather than just a partial year in 2017 will contribute about a half ppt to revenue growth and approximately 2 ppt to OpEx growth for the year. 2nd, recognition awards would contribute approximately 2.5 ppt or $300,000,000 to revenue growth and 4 ppt or $200,000,000 to expense growth based on our current estimates. These amounts are driven by 2 factors. 1st, we have recently determined that certain market development programs will now flow through the P and L on a gross basis, resulting in about a $200,000,000 in increased revenues and offsetting expenses. The remaining $100,000,000 relates to a change in the timing a particular deal incentives are recognized. These amounts, which are also detailed in the appendix, are estimated based on our current and assumed commitments and are thus subject to change. We will be disclosing the impact of the new revenue recognition rules on a quarterly basis throughout 2018, so you will be able to follow the effects each year each quarter. You can have fun with that one. Just as a reminder, the new rules have no impact on the underlying economics of the business. And finally, we will be expanding our center for inclusive growth. The initial contribution will be $100,000,000 to a new not for profit entity to enable a variety of workforce training, financial inclusion and digital infrastructure initiatives, which will add another 2 ppt to operating expense growth for the year. We expect to take this charge in the Q1. So overall, with these adjustments, we estimate 2018 year over year growth net revenue will grow at a mid teens rate and operating expenses will grow low double digits, both on a currency neutral basis and excluding special items. I have a few other items for you to consider for 2018. We expect operating expense growth in the first quarter to be $250,000,000 higher than what our annual growth rate of low double digit would imply due to the timing of the market development programs, which I just referred to as part of the new revenue recognition rules, the impact of the acquisitions, which occurred after Q1 last year and the charge for the Center For Inclusive Growth. When modeling as reported numbers, foreign exchange is expected to be a 1 to 2 ppt benefit to the top line and about a 2 ppt benefit to net income for the year based on our planned exchange rates. And finally, we expect a tax rate of approximately 20% in 2018, primarily due to the impact of the tax reform here in the U. S. So turning to Slide 12, I would like to move to our long term performance objectives for the 2016 to 2018 period. As a reminder, these objectives are on a currency neutral basis. They do exclude acquisitions and special items and are normalized for tax. They do however incorporate the impact of the U. S. Tax reform in 2018. For revenue, given our expectations for 2018 that I just discussed, including the new revenue recognition rules, we now believe that net revenue will grow in the low teens on a 3 year CAGR basis. We remain committed to a minimum annual operating margin of at least 50% and we now expect EPS CAGR over the 3 year period to be in the mid-20s, up from the approximately 20% we last commented on. This reflects our continued strong business performance and expense management initiatives as well as a 4 ppt benefit from lower taxes in 2018. The new revenue recognition rules to be implemented in 2018 are expected to have a minimal impact on the 3 year EPS CAGR. With that, let me turn the call back to Warren to begin the Q and A session. Thanks, Martina. Kim, we're now ready to start the question and answer session. Thank you. And your first question comes from the line of James Snyder with Goldman Sachs. Your line is open. Good morning. Thanks for taking my question. I was wondering if you could maybe start out on the healthy trends you've seen across the globe, but particularly in international debit, which I think accelerated, as you mentioned quite a bit. There's particular pickup in Europe. Can you maybe talk about how much of that is market share? How much of that is improving economy? And maybe you can kind of talk about the impact going forward on your yields given it seems like there was a substantial decrease again in the number of Maestro cards as you convert those to standard debit? Yes, James, good morning. And let me just take this for a minute. In Europe, where we're seeing really good drivers in Italy and Germany and France, number of these kind of countries. And those are good economic environments. I called out that the holidays in January lasted a little longer in some of these countries. In terms of what where we added the market share was really in the Nordics. So we actually have slipped the deal in Sweden. That is coming in over this year and that will actually benefit these kind of numbers. From a Maestro point of view, yes, you're absolutely right. We have been talking about that in a number of countries, we're actually flipping our Maestro portfolios into debit Mastercard portfolios. We are very well on our way in many of those countries. And what we are actually seeing is when we do these kind of flips that on the new debit Mastercards, we see about 2x the volume that we used to see on the Maestro cards. So we are not just seeing cross border volume, but we are also seeing local volume and that will continue to benefit and it will improve our yield over time. You have actually been seeing that our yield has been improving over the last many years, both on the core business, where you're seeing it predominantly because of the additional processing that coming in. By the way, we are now processing about 54% of the transactions that are done on Mastercard versus when you just look 2 years ago, it was just shy of 50%. And secondly, of course, the healthy cross border trends. When you look at our total yields, that is where obviously our growing services offerings are really benefiting us and that's why you're seeing very healthy years across the whole company. Thank you. And your next question comes from the line of Don Fandetti with Wells Fargo. Your line is open. Hi, good morning. The cross border number, even if you sort of strip out cryptocurrency was notably better and I know the dollar has been generally weakening. Do you expect as you think about guidance for 2018 and just look out, have we sort of stepped up into a structurally higher cross border rate? And then lastly, can you talk about volume into the U. S. Cross border? John, I'm so glad you're asking this question because of course when you see for the 1st 4 weeks in the year a 22% cross border number, you're asking exactly the right question in my opinion. What we always say is 4 quarters do not make a year. In fact, the guidance that we're giving 4 weeks from a year. 4 weeks don't make a year. 4 quarters do. Yes, 4 quarters do. At least last night. Yes, you're right, Ajay, So 4 weeks don't make a year, but in particular, all of the guidance that we're giving you for the top line of 2018, we are not planning on those kind of cross border numbers, growth numbers. We are planning much more to what we have been seeing over the last couple of years. And even with the weaker dollar, I don't think that trend will change much. So I don't think it's prudent to be planning on this kind of number. And I would like to point you back to the guidance that we had from a new revenue point of view. Okay. And then the volume into the U. S? Volume into the U. S, we actually do see it's kind of mid single digit volume into the U. S. What we do see is a volume outbound of the U. S. Is picking up. Okay. Thank you. Thank you. And your next question comes from the line of Darrin with Barclays. Your line is open. Thanks guys. Nice job. Just want to touch on when you look at your guidance for 13% revenue growth at the or 15% including the accounting change, just versus the 18% run rate, just make sure we have the right variables that would cause the deceleration being I guess Venezuela M and A grew over lower pricing. Anything else we're missing there? I mean just lower pricing benefits. And then quickly, Martina, on the when you look at the tax investments, I just wanted to squeeze in what will be the steady state of investment beyond 2018? Some of this just feels that it could be one time or should we expect that to continue? Thanks guys. Yes. Okay. On the first question, first of all, you need to take into account the half PPT on Venezuela. That's the impact on revenue. And then in particular, you also need to take into account the acquisitions that you called out. We had 8 months of acquisitions built into 2017 numbers. And so you only get the lapping effect from the 4 months. So when you actually look at the total results of 2017, we are basically saying that 2018 is just going to be slightly better in part because of course what we're expecting in the United States even though we are very watchful on a number of more potential risk countries around the world, right? Middle East, Africa is a risk country, but we are watching very carefully Brazil. We're watching very carefully Mexico, as well as the impact potential impact from a Brexit point of view. So overall, while the U. S. Is a little better, we're actually believing that economic environment in 2018 will be very similar to 2017. So all of this is baked in just slightly better than 2017 on the net revenue side. That's where we are. Okay. On the tax savings, yes. Yes. On the tax impact, just your second question. So what we're doing in terms of the Center For Inclusive Growth, as Ajay said, we're planning over several years to put a $500,000,000 into that center. The first chunk is going to go in Q1 with $100,000,000 and then we're going to see how we're going to lay it out for the next several of years. So you are going to have to expect that we are going to continue to do some contributions in that, not in 2018, but likely 2019, 2020 as Of course, that's not just a one time thing. We really want to make sure that our employees are focused on making sure that they are well situated from a pension benefit point of view. So this is going to go in this year, sometime this year. We haven't given a date yet and that's going to continue. The other investments are also in our baseline and I would suggest to you that both organically as well as inorganically, we're going to continue to look at that and make more investments. Okay. Literally in those areas that we're talking about from digital and technology and data and fast ACS, the kind of things we talked about in September, very focused on the strategy. That makes sense. Thanks guys. Thank you. And your next question comes from the line of David Togut with Evercore. Your line is open. Thank you. Good morning. Europe continues to accelerate nicely and clearly a lot of that's due to some solid market share gains. But I'm wondering, Ajay, if could comment on the merchant acceptance footprint in Europe for electronic payments, especially post interchange caps a couple of years ago? And then my follow-up is on PSD2. And any update you could give us on bringing VocaLink's capability to the European continent in advance of PSD2? The first part, the merchant acceptance, there is growth across the European region on merchant acceptance from large outlets that earlier used to prefer to take either local payment systems only or cash and that changes there all the way to small ones. What you do see really changing also is the reduction in suppression. So even if the outlet said we accept, in actual fact when you showed up for a small ticket charge or a low value payment, they would encourage you to kind of lay off the idea of producing electronic payment. I think all that has changed quite dramatically. It's helpful. It's part of the secular change in the way cash is used in the European economy. I wouldn't declare victory on that right now because I think a year or 2 in Europe is a relatively small time in a set of complicated countries with lots of local dynamics vis a vis local schemes, local players and the like. So I would tell you keep your eye on that space and we keep working into the acquiring community. We're talking about a 4, 5 year transition in a continent like Europe. It's good signs. It's helpful. It's a nice tailwind, but I'm not running with it to the bank yet. That's kind of the first part. Your second question was about remind me what the second question was? PST-two. PST-two, favorite of it. So we're coming up to the timeframe of when all this starts to go live so many ways in different aspects of implementation in Europe. We have been working both internally as well as with the help of our largest clients as well as in conversations with regulators about the implications of PSD2 and the things we can do around PSD2 with these European merchants and European banks and the new European entities that will get created as a part of PSD2, the PSPs and the various acronyms that are being created in PSD2. Your question was around VocaLink and PSC2. So to get VocaLink onto the ground in different European countries beyond the software status, which is kind of what it is today in the Nordics and some other markets around the world will require us to actually participate in the RFP process of different ACS systems being opened up in Europe. We are participating, you heard me in my opening comments, we are participating in those RFPs. These take a year or 2 to get resolved and settled. After they get settled, it will take a while to get invested in and implemented. But we are very active in all of those. And one of the reasons why I think you will see us using some of the tax reform money in a sensible way in our business is to keep on focusing on the opportunity with fast ACH, thanks to VocaLink's capabilities in Europe, but also outside of Europe, even in the United States and other markets, not just in infrastructure, but it could be in the applications, it could be in the scheme rules and it could of course be in different aspects of the range of things we could do with fast ACH. Thank you very much. Thank you. And your next question comes from the line of Andrew Jeffrey with SunTrust. Your line is open. Thanks for taking the question. Ajay, kind of a big picture strategic question for you, especially in the wake last night of a pretty meaningful shift in the PayPal, eBay relationship. One of the things that PayPal has asserted is its value prop to large marketplaces, especially next gen marketplaces. And I see Mastercard building a pretty comprehensive value proposition of its own. And I just wonder how you think about the sort of so called commodity nature of Visa, Mastercard versus sort of the value add of a provider like PayPal and whether or not the lines perhaps are beginning to blur a bit in terms of go to market value proposition? So I think in the whole E and M Commerce space, there's so much going on, Andrew, in that whole space. And I think if you go back in time when essentially Visa and Mastercard in those spaces and other brands like ours, the other card what we call card network brands. We got into a position where we became part of a drop down on a merchant's checkout site. Dropdown, you've got one brand or the other and you entered a lot of details and you entered a lot of addresses and that created its own friction and its own lack of branding at the checkout point, even though the consumer was aware of the brand because they were looking at their card and entering the data. I think that's moving and PayPal is one way of that movement, but our own efforts with branded checkout points is moving and we will continue to do that. I think PayPal itself, its relationship with something for Dan to answer, but I'm pretty certain that all of you thought about one day that relationship will come up for reassessment. And it's come up for reassessment and Itay has chosen what it wants to do. I think Dan has done some interesting work of building out his partnerships in the meanwhile. So he has kind of consolidated his own position with a second and third leg of the stool. And I think we are a key beneficiary of that because as you know, we've got a great partnership with PayPal, which includes all their co branded cards and their corporate cards and all the understanding around how their wallet is used, including the visibility of the brand and the non steering towards ACH and the data flow and basically the pass through angle compared to the staged angle, blah, blah. So my general net take of all this is, this is still a wide open field. It's going to be years before you can figure out who's playing what game here. All I'm trying to do with our company and all of us are doing is, we want to be very much a part of that game. So we're going to keep investing in tokenization and secure checkout. We're going to keep investing in an enhanced consumer experience in digital. You'll find us doing all kinds of things with banks, with merchants in that space. We're going to keep investing and align the developer community to access our capabilities in digital and core payments through the simplest form of APIs and SDKs so that we can get embedded in more and more locations. We're going to keep investing in creating good R and D with our labs and making sure that we are capable of working with our clients with labs as a service. You heard me talk about that with specific reference to Bank of America, but frankly it applies to many other clients as well. So we've got a whole series of strategies in digital to make us not be anywhere other than at the forefront of what's going on here with simple transparent standards. And standards are important because they enable merchants and banks to connect one time, not multiple times. So you'll see us over this period of years to come, that's the focus. Simple experience, simple standards, focused on security, secure every transaction, make sure we do good stuff with Labs, make sure the open APIs and SDKs are available and well used and make sure that we focus on all forms of payment, not just card rails, but ACH, fast ACH, all those so that you enable banks and merchants to do the best thing for their consumer. That's our digital strategy, not changed. PayPal, eBay, other issues will come and go. We're doing what we need to do. Thank you. Thank you. And your next question comes from the line of Jason Kupferberg with Bank of America. Your line is open. Hey, thanks guys. Just two quick ones. First on your rebate and incentive expectations for 2018. And then can you just give us the latest update on what you're thinking in terms of what might happen in Europe with European Commission looking at some of the inter European cross border interchange fees, some of the potential fines. I know you've disclosed this in your 10 Qs. And any way you could frame up what percent of your cross border business is actually inbound into Europe just so we have some sense of reference in case we get some headlines on this soon? Jason, first of all, on your first question, I'm not going to give you any guidance on rebates and incentives in 2018 and it is because of the new revenue recognition awards coming in. There are so many moving parts between growth revenue and contra revenue that I just feel given all of the work that we were able internally to do, I just feel that the net revenue number is just the best guidance that I can give you. But I do want to take the opportunity to deep dive into that just a little bit more. As you know, I called out $300,000,000 of benefit on the net revenue line due to the new revenue recognition rule. Dollars 100,000,000 of that is really in relation to customer business agreements and through into incentives. And there are a number of effects that we had to be estimating in this. So first of all, as you know, we had amortization of incentives on previous deals that have been previously expensed. So in prior years, we expensed those and they will be now expensed over the life of the deal. And that will be a negative, right? We estimate actually that roughly about a $500,000,000 of incentives will need to be re recognized as contra revenue under the new rules starting 2018. And we will the average life of this recognition is approximately 7 years. So it's not so it's a headwind. It's not really material in the context of our size. But then in addition to that, we would have had some incentives in 2018 or later that will now have to be carried back to prior years to the original deal inception or carried forward. So that will actually reduce the amount of incentives recognized in 2018. So you can see these two things are toggling with each other. And then the last the third thing is that obviously we will be having new deals coming in and that could impact this calculation too depending on the terms and conditions in these kind of deals. So when you put all of this together, we do estimate the net benefit of that $100,000,000 that I just referenced. But obviously, that could change over time. And then beyond 2019, we will continue to amortize the remainder of that $500,000,000 of that roughly $500,000,000 that we have to re recognize as contra revenues under the new rules. So you can see this is a relatively complex area and that's why we're staying with net revenue guidance and we're not going to split it up in growth and into contracts. With respect to your second question, there's really not much more that we can say to you. And quite frankly, what our cross border business, inbound business in Europe is, has actually no relationship in terms of how the European Commission would be looking at finding us, if they find us. But we have at this point in time really no new news. So I'm still going to point you back to the last Q that we filed. That is a pretty accurate statement in there. And unless something happens between now and when we file the 10 ks on what, September 14 or 2015, If you have an update, obviously, the K will be updated by that time. Margina is an accounting heaven for the last few weeks months. Yes. Between rev rec and tax, I'm sure it's been a party. Yes. And you also got Venezuela, which she's done an outstanding job of in trying to put her arms around how to manage that through the next period of time. In Venezuela, we're still very much on the ground doing all the right things. We've got a great team. We're supporting a lot of our clients there. We're not pulling out of the business on the ground. That would be a very unfortunate thing to do. And I think it will spark all kinds of humanitarian issues given the role we play in that economy. In fact, we try to work with other players, including multilateral institutions, try and find a way to make this a sensible outcome because there will be an outcome one day in Venezuela. So this is not a you got to think out long term and what we're doing is all these things, whether it's European cross border or Venezuela or these rules. At the end of the day, we're trying to give you guys some thought of what we're thinking in terms of what the impact could be. But Madhina has laid out a pretty good estimate of where we think our 2018 revenues and expenses and EPS and our combined 2016 to 2018 goals will go. And I'd say to you over 16% to 18% we've had a good run. We gave you an update in September when we raised our guidance. Now what we are doing basically is making sure the accounting flows through. Yes, there's a small improvement in 2018 that you pointed out. Some of it gets eaten up by Venezuela. Some of it gets eaten up by the lapping of the acquisitions. That's kind of where we are. We are running our business to win share and keep taking advantage of the secular trend in the business. That's what we're trying to do. And not getting ourselves tied up between rebates and incentives and gross revenue and net revenue at a time when there are so many moving parts that asking someone to estimate accurately would be asking for the move. That makes sense. Thank you. Thank you. And your next question comes from the line of Bryan Keane with Deutsche Bank. Your line is open. Hey, Bryan. Thanks. Just wanted to talk or ask about 2 things. 1, just the strength in U. S. Credit and debit, is that just some lapping in some of the headwinds, obviously USAA, but the numbers are obviously picking up there, maybe strengthened? It is. Okay. So there's nothing else to call out there? No. Most of it is just that. And then the other things you heard about us winning, they're all coming on board. So you'll see some benefit from Bank of America when it starts issuing. It will take time. You'll see some benefit from the Kroger co brand, the Cabela's co brand, but these things take time. Meanwhile, there's the natural spending pattern that's spending pulp shows up and there, as I said, Q4 growth was actually lower year over year than Q3, just to be clear. Yes. Yes. And it doesn't seem there's no flips going the other way like that created the headwind like USAA. Don't go there. You're giving me nightmares. Don't go there. Yes. And then my follow-up is just on tax reform. I just was trying to quantify total tax reform investments. I got the $100,000,000 for the inclusive growth. And then just thinking about employee retirement and then some of the accelerated investments that you talked about, Ajay, just in all, it seems like maybe we're getting to 20% to 25%. I'm just trying to get to a number of what we're reinvesting total of the tax benefit. Thanks. Okay. Just to let you know, the total cash tax benefit And we're doing then 2 things. 1, we're taking the $100,000,000 in order to invest it into the Center For Inclusive Growth. And the other part that Ajei was mentioning in terms of the employee benefits as well as the additional investments we're doing, we have that embedded in the baseline of the operating expenses, okay? And that's it's all embedded in the low double digits guidance that I have been giving to you for 2018 based on the new revenue recognition rules. I don't want to run a business in which I'm paying employees their retirement long term because this is not a 1 year $1,000 contribution, Kenneth. This is we're adding to our already good 401 and defined contribution plans around the world. And secondly, we're investing in data and digital and fast ACF. We don't want to run a business where that stuff is kept as a separate item. So, Martina has got those embedded in the way we look at the future of our business. The only thing that's not embedded in that is these lumpy contributions that are going to the center for inclusive growth because honestly, dollars 100,000,000 going into that center being directed We're telling you about it, but it's embedded in the total, but We're telling you about it, but it's embedded in the total, but not in the net that we're looking at. Right, Martina? Well, it's in the low double digit operating expense guidance. We put 2 ppt for that particular contribution. In the total. In the total. But not in the organic growth. Okay, great. Thanks. Very helpful. Yes, I got it. Thanks. Thank you. And your next question comes from the line of Greg Morrow with Autonomous Research. Your line is open. I wanted to ask you on Brazil considering recent IPO drawing attention there plus you're seeing the recovery finally seeming to be on firmer ground. You've gained a fairly enormous market share against Visa there over the last few years. And I believe last summer you're now the biggest new issuance brand in Brazil. I was wondering if you expect to see A, vis a vis able to rebound against you there and B, how you look at that market going forward considering the big gains you've had recently? First of all, I will always expect my competitors to make every effort possible there. They're good and strong companies. They've got good people on the ground. They're going to make efforts to win back share. And that's the reality. And it's the I believe that we survive by being competitively paranoid about all our competitors. So that's to me just a I take it as a given that they'll attempt. There's a lot of competition on the ground. It's not just Visa, it's Ielo, it's the local methods of doing a lot of work. There's a lot of competition on the ground locally. There's also a lot of regulatory change that is going on in Brazil, including with the Bankers Association attempting to look at the idea of the way installments are paid and the whole installment method is managed, including the settlement time. There's a ton of things going on in a market in which we are today a very large market share player there. The political environment in Brazil, yes, this year 2017 showed an improvement, but you got to remember, you're comparing 2017 to 2016, which was not a particularly, let's say, delightful year in Brazil, hard year. And they got some political stability, 2017 turned out to be better, good economic policies were getting put in place. Remember that 2018 has an election and that election has currently identified 2 players to come there, none of whom is in the current government. And so it's a little unclear to me what instability that could cause in the economic environment. That's why Martina pointed out and I pointed out that there are pockets of instability across the world that we're careful of and Brazil is one of those for this reason of the political circumstance and the longevity of their economic reforms. Now I've been around a long time with working with Latin America and I've learned that you cannot take for granted what happens for a couple of years because it does find its way through change on where politics goes. So that's where we are. I'm relatively constructive about Brazil. We're investing on the ground. The number of people we have in our office has increased. Our capabilities on the ground have increased. Our technological investments on the ground have increased. We're going to keep seeing growth there is what I'm hopeful for. But 2018 is the year to watch out for. Jim, I think we have time for just one last question. Thank you. Your last question comes from Tien Tsin Huang with JPMorgan. Your line is open. All right. Thanks for including me here. I won't ask an accounting question. This is just want to ask a bit about deal activity maybe because based on Craig and Brian's questions, how would you characterize guys the pipeline for new deals and renewals this year in 2018 versus 2017? It seems like you've got a good backlog going. So I'm curious what the pipeline might look like for this year, especially in things like B2B, if you can comment on that. Yes. So Tien Tsin, obviously, with the numbers in Q4 that you saw on the rebates and incentives, and we had given you a little bit of a heads up on our November call that that number might be coming in a little bit higher than what we had forecasted before. That should show you that we have actually terrific deal activity in Q4 and those deals will be rolling in over the next to 18 months. It depends which deal you're looking at. I quite frankly with everything that I'm seeing from the pipeline from our regions around the world, I think that we are going to have a similarly robust deal activity in 2018. I don't think there's any letting up. I think there is a lot of players in the market that are looking to do things with us as a network and it will be similarly robust. On B2B Tien Tsin, the global travel deals that we did over the last couple of years, they're actually helping us in our cross border as an example. Back to somebody's question, I forget on cross border. But there's all this work we're trying to do with the B2B Hub. We'd announced that one partner has signed up. There's a bunch of partners in the pipeline. Hopefully, a few of them will come into locking on. There's all the work we're trying to do with Fast ACH and Send in different parts of the world. Yes, so B2B is pretty active for us right now. We consider ourselves to have good assets in the place. So we are working our pipeline hard. So I'm sorry, I'll cut you off, Tien Tsin. We can chat another time. But thank you all for your questions. And I'd like to wrap up with some closing thoughts. We're pleased with 2017 financial results. We think it's all driven by strong operating performance and execution of our strategy. Overall, economic trends are positive. And as we've said a couple of times on this call, we're going to monitor some risks and uncertainties that Martina and I have spoken to. But overall, we expect 2018 growth to be similar to 2017. Meanwhile, we expect tax reform will benefit the U. S. Economy and have a positive impact on our company. We see this as an opportune time to further invest in our employees and communities and continue to strengthen our business' strategic investments in those key growth areas, while continuing to return excess capital back to our shareholders. And so thank you for your continued of all of us in our company and thank you very much for joining us on the call today. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.