Welcome to Visa Incorporated Fiscal Q3 twenty thirteen Earnings Conference Call. All participants are in a listen only mode until the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Mr.
Jack Karski, Head of Global Investor Relations. Mr. Karski, you may begin.
Thanks, Brad. Good afternoon and welcome to Visa Inc. Fiscal Q3 2013 earnings conference call. With us today are Charlie Scharf, Visa's Chief Executive Officer and Byron Pollitt, Visa's Chief Financial Officer. As always, this call is currently being webcast over the Internet and can be accessed on the Investor Relations section of our website at investor.visa.com.
A replay of the webcast will also be archived on our site for 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 those factors is available in the company's filings with the SEC, which can be accessed through the SEC's website and the Investor Relations section of the Visa website for historical non GAAP or pro form a related financial information disclosed in this call, Related GAAP measures and other information required by Regulation G of the SEC are available in the financial and statistical summary accompanying our fiscal Q3 press release.
This release can also be accessed through the Investor Relations section of our website. And with that, I'll turn the call over to Byron.
Thank you, Jack. Let me begin with my usual callouts and observations. 1st, some color on the 3rd quarter's 17% net revenue growth. It is important to note that this growth rate benefited from the absence of significant one time client incentives incurred in the prior year. Without these one time client incentives, revenue growth for Q3 would have been closer to 14%.
That said, payment volume growth was broad based globally for the March quarter and we're seeing double digit growth rates in the June quarter for both credit and debit on a constant dollar basis. Based on these trends and with 3 quarters of the fiscal year now on the books, We are raising full year 2013 revenue guidance from low double digits to around 13%. 2nd, service revenue. Though up 7% on a year over year basis, it was down sequentially was executed in fiscal Q3, but was retroactive to the beginning of Q2. This contract as discussed on the Q2 earnings call disproportionately impacted the service revenue line and resulted in offsetting reductions in gross service revenue and related client incentives.
Because it was signed in fiscal Q3, the service revenue impacts for both Q2 and Q3 were recorded in the current quarter. This means the Q4 service revenue growth rate should be a more representative indicator of underlying growth. 3rd, client incentives for the quarter as a percentage of gross revenue were 14.8%. As described previously, 2 quarters of Chase related incentive reductions were booked in Q3. This impact was contemplated in our most recent full year guidance and we remain comfortable with client incentives as a percent of gross revenue in the Now that we have fully lapped implementation of the Dodd Frank routing rules, beginning in June, quarterly interlinked payment volume growth has turned positive for the first time in over a year.
Going forward, as we lap the period during which Visa's post Dodd Frank debit strategies We would expect healthy but moderating revenue growth rates for U. S. Debit. 5th, Given our earnings results year to date and our expectations for the fiscal Q4, we are increasing our fiscal 20 adjusted EPS guidance from around 20% to the low 20s. Lastly, As we remain committed to returning excess cash to our shareholders, during the quarter we spent approximately $1,000,000,000 to repurchase 6,000,000 shares at an average price of approximately $177 This leaves $61,000,000 remaining in our prior authorization.
And as we announced earlier, our Board recently authorized a new $1,500,000,000 share repurchase program, which will run through July of 2014. Now let's turn to the numbers. As is our practice, I will cover our global payment volume and process And conclude with our guidance outlook for the balance of fiscal 2013 fiscal 2014. Global payment volume growth for the June quarter in constant dollars was 13% above the March quarter's 9%. This was driven by sustained growth in all of our regions including the U.
S. Which saw some incremental benefit from the lapping effects associated with U. S. Debit regulations. More recently in the U.
S. Through July 21, payment volume growth was 10% compared with 11% in the June ending quarter. Drilling down further, U. S. Credit growth of 10% held at Q3 levels, while debit which also grew at 10% experienced a healthy but moderating growth rate as we lap the growing impact of Visa's U.
S. Debit strategies. Global cross border volume delivered a solid 11% constant dollar growth rate in the June quarter, which compares to a 10% rate in the March quarter. The U. S.
Grew 9% and the rest of world 12%. Through July 21, cross border volume on a constant dollar basis grew 7% with a U. S. Growth rate of 9 and the rest of world at 6%. The slowing growth in July is most pronounced outside the U.
S. And we believe is due in large part to the timing of Ramadan versus last year. Based on historical travel patterns, We estimate the Rabadan impact to be in the 250 basis points to 300 basis points range for the month. And if past this prologue, we should see a bounce back in August. Transactions processed over Visa's network totaled $15,000,000,000 in the fiscal Q3, a 14% increase over the prior year period.
The U. S. Grew 12%, while the rest of world delivered 23% growth. We have now fully lapped the negative impacts associated with U. S.
Debit regulation. Through July 21, process transaction growth was a positive 14%. Lastly, please note that in our operational performance data pack that was released with today's earnings results, We updated the cash volume in our LAC region to account for several quarters of under reporting by one of our largest issuers in Brazil. As a reminder, these cash volumes have no impact to our revenue. Now turning to the income statement.
Net operating revenue in the quarter was $3,000,000,000 a 17% increase year over year, driven by solid growth globally in both domestic and international transactions and as mentioned earlier, aided by significant non recurring incentives in the prior year quarter. Currency hedging resulted in only a modest We anticipate continued headwinds in the next fiscal quarter and for fiscal 2014. Moving to the individual revenue line items. Service revenue was 1,300,000,000 was up 7% over the prior year period. On a sequential basis, growth was negatively impacted by the Chase agreement, which as I previously outlined resulted in lower service revenue offset by a lower level of incentives paid to Chase.
Data processing revenue was $1,200,000,000 up 15% over the prior year's quarter based on solid growth rates in Visa process transactions inside and outside the U. S. And strong CyberSource transaction growth. With the full lapping of the implementation of U. S.
Debit regulation, data processing revenue growth is now relatively on par with processed Transaction growth. International transaction revenue was up 14% to $854,000,000 reflecting solid strength in Client incentives as a percentage of gross revenue for the quarter came in at 14.8%, positively impacted by the Chase deal. That said, we anticipate a meaningful step up in both incentive dollars and the percentage rate In Q4, due to anticipated deal activity both domestic and international, which should put us within our 2013 guidance range of 16% to 17%. Total operating expenses for the quarter were $1,200,000,000 up 9% from the prior year adjusted results. This was primarily due to higher costs associated with investments in our growth strategies.
Marketing expenses were up 4% from the prior year and stepped up from the prior quarter as we increased marketing to support a number of sponsorship campaigns including the 2013 FIFA Confederations Cup in South America and the 2014 Sochi Winter Olympics. Operating margin for the quarter was 61% and is consistent with our current guidance. Our effective tax rate for Q3 was 33.2%, While higher than our full year guidance of 30% to 32%, the year to date figure of 31% is tracking to that range. Net income at $1,200,000,000 was up 16% over the prior year adjusted results. Fully diluted EPS was $1.88 for the quarter, up 20% over prior year adjusted results.
Stronger than anticipated revenue and more aggressive share repurchases were key drivers. And as noted earlier, $122,000,000 in the quarter and continue to be in line with our full year expectations. At the end of the June quarter, We had 645,000,000 shares of Class A common stock outstanding on an as converted basis. The weighted average number of fully diluted shares outstanding for the June quarter totaled 651,000,000. Finally, in terms of guidance, other than our refinement of full year 2013 revenue guidance to around 13% And adjusted diluted earnings per share growth to low 20s, all other outstanding guidance metrics for the full year fiscal 20 13 and 2014 remain the same.
And with that, I'll turn the call over to Charlie.
Thank you, Byron, and good afternoon, everyone. First of all,
I just
want to reiterate that we feel very good about our performance this quarter. There's very little new news in the underlying revenue trends as Byron has just described, which means that we continue to see broad based growth geographically and also by product. And these are at growth rates consistent with what we've seen in prior People often ask us about what we see in the economy. And what I guess we can say is we don't see meaningful changes to to us and our clients. We do continue to feel very good about our business and our ability to deliver strong results in the current economic environment.
We did host our Investor Day on June 6, and I want to thank all those who attended both We know it was a lengthy call, but hopefully you found it productive. We certainly appreciate all the feedback that we received. Just a couple of quick reminders of some of the important themes that we covered. First of all, We feel great about the strong foundation that this company has been built on. There's been strong historical growth.
Have and will continue to provide tailwinds. The opportunity to move transactions from cash to electronic means is still huge and we believe we'll be there for years to come. This is true in both the developed and the developing parts of the world. As we pointed out on Investor Day, we have 22 share of PCE in the emerging I'm sorry, within the developed markets and 9% in the emerging markets. So there's still much room to grow.
In addition to us growing along with the growth of PCE across the world. We love our core network. It served us well and think it provides us tremendous opportunities to leverage our and grow our business. Historically, What's really benefited us has been the global acceptance, the network reliability, safety, security and soundness And our risk related tools are just a huge value added component to the network. While we continue to build on these historical As we pointed out at the Investor Day, the future for us will all will be about using the network is a tool to continue to create more value for issuers, acquirers and merchants.
And that includes us building broader capabilities, but also giving them access to our network as a device that connects them together. 3rd, the company has and continues to make huge investments in the We walked through some of the additional spending that's been done to the tune of an additional $700,000,000 versus prior years, which are, for the most part, all geared towards growth opportunities. And lastly, we talked about our evolving rules and practices, recognizing how the payments world the importance of the Visa brand the safety, security and soundness of the payment system that we continue to protect and control our intellectual property and that we enable clients of all sizes to So in short, these are things that, while we think we can continue to do more and more for all of our clients, We think these things could also add value to the Visa network. Let me turn now to a little bit of an update on some of the regulatory and litigation That have both been in the news and we've spoken about. First of all, in the United States, on the MDL case.
The deadline for the opt outs was May 28. As expected, I'm sure you saw lawsuits that were filed against Visa, Mastercard and in some cases the banks from retailers, which opted out of the merchant settlement agreement last year. The final figures are still being calculated, But our estimate of the opt outs is that they represent slightly above 25% of our U. S. Credit volume.
We continue to expect approval from the court sometime in the fall. I do want to stress that these are proceedings that ongoing for a long period of time. We remain committed to figuring out how to work with merchants of all sizes to resolve all of our differences amicably. And we, as you've heard from us, are focused on finding new ways to work with them in conjunction with acquirers and issuers to support all of the individual constituents' growth objectives. Secondly, Canada.
Yesterday, Canada's competition tribunal issued its decision to dismiss the Competition Bureau's case And just as a reminder, Visa Inc. And Visa Europe are separate independent operating companies. First of all, let me talk about in May, we alerted you to a European Commission inquiry specifically relates to the interchange applied to transactions between a non European Union cardholder and a merchant located within the European Union. We continue to assess their claims, and we are working and a productive and professional manager with them and hope to reach resolution, but there's nothing more to report at this time. Separately, the European Commission earlier today released proposed legislation for the payments industry in the European Union, which had been expected.
The proposed regulation covers a wide range of topics related to the European payments industry, including domestic and intra EU cross border interchange rates, co badging requirements, processing requirements and point of sale rules such as honor all cards. The most recent announcement of the commission appears to address issues similar to the commission's competition case, but the proposed regulation would only transactions when the issuer and an acquirer are located in the European Union. We understand that proposed legislation is We'll continue to keep you updated if we learn of any more developments in either of these two proceedings. Also in Europe, I'm sure Just talk for a second about a topic which has a lot of you are writing about and has gotten a lot of press and that's tokenization. And let's start with Stating the obvious, which is we all know that transactions are increasingly moving to digital card not present channels due to the growth of web commerce, mobile and digital wallets.
As you've heard from us in the past, we've been building our capabilities to deal with transactions like this, Both technically and through our rules and requirements, V. Me and CyberSource are just two examples where we've made significant investments to build capabilities in this And as we talk about tokenization, I do want to just make the point that tokenization is not a new concept to us. Historically, we define the 16 digit account number in MessageSet and these effectively operate as tokens in the payment system today. The reality is the development of digital commerce and related risk makes the evolution of these existing tokens to a more secure form Very necessary in a way that works both in the physical and the digital worlds. We need to eliminate the flow of sensitive data that might be vulnerable to a breach And new entrants into the payment ecosystem has also brought into question whether the appropriate information will continue to flow between merchant, acquirer, issuer and consumer.
And rightly so, the entire payments industry is focused You read earlier this month about efforts that the clearinghouse has underway with its 22 U. S. Banks to do some work on this topic as well. We believe that we play a critical role in helping define the standards for This is an area where everyone needs to work closely together and it's paramount that we ensure transparency, security and So that the integrity of the payment system remains. Successful tokenization initiatives must also The interoperable and standardized and do several very important things.
Number 1 is they need to deliver value to all stakeholders. That includes issuers, consumers, merchants, acquirers, payment gateways and everyone involved in the digital commerce platform. It's got to be standards based, technology agnostic, such that a tokenization solution builds on the existing open nature of the payments not just in the United States. As I've said before, we're committed to working on this broadly with all of our partners. It's something we are working on and we feel very good about the progress that we're making with our partners on this one.
In conclusion, I just want to also talk about the repurchase program that Byron mentioned. It's the 9th share repurchase program that the company has authorized. Since the IPO, our Board of Directors has authorized over 11 1,000,000,000 in share repurchase programs. And as we've talked about, I think, almost on every call and at the Investor Day since I've joined that we remain committed to returning excess cash to shareholders, both through repurchase programs like this as well as further dividend increases. So having been here for 9 months, as I commented at Investor Day, I remain More bullish as each day goes on when we look at the opportunities that exist in the industry and the assets and the ideas And the people that we have at Visa.
So with that, operator, Feyd and I are ready to take any questions that are out there.
Our first question comes from Andrew Jeffrey of SunTrust. Your line is open.
Good afternoon. Thanks Charlie, could you speak broadly about Visa's U. S. Consumer credit share and how you feel you're positioned There is potentially you're sharpening the pencil a little bit in the U. S?
Sure. Listen, I think we're blessed with Just an outstanding U. S. Credit franchise, which has been built up through the years That's for sure. We look at the partners that we have and look at their performance.
And Certainly, our performance has been helped by their strong performance, and that's true both on the issuer side as well as on the co brand side. We've also been certainly beneficiaries in the United States credit market As the affluent customer has recovered more quickly than the non affluent customers and as we look forward, A more broad based recovery is something which should be additive to the affluent business that we have today. Ultimately, our ability to compete as effectively as we have within the United States revolves around all of the things that we've been talking out here that we know we need to continue to build out. Those include what we're doing in the Digital space, they include what we're doing in the mobile space, as well as just the continuing to provide the flexibility that we've talked about in terms of our core product set. So listen, and I know from the prior role that I played, The market has always been a competitive one.
There have always been networks out there competing for the same business. The pencils Have been sharp for a period of time. And as we think about what we've got to do going forward, we certainly expect that to continue.
Our next question comes from Dan Perlin of RBC. Your line is open.
Thanks. I'm just interested to know how important local market processing through DPS and VPS is to you guys. From a long term growth perspective, it does represent an important enhancer to the yield as you've talked about. You highlighted it at the Analyst Day and it seems to be kind of coming up with some pros and cons in various economies as you kind of outlined in your prepared remarks. So if you could just speak to that point, I'd appreciate it.
Thank you.
Yes. Listen, I mean, as we talked about at Investor Day, processing, we think is the second part of The equation that we can provide for our customers, when we process the transaction, when the press when the transaction goes over our network, We are enabled to that gives us the opportunity to do all the things that we can do, both from a risk perspective, as well as being able to provide all the analytical information that we can provide back to the issuers in order for them to help grow
their business. And I would just add, The more of the the more we integrate into the processing pipeline, the more we have opportunity to differentiate our service offerings. So in the case of DPS, this creates an opportunity for us to introduce More innovative product services via mobile, as an example, and to Add to form factors that expand the activation capability or opportunity for our clients. So where we can provide processing services like DPS, which have the Single largest debit scale potentially outside of China, I suppose. This is an area where we can sell in delivering client service.
Our next question comes from Donald Sanditi of Citigroup. Your line is open.
Yes. Charlie, I was curious if there are any updates on the Visa Chase network deal in terms of timing? I think it was there was going to be some type of pilot or By the end of the year. And then also I was wondering if you have any sense on the scope of that initiative. Would it just be for merchants Or transactions that are acquired through Paymentech or could that be broadened to other merchants indirectly?
Okay. So On the first part of the question, I continue to say this, which is when it comes to what Chase Merchant Service is doing, there are series of questions that you need to ask them about. What we're doing is providing the capabilities that we outlined several quarters ago. We are on schedule to deliver the ability for CMS to be in the marketplace by the Q4. What actually winds up in the marketplace is really driven by them through their discussions with merchants.
And again, so that's a question for them. And the agreement holds that they need to have a direct relationship with a merchant in order to take advantage of whatever it is they intend to provide through CMS. And so as I've said, I would expect that sometime as we get into next year that we would Start to see some things in the marketplace. And at that point, we'll all be in a position to evaluate what we think The benefits of them are.
Our next question will come from Chris Brendler of Stifel, your line is open.
Hi, thanks. Good afternoon. I wonder if you could give us an update on V. Me, specifically on merchant acceptance. It seems from my perspective that I haven't seen as broad an acceptance as I would expect at this point.
I think you had some concrete goals for the top 100 retailers by the end of this year. Is there an acceleration coming? What's the issue? Is it difficult to get merchants to add v. Me?
And then in line with that or along those lines, MCX, is this something that you think potentially is It seems to be gaining a little bit of momentum. And is V. Me a key part of your strategy in combating merchant mobile wallets? Thanks.
So let me start with V. Me. I guess when we talk about V. Me, you can't It's hard to separate out how we're doing with issuers versus how we're doing with merchants because In our discussions with each, we really need to have to grow both sides in order to be successful, right? It's the chicken and the egg, which is merchants aren't going to want to spend the time and the effort and the The money to establish V.
Me on their site unless they think there's a real need for it. And the issuers are going to be careful about marketing it their clients until there is a meaningful amount of acceptance. Having said that, we now have about 90 U. S. Financial institutions as partners.
They include BofA, P&C, BBVA, ICBA and others and some of those have started actively to market these programs. We have Signed an additional 72 merchants this past quarter, bringing the total signed number of merchants to 253, many, many of which will go live in the coming weeks months. So there is a lot more coming here. There is a fairly Significant pipeline of merchants. As we continue to work with acquirers on this to get it in the marketplace, We'll report back.
And MCX was the second question. Listen, I think MCX, we know what you know about MCX, which is you might know more than us. So our view on MCX is that we will learn as they continue to disclose what it is they're doing. And we're on doing what we can to build the right kind of tools to work with merchants so that they want to do business with us.
Our next question will come from Tien Tsin Huang of JPMorgan. Your line is open.
Great. Thanks. Everything looks pretty clean. I guess I just asked about U. S.
Debit growth that did bounce back nicely to 12%. I was just looking at the 10 Q, it says Is that sustainable? And what's driving it? Did you flip on some new cars? Or is it paved?
Any detail there would be great. Thanks.
So Tien Tsin remember we're lapping the implementation of the Dodd Frank, not Not supposed to say Durbin anymore. Dodd Frank rules, which took effect April 1 last year. So it was in that quarter That we experienced the single largest negative growth rate in terms of interlinked volume. In fact, it was a 54% reduction in payment volume growth in the June ending quarter 2012. And then in the coming quarters, as our strategies began to gradually take Hold, we started to see a less negative growth rate.
So one could Deduce from that that in terms of actual year over year growth rates, it's conceivable that This June ending quarter might be high tide. And then as we begin to lap the other quarters the subsequent quarters that the relative gross earnings have a tougher comp to deliver. I'd also just like to underscore that there is no way we're going to Cover all that market share that we have conceded as a result of the legislative change. So I think that there will be we still need a few more quarters in order to get to some sort of normalized state. But as I said in my earnings commentary, in the subsequent quarters, we still expect healthy growth rates in debit, But to U.
S. Debit, but everything else being equal, they should moderate a bit as they begin to lap the strategies we put into place, Which in turn had growing effectiveness as time passed.
So let me just add to that. So the follow-up is, So we still think we have from our perspective a business which can grow at a reasonable rate, Understanding that we believe we've permanently lost share because of legislation and those two things can coexist.
Our next question will come from Glenn Greene of Oppenheimer. Your line is open.
Thank you. Just Regarding the EU proposal, I wanted to just get some context from you regarding whether or not it's having any bearings on your discussions with Visa Europe regarding their Potential to exercise the put as well as the negotiation of the specific terms, meaning has this been somewhat of a stumbling block Stumbling block getting clarity on the EU proposal?
I think you got to ask Visa Europe has a put. And so that means we don't have a call and we it's and we can't even We can't proactively engage them in a discussion on price or things like that. So what impacts their Thinking relative to their desire to put the company, you really have to ask them. I mean, I think It's a complicated set of circumstances. There's a lot going on in Europe right now, and I think you can make arguments either way, whether it makes you were sitting in their position, whether it would make you more willing or less willing.
But it's their decision, so they're the appropriate people to answer the question.
Our next question comes from Craig Maurer of CLSA. Your line is open.
Yes. Hi. Thanks Two questions. First, could you comment on China? There seems to be Some movement in terms of issuers being allowed to issue cards in China, some discussion regarding processing.
I was wondering if you could discuss if there's Any thawing of those discussions or your thought process around timing of when the market might become open to you? Secondly, on incentives, like you said, you got 2 quarters of benefit from the Chase deal in quarter I believe is what you said. But looking out to next year, is it reasonable to believe that you could come in as a percentage of gross revenue below the bottom end of this year's guidance due to the new arrangement? Or are other clients increasing And therefore, that's a false assumption. Thanks.
Why don't I start with China? And Unfortunately, there's still not a lot of new news to talk about with China. The agreement with the UTO requires China to issue regulations by the end of July to Very small incremental things announced by the Chinese government, But they have not been clear as we read the information to lay out a road map to open up at the domestic marketplace. So we're waiting with everyone else until that happens. We have no Better idea than anyone else, what form that will take, what time period the opportunity for us In what time period that opportunity would evolve.
And so there's not a lot there. Now having said that, we are still in the same place with we feel from a long term perspective, putting aside whether it's 1 quarter, 4 quarters or 8 quarters away, the opportunity to compete in the domestic marketplace in China with the capabilities that we have, we think could be significant over a long period of time. Unfortunately, we still don't know What the time period is and what the requirements to participate will be?
Over to incentives. You asked an interesting question. There's clearly 2 forces at work here, one of which is the Chase contract where The pricing has been restructured so that it is more per transaction. There are still incentives related to the contract, but not Nearly at the magnitude that they were pre contract. At the same time, The vast majority of our issuers are in growth mode with their portfolios.
The larger They grow their portfolios the more incentives we pay and that has been our business model for decades. And so As is our practice, we will schedule those out over the next coming next 2 months. We will also take a hard look at what contracts are likely to renew in the coming year, which also weighs into that calculation and then give you a report out in October. Let me just signal in the spirit of your question That it's best to in our view, it is best to model incentives on a full year basis, Recognizing that they can have a lot of variation between quarters. And as I said in my earnings remarks In Q4, we expect an above average level of deal activity as we move to the closing out of our fiscal year.
And therefore, we expect a higher percent as a incentives as a percent of gross revenue and you should not Consider that representative of the go forward trend.
Our next question comes from Tom McCrohan of Janney. Your line is open.
Hi. Thanks for taking the question. Just a quick question on CardNot Present given the growth in e commerce. How much of Visa's volume today is CardNot Present e commerce volume? And Is the revenue yield on those type of transactions the same as for transactions that occur present?
Thanks.
Good question. That's not something that we're that we have decided to speak about publicly at this point. Inevitably though I think that's something that we will be talking about much more in the future since that is the fastest growing Channel that we have and by way of FormFactor within FormFactor, the fastest growing Factor is mobile and the 2 of them clearly are linked. So I would say we're short on detail today, but more to come in the future.
Our next question will come from Moshe Katri of Cowen. Your line is open.
Hey, thanks. Byron, can you talk
a bit about credit in the U. S? Maybe compare what you're seeing on the corporate side versus on the consumer side of the business? And if there are any changes during the quarter?
I would say that the in terms of health, the corporate side is healthy, but the factors that are fueling the Really strong performance we've been experiencing in consumer credit are Constitute more of a tailwind. When we look across the corporate spend, a lot of that has to do with the degree of Recovery in the economies across the globe, our view is that the recovery This is a technical term. It's sluggish, which is one step above anemic. And given that enthusiastic description, The very fact that we are seeing positive growth in corporate spend on cards in categories like airlines and the T and E components we view as encouraging. Having said that, there is for us in our view A significant opportunity to further penetrate the commercial sector.
We have invested significantly In our commercial information platforms that support that part of the business with our commercial clients And we believe with the investments we've made in our IntelliLink platform that we are well positioned to experience meaningful
Our next question will come from Arvind Ramani of BNP. Your line is open.
Hi. Thanks for taking my question. Good quarter. Just a quick question on your Clearly the affluent has kind of has come back, but kind of what are your assumptions For continued growth from the affluent market? And also what's your view on the non affluent market?
So the affluent part of our portfolio really has been The driver of the credit spend that we have been reporting over the past year. In the last quarter or 2, we are starting to see some participation from the next Income cohort down, but it is not yet significant. And therefore, driver in our results to date. As we look out into the coming year, when I describe the Economic underlying economic growth as sluggish. If I were to relate that to the U.
S. Creating 200,000 jobs a month, which is kind of the minimum to make any progress against unemployment, We would describe that as not anemic, but as sluggish growth and but it is creating new jobs And those new jobs ultimately translate into spend. And so our outlook is that the Non affluent spend will contribute more, but not significantly more To the payment volume spend in the coming year. That's how we're thinking about it. And when we gave our guidance for 2014, the limited guidance at this point, that was The assumptions that underpinned the growth rates we expressed.
Our next question comes from Smriti Efraim Promote of Morgan Stanley, your line is open.
Great. Thank you. International revenue growth was strong in relation to cross border volume growth. Can you Talk about the drivers behind that and how much of the lift did you guys get from the mix shift towards tighter yielding geographies?
Yes. So I would say that there's a little bit of mix. There's a lot of volatility. So whenever there is significant volatility in the currency markets That translates into higher international revenue for us. That's something that can be can appear in 1 quarter and disappear the next relative to whatever And average volatility is.
We have been seeing with the strengthening of the dollar, the volatility in the Australian Dollar, Japanese yen to a lesser extent the euro and the sterling, the turbulence in those markets Is really and the associated volatility is the principal driver of the difference in International revenue versus the actual number of versus the growth in payment volume that we experienced.
Our next question comes from Rod Bourgeois of Bernstein. Your line is open.
Okay, great. Hey, just a 2 part question about Europe. So, if you were a network Competing in the vast majority of Europe, what do you like and not like about the EC's regulatory proposals that have recently been released. And the second part of the question is, is there any worry that Europe's regulatory moves might fuel merchants to push for regulation in other countries such as the U. S.
And or emerging countries?
Yes.
Again, so this is our view if we were Europeans, Which we are certainly not. I guess when we read it, the things that we like about it are I guess, first of all, there's recognition in the value of interchange. We can argue about what that number is. But we've heard lots of things through the years about whether interchange should exist or not exist in some parts of the world and Recognition that it belongs is a statement in itself. And Certainly, I put no surcharge into that category as well.
And on well, and then The thing I would say which straddles both sides of the good and the bad is level playing field. And so, card networks that operate both 3 party and 4 party models fall into both sides of So on the one hand, it's a positive thing to bring some parts of their business into this level of paying field. But the fact is There's still a meaningful part
of the
marketplace that there's just you can argue an unfair The second thing I would put In the negative category is co badging. And the third thing I would put is this The splitting of processing from the brand. And second part of Rod's question was?
We'll metastasize other areas of the world.
Yes. And listen, I think it is the whole world the world's a But everyone sees what everyone else does for sure. Everyone so people We've seen what happened here in the U. S. On debit.
We've seen Australia. They've been watching Canada. They've been watching Europe. So it's certainly You have to believe that when one significant part of the world does something that the other part of the world looks at it. In this case, remember, this is a this is proposed legislation.
It will take several years for comments and for it to work through its process. So the things that have been decided here, as best I can tell, are not set And we'll see how these things actually evolve in the marketplace.
Our next question will come from Dave Koning of Baird, your line is open.
Yes. Hey, guys. Just looking at the 10 Q, rest of world revenue, not just the international line, but actual rest World revenue was up 24% this quarter. The last four, it was up about 10% to 14%. And I think the explanation of Some FX volatility probably helped on the cross border part of that, but it was a pretty big acceleration.
Maybe you can talk through maybe a couple of other reasons that that also accelerated so
There are two reasons that matter. You hit the first one, which is the boost in international is reflected. We booked that Into the Rest of World line. And the second, if you recall, when I mentioned that the 17% revenue growth for the quarter benefited from significant non recurring incentives That brought the growth rate down by several percentage points if you were to exclude those. All of those significant non recurring incentives were outside the United States.
So they had the effect of amplifying the growth rate of rest of world and those are the 2 main drivers.
Our next question comes from James Friedman of Susquehanna. Your line is open.
Hi. Quick question on EMV. It looks like we're about 18 months from the deadline set in 2015. Are you seeing banks Accelerate the issuance of EMV cards ahead of the deadlines and any comments on EMV with regard to Merchant acceptance would be interesting. Thank you.
We certainly hear a fair amount being discussed about it. And we also have, I think, more Issuers in the United States issuing ship cards due to the importance of Making for an easy acceptance experience when people travel outside the United States. I don't have the numbers in terms of The amount of EMV cards that are being issued today,
It
is bigger than it's been, but it's not the by any stretch of the imagination, the majority of the cards yet. But I did read something recently that suggested that the percentage of issuers that are intending to do it is growing. But I don't think we know any more than that today. And on the merchant side, I would say It's a similar conversation with the exception being to the extent that Machines in merchants facilities
have to
be replaced. They appear to be being replaced with Machines that will accept the new form of card.
Brad, at this point, we have time for one last question.
Our last question comes from Darrin Peller of Barclays. Your line is open.
Thanks guys. Just I just want to jump in year to date we're clearly seeing a more meaningful margin expansion for this year again versus what we saw in the prior year really prior year 2. Average margins for the 1st 3 quarters are around 62.5%, so really more than 100 basis points expansion year over year. Is there anything unique about the year's quarterly revenues or maybe the operating leverage in the model in the past quarters that Shouldn't repeat or is this is there something that we can expect this type of margin upside just from pure operating leverage embedded in the model?
Let me respond to that in 2 ways. First of all, I just want to anchor the group back into the guidance for 2013 since we're talking margins And you began with year to date. So we held our guidance at around 60% operating margin, which implies The math implies that the year to date is Trending higher than what we would expect for the Q4, which is why we kept it at around 60, so point 1. Point 2, There is fundamental operating leverage in the business as you know. We have been very consistent In that we don't solve for operating margins.
We don't have targets. We don't have internal requirements. What we do solve for our investments that drive shareholder value, it is the nature of our business that many of those Investments are expense versus capital. And therefore, as we continue to ramp up the investments that support our growth strategies. It is they often carry a significant expense component to them And would immediately put downward pressure on the margins.
And I think it's safe to say that that philosophy Of investing for growth and value both today and tomorrow is a philosophy we intend to follow. And that if that means some sacrifice of Theoretically higher margins, we're fully prepared to do that in the name of shareholder value.
And let me just add one more thing to that, which is as has been pointed out By a bunch of you and also on this call is, we do operate in a competitive marketplace. And it wouldn't be right for our long term shareholder interests to be thinking about how our services should be priced based upon a commitment that we would make to you all to continue to increase the margin levels that we have. We have to look at each transaction and say, How does the market price those transactions? What value do we think we're providing? And have the ability to compete effectively if we think it makes sense.
And so that all gets factored into the guidance that's given.
And with that, we want to thank you all joining us here today. And if anybody has follow-up questions, please feel free to call Investor Relations. Thanks.
Thank you for your participation on the conference call today. At this time, all parties may disconnect.