Welcome to Visa Inc. Fiscal Q3 twenty twelve Earnings Conference Call. All participants are in a listen only mode until the question and answer session. 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.
Good afternoon, and welcome to Visa Inc. Fiscal 3rd quarter earnings conference call. With us today are Joe Saunders, Visa's Chairman and Chief Executive Officer and Byron Pollitt, Visa's Chief Financial Officer. As always, this call is currently being webcast. It can be accessed on the Investor Relations section of our Web site at www.investor.visa.com.
A replay of the webcast will also be archived on our site for 30 days. 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. These include setbacks in the global economy and the impact of New financial reform regulations.
Additional information concerning these factors is available in our last 10 ks on file with the SEC. It can be accessed through the SEC website in the Investor Relations section of our website for historical non GAAP or pro form a related financial information disclosed on this call, The related GAAP measures and other information required by Regulation G of the SEC are available in the financial and statistical summary accompanying today's earnings press release. This release can also be accessed through the IR section of our website. And with that, I'll turn the call over to Joe.
Thank you, Jack, and good afternoon, everyone. We are pleased to have the opportunity today to review our Q3 performance and the progress we continue to make in delivering against our strategy. Visa had another quarter of strong financial performance posting net operating revenues of $2,600,000,000 a 10% increase over the same period last year. After adjusting for our previously announced litigation reserve, Net income for the quarter was $1,100,000,000 a 20% increase over the same period last year. This equates to adjusted Diluted earnings per share of $1.56 a 25% increase over the fiscal quarter of 2011.
So with 3 strong quarters of operational performance behind us, which include insights into both the initial adverse Durbin impacts And our fiscal Q4 services revenues, we are now adjusting our 2012 EPS growth guidance to low 20s. And we continue to deliver our commitment to return excess cash back to shareholders. We used $461,000,000 of our excess cash to repurchase 4,000,000 shares during the fiscal Q3. Looking ahead, our Board has authorized an additional $1,000,000,000 share repurchase program. You've heard this before, but it's worth repeating.
The shift from cash and checks to digital currency is a global And that we expect to continue well into the future. Today, more than 30% of global consumer spending, almost $10,000,000,000,000 Remains on cash and checks. Despite Visa's success increasing penetration of electronic payments over the past several years, The total opportunity to take share from cash and checks worldwide has actually expanded since our IPO, driven primarily by global population growth and expansion of many emerging Well, we're never content just to benefit from evolving demographics. Visa is taking action to accelerate growth beyond the To do so, we are focused on building and expanding the entire payments category in Every market that we operate. That means in our partnership that means In partnership with our financial institution clients, putting more payment products in more people's hands, Tapping entirely new market segments with diverse product offerings, expanding the places where Visa products are accepted And innovating next generation payment technologies that create a superior payment experience for account holders and add value to financial institutions and merchants.
And as we are successful In expanding the overall payments category, Visa's business benefits through diversity and resiliency, which helped us Continue to grow through the past economic cycles. So while we are closely watching economic conditions that could impact Visa's business, Including fallout from continued volatility in Europe and softening outlooks for both China and Brazil, our underlying business drivers Remains strong. To begin my business review, let's first discuss the United States where credit posted yet another strong quarter With payment volumes increasing 10%, Visa's 5th consecutive quarter of double digit performance in that category. In addition to strength in the overall category, I'm confident we picked up share in credit as we've added new clients and build upon Visa's strong Existing client relationships. Turning to U.
S. Debit, the situation continues to play out as expected and in line with our guidance for the rest of fiscal 2012 and 2013. During the June quarter, Visa's aggregate debit payments volume growth in the U. S. Was negative 9% As our clients complied with the April regulatory deadlines.
This was driven by the fall off of interlinked payment volumes, which came in line with our projections. Meanwhile, Visa Debit, which excludes InterLink, posted healthy mid single digit payment volume growth, which we expect to continue. As predicted during last quarter's call, I am confident Visa experienced the trough for U. S. Debit payment volumes during the fiscal quarter and we are now seeing signs of improved performance in the 4th fiscal quarter.
That being said, and as we have stated previously, we recognize that some debit share loss resulting from this regulation will be permanent. As for implementation of our debit strategies to compete for merchant routing and wind issuer business, I will simply say I am pleased with our progress And confident in our long term position. Our efforts remain on track and our strategies are gaining traction. We are absolutely delivering the value we promised to our merchant and financial institution clients and Equally important, the strategies are delivering on Visa's own financial and operational expectations. As for the CID, the Status is essentially unchanged since our last call.
I remain comfortable our actions are appropriate, and we continue to be in regular with the department providing information as requested. I will keep you updated if and when the situation warrants. Switching gears, I'd like to briefly provide my perspective on the proposed merchant litigation settlement announced earlier this month. We reached a reasonable outcome that ensures the long term health and competitiveness of the payments industry in the United States. Importantly, our current guidance for fiscal 20122013 fully takes this agreement into account.
I am pleased that we have settlements after an extensive process coordinated by court appointed mediators, Which have been approved by class representatives, class counsel and the retailers who filed separate suits. We anticipate these will have support among the retail community in the U. S. Because it is a fair and an appropriate compromise for all parties And that the agreement will be approved by the court. As for the next steps, preliminary court approval of this agreement is expected in the fall and Visa is preparing to begin implementation in the early part of 2013.
Bottom line, we are moving towards ending a 7 year dispute with an important constituency of our client base, merchants. And we are doing so in a reasonable and responsible way. Looking ahead, we are actively looking for opportunities to work collaboratively with the U. S. Merchant community to advance our mutual agendas.
In particular, we believe that Investments we are making in next generation payment technologies, V. Me, mobile payments and merchant offers We'll drive considerable value to merchants. Now let's Shift the discussion to Visa's international business where we continue to focus on driving long term growth. Breaking down our specific regions. In constant dollars, payment volumes in Asia Pacific grew 13%, Canada at 8%, while CEMEA and Latin America posted gains of 41% 20% respectively in the June quarter.
As I mentioned at the beginning of my remarks, a top priority is building the payments category globally. To that end, we continue to execute a targeted investment strategy in several geographies with significant growth potential, Deploying locally tailored acceleration plans to substantially increase Visa's revenue over a 5 year horizon. So let me give you a few specific examples to demonstrate our progress. In Russia, Over 80% of consumer spending is still cash based, which presents a significant opportunity. To drive future growth, Visa is intensely focused on expanding usage in everyday spend merchant categories, Including supermarkets, a strategy that aligns particularly well with our strong stable of debit cards in that During the most recent quarter, Visa launched acceptance at Mugneat, the country's largest grocery chain with more than 5,000 stores.
In fact, with the addition of Bugnie, Visa now is accepted at the 4 largest food retail chains in Russia, a major step towards accelerating growth in that country. At the same time, in the Middle East, we are building on our traditionally strong position with affluent and Sharia compliant credit products working with clients to expand debits. As one example of our success, Visa recently secured a significant multi product extension with the National Bank of Kuwait. A key element of our strategy is increased investment in local expertise and local engagement. To that end, we We recently opened our first offices in Doha and Abu Dhabi as well as doubled the size of our presence in Dubai to serve clients better across the Middle East and the CEMEA region generally.
And in East Africa, a region I recently visited, we are investing now to reap long term returns. We recently opened a regional headquarters in Nairobi, Kenya. An important opportunity in that geography is using our deploy mobile solutions and drive long term growth. We are also making steady progress in Rwanda, which offers a case study of how Visa can proactively engage governments and align our own growth agenda with domestic priorities. In that regard, we are working with the Rwandan government to increase access to and usage of Electronic payments in that country.
A key priority is financial inclusion and literacy using mobile technology. Additionally, Visa is now processing domestic payments and interbank ATM withdrawals, an important step Forward for this emerging economy. Also, our efforts will help increase tourism volumes from international travelers, a key driver of economic And a top government priority. Finally, this effort should be the foundation for our activities in the entire East African region. Expect us to talk to you more about this in the future.
We're also making Steady progress in Indonesia, a rapidly expanding economy with a growing affluent middle class and a population fast approaching 2 A key element of our strategy here is growing acceptance. To that end, Visa signed a multi phase, Multi year card acceptance promotion with the country's largest petrol chain, PerTamina. With more than 4,000 gas stations nationwide $30,000,000,000 in sales volume annually, the promotion will help expand the acceptance of Visa credit debit cards over the next few years. Most recently during the last quarter's CyberSource, Visa's 2010 acquisition signed a number of deals to accelerate e commerce acceptance, including one with the national airline, Garuda, to provide payment gateway and fraud management services. Meanwhile, in China, I know you are already aware of the World Trade Organization's final report The findings of the case between the U.
S. And Chinese governments concerning China's domestic electronic payments marketplace. While we are still assessing its implications, we are hopeful the ruling ultimately could provide for more global entrance into China's payment marketplace. Although a number of additional steps still need to be taken in the WTO process before we have Any clarity or certainty. Most importantly to Visa, we continue to make strategic investments to expand our existing business in China.
To that end, we executed several long term client partnerships During the quarter, including multiyear extensions with Citic Bank and China Minsheng Banking Corporation. We also secured a new relationship with Bank of Communication. Overall, our focus is on advancing our partnership with local banks and China Union Pay to serve consumers and businesses using our existing $78,000,000 co badge cards when traveling abroad. In fact, earlier this week, Visa cosponsored a payment security symposium with China Union Pay. The symposium Was hosted by the Payment and Clearing Association of China and was under the endorsement of the People's Bank of China.
During this event, Alan Ritchie, our Chief Enterprise Risk Officer joined banking executives, regulators and law enforcement in Beijing to speak about Visa's role in payment security in the fast growing Chinese market. And finally, we are 2 days away from the start of the 2012 Olympic Games. There's a reason that Visa has been a sponsor of the Olympic Games For more than a quarter of a century, no sponsorship platform offers a better opportunity to help our clients around the world Grow their businesses while also driving incremental transaction revenue for Visa. Over the past 13 Olympic Summer Games and Winter Olympic Games. This sponsorship has provided Visa with a global platform to amplify our brand message among a passionate global fan base and drive tangible business results.
We work with our clients to tailor their Olympic related activities to address the unique needs of their own business geography, including cardholder acquisition, retention or increasing usage. This year, I'm pleased that Visa has engaged A record number of clients in our program with more than 1,000 financial institutions and merchants worldwide activating Olympic related activities, including a large portion from priority growth markets. This represents a 70% from our program in Beijing and positions us for a highly successful event over the next 2 weeks. So to wrap up, our strong performance during the fiscal quarter demonstrates the underlying strength and resilience of Visa's We continued to accelerate the migration away from cash and check to electronic payments. We helped our clients grow their core business lines.
We expanded our footprint in international markets both emerging and established. We advanced our innovation agenda and we took significant steps to resolve critical business issues. As always, I remain highly confident in the future of Visa. And with that, let me turn the call over to Byron.
Thank you, Joe. As is my practice, I'll begin with some observations and callouts. First, note That we reported the quarter on an adjusted basis. We eliminated the previously disclosed litigation accruals Associated with both the MOU in the merchant's litigation and the preliminary agreement with the individual Since both of these events are covered by our retrospective responsibility plan, these accruals, which totaled $4,100,000,000 resulted in a quarterly after tax loss of $1,800,000,000 on a GAAP basis. Excluding these litigation accruals, We reported solid earnings per share of $1.56 for the quarter.
2nd, The all in impact from U. S. Debit regulation, which includes restructured pricing, incentives, strategies and volume loss cost us about $0.04 in EPS for the quarter. We expect a similar, if not slightly higher impact in the next few quarters as more of our debit volume is exposed to lower variable fees and incentive agreements. As we have stated before, this is already incorporated into our guidance.
3rd, foreign tax credits resulted in a benefit of $56,000,000 or $0.08 to our adjusted diluted EPS this quarter. These tax credits were contemplated And our full year guidance with the amount recognized in the Q3 representing the total for the year. 4th, U. S. Revenue growth Has been supported by 5 consecutive quarters of double digit credit payment volume growth, most recently 10% in the quarter.
Through the 21st July, credit payment volume growth has comped at a 9% rate, consistent with a somewhat tepid but sustained U. S. Economic recovery. 5th, as anticipated, Aggregate U. S.
Debit posted a negative 9% growth rate in the 3rd quarter, led by interlinked payment volume, which was off 54%. So far, the month of April has proven to be the trough in debit payment volume loss. And since then, we have seen sequential monthly progress during the quarter in recapturing portions of this InterLink volume. Importantly, Visa Debit, which Excludes InterLink, continued to post solid mid single digit payment volume growth. 6th, client incentives for quarter as a percent of gross revenue were 19%, consistent with our full year guidance range, which is weighted to the back half of the year.
Higher incentives had 2 drivers. 1st, Pricing adjustments linked to our U. S. Debit mitigation strategies, which are expected to continue and potentially grow As our merchant and acquirer agreements take hold and second, certain rest of world incentives, which are not expected to repeat in the Q4. Lastly, in late May, we received from the IRS a notice A proposed adjustment for our fiscal 2,008 federal income tax return.
This notice would disallow the deduction and associated tax benefits related to payments made in 2008 toward the American Express litigation. We disagree with this proposed adjustment. We are comfortable defending our position. And importantly, We made no changes to our tax estimates relating to this deduction or any similar deductions for covered litigation Resolution of these types of tax matters generally take some time to conclude. Now let's turn to the numbers.
As is our practice, I will cover our global payment volume and processed transaction trends for the quarter, followed by our results through July 21. I'll then cover the financial highlights of our fiscal Q3 and conclude with our guidance outlook for the balance of fiscal 2012. Global payment volume growth for the June quarter In constant dollars was 6%, down from the March quarter's normalized 10% after adjusting for the leap year. Several callouts. First, combined credit growth for both the U.
S. And rest of world held steady versus a normalized prior quarter. Both produced double digit growth. 2nd, Rest of world debit growth was unchanged at 28%, same as the normalized second quarter rate. 3rd, more recently through July 21, U.
S. Payment volume growth was Flat comprised of 9% credit growth and minus 7% for debit. Global cross border volume delivered a solid 14% constant dollar growth rate in the June quarter, which compares to a normalized 15 rate in the Q2. The U. S.
Grew 11% and the rest of world 16%. We continue to see very strong results from our Asia Pacific, Latin America and CIMEA regions. Through July 21, cross border volumes on a constant dollar basis grew 12% with a U. S. Growth rate of 9% and the rest of world at 13%.
Transactions processed over Visa's network totaled $13,100,000,000 in the fiscal Q3, a 1% increase over the prior year period. A debit led decline of 3% in the U. S. Was offset by 18% growth in rest of world. For the month of July through 21st, process transaction growth was a positive 2%, driven by an improving trajectory and U.
S. Process transaction growth. Separately, CyberSource reported 1 point 3,000,000,000 transactions for the period, a 25% increase over the prior year. Three callouts. First, as expected, the brunt of U.
S. Debit regulation is being felt by our InterLink product, where transaction growth will continue to be negative until we lap the implementation of the rules next year. 2nd, Visa process transactions continue to grow at double digit rates for U. S. Credit and rest of world.
Finally, although there appear to be darkening economic clouds, our global revenue drivers remain healthy With no clear signals of a downturn at this point in time. Now turning to the income statement. Net operating revenue in the quarter was $2,600,000,000 a 10% increase year over year. After hedges, There was no meaningful foreign exchange impact on net revenue in the quarter. Moving to the individual revenue line items, Service revenue was $1,200,000,000 up 15% over the prior year period.
This like strong payment volume growth in the March quarter, the revenue from which is recorded in the June quarter. Data processing revenue was $1,000,000,000 up 17% over the prior year's quarter based on solid growth rates for CyberSource transactions and Visa process transactions outside of the U. S. As well as competitive Pricing actions that became effective in the quarter. As a reminder, the fixed acquirer network fee initiated in the 3rd quarter is booked to data processing revenue.
Offsetting merchant and acquirer incentives are reflected in the Contour revenue incentive line, which I'll cover in a moment. Turning to a different metric, we saw a Step up in the gross revenue data processing yield due in part to strategic pricing adjustments, but also driven by the steep decline in EnerLink transactions in the quarter, which are by far our lowest yielding product. International transaction revenue was up 13% to $748,000,000 reflecting continued strength in cross border volumes with low double digit growth rates in the U. S. And mid teen growth in the rest of world as measured on a constant dollar basis.
As I highlighted earlier, client incentives for the quarter came in at 19%. The 4th fiscal quarter will also see an elevated level, but is likely to be slightly less than Q3. Together, these incentive levels are consistent with our full year outlook of 17% to 18%. While we are not yet Prepared to offer a more detailed view of fiscal 2013 incentives, we do expect a modest increase from the 2012 level of 17% to 18%. Total adjusted operating expenses for the quarter were $1,100,000,000 up 10% from the prior year.
This was primarily due to higher personnel expenses and costs associated with our investments In the second half of the year timed with the global promotion of the London Summer Olympics. Our adjusted operating margin for the quarter was 58%, bringing our fiscal year to date to 61% consistent with our guidance of about 60% for the year. The 3rd quarter's margin is in line with our expectation For expense timing as we realize a second half ramp up in incentives, investment spending and marketing associated with the Summer Olympics. Capital expenditures were $108,000,000 in the quarter and are $235,000,000 year to date. Given our current guidance of $350,000,000 to $400,000,000 for the year, we will likely come in at The lower end of that range.
Our adjusted tax rate for Q3 was 29.2% And as I mentioned at the outset, was positively impacted by a $56,000,000 benefit from foreign Tax credits. The amount recognized represents the total for the year. During the quarter, we spent $461,000,000 to repurchase 4,000,000 shares at an average price of $115.51 per share. Our Board recently authorized a new repurchase plan totaling $1,000,000,000 effective through July of 2013. Separate from the share repurchase program, on July 24, we added an incremental $150,000,000 to the escrow account.
The 4th quarter event will reduce The B share conversion ratio to 0.4206 thereby reducing We had 670,000,000 shares of Class A common stock on an as converted basis. The adjusted weighted average number of fully diluted shares for the 3rd quarter totaled 6 $75,000,000 Finally, we are making only one adjustment to our outstanding 2012 fiscal guidance other Then the minor notes I've addressed. Given where we are year to date, we are eliminating high teens from our EPS growth guidance And going with just low 20s. As is our custom, we plan to fully address our 2013 guidance on our 4th quarter earnings And with that, operator, we are ready to take questions.
Thank you. First question comes from Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks. If you I was hoping you could flesh out a little bit the steps that you've taken now that we're kind of 3 months Further in with respect to the debit acquiring fee and you've talked about some of the But what's actually happened? How much of that has been implemented? And could you talk a little bit about how that's kind of been how that has flowed through the numbers?
Thanks.
Well, there were I'm not exactly sure about the specific question, but there were 2 significant things that we did. 1 was The pricing and one was the paved or the debit card change from a fixed pricing point of view That's been fully implemented from a paved or a debit card point of view. That has been Significantly implemented, but it's being implemented in phases and it will take a few more months to get it fully done.
Remember,
however, that we retained the Interbank logo On the majority of our largest customers. And so none of that volume As long as the InterLink logo is there, we'll go through PAVE.
The next question comes from Dan Perlin with RBC Capital Markets, your line is open.
Thanks. So, what I was thinking is Now that you have at least arrived at this settlement proposal, I'm wondering if you're thinking about the utilization Your free cash flow differently from what we've seen over the past several years as you funded the escrow town? And then secondly, as you talk about the investments that you think are going to be important to the merchants, when we look at the incremental Margins in the quarter versus, say, the past couple of years were at kind of a low level or certainly close to trough level. And I'm wondering if we should be thinking about the investments going forward at these more incremental margin levels? Thanks.
So let me take the first one. We have no change whatsoever in our philosophy of returning excess cash to Shareholders, to the extent that we are not placing cash in the escrow account, The alternative would be open market repurchases of our A shares and that is exactly what we We intend to focus on. So no change on that front as further evidenced by the approval by the Board to authorize The new $1,000,000,000 share repurchase program. 2nd, with regards to margins, let me reframe that. Last This year we delivered about a 60% operating margin.
That is our guidance for this year. The lower margins That operating margins you're seeing in this quarter and we'll see again in the next quarter are all consistent with our guidance of about 60 for This year, as you may recall from our at the beginning of year earnings call, beginning of fiscal year, We indicated that it would be about $60,000,000 for the year, but that we would be a little higher in the first half of the year and a little lower in the second half of the year largely due to a ramp up in technology investments and a weighted marketing spend for the Olympics timed with the second half. So This year, past year, about 60 and we'll let you know what 13 looks like in another quarter.
The next question comes from Aaron Peller with Barclays. Your line
is open.
Thanks guys. Nice quarter. Can you first start off, you said in the past that you would expect an acceleration of revenue growth in fiscal year 2013, I think, versus 2012 levels.
Can you just comment on
the main drivers of that, especially if you expect incentives to be sequentially higher year over year next year?
So what we I said was or meant to communicate was that this was a comment around the implementation of the Durbin rules and that what we Expected is that once we had annualized the impact of Durbin, Which will take us through the first two fiscal quarters of next year. Once we had lapped those rules And the Durbin impacts were in our base. At that point, everything else being equal, we would expect an acceleration, Particularly in our specifically focused on our debit business because we've got the Durbin impact now in our base. So That's what we meant by that. Everything else being equal, we would expect to see it.
Again, with regards to revenue growth for next year, We'll be much more specific about that on next quarter call.
The next question comes from Rod Bourgeois with Bernstein. Your line is open.
Yes. So Byron, just a follow-up to that. Does that mean your fiscal 2013 guidance signal is not relating to overall revenue growth, Is this related to the growth in your debit business in the U. S? And then I guess the follow-up to that is that You indicated that your growth trends are not showing much effect from macro issues and you had a string of pretty good incremental wins that are presumably offsetting what appears to be a general slowing in retail spending.
Is there any way to quantify the recent contribution in Your growth rate from new wins that are occurring as an offset to the cyclical pressures that are out there.
So let me yes, let me I'll go first in responding to that. So the guidance the Specific quantitative guidance we have for next year for 13, number 1 is EPS growth in the high teens. Number 2, incentives that are modestly slightly higher than what we expect to experience this year. That's the extent to which we've guided to 13. And remember, when we said we expect revenues To generate that's everything else being equal, we expect to have debit the U.
S. Debit part of the business Annualize halfway in through the year. So in order I mean honestly to give a much more informed perspective on revenue growth for next year, We'll wait till the Q4 call at which point we'll have much better visibility of what we're looking at going in. Meanwhile, we are reconfirming the guidance that we currently have for fiscal year 2013. With regards to Incremental wins, you can say we have some certainly on the credit side.
We don't have we have the opposite so to speak of the U. S. Government on the debit side. And so in balancing those And looking at the current underlying revenue drivers of cross border, volume growth, transaction growth inside the U. S, outside the U.
S, That's really what's underpinning our guidance comments for 13 for the balance of year and for 13 to date. Joe?
Yes. I don't think that there is a significant amount of traction yet on some of the Credit wins in the United States. So I don't believe that that's where the growth is coming from. It certainly is cause for optimism as it relates to our credit volumes going forward. I would also reference a lot of our wins outside of the United States, which are picking up steam as As we talked about and will provide revenue.
And I'm sure as Byron has pointed out that Everybody understands a lot of our 'thirteen guidance was a reflection on how we would fare Given the Durbin legislation, right now, our metrics in every other regard are quite Strong and we will, as Byron said, address our expectations next quarter.
The next question comes from Glenn Fodor with Morgan Stanley. Your line is open.
Hi, good evening. Joe, I applaud your comments about working more collaboratively with merchants. The fact is though We're just now hopefully turning the chapter on a relationship that's had tension involved for many, many years. So this is a big step forward for both sides, positive step But besides the technology that you alluded to earlier, I mean how difficult do you think it will be to change your overall cultural approach and And just general relationship overall with the merchants from a very high level aside from the actual product level?
There's been a I suppose that you characterize the last 7 years as a contentious relationship. But the fact of the matter is when you look at The history of the usage of electronic payments, it's been growing quite rapidly during that period of time. So I'd characterize it as a kind of a love hate relationship. I mean, something that you sometimes Can't do with and what generally you can't do without. And I think that we are in a position To reach out and do much more going forward, particularly because of the technology That will bring a new level of value to the merchant community.
And I'm very, very optimistic about it. We work with the merchant community through All of this, even as you talk about what's going on right now or as certain merchants May complain about this or that. Remember, we have incentive contracts with significant number Of them. And so we are working with them. We're dealing with them on a daily basis, and we think that those relations will Improve as time goes on.
Certainly, that's going to be our endeavor.
The next Question comes from John Williams with UBS. Your line is open.
Hey, good evening. Thanks for taking my question. Just very quickly, Byron, I just wanted to get more detail on your comment that you said you're seeing no clear signs of a slowdown. I think if you look at the other folks in the industry, American Express is the one that really comes to mind. Do you have anything to say regarding the affluent calling out high end versus low end differences that you might have seen maybe travel and hotels or any other Somewhat discretionary verticals that you might have seen some change in behavior over the last few months?
Thanks.
I think it's too early to make that conclusion. John, what we do is watch We break down the quarter month to month and there can be some very wide differentials Within a given quarter, let me give you an example. In the quarter just completed for U. S. Credit.
We grew 8% in the month of April, 12% in the month of May, 10% In the month of June. All in, it delivered 10% growth. And so when we look at the Kind of progression over the past couple of quarters. These are all they bounce around month to month, but they're all pretty healthy. And so, I think the hardest part of a trend to call is the beginning.
And given the kind of Healthy growth rates we're experiencing, it's we just don't see a discernible trend. But I promise you we will update everyone quarter by quarter and would be happy to go through monthly progressions to help give A better flavor for this. So I'm not saying it's not happening, just saying we're not seeing it yet.
The next Should comes from Jin Wong with JPMorgan. Your line is open. Hey, thanks. Just wanted to ask a few questions on the litigation settlement. So I guess, what's the process in dealing with the merchants that opt out?
And also what's the plan for the, I guess, I call it the overfunded litigation escrow? How are you Deal with that as the Class B shares come unlocked. And then lastly, maybe it will be Matt, Jack. Just what's the in terms of the surcharge, No surcharge rule going away. How much volume and earnings do you estimate would be at risk by allowing surcharging in the U.
S? Thanks a
Well, I'll answer the question about surcharging, and then I'm going to let our counsel who Watched over this litigation for the past 7 years, make some comments about the rest of your question. We think that the position that we struck and If you look at the MOU and you look at all the details of surcharging and how it can be affected and what the caps So forth and so on. We think it's a fair settlement and we do not look at Surcharging per se as it relates to this litigation is something that will significantly affect us at all. I mean, that's our feeling about it. That's our position.
We could talk about this for hours. And of course, we Kevin, we did before. We agreed to do anything and we'll just have to let it unfold. But I think it's a I think that The settlement is a reasonable settlement for both sides. Josh?
Thanks, Joe. As To the process going forward, we are very confident that the court is going to approve this settlement. And the reason I say this is this case has been pending for 7 years. And during a great deal of that time, there has been a court ordered mediation process With 2 mediators and the involvement of the court. And at the end of that time, all of the class counsel, the class representatives, the individual merchants as well as the financial institution defendants have agreed to the deal.
It's a fair and reasonable deal. And therefore, we're comfortable that at the end of the day, the court is going to approve
And with regards To the Tien Tsin, the unlocking of the shares, we've had a lot of practice with the unlocking of the C shares. And as a result, we are very confident that when that time comes, We'll be able to manage that with barely a ripple with regards to impact on stock price.
The next question comes from Jason Kupferberg with Jefferies. Your line is open.
Thanks guys. Why don't I just pick up on that question if I could and just thinking out beyond the court Approval coming in the fall that you guys expect. Can you guys just clarify what sort of true legal recourse The retailers that choose to opt out of the settlement, what kind of legal recourse they actually have? Obviously, a couple of the biggest have Publicly announced that they do not support the settlement, which probably doesn't surprise anybody. But if you can just clarify for all of us what kind of legal recourse they actually have, When and if they formally opt out that would be great.
Right. The way the deal is structured is that opt outs And you always expect a couple in a class action lawsuit can sue only for monetary relief. There's something called A non opt out Class IV injunctive relief. What that means is that all of Visa and Mastercard's rules in existence as At the time of approval are released both by the opt ins and the opt outs.
Next question comes from Bryan Keane with Deutsche Bank. Your line is open.
Hi, guys. I just want to ask about the mid single digit growth in the Visa debit line. I guess I thought that number would be Little bit higher, has that trended down over the last couple of quarters? And then if it has, what might be driving a little bit slower growth in Visa debit? Is it a move Towards pin, loss of share, Durbin?
Thanks.
Well, I mean, we always expected to have some Deterioration in the magnitude of that growth number. And as a matter of fact, it's doing better than We had originally anticipated. Remember, when the whole Durbin thing came and you had a number of debit cards with rewards It drove financial institutions to promote it much more heavily. It encouraged consumers to use it considerably more. And so part of the whole Durbin This is a little bit of a damper on debit card transactions in general.
Not that they were going to stop, it's just That the rate of growth was going to slow down. So we're actually quite happy with where we are.
And I'll just add a little quantitative perspective. We were in the 4th fiscal quarter of 2011, we were kind of at the upper End of mid single digits in that category, we've remained in that range for Qs 1, 2 and 3. And if you look at Q2 on a normalized basis pulling out the leap year, the growth rates for Q2 and Q3 are identical. So I would say this is with the overlay of what Joe said in terms of kind of A modest level of impact. It has been relatively sustained during this fiscal year.
The next question comes from Wayne Johnson with Raymond James. Your line is open.
Hi, yes. Good afternoon. This question is for Joe. Could you give us an update on how V. Me is progressing For commercial launch, is Visa still on track with that?
And if you could just Provide kind of initial expectations how we should see this rollout this fall?
Well, yes, I think we are right on track with the click to buy and aliasing capability that we Suggested we would roll out by the end of the year. It is up. It is live. It is running. We have we currently have 6 relatively large merchants on We do not have a significant number of consumers at this particular point in time, but we're on Schedule with several financial institutions to begin that in the very near future.
And so Right now, we're still anticipating a holiday season rollout of the project. And of course, We'll gain a lot more traction in 2013 than it will at the beginning of 2012. But We're happy with the progress. We're happy with the performance and we're happy with where we are both with the merchant community And with financial institutions.
The next question comes from Tim Willi with Wells Fargo. Your line is
open. Thank you. Could you talk a bit about anything you've seen in Latin America looking at For the regional data constant currency that one seemed to show more of a slowdown at least for the June data while all the other regions sort of held Steady. So I'm curious if there might be something relative to that economy or country that impacted those numbers that might be in play for a couple more quarters. And then if I could Just one other end, just any thoughts around the average credit ticket in the U.
S, which had been climbing steadily out of the recession And now seems to be in a slightly sort of negative position. Is that fuel? Or is there something else you You might think what accounts for that trend in the last couple of quarters.
Let me start with the Latin America. With regards to currency, First of all, let me just mention to the group that we do hedge exposures. So whatever impact With the exception of 2 countries, which I'll turn to in a moment, we can dampen the impact on FX. With regards to Currency specific countries, we are seeing a depreciation In Argentina and a continued depreciation in Venezuela, the outlook for devaluation, I would say Nothing is a certainty, but at some point, it looks like we're heading to that. And you can't there's no Economic hedge for either one of those two currencies.
So is that a bit of a drag on our Latin America business? Yes. Is it hedgeable? No. And so but that's baked into the numbers we've reported.
With regards To any other country call out, I would say Brazil has tempered a bit. There has been a tax placed on credit usage for cross border Travel, which has definitely put a bit of a break on the exuberance of the Brazilians to see the world. That tax is not applied to debit, but it is applied to credit. And so I would say overall, Particularly the rest of Latin America that the business is strong. It has Very healthy growth rates unimpeded by shifts in currency.
Average credit tickets, no substantive change In that metric for the moment. But if you'd like something more specific, I'm sure if you called our IR group, Jack or Victoria would be able to give you something a little Specific.
The next question comes from Craig Maurer with CLSA. Your line is
Yes. Thank you. Two questions. One question for counsel relating to a previous answer. When you say Opt outs can show only for monetary relief.
Does that include relief from interchange? And secondly, For Byron, the yield on process transactions in the quarter jumped significantly, which was expected, but it was a lot more than what we were looking Do you think that the yield posted in the quarter is a good one to think about going forward? Thanks. Let me start with the yield question. So the yield increase in the data processing Category absolutely was expected.
Remember a couple of things as perspective that As part of our Durbin mitigation strategies, we implemented a fixed acquiring network fee, which is completely captured in the DP category. We also reduced variable transaction fees, which are also included In the DP category, but we then introduced a degree of incentive offset and that appears in a completely different line. So while The gross yield for DP goes up. It's not a true picture and instead you really ought to be looking at net Yield, which I'll come back to in a minute as it relates to Visa Inc. Revenue yield.
With regards to the DP yield, there is one other factor involved Which will which has an impact on the calculation, which is our lowest yielding product is InterLink. So as and that has borne the brunt of the loss as we conform to the new rules. And so as InterLink Moves out of the denominator in terms of yield calculation. It has the least impact on the numerator and automatically The yield moves up. And so you have both of those indicators going forward.
There are a number of factors Impacting the DP line, debit is 1 including InterLink, CyberSource books into the DP line. And so I think what it's going to take is the next 2 or 3 quarters or so in order for us to kind of reset what the base Trend lines ought to be projected off of with regards to data processing. So I think wish I could be more helpful, but I think it's going to take another couple quarters before this sorts out. When you put all of this together and you look at the Visa Inc. Revenue yield Of which DP is an important component, but that captures the incentives.
In the way that we capture and measure yield, Our yield for the 3rd fiscal quarter of 2012 is actually flat with the yield we experienced in the Q3 of 2011 Fiscal year 2011. So a lot of moving parts. This is where we're sorting out and I'm afraid it's
And as to your first question, Opt out merchants can only sue for monetary damages. And by the way, those claims would be covered under our retrospective responsibility plan. Claims for things like rate relief or interchange reductions, that's in the nature of injunctive relief and opt outs Cannot make those claims.
The next question comes from Sanjay Ronny with KBW. Your line is open.
All right. Thanks. It sounds like you guys are still seeing some reasonably good underlying organic growth globally. And I was just Wondering how we reconcile that with kind of the darkening clouds commentary you mentioned before. And then secondarily, I was just wondering if you could talk about the tau The tax benefit will be utilized in terms of the litigation escrow reserve bill?
Thanks. Well,
Byron, why don't you answer the second?
Yes. I'll do the first one. With regards to the litigation of the How the tax impact will be utilized. There's a different treatment for GAAP and it's a different treatment for cash flow. So for GAAP, we go ahead as soon as it's probable and estimable, which we concluded it was, we go ahead and put that through the income statement.
So on a GAAP basis, that's now behind us. With regards to the cash flow impact, you can't Record the deduction on your return until you actually make a payment. And so the Payments associated with this are potentially some time out. And so there will be No cash flow impact this year associated with that. Once the agreement is once we're further along Much further along in the litigation process, we'll be in a position to actually make payments at which point we can Then can they take the tax deduction?
We'll give you some perspective on that on the Q4 call.
And as it relates to your first question, we I mentioned in my Comments that the demographics of the world are changing. The number of places that accept electronic payments Are increasing. And so there is some countercyclical things that occur and allow us To build volume even when economies are slowing down to some extent. That's always the difficulty we have In calling out what's going on in the world or what do we see or how do we measure or know exactly what's happening. And it's tough because more and more people have access to electronic payments and More and more locations except electronic payments and those have to be factored into the equation.
Jose, at this point we have time for one last question.
The last question does come from Glenn Greene with Oppenheimer, your line is open.
Thanks and thanks for squeezing me in. I'll just ask on the U. S. Debit volume trends. You sort of saw, I mean, through May, I think you gave us an update.
It was sort of negative 8% end of the quarter, kind of negative 9%. And encouragingly, it certainly looks like it improved in July to negative 7%. So I mean, I guess the question is, do you think we're sort of in a sustained Proved trajectory and obviously the pricing efforts are having some effect here, but where do you think we go from here?
We're in uncharted waters. We like the notion that it's an improving trajectory and we will honestly, we'll know better how Competitors respond to our strategies and I think this is still very early days in terms of trying to project how this will play out. Remember, the rules only went into effect April 1. So we've only had, what, 3 months 3 weeks of operation under these new rules. And to date, we're pleased with how our strategies have taken hold to start and we'll report on how well they continue to perform in the
Without making an absolute prediction on the heels of what Byron just said, though, I will remind you what I said in the Remarks I made earlier, and that is there will be a permanent deterioration in our debit card volume as a result of the Durbin legislation. There's absolutely no question about it. So when we talk about waiting and seeing, we're kind of waiting To see where it gets to, but I don't expect to be close to where we were when the whole thing
Well, that wraps it up. Thank you all for joining us today and thank you to Josh Blom for his Comments earlier, special guest star. If anybody has any follow-up questions, feel free to call Victoria and myself.
Thank you for your participation