Thanks, Jose. Good afternoon and welcome to Visa Inc.'s Conference Call to discuss our initial views on debit regulation following last week's release by the Federal Reserve. Joining us today are Joseph Saunders, Visa's Chairman and Chief Executive Officer, and Byron Pollitt, Visa's Chief Financial Officer. This call is currently being webcast over the internet and can be accessed on the Investor Relations section of our website at www.investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. A Form 8-K was released about a half hour ago containing Visa's current outlook on certain financial metrics, which will be discussed in this call. Let me also remind you that this call 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 guaranteed the 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 our last 10-K and our Form 8-K filed today with the SEC. They can be accessed through the SEC website and the Investor Relations section of our website. With that, I'll turn the call over to Joe.
Thank you, Jack, and thanks to all of you for joining us today. Earlier today, we issued a Form 8-K reaffirming our annual net revenue and earnings per share growth expectations for the balance of fiscal 2011 and, for the first time, provided fiscal 2012 financial outlook based on our initial views of the Federal Reserve's debit regulations. We also announced the completion of a $1 billion share repurchase program authorized in April. Based on what we've reviewed thus far and as reflected in the guidance we issued earlier, we remain confident Visa will continue to thrive as an innovative, globally oriented growth company. While we're still reviewing the details of the 400+ page document, on balance, the rules are an improvement from the initial draft published in December 2010.
Specifically, we were encouraged to see, for institutions over $10 billion, The Fed capped debit interchange rates at $0.21 with an additional component of 5 basis points to account for fraud losses. While significantly lower than the industry average of $0.44, this is an improvement from the $0.12 flat fee initially proposed by The the Fed in December. At this level, issuers can at least partially defray the cost of running a secure, reliable, and efficient debit card program. Above and beyond the $0.21 and 5 basis points to account for fraud losses, the Fed proposed an interim rule that allows a fraud prevention adjustment of $0.01 per transaction if issuers adopt fraud prevention policies. The Federal Reserve has requested comments due by September 30th, after which they will make a final decision on the fraud prevention adjustment.
Importantly, the Fed extended the effective date of the interchange cap to October 1st, 2011. This delay allows us additional time to work with our clients to effectively implement these changes. With respect to routing and exclusivity, we are encouraged to see that the Fed has selected Alternative A, requiring two unaffiliated networks on a card for processing debit transactions. This was the better option of the two proposed. However, we continue to believe it will have unintended consequences as it relates to small banks, credit unions, prepaid and government programs, as well as industry investments in security, innovation, and reliability. As we have previously acknowledged, the implementation of this regulation will have an impact on Visa. However, we continue to believe the impact is manageable based on the environment as we now see it.
It is important to keep in mind these rules affect, but far from eliminate, a portion of U.S. debit revenues, which in total account for approximately 20% of our global net revenues. Let me be clear. Visa is ready to compete in the new debit environment. As I have said throughout this process, we have been diligently preparing for a variety of Fed rule scenarios. The finalized rules provide us with the clarity needed to begin implementing our plans. While it would be imprudent to share specific details of our strategy, primarily due to competitive concerns, we will have more to say on July 27th when we report our third quarter earnings in the fiscal fourth quarter call in October. At those points, the majority of our strategies will have been announced or be well underway.
As per our guidance, you can see from the 8-K we filed earlier, we have reaffirmed our fiscal 2011 financial outlook for annual net revenue and earnings per share growth and have provided ranges around the top line annual net revenue and bottom line earnings per share growth for fiscal 2012. Maintaining the status quo on our fiscal 2011 financial outlook includes our expectation for client incentives coming in at the top of the 16%- 16.5% range we had previously guided to. As Byron mentioned during our last earnings call, providing some level of incentives to specific merchants may be an effective strategy to ensure Visa receives routing preference.
Our annual net revenue outlook of high single-digit to low double-digit growth and our earnings per share of mid to high teens in fiscal 2012 is based on the changing business landscape, including the assumption that some portion of transactions may be routed away from Interlink to alternative PIN networks. Make no mistake, we will compete vigorously to maintain a Visa routing preference and have several strategies we will put into action to achieve this outcome. With that being said, we expect that fiscal 2012 will bear the weight of the regulations financially, and in fiscal 2013, revenue growth will regain momentum off of 2012's level. We also announced today that Visa has completed its $1 billion share repurchase program authorized in April. This resulted in the repurchase of approximately $13 million shares at an average price of approximately $77 per share.
This continues our commitment to return excess cash to our shareholders and is a testament to our conviction in the long-term growth potential of this company. In closing, let me say to our investors, clients, and business partners, I believe Visa is well positioned to continue to be a leader in electronic payments because of our strong business foundation. This includes our broad suite of products and services, global brand, client relationships, history of innovation, and VisaNet platform. Thank you all for joining us today, and we look forward to speaking with you again at the end of the month. Operator, we're now ready to take questions.
Certainly. If you would like to ask a question, please press Star, one and clearly record your name. You will be announced prior to asking your question. To ensure all questioners are heard, we ask that you please limit yourself to one question. Once again, to ask a question, please press Star, one. To withdraw your question, press Star, two. One moment for the first question, please. The first question comes from Glenn Fodor with Morgan Stanley. Your line is open.
Hi, thanks for taking my call and thanks for the timely call here. Your history suggests you always give guidance that has a degree of conservatism built in, obviously to account for a number of unknown variables. Can we assume that you're following that same approach here?
I think that we've been very consistent in how we have delivered guidance, and there's no reason to believe that we're changing anything that we do.
Next question, Jose.
The next question comes from James Kissane, Bank of America Merrill Lynch. Your line is open.
Yeah, thanks very much, and thanks for doing the call. Sure. If there was no Durbin Amendment, where do you think you'd be guiding 2012 revenue and DTFs? Just trying to get a sense of what portion of the guidance in 2012 was directly related to Durbin. Thanks.
Jim, this is Byron. This call is very specifically about the hand we've been dealt with the Durbin . The guidance we've given specifically relates to this situation, and as I'm sure you can appreciate, we're not prepared to speculate on what might have been. What's much more important is what does the landscape look ahead? That's what we've given you today. As our strategies unfold, we'll be prepared to discuss that at more length in future earnings calls.
The next question comes from Tianyi Wang with JP Morgan. Your line is open.
Hi, thanks so much. Good afternoon. I guess I just want to ask about sort of the assumption. I know you can't give any real details, and I wouldn't expect you to, but I'm just curious from a modeling perspective, as we think about incentives, should we expect, it sounds like, a one-time pickup in incentives as we transition into more incentives to merchants next fiscal year and then that steps down again? Also, in your assumptions, are you assuming, separate from that, any kind of price concessions offered to the issuing banks? Do you follow my question?
I follow your question. I would say that if in the future you see increases in our incentives, it would primarily be due to significant increases in global value, not Durbin or the United States. As it relates to the rest of your question .
With regards to, are there price concessions, our guidance going forward contemplates that we would be faced with that type of situation, and in order to preserve and grow the business under the new structure outlined by the Durbin that we have to contemplate that type of situation in our guidance.
The next question comes from Rod Bourgeois with Bernstein. Your line is open.
Okay, great. Can you be a little more specific about what you expect will detract from fiscal 2012 revenue growth and what we'll call normal growth to reinstate in fiscal 2013? If you could provide any color on what you're assuming about the level of aggression that your debit competitors might employ over the next year as the no exclusive network provision is implemented. Thanks.
I would say what we're prepared to talk about at this time is the primary impact that we expect from the legislation would be in fiscal year 2012. Once embodied in a base that's reset, then 2013 would be growing off that, the base that has, in fact, been reset. In terms of the market assimilating the changes, we expect that the vast majority of the Durbin changes that impact competitive dynamics to be incorporated in our fiscal year 2012. Until we're prepared to talk more about the specific strategies that we intend to deploy, we're going to defer a specific response, any more detail to the question that you just asked. Obviously, for competitive reasons, we now need to deploy the strategies, which we're awaiting the clarification that took place when the Federal clarified the rules.
Our teams are deployed, they're underway, and as that becomes more publicly visible, then we'll be prepared to talk about specifics at a more granular level.
The next question comes from Jason Kupferberg with Jefferies. Your line is open.
Hey, thanks, guys. Just wanted to ask a question on the revenue growth outlook for fiscal 2012. If you look at the traditional 11%- 15% range versus the fiscal 2012 range, you're shaving off about three points, it looks like, at the midpoint. How would you roughly break down that three-point impact between the interchange versus the exclusivity portions of the Durbin Amendment? Can you make any initial comments on how you think the issuers may actually implement Alternative A, i.e., are they more likely to take, let's say, Visa exclusive debit cards and just replace Interlink with a different debit network, a different PIN debit network, or simply add an additional PIN debit network to the back of those cards? Thanks.
Jason, I don't want to sound like a broken record, but we can more easily and productively talk about that level of specificity when we feel that it is appropriate to talk about our specific strategies. The intent of today's 8K and call was to give our outlook for 2012 and to emphasize that we think the bulk of the impact of the Durbin Amendment as it relates to Visa will be a 2012 event. We'll reset. We feel our strategies should enable us to pick up momentum going into 2013. Once our strategies are deployed and we've had a chance to implement them with our clients and our trade channels, then I think we can talk more specifically about where we see the important battlegrounds and why we're confident we can deliver the numbers that Joe articulated.
The next question comes from Moshe Orenbach with Credit Suisse. Your line is open.
Great, thanks. Joe, I would assume that your big customers aren't really interested in losing their own revenue streams either and might be repositioning their products to ones that are more consistent with credit interchange and trying to get some of their customers moved onto that. Could you talk about what the process and timeframe for that might be like and whether you've incorporated any of that into your thinking or is that something for the future?
It is something for the future, but certainly as it relates to financial institutions, and I can't specifically speak for them, but certainly they're looking for any one of a number of things that they can do to make this outcome a little bit more favorable to them. I think that any trend and any movement from debit to credit is a transitionary thing that would take some time. You know, let's remember, it's easy to talk about doing that, but the last time I checked, we were still in a recession. In order to move transactions from debit cards to credit cards, you have to be willing to give the credit to people. I think that that will happen over time, but I don't think it's anything immediate.
The next question comes from Julio Quinteros with Goldman Sachs. Your line is open.
Great, hey, Byron, just real quickly, can you walk through and if there's any detail that you can provide on the implied margin assumptions for fiscal 2012 and also the level of incentives? I'm not sure if you actually talked about that. Then buybacks, are there any assumptions for the fiscal 2012 numbers that are baked in? Thanks.
What I can say, a fuller description of 2012, it's our custom and our practice and our tradition since we went public in 2008 to give that kind of granularity on the fourth quarter call, which we fully intend to honor past tradition in that regard. I will say, though, that the philosophy of returning excess cash to shareholders in the form of dividends and buybacks is something that we continue to subscribe to fully. It should not be lost that we completed the most recent program, which was a $1 billion share repurchase program that we completely used up over the past month or two as a sign of continuing faith in our ability to remain a growth company for years to come. That is a practice, buybacks, that we would expect to continue in the coming year.
The next question comes from Dan Perlin with RBC Capital Markets. Your line is open.
Thanks. I just had a quick one. As we think about gross revenues, is there really that much change in terms of the trajectory that we've seen thus far? Secondly, given the unit cost advantage you guys have in debit, I'm just wondering, you know, level of price competition and there really other competitors' ability to compete with you on price? Thanks.
I think that remains to be seen. I mean, we expect our competitors to be aggressive. In spite of not talking about our specific strategies, we do expect to have some deterioration in our PIN business, as I mentioned in my comments. I do believe that we have the assets and the products and the process that we're putting in place that will put us in pretty good stead. I still believe that we're in a better position to compete in this environment than anyone else. Until somebody shows me that they've got more than we do, I'm going to continue to believe that. I don't think that'll happen.
The next question comes from David Togut with Evercore Partners. Your line is open.
Thank you and good afternoon. Byron, is it fair to assume from your fiscal 2012 guidance that you will be allowing early contract renewals with card issuers with price reductions effective on October 1st, the same date that the new interchange cuts go through?
Let's see, how to respond to that. We are always open to renegotiating contracts whenever it is timely. If your specific question is about debit and the need to redo contracts related to the Durbin Amendment, we have reviewed all our contracts. The vast majority of those contracts are already in compliance. Some of those, a few, will need to be redone. One of the key elements here is that with the shift in the merchant being able to control more of the routing, a number of our contracts just simply need to be revisited, not because they're out of compliance, but because it's important we have the right incentives associated with them that incent the right behavior with our banks. It's just acknowledging that the ability to direct routing has shifted, and therefore we need to shift the incentive structure in some of our contracts.
Once again, all of our contracts have been redone. There is no need to do a rush to redo an enormous number by October 1st.
The next question comes from Bruce Harding with Barclays Capital. Your line is now open.
Can you just do a little remedial, I mean, on exactly how the process works now? The deadlines were extended somewhat. The language in the Fed ruling mentioned that a large number of debit cards already satisfy the law. I think that number is roughly half of debit cards, if you could just comment on that. Just to clarify in your thinking, is it the October deadline or the April when most of these changes take effect and new cards are mailed? Do you see any shift? Is there any reason that some investors and people that we talk to believe that this will really reduce the amount of PIN in the marketplace because there's really no pricing differentiation anymore between PIN and signature? How do you factor that into your numbers that you gave us today?
Is it possible that signature will become a bigger share than the roughly 2/3 it is today? Do you think it could go the other way and why? Thank you.
That was a lot of questions. First of all, there are a lot of debit cards in the market today that have multiple PIN marks on the back, and that has been the case for a number of years. Second of all, the implementation of the reduced interchange is effective on October the 1st. In the original amendment or Durbin, whatever you want to call it, I think it was July 21st, the required implementation of the routing and the exclusivity is April 1st, but it may be executed prior to April 1st if a bank chooses to do so. There is no need for financial institutions to issue new plastic.
There is a specific reference in the Durbin Amendment, specifically in the Fed commentary, that says that a bug does not have to physically be on a card to be part of the acceptance of that card, so it would be listed in the PIN tables. In fact, that happens today. In the last several years, there are many PIN networks that have appeared on cards or are part of a bank's clearing mechanism that are not actually on the card. I think the reason for moving to PIN has been ameliorated to a certain extent by compressing the rates. You're absolutely right about that. There are certain institutions that are primarily PIN institutions, and they will continue to try to do that.
I know that there are a number of cards in the market today that do not have a debit card mark or a PIN mark on them at all. They are purely signature cards. These cards are going to have to have a debit card mark on them in the future. That's going to have to deteriorate to some extent the signature volume on those particular cards, particularly in merchants such as supermarkets that try to steer you towards the usage of a PIN. All of this, Bruce, is to say that this is a complex set of rules, and there are a lot of things that go one way and other things that go the other way. Our guidance embraces looking at this in totality, and our strategies embrace what we believe we need to do to be successful. That's what we'll be talking about in a couple of weeks.
Jose, we have time for one more question.
Certainly, the last question comes from Craig Moore with CLSA. Your line is now open.
Yeah, thanks for squeezing me in. Joe, just wanted to follow up on Bruce's question, wouldn't it make dramatically more sense than issuer chooses to where it can eliminate the signature component of a card because, you know, they could offer the signature component to the bank, the bank customer at an annual fee, or if not, you just get a PIN card. Because PIN is accepted at far fewer places, you're essentially, by default, forcing over to more profitable credit, and at the same time, lowering your fraud costs because of the dramatically lower cost of PIN. It would achieve several things for a bank all at once.
First of all, I believe something in the neighborhood of 70% of the merchant outlets do not have PIN pads. It is dramatic. If you issue the PIN-only card, it would be good at supermarkets, gas stations, and some large discount stores, but it would not be in most merchant outlets. Having said that, you have to have two unaffiliated networks on a card. That means you have to have two signature marks on a card or two PIN marks on a card and no signature mark, or you need to have one signature mark and two PIN marks if one of them is unaffiliated, or you could have three PIN marks and three signature marks. This is an extraordinarily complicated situation. Having said that, we feel pretty comfortable with our client relations, and we feel very comfortable with protecting the mainstream of our business.
I do not think we are looking at this as a significant change in the way things are done. I think it is a permanent change in the way things will be done. I am excited about our opportunity to compete.
Thank you all for joining us today. We, of course, look forward to speaking to everybody at the end of July following our 27th scheduled earnings call. Bye-bye.
Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.