Welcome to Visa Inc. 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, Jose. Good afternoon, everyone, and welcome. With me today is Byron Pollitt, Visa's Chief Financial Officer. This call is currently being webcast over the Internet. It 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 website for the next 30 days. A PowerPoint deck containing highlights of today's commentary was posted to our website prior to this call and is currently available. Let me remind you that this presentation includes forward looking 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 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 As stated in the press release announcing call.
Its purpose is to provide you with additional insight and explanation necessary to further understand several financial dynamics of our 4th and Yearly Results. Our goal in providing this information is to avoid any confusion or misperceptions on tomorrow's previously scheduled earnings call allowing for a more focused conversation on the quarterly and yearly results. We have We're scheduled 30 minutes or so for this call and have left plenty of time for questions and answers. And so with that,
I'll turn it over to Byron. Thank you all for joining call into a more constructive context. We have left plenty of time for questions. So if parts The explanation are not clear. We encourage you to ask about them.
And then on tomorrow's earnings call, I plan to reference, but not So this call would be a good time and of course you can always follow-up with the IR group afterwards To get further clarification. So if you have the slide deck in front of you or on screen, let's turn to Page 3, the one titled Incorporating CyberSource Results. So as you all may recall, Visa Inc. Acquired CyberSource Corporation on July 21. Pre acquisition, CyberSource reported its revenue in a way that included interchange that was subsequently passed through on to issuers.
At the time that we announced our We had our special earnings call on CyberSource. We indicated that we would be reporting those revenues Net of any interchange and in fact beginning with our Q4 results, we will be reporting them net of interchange And roughly 90% of those revenues will be booked to data processing revenue and the other 10% or so We'll be booked to other revenue. I also want to point out because the CyberSource revenues are In looking through the important revenue drivers of CyberSource results. The most important we feel is billable transactions. That operating metric will be Regularly published in our operational performance data pack beginning with the Q4 call and we will Provide you at that time with a history so that you can look on a pro form a basis so that you can look at growth rates.
Moving The second topic with the acquisition, we booked $727,000,000 of intangible and 5 years, we expect an annual amortization rate of $76,000,000 and we expect to fully amortize these assets over a 15 year period. You should on a separate but related matter, you should note that there is 68,000,000 of annual amortization related to the 2,007 Visa Inc. Reorganization That will fully amortize at the end of Q4 2010. Said another way, there will be No further amortization of those assets beginning in 2011, but we will have the assets to be amortized related to CyberSource. They're pretty close On a year over year comparables standpoint, I think it's important to recognize that in fiscal year 20 We booked 2 months of CyberSource results.
During that 2 months, there was $41,000,000 in net revenue booked, Of which $37,000,000 went to data processing and approximately $4,000,000 went to other revenue. The EPS dilution associated with this transaction in fiscal year 2011 is expected to slightly dilutive about $0.04 compared to $0.02 in Q4 2010 and $0.03 Let's turn to the second, Page 4, reporting of non Visa transaction Pass through revenue and expense. So historically Visa has processed a modest number of Our pass through Visa in the settlement process with a very minimal margin applied. We refer These types of transactions as gateway transactions. Excuse me.
Let me give you an illustration of what we mean by this. In a normal transaction, it would originate with the merchant, go to the acquirer and then on to the network. That network could be Visa, could Mastercard could be Star, could be NICE. Let's assume for the moment that it's Mastercard. So in this case, A Visa gateway transaction would go from the merchant, not to the acquirer, but to Visa And then plug in to Mastercard.
In other words, we would gateway the transaction from the merchant to Mastercard. In a Merrily interchange and then it would pass through in this particular case and gate The transaction to Mastercard, at which point, it would show up as revenue to Mastercard where it would be sent Mastercard and we would expense basically what we booked as revenue. In this case, the revenue is booked to data processing And the expense is book to network and they completely offset each other. Having said that, it is common to charge a very, very nominal gateway fee in a situation like this, but the vast majority of the revenue and the expense is what we refer to as passed through. As I said, historically, this represented a modest number of transactions.
But looking to fiscal year 2011, we could see a substantial increase in this type of pass through volume. So So management decided to revisit its income statement presentation of these types of transactions. And while the gross accounting Management believes that a net presentation, which only records Visa's earned margin or the nominal gateway fee As revenue is more conservative and better reflects the underlying economics. So beginning in fiscal year 2011, we are prospectively adopting a net presentation. And since we are adopting it prospectively, this means that there will That each other, the earnings impact is neutral.
So we will begin reporting it next quarter in that way. And when we do, we will footnote the corresponding pass through revenue and expense for fiscal year That brings us to Visa Extras. For those of you that are unfamiliar With what Visa Extras is, let me give you a brief description. In short, it's a turnkey full feature card A platform whereby they can offer a rewards program. Think That then can be redeemed for prizes, for trips, that sort of thing.
We offer to our clients a turnkey full feature platform That enables any size bank to offer such a program. Under the arrangements in which we operate this Cardholder Rewards Program. When a reward is redeemed, the service provider, And Visa passes through the expense to the client. No margin is applied. Reimbursement by us to from the banking client is booked revenue to other revenue and the expense of fulfilling it, which we pay to the outsourced provider is book to marketing.
We don't apply any margin to these transactions, so they completely offset each other. So two call outs for fiscal year 2011. Visa is now moving to a direct bill where the outsourced service provider Combination with this and the fact that a large issuer converted away from the platform in June 2010, This will result in fiscal year 2011 of $89,000,000 in revenue And expense booked in 2010 that will not repeat in 2011. Again, since this revenue has no margin, The earnings impact is neutral. So as you think about your modeling, there will be $89,000,000 of other revenue that will $89,000,000 of expense that had been booked to marketing will not repeat.
Just as with the Final, 4th topic, revaluing the Visa Europe put option. As many of you may remember, As part of the 2007 reorganization, Visa Europe received a put option, which gives it the perpetual right to sell its At an amount above fair value. Under GAAP, Visa is required to revalue the put option each quarter with changes in value recorded as a non operating gain or loss in the income statement And through Q3 of fiscal year 2010, no such adjustments in value have been required. In Q4, However, management's evaluation indicated that the put option decreased in value by $79,000,000 Our difference will be flowed through our income statement in the 4th quarter. This change in the put option value is recorded as a non cash income statement event.
It is not subject to tax. So the full $79,000,000 will be added to net income for the quarter. And We want to emphasize that this change in value is primarily due to the change in PE with a modest Due to updated foreign exchange rates, it in no way reflects any change. I say in no way, it does not reflect in any way a change in Visa Europe's intent to exercise. This is The value is completely driven by a change in the PE and a change and a more modest impact due to a change With that, that's the prepared remarks on the forward comments, topics.
I'd now I'd like to throw it open for questions.
Yes, thank to asking your questions. Our first question comes from Adam Frisch, Morgan Stanley. Your line is open.
Thanks. Good afternoon, guys.
Howdy.
Just a few questions, Byron, but the most obvious first and then I just want to have a couple of things on each of the items. The rationale for doing this call today, I think your explanation of things was very logical. It's really Not very material at all in totality, but doing it today versus tomorrow or maybe even a few weeks ago, When did you know all this was happening? And what's the rationale for doing it this afternoon? Because I think some people are spooked when they saw the headline set.
We had planned for some time to do the pre what we're referring to as the pre earnings call. I would say that the gating factor on when to do it was primarily a function of Getting our earnings for the 4th quarter completely tallied so that we could be very specific About the revenue that would be impacted for the extras for the non Visa Process transactions and to make sure we had the most up to date result on the put valuation. That way We could deal with that the day before. Now have confidence in our numbers And allow the earnings call to focus more on the revenue drivers, the guidance and not have it Dominated by topics that in your words are less material.
Okay, great. That seems very logical. Two fast questions. 1, Excluding amortization because that's more of a wash in fiscal 2011 versus fiscal 2010 and the put accounting, the net of all this is as it relates to reported results In fiscal 2011 is that revenues and costs will both be down about $230,000,000 So revenue growth may appear a little bit light, But margins a little higher, is that the net of all this?
Yes. We'll let you characterize our revenue And expense position tomorrow after we give you guidance, but the $230,000,000 which would be the sum of $40,089,000,000 That's correct. So that would be roughly $230,000,000 in revenue in 10, not repeated, dollars 230,000,000 Expenses not repeated and then we've given you the line items where to adjust that.
Okay. And then the last question for lack of a better way to put it, You plan on disclosing the old way and the new way on tomorrow's call for the quarter and for forward guidance, so people aren't confused?
What if you're referring to extras and to non Visa Transaction processing, what we're going to give you what we have given you is the
Okay. But if Revenue growth or if revenues are going to be light by 2 thirds that's a wrong way to
put it.
We will give amounts today that have been excluded.
Okay. So people will be able to make an apples to apples compare about how well the business is growing?
Yes. You'll be able to with today's data, you'll be To subtract out of the revenue, what won't repeat next year, our guidance next year will be inclusive of these changes and
The next question comes from Sanjay Sakhrani, KBW. Your line is open.
How are you doing?
Just a
couple of questions. One is, Will we get the CyberSource related net revenues on a recurring basis going forward? And I guess the second question was just the higher pass through volume expectations. Is Regulatory driven or is that something else there? Thanks.
On CyberSource, no, that's not our it's simply Not a big enough piece of our business today to warrant having it called out. And so what we've done to Helpful is guided exactly where the revenue is going to appear. And as we said, it's roughly 90% is Going into data processing revenue. With regards to the pickup in volume Sometimes there are relationships with merchants or with issuing banks where this is simply a more Cost effective way of structuring the network involvement. And So it is much more a function of historically, this has been a pretty modest number and we can see that this is Picking up in volume and therefore we wanted to have an accounting treatment that was much more reflective of the
Is there a transfer from your current volume to pass through or is this just incrementally new volume that's going to be pass through?
No, it's a good question. This is a it's simply a pass through of fees. It does not appear in our purchase volume our payment volume. So, no impact on the payment volume, simply An adjustment to a couple of our line items that completely wash each other out.
Okay, great. Thank
The next question comes from Julio Quinteros, Goldman Sachs.
Just looking at the commentary about
the valuation approach for the European put option, part of it is your PE and the other It is Europe's earnings. Can you just walk us through where Europe's earnings are right now? I guess since you guys came public, How much progress has Europe itself made in terms of its earnings profile? In other words, I'm just trying to make sure that what you're doing here is related to Europe simply and not necessarily A deteriorating profile in the European earnings profile itself.
Yes. So without commenting specifically on Europe's earnings, let me Because RPE has contracted relative to a fair market PE that a third party might offer for Visa Compared to where that delta stood in 2,007 and the contraction of RPE has heard primarily subsequent to the emergence of the Durbin Amendment. That drop in the PE It sustained itself. We felt that it was appropriate to make an adjustment at that point in time. I mentioned that there was a modest Date relative to FX, that is a minor input into the an important, but a minor input in terms of impact.
This is Completely due to the change in PE, it in no way reflects any change whatsoever in either Visa Europe's intent to
comments that you made or maybe it was Adam on a $40,000,000 $89,000,000 totaling the $230,000,000 Can you just break those two Just
to make sure I have that.
Yes. So with regards to the non Visa transaction pass through revenue, on that slide, If you look at 1, 2, 3, the 4th bullet, you'll see that it refers to $140,000,000 of pass through revenue that will And then if you take a look at the Visa Extras slide and you turn to 1, 2, 3, 4th bullet, you'll see There's $89,000,000 that doesn't repeat. If you sum up those 2 together, that's $229,000,000 rounded $230,000,000 So That's $230,000,000 of revenue and expense completely offsetting each other that were booked in 2010 that will not reoccur In fiscal year 2011. Got it.
I was missing $100,000,000 there. Perfect. Thanks guys. Talk to you tomorrow.
Okay.
The next question comes from Craig Maurer, CLSA. Your line is open.
Yes, good evening. Just a quick question. You had mentioned An issuer deconversion from Visa Extras. I was just wondering if you can comment on the circumstances around that? Excuse me.
It is not It is not unusual for an issuer to try and differentiate For their cardholders via the attractiveness of their rewards program. And so Many issuers actually operate their own rewards program. And in this particular case, we had a large issuer that wanted So we look at this as something in the natural course of events and that was completed in June of 2010. And so that would have come off the book, so to speak, automatically. We like the idea of having the issuer deal directly with the service provider.
And so we had begun an initiative, I want to say over a year Earlier, to begin planning for the capability for our issuers to go direct and remove us From the middle of those transactions and with the beginning of the fiscal year 2011 period, that's now Okay. And if I could just clarify the question Sanjay asked. Regarding the pass through, I understand the offset, but the actual volume that will drive the increase in pass through, was that volume Visa Is processing that will move to a pass through situation? No. Or is this new volume?
No. It is neither. It was never volume recorded on our books and it will not be recorded Ever, because these are not Visa transactions. What we record on our books Visa Process Transactions. The only revenue associated with this is a very nominal gateway fee That is typical for a network provider to charge if they are gateway.
By the way, Some of the other networks gateway volume to us. So to the extent that they initially
The next question comes from Bruce Harding, Barclays Capital. Your line
is open. Byron, while we're on the subject of accounting, Annie, I thought I was all excited. I thought you might The getting rid of the lag on reporting service revenue, any news on that?
What I can tell you is that we are fully capable of executing that today And that the what is what we still have to work out is the Ability to execute that with all our clients. And so those issues are not resolved, and
Next question comes from Ed Grosjens with HITE. Your line is open.
Hi, Byron. Hi, Jack. Thanks for taking my question.
Hi, Ed. Howdy.
Simple question. The gateway the expectation for more pass through gateway transaction, is that related to exclusivity in Dodd Frank, I
guess? No. No, it is this type of Gateway transaction, it has capability has existed for quite some time and it is one where There are certain merchants that have believed that it is less expensive to do it this way, more convenient, more effective. That's not true in all circumstances. And so from that vantage point, this is I would say This came about in the kind of normal course of business and has absolutely nothing to do with Dodd Frank.
Okay. And is it just that merchant decision of looking at this transaction processing the transaction this way that you expect more to be done next year?
Sometimes it's a merchant, sometimes it's a issuer decision in the way that they want to deploy. But we could see a pickup In volume, I would not extrapolate that into a trend, but we could see a pickup in volume. And we just if that is going to happen, we'd prefer to reset the income statement presentation now so that if it ever did pick It would be reported on a net basis, which we believe is a preferred treatment and better represents the underlying
Great. Thank you very much.
Welcome.
Our last question comes from Jason Kupferberg with BS, your line is open.
Thanks, guys. Just a couple of items here. I guess, while we're on the topic of the other revenue line, since that's where Pulling the Visa Extras out of. Can you just remind us what some of the bigger components are in that line and any comments on kind of the The stability of those items as we just think going forward.
Yes. The largest contributor to that line is the licensing fee That we report from Visa Europe. We have certain consulting fees.
CLO also The
licensing we get there from the Brazilian operation and we have certain consulting fees that we charge under Certain client arrangements that would also be booked there. The 10% of the revenue that CyberSource generates that does not Go through the data processing line, which I would characterize more as consulting fees would go through So it's truly with the exception of Visa Europe licensing fee, Which is the single largest component and the and substantive licensing arrangements like Cielo, the The rest is pretty small sources of income.
Okay. And just a follow-up on these gateway Transactions, understanding that you guys see more of this coming in fiscal 'eleven, but I guess what's the motivation for the merchants or the issuers? Is this cheaper I'm just trying to understand what's catalyzing the increase in people out.
It can be cheaper, can be more efficient in dealing With one gateway as opposed to multiple.
Okay. And just last question for me coming back to the Visa Europe Put option. If I recall correctly, I think in the past you guys have disclosed that there's a, I think, a 40% assumed probability of exercise on that put at some point And time in the future, does that 40% number change at all?
None. You're correct in remembering that it's 40% And that percentage has not changed and will not change as a part of the calculation for the Q4 fiscal year 20 10 put valuation.
Excellent. All right. Thanks, guys.
You bet.
Well, listen, thank you all very much for joining us today. We hope this was helpful. And we look forward to seeing you all figuratively speaking on tomorrow's earnings call. Take care.
Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.