Welcome to Visa Incorporated Fiscal Q2 20 Earnings Conference Call. 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. Chad Karski, Head of Global Investor Relations.
Mr. Karski, you may begin.
Thanks, Shania. Good afternoon, everyone, and welcome to
Visa Inc. Fiscal 2nd quarter earnings conference call. With us today are Charlie Scharf, Visa's Chief Executive Officer and Vasant Prabhu, Visa's Chief Financial Officer. This call is currently being webcast over the Internet and is accessible 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 PowerPoint deck containing financial and statistical 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. These statements aren't guarantees of future performance and our actual results could materially differ as a result of a variety of factors. Additional information concerning those factors is available in our most recent reports on Forms 10 ks and Q, which you can find on the SEC's website in the Investor Relations section of our website. For historical non GAAP or pro form a related financial information disclosed in 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 press release.
And with that, I'll now turn the call over
to Vasant. Thank you, Jack. In keeping with prior practice, let me begin my remarks by highlighting some key callouts from the quarter. First, we reported a solid quarter of financial results despite a backdrop of continued domestic and international economic crosscurrents. Importantly, revenue growth of 8% was a couple of percentage points better than we had expected and telegraphed last quarter.
The upside was driven by lower incentive levels than previously assumed and a higher currency volatility benefit. Our flat EPS growth for the period year over year was a direct result of the favorable tax impact we enjoyed in the Q2 of fiscal 2014. 2nd, the overall strengthening of the dollar continued to exert pressure on revenue growth. Exchange rate headwinds this quarter reduced reported revenue growth by approximately 2.5 percentage points. We expect dollar strengthening and its associated impacts to continue for the balance of the year.
3rd, for the 2nd consecutive quarter, our client incentive rate came in below expectations. This was once again due to the timing of certain contractual obligations as well as moderately lower payouts associated with lower payment volumes in several challenged geographies like Russia and Brazil. We expect client incentives to be higher in the second half of the year. 4th, our effective tax rate was 32% in the 2nd quarter, 10 points higher than Q2 last year when we recorded an IRS Section 199 tax benefit related to multiple years. Our tax rate will fluctuate from quarter to quarter this year as I will discuss later.
Overall, the underlying drivers of our business remain stable and healthy as evidenced by payment volumes and transactions growth. However, the strong dollar impacts us negatively this year not only on currency translation, but also in our cross border business. Despite these headwinds, we are maintaining our outlook for the year in line with guidance previously provided. There are however some significant shifts from quarter to quarter, which we want to make sure are clear to you all. First on the revenue front.
After a better than expected Q2, we now project the Q3 to represent the low point of growth for the year at 6% to 7% on a nominal basis. Growth will pick up again and approach double digits in Q4. The 3rd quarter is expected to be negatively impacted by higher client incentive, some shifting from the Q2, the continuing drag from lower gasoline prices and tougher comparisons in the other revenue line which benefited last year from revenues associated with our FIFA World Cup sponsorship. The full benefit of price increases and a smaller incentive drag due in part to the lapping of a deal intensive quarter in fiscal 2014 will help Q4 revenue growth. 2nd on the expense front, we expect a meaningful step up in expense growth in the Q3 as a number of programs including marketing and certain technology initiatives have been phased through the back half of the year.
As always, we will continue to carefully monitor the economic backdrop and can and will make expense adjustments as necessary. Our full year expense growth expectations remain unchanged at this time. 3rd, we expect a higher tax rate in the 3rd quarter followed by a substantially lower tax rate in the 4th quarter. Our estimated tax rate in the 3rd quarter is expected to be as much as 200 basis points higher than the rate in the 2nd quarter. However, as currently anticipated, we expect to take advantage of certain tax benefits as early as the fiscal 4th quarter, which would drive an effective tax rate in the low 20s in Q4 and no change to our full year fiscal tax rate expectation of the low 30s.
When you put this all together, we are now looking at 3rd quarter fully diluted EPS being $0.06 to 0 point 0 $8 lower than analyst current expectations. For the year, we now expect our fully diluted earnings per share growth to be at the low end of the mid teens range in line with current analyst expectations. Moving on to Q2 business drivers and our financial results. I'll start with Global Payments volume and process transaction trends. Global Payments volume growth for the March quarter in constant dollars was 11%, unchanged from the prior quarter.
The U. S. Grew 9% and international grew 13%, both at similar levels to the December ending quarter. Drilling down further, in the March quarter U. S.
Credit grew 12%, a 2 percentage point moderation compared to the December quarter. The Chase account conversion is complete and consistent with last quarter consistent with the last quarter contributed approximately 3 percentage points to our overall credit growth in the period. This positive impact will continue for the next two quarters though at a declining rate before lapping. Lower gasoline prices, the full effect of which hit payments volumes this quarter reduced credit volume growth by 2 points. As such, gasoline prices appear to be the primary driver of the step down in credit growth.
S. Debit grew at 6% in the March quarter, generally in line with the December quarter. Lower gasoline prices had an outsized effect on debit growth, reducing it by approximately 3 percentage points. In aggregate, lower gasoline prices impacted U. S.
Payments volumes by a negative three points in the quarter. A portion of the savings from gasoline price declines is being spent in other categories, primarily grocery and restaurant segments. This is evident in debit payment volumes, not yet in credit payment volumes. More recently through April 28, U. S.
Payments volume growth was 9% with U. S. Credit growing 12% and debit 6%, essentially unchanged from Q2 trends. Global cross border volume delivered an 8% constant volume growth rate in the March quarter, unchanged from the December quarter. The U.
S. Grew 6% and international grew 10% in constant dollars. The further strengthening of the U. S. Dollar since the beginning of the year continues to have a negative impact on cross border commerce.
Forward currency curves imply that the dollar will gain in strength. If this materializes, these cross border trends are likely to persist and perhaps worsen. Through April 28, cross border volume on a constant dollar basis grew 9% with a U. S. Growth rate of 6% and an international growth rate of 10% generally in line with the 2nd quarter rate.
As you can see, when you adjust for the dollar, the underlying drivers of our business have remained very stable in aggregate. However, the significant currency moves we've experienced this year are impacting cross border commerce in a variety of ways with the largest impacts coming from the U. S. Dollar. Overall, cross border volume growth has remained suppressed from historical levels.
As may be expected, outbound cross border commerce from weakening currencies like the euro, ruble and the Canadian dollar has been slowing. Hardest hit corridors were Russian cardholder spending across Europe and the Middle East and Canadian and EU cardholder spending in the U. S. Offsetting this to some extent is accelerating cross border commerce of the strong currencies, primarily the U. S.
Dollar. In Q2, we saw U. S. Cardholder spend stepping up in Europe and Latin America. Chinese travel across the world continues to be robust and cross border spend out of Latin America is also picking up helped by easier year to year comparisons.
Currency shifts will remain a critical variable to watch as the year progresses. Any moderation of dollar strength will help our business and vice versa. Any pickup in economies like Europe, Brazil and Russia would be welcome. Transactions processed over Visa's network totaled $17,000,000,000 in the fiscal Q2, an 11% increase over the prior year period, which was a one point improvement from Q1. The U.
S. Grew 9% while international delivered 14% growth. Transaction growth in the U. S. Is helped by some spending shift from GAAP to lower ticket categories of spend like QSRs.
Through April 28, process transaction growth was 10% with a U. S. Growth rate of 8% and an international growth rate of 14%. CyberSource transactions grew 14% in the period as our reboot of the business continues to pay off. CyberSource will celebrate its 5 year anniversary as a part of Visa this year and we have completed the integration of this business into our global merchant services and solutions functional area.
With the integration complete and since CyberSource transactions do not represent a material component of Visa's business, we will no longer call out this data separately after this quarter. Turning now to our Q2 reported financials. Net operating revenue in the quarter was $3,400,000,000 an 8% increase year over year driven primarily by solid growth globally across all revenue categories and as mentioned earlier negatively impacted by approximately 2.5 points by the strong U. S. Dollar.
Solid global payments growth volume drove service revenue up $1,600,000,000 up 8% over the prior year. As I mentioned earlier, underlying payments volume growth in local currencies remains very healthy. Data processing revenue at $1,300,000,000 was 9% over prior year's quarter based on continued strong growth rates in Visa process transactions both in the U. S. And internationally.
As mentioned, transaction growth in the U. S. Was helped by some gasoline related savings being spent on lower ticket size transactions such as QSRs. International transaction revenue was up 11% to $964,000,000 with higher currency volatility countering impacts from moderating cross border payment volumes and currency translation. As we measure our key currencies, volatility was at 5 year highs in Q2 meaningfully contributing to international revenues.
Total operating expenses for the quarter were $1,100,000,000 up 1% from the prior year with moderately higher personnel, depreciation and G and A costs offset by lower marketing and network and processing expenses. Higher personnel costs are primarily the result of higher headcount reflecting reflective of our strategy to invest for future growth. The uptick in G and A was primarily the result of a loss related to our debit processing business in Asia, which we sold during the period. Higher depreciation was a result of ongoing investments in technology assets and infrastructure to support our digital solutions and core business initiatives. Offsetting these were lower marketing expenses due to the absence of the Winter Olympics and FIFA World Cup spend in the prior year as well as shifts in current programs to the second half of the fiscal year.
As mentioned earlier, this will result in a step up in expense growth for the balance of the fiscal year. Our operating margin was 67% for the 2nd quarter in line with our annual guidance of mid-60s. Capital expenditures were $98,000,000 in the quarter. At the end of the quarter, adjusting for our recent stock split, we had 2,450,000,000 shares of Class A common stock outstanding on an as converted basis. The weighted average number of fully diluted shares outstanding for the quarter totaled $2,460,000,000 On a split adjusted basis, we repurchased a total of 16,200,000 shares during the March quarter at an average price per share of just under $65 per share.
Fiscal year to date, we have repurchased 28,600,000 shares at a price of just under $65 per share for a total of $1,900,000,000 We currently have authorization to buy up to $3,800,000,000 of stock. Since the IPO, Visa has had a clear capital allocation strategy of investing cash to grow our business organically and through acquisitions as job number 1, then returning excess cash to shareholders to stock buybacks and dividends. Our dividend policy remains unchanged and our Board recently declared a $0.12 quarterly dividend per split adjusted share. For the past 7 years, Visa has had a consistent approach to stock buybacks with the pace being modulated to some extent from quarter to quarter by valuation considerations. This approach to buybacks will continue as evidenced by our purchases year to date.
This is a growth business that generates significant cash flow and a low beta stock. A systematic buyback using excess cash after capital investments and dividends is a strategy we have been and will remain committed to. In summary, the underlying drivers of our business remain robust. The strong dollar and other large currency moves have created some headwinds this year as has the sharp decline in gas prices. These are the normal fluctuations one expects in the course of business.
The very attractive long term secular growth trends in our business remain intact. Despite the headwinds this year, our results are on track so far and we are comfortable reaffirming the guidance we provided to you at the start of our fiscal 2015. To conclude, this is my first earnings call as CFO of Visa. I'm delighted to be part of Charlie's team. I look forward to meeting with many of you in the coming days weeks.
And with that, I'll turn the call over to Charlie. Thank you very much, Vasant and official public welcome from all of us. First of all, let me just start with commenting that we're very pleased with the quarterly results. We think of them as solid and consistent and certainly gratifying in the face of some of the more challenging economic conditions and geopolitical concerns that we see around the world. Net revenue grew 9% nominally.
FX impact hurt growth by 2.5 points. Operating income growth of 11%. Payments volume increased 11% on a constant dollar basis and cross border volume growing at an 8% on a constant dollar basis are all very solid numbers. We see very little change in the overall global economy with some exceptions and we see more short term risk than we see upside. Consumer spend in the U.
S. Specifically continues at reasonable levels, but it's not accelerating. Gasoline prices continue to negatively impact both credit and debit. Outside the U. S, the strong U.
S. Dollar as Vasant pointed out is meaningful. We see this through the FX translation impact, But additionally, the benefit that we see of U. S. Vendors outside of the U.
S. Is outweighed by the negative impact on the non U. S. Vendors spending less in the United States. Away from the economic growth environment, we continue to feel terrific about our activities to drive growth, which I will talk more about.
We continue to make excellent progress on our evolving technology initiatives, which include everything we're doing in the digital space, mobile specifically, Visa Checkout and the work we're doing in our Global Merchant Services and Solutions Groups. And we continue to have a strong flow of significant client wins and renewals. And renewals. I'll speak a little more on several of these points in a moment, but in some while we remain appropriately cautious in the short term, we remain quite bullish on the medium continue to believe there are tremendous opportunities for years to come. Let me just amplify some of the comments that Vasant made regarding payment volume for a second.
First, the negative impact of gasoline on our U. S. Payment volume is significant at 3 percentage points. As we've said though the initial impact on payment volumes was felt in our Q1, the full impact did not hit until the Q2. And so the revenue impact will not be fully felt until our Q3 because of the quarter lag on service revenues.
In an update to our March quarter Visa Insight survey, things haven't changed much with consumers. About 30% tell us they're spending more in other categories, up from 25% last quarter. The 2 categories that continue to stand out are lower ticket categories groceries and quick service restaurants. As I said last quarter, the lag time between lower prices in spending we think is about 6 to 9 months as consumers accumulate enough to feel comfortable making larger purchases. Keep in mind consumer confidence and confidence in sustained lower gas prices will impact their willingness to spend.
Cross border volume remained steady at 8% in the quarter as we said. And as Ait mentioned and Vasant has mentioned the effect of the strong U. S. Dollar against certain global currencies negatively influencing cross border spend and ultimately revenue growth. The U.
S. Cardholders are spending more outside the U. S. As a result of the stronger dollar, resulting in higher transaction and payment volume growth on a constant dollar basis at international merchants. However, given currency translations and generally lower acquiring fees in foreign countries that volume is not as lucrative as what we would have enjoyed on an inbound basis.
On the other side of the equation, the strengthening of the U. S. Dollar has hurt inbound spend to the U. S. Primarily from the Canadian, European, Brazilian and Japanese corridors.
And as Vasant mentioned, higher currency volatility has offset some of this. Let me just turn now and talk about some important client activity. Starting with the U. S, we renewed a multiyear credit issuing agreement with U. S.
Bank, a great partner and one of our leading issuers and the 5th largest commercial bank in the United States. U. S. Bank has been a long time Visa partner and we look forward to building further upon the exciting things we've done with them in terms of innovation, new product development and security. In the U.
S. Co brand space, Best Buy, the world's largest retailer will convert their consumer credit card portfolio to Visa later this summer. We also renewed a multi year credit agreement with BP. BP has been a longtime Visa partner and launched its first co brand in 2,006. And we're thrilled with our new agreement with Costco.
We're very pleased to have been selected to replace American Express as the credit card network for its U. S. Warehouse clubs and gasoline locations beginning April 2016, a strategic benefit for all Visa issuers and their cardholders. We're also excited to be partnering with Citi on the new Costco Visa co brand credit card. We view Costco as a truly unique opportunity and very strategic.
As I said, it's good for Visa, but an even bigger benefit for all of our clients. They're one of the largest and best retailers in the world, the 3rd largest merchant in the U. S. According to the National Retail Federation, someone who historically did not accept our credit product and we now have an opportunity to gain acceptance where Mastercard and American Express are not accepted in the credit space. We also love that this is a truly long term acceptance and co brand partnership.
For all of our clients and their consumer and business clients, it will be the first time in 16 years to gain access to the tens of 1,000,000,000 of dollars of annual credit payments volume that Hereford went to America Express. It's a great opportunity for it to drive incremental usage. It should help all Visa issuers drive their cards towards the top of the wallet and increase new account card and cardholder acquisition opportunities. This was a very competitive process and there's been much discussion of what drove the outcome here. I don't want to speak for Costco, but let me say that I've not met a retailer that cares for their clients, their members more.
Going forward, Costco will be entrusting their clients, their members, these precious relationships to Visa. If it were me, money wouldn't win the day. The best brand with the best capabilities would win. I've consistently said price matters, but cannot win a strategic relationship. So our strategy is not to be the low cost provider.
As I think about what drove the decision here, I look at a series of things including the view that we're the premier brand for Costco members, the belief that our brand will help Costco grow more than all the others clear strong brand preference amongst their members and target market, specifically with the higher growth affluent and millennial car holders, which in this case will drive membership and sales growth directly for Costco, our broad global acceptance, our superior data and analytics capabilities and our leadership on innovation. I would also point out that we feel that all the benefits I've outlined plus what our issuers bring to the table can create more value than others. Specifically and quite simply, we, our issuing partner and the co brand partner can make more and provide greater value to our clients than smaller closed loop networks. As a reminder, the implementation of these agreements is subject to the purchase of the existing co brand credit portfolio by Citi. Turning to our business outside the U.
S, let me first start with China. First before I turn to market opening, which I know is a topic that you all want to hear about, I want to talk for a second about our existing business. It is doing extremely well. We have a significant and fast growing business with relationships that have been growing and deepening. We are the market share leader versus non Chinese providers and that share has been steady since 2013.
We continue to sign contracts and be awarded new issuing business from Chinese banks. As examples, this quarter, we renewed and expanded our agreement with China Citibank, one of the largest partners in China. The program will now include issuance of Visa only branded companion cards in addition to the dual branded program in place. China Everbright Bank, one of China's largest financial institutions renewed their credit agreement with Visa. Regarding the market opening news, clearly this is a significant and positive step.
The facts as we've read them thus far are consistent with our expectations and we're very excited to see more specifics, which obviously will be important. We do intend to apply for a license. As I've said, we have a strong business today with great local relationships, which have only become stronger over the past several years. We're excited to participate in one of the most important markets in the world and for Visa to help in the growth of domestic Chinese marketplace working with Chinese companies and the Chinese government. To be clear, we are not pursuing this for the short term profit opportunity.
This is a long term commitment, which will pay off over the long term. We intend to prove our value as a partner within China, so bringing our value added capabilities to help grow the Chinese economy will come before our revenue and profit growth for quite some time. Regardless of when we start to participate domestically in China, we do not expect this to be a meaningful contributor to our financial results for many years to come. Turning away from China. First Rand Bank, large issuer in South Africa and our largest issuer in sub Saharan Africa extended their contract with Visa.
We also renewed our partnership with Desjardins, the leading cooperative financial group in Canada and the 4th largest cooperative financial group in the world. And lastly, Banorte, one of Mexico's oldest and largest financial institutions renewed their credit agreement with Visa. On the other side of the equation, Citibank and Itau will be moving their business away from Visa. In certain regions around the world, we have contracts with Citi, which will continue to run for quite some time. In terms of how quickly these conversions commence and ultimately how long it takes has not been made clear to us and we will let you know as we learn more.
While losing any business is disappointing to us, we know that we're not going to win everything as we operate in a very competitive environment. We've always been very thoughtful and strategic about choosing for which clients we want to be aggressive when it's competitive process and we feel great about our portfolio client relationships. Importantly to us, we remain disciplined in our approach to negotiations and the net of these recent wins and losses leaves Visa and our partners in a better strategic position for the long term than we would otherwise been the case. Couple of other quick updates on the regulatory and legal fronts. First of all, in Russia, we've been actively working with the National Payment Card System and Central Bank to achieve full migration of Russian domestic Visa transactions with minimal disruptions.
All domestic visa transactions will continue to be processed in accordance with the National Payment System Law. And in the U. S. On the merchant litigation case, we continue to make good progress in settling the opt out cases. Fiscal year to date, we've paid out $321,000,000 and additional settlements are progressing nicely.
And we continue to lead the world into the world of digital commerce. Visa Checkout continues to make great strides. We now have 2 60 Financial Institution Partners and 140 merchants live globally.
To date,
we have over 4,000,000 registered users, over 46,000,000,000 in total addressable volume accepts to Visa checkout and we continue to add merchants, including small and medium sized retailers, where our acquiring partners are helping us grow acceptance. We're also deploying Visa Checkout outside of the U. S. As an example, we launched Visa Checkout in China at the end of March. China Merchant Bank is the 1st financial institution in China to introduce Visa Checkout to its customers.
And in the coming months, we're working with other Chinese institutions to deploy checkout. In April, we kicked off consumer marketing campaigns in both Australia and Canada in partnership with some of the biggest merchants in those regions. We're on track to be live in a total of 16 markets this year. Comscore conducted a study last month to evaluate our progress with merchants since launching Visa Checkout last July. The findings are very clear.
Visa Checkout customers convert to buyers 69% of the time. This is 66% higher than conversion rates reported with traditional online checkout. The product is doing exactly what we said it would do solving the online friction problem at a rate that's higher than the competitive solutions we surveyed. Then the digital solution space, a few comments. In my time here at Visa, it's amazing the amount of companies that are working and talking about the future of payments in the role, some very young and some very established.
Regardless of the tenure, it's clear to me that the fall to 2 categories, those that talk about being innovative and those that are actually driving innovation in a way that truly drives incremental value and can scale. I'm proud of the work of the Visa team and proud to be leading the industry into this digital world. When we launched tokenization, we told you it was more than a set of just security standards. We said it was a platform to enable new commerce experiences then came Apple Pay. When we participated in the Apple Pay launch, we said it was just the beginning and there will be more solutions that leverage our digital platforms.
Since then Samsung has announced the new Galaxy S6 payments experience and Google's Android operating system supporting host card emulation. And we have several clients developing new HCE based applications in our sandbox as we speak. As the industry leader, Avisa Partnerships gives the chance for these experiences to be successful because of our technology, our scale and our leadership. Our innovation is not something every consumer sees, but it is the things that we do as a platform that others can build upon and it's our platform that becomes embedded in all sorts of devices, operating systems and mobile apps. Essentially, we're enabling our partners to take advantage of 1 common digital payments platform and a set of standards, but still able to customize their solutions to their specific client needs appropriate to their markets with their preferred user experiences.
Great companies come to Visa first because they know we understand the technology of payments better than anyone else and we understand the needs of their users. And we continue to build out our capabilities to support our merchant partners. We completed our acquisition of TrialPay this quarter. It's a platform that we've worked with before and one that proved its value proposition before we decided to acquire the company. Combined with our broader merchant capabilities across Visa Analytics, loyalty products and VisaNet capabilities, is a platform that we intend to use to help merchants improve their marketing and thereby drive their incremental sales.
During the last 6 months, we introduced to the markets 3 new products and solutions specifically designed to help our merchant partners. First, we created a customer intelligence dashboard, a custom analytic dashboard for merchants to enable them to understand who's shopping with them at the store level. We're helping merchants not only understand the sales trends, but also who's shopping, their demographics, where they live, where else they shop, etcetera. The platform is helping our gasoline merchants better predict demand, airlines to optimize routes and load factors and many others to optimize marketing campaigns. The second solution is a digital marketing measurement product.
Earlier this year, we launched new platform, which enables our merchant clients to measure their digital market spend with an entirely new level of accuracy. When a merchant runs a digital campaign, we're able to show them in real time how many of those impressions led to specific sales using a Visa card. For many years, merchants have taken a big leap of faith that clicks led to real sales. For the first time ever, we're now helping them measure the actual sales. The final example is a pilot program, but one that we're excited about.
It's platform that actually drives new customers into our client store. The platform is powered by trial pay where we place targeted merchant offers on the web and on mobile apps. For example, you're checking into a flight, you'll see an offer to get 500 miles if you shop at Peet's Coffee in the next week. When the customer comes in to buy their coffee, they're notified in real time that they've received their bonus, miles in this case. Also, we track the purchases and show the merchant in real time how many of the customers are coming into which specific stores.
Early days, but client interest remains very strong. And as you can see, these are products, which we believe over a period of time changes our dialogue with merchants as we help them grow their business. So just to wrap up, we're very pleased with our performance for the first half of the fiscal year, especially in light of some of the challenging aspects of the economic environment. It continues to be very exciting time in payments. As you can tell from all the recent announcements, we remain bullish on our future and we continue to broaden and deepen our working relationships with issuers, acquirers, merchants, governments and other third parties.
With that, Vasant and I will be pleased to take your questions.
Okay, Shania. We're ready for the Q and A. Thank
Our first question is coming from a Tarrin Peller of Barclays. Your line is open.
Thanks guys. Listen, just trying
to square a little bit more
of the discussion on EPS growth being at the low end of the mid teens guidance range with given that your unchanged revenue growth guidance. I mean was it primarily tax rate assumptions in the second half of the year? And then just to further add to that, were you are you incorporating further volatility benefits FX volatility benefits in your outlook and guidance because it clearly helped your cross border volume revenue growth this quarter? Thanks guys.
Yes, Darren, just a couple of things. One, I think the 2 things you should take away from what we said was there's a certain amount of moving around going on between the Q3 and the Q4. We said that the revenue growth in the Q3 will be the low point of the year in terms of growth and then it will pick up in the 4th quarter approaching double digits. So that's one thing. The second is expense growth will step up a bit in the Q3, still at the mid single digits level for the full year.
The step up in the Q3 is some expenses shifting between the first half and the second half in marketing, in technology. And then if you look at our personnel expenses, you should be looking more at what the Q1 level was and a little bit of growth with some of the initiatives we have underway. And then the last piece that shifts things mostly between the 3rd Q4 was the tax rate. The main takeaway from all this is as we said $0.06 to $0.08 shift out of the Q3. And for the full year all we're saying is we still feel good about the range we provided, but we are at the lower end of the range and really in line with where the Street is right now.
Your other component of the question was remind me Jack. Yes, currency volatility, we did tell you that it was at 5 year highs in the Q2. So in terms of what we're expecting going forward, as you know, we benefit when there's volatility because FX spreads widen. It does offset a little bit the translation impact of currencies. We're not assuming they stay at 5 year highs.
We're assuming that there's some amount of regression to the mean, but we're not assuming they go to the kinds of lows we saw last year. So it's anybody's guess really. So we're just assuming that it's not to stay at this level, but nor is it going to be as calm as it was last year. Next question please.
Next question is Moshe Orenbuch of Credit Suisse.
Great. Thanks.
Could you talk a little bit about how you will be trying to protect the volume from Costco together with Citi from American Express trying to win it back? And maybe just as a corollary, just talk a little bit about your thoughts about what's going to happen existing co brands come up for renewal and the competitive environment there?
Well, so let me look at the second one first. I mean, co brands are in the market certainly all the time. It's been a competitive marketplace. And all the things that I talked about in terms of the advantages that we think we brought to Costco, we think we can provide to almost all co brand partners out there. We are in this case, it's certainly helpful to be the incumbent and the leader in the space.
We've got deep relationships with the largest co brand providers certainly here in the United States and others across the world. And those are relationships where we believe if you treat the partner properly, you prove to them over a period of time, you help them grow. There's got to be a reason for them to want to do something else other than be with you. And so we feel very good about our positioning there. On the Costco front, I mean, again, I think when you take a look at what we bring to the equation, you can assume that Costco who's got the most to lose in this has thought an awful lot about what risks they have and what opportunities they have.
And the reason for them to want to go and take the risk of moving the portfolio is because they think there's more upside doing business with us and Citi in this case. And when we think about and they think about the brand preference that their customers have, as I said in my remarks, the things that specifically the affluent and millennials think about our brand versus the competing brands out there, we're very confident that we'll be able to do a better job for Costco than the incumbent. And that will start day 1 as we work extremely closely with Citi and Costco. And that work has begun already.
Thanks. Congratulations on the big win. Thank you. Next question please.
Next is Jason Kupferberg of Jefferies.
Thanks guys. So can you just confirm whether or not some of your planned pricing actions for April got implemented as expected? And then can you also just clarify related to Costco, the incentives there hit in fiscal 2015 or in fiscal 2016 when the contract actually begins? So Costco will be 16.
And the pricing is in. Just to clarify, the pricing there were 2 changes both of which happened in April. The first was U. S. Acquirer service fees on all credit products and the second was U.
S. Acquirer international service assessments. They went in roughly around the same time, but the impacts are somewhat different. So one of them hits a little earlier in terms of impact on our financials, the other a little bit later. So we get the full benefit of the pricing in the Q4.
We get a little less of a benefit in the Q3 and it's really a small difference, but it's in.
Okay.
Next question please.
Yes. Sanjay Sakhrani of KBW.
Thanks. I guess I have a follow-up question to the Costco. Charlie, you mentioned it's been competitive in co brand, but is it from an economic standpoint incrementally more competitive? And I guess does that then play out further as you renew some of the other co brands down the line? And then I guess secondly how confident are you that Citi will be able to secure the portfolio from American Express?
Thanks.
So when you say is it economically more competitive?
Is it getting progressively more meaning like are the economics materially different than they were before?
Well, first of all, so look first let's talk Costco for a second. Then let's talk more broadly about Co Brands. And I tried to make this point clearly. So let me just say to make sure that I'm even clear on it which is we view Costco as something extremely unique. And so this is an industry where it's amazing the gossip whether and I don't know whether it's the consultants or what it is, but everyone likes to go around and talk about everything that's happening in terms of pricing and who did what to whom on this.
And what I would tell you is what we and my guess is issuers were willing to do for Costco is very specific to a unique opportunity to gain the kind of credit acceptance that we've talked about and the kind of co brand that we've talked about for a partner now that didn't accept our products in the past of this size. It is a we just we view it as a unique opportunity to capture that volume and then to use the ability to have that acceptance to grow our products elsewhere regardless of whether they're co brand or not co brand. But obviously the co brand here will bring it with it extraordinary benefits. So Costco to us stands on its own in terms of the way we think economically about what we should be willing to do. In terms of whether the co brand space is getting more competitive economically, I'm not sure from where it's very, very competitive as is the issuing business.
And I think when people lose relationships like this, they need to figure out where they're going to look. And so we assume that they'll continue to be competitive. And as we think about our future and we think about our ability to continue to deliver the kind of growth that I think you were all expecting from us, we factor that into our assumptions along the way.
Okay. And just the Citi portfolio? Citi's portfolio?
And I'm sorry. And make sales of the Citi of the existing portfolio?
Everything that we hear is suggests confidence, but we're not a party to it. Next question please.
Next is Bill Cartagena Nomura.
Thank you. Apologies for another Costco question, but I was wondering if you could speak to whether any of your issuing bank partners have expressed any sort of concern about the interchange rate at which the Costco volume will be coming over just in the sense that it could be difficult for them to offer rewards on the Costco spend. Just curious if you think that could be an issue?
Well, I guess, I would start with there were a lot of there were more issuers than Citi who wanted to win the co brand. And so whoever certainly was involved in the process understands the competitive dynamic and what would exist. And again, I think from our perspective, the conversation is exactly what I've said here is, this is it's a unique and strategic opportunity to get access to an extraordinary amount of volume that we and our clients weren't going to have access to. And if you think about if we didn't win the kind of conversation that we were going to have and the kind of conversation we would have to have with our issuers and their clients about not being able to participate in one of the opening of 1 of potentially the biggest retailers in the world is not a conversation that we would have relished. So we feel very good about what we've done here.
When we make decisions that affect our clients, we take them extraordinarily seriously and understand that they will look at those decisions in the context with everything else that we do for them. And we feel good about what we've where we've come out and are confident that it's a benefit for them. Great. Thank you.
Next is Craig Maurer of Autonomous.
Yes. Hi.
So a question on Brazil, the Itau loss from what we understand that will be fairly material as a percentage of that business. And with Elo creeping into the market as well, are you concerned at all about Visa's historic market share in Brazil shrinking significantly? And following up on your comment on a Mexican win, do you have any greater visibility on when that market will open for Visa processing? Thanks.
Let me do the first one and then Jack may just remind me about the second question. So in Brazil, listen, losses are losses. I would just make it clear that these types of decisions aren't generally decisions that people make without talking to a series of people. So we were certainly involved in a series of the conversations. And again, everyone makes their decisions in terms of what they're willing to do and at what price they're willing to do it at.
And when a large issuer says that they're going to move volume away from you, it's going to be hard for us to make that volume up elsewhere. And that's a decision that we chose to make to some extent relative to how aggressive we were willing to be relative to pricing. Because we as I said in my remarks, it's important for us not just to win volume, not just willing to win incremental revenue, but do it in a way which is smart for us and for the payments industry for the long term. And LO is it is a fact. It is what it is.
It's a different kind of network with different kind of capabilities targeted for the most part at different types of consumers than we generally target our business. And I'll tell you that I feel great about the relationships that we have with the other large issuers in Brazil and think we have the opportunity And Mexico, yes And Mexico, yes, I mean there's no timetable. We're actively working on some things there, where we think that we can prove to the issuers that by us processing, it actually becomes a benefit for them and there's nothing imminent there, but it will evolve over time. Next question please.
Next is Dan Perlin of RBC.
Thanks. So my question is basically this. The step up in expense growth occurring at the same time that your incentive fees are kind of suggesting that they're also stepping up. I guess there's 2 things. One is, it kind of alludes to the fact that you obviously see something on the horizon maybe at second half of this year or early into next.
And I'd like to get some color on that, why you pulled the trigger on both at the same time? And then secondly, why the incentive fee slips? So why did the client take so long to convert? What were the what were those conversations like? And why have they not taken place?
Thanks.
So let
me do the first one first. I mean the first are unrelated and it's there's nothing that we see on the horizon or anything like that. As we said, incentives first of all, we've talked about I mean, I've been here 2.5 years and it seems to me we talk about this every single quarter, which is we do our best to provide insight and we certainly do it for our own planning as to what incentives are going to be quarter by quarter. But we don't have a lot of control over it. It's hard to know exactly when negotiations will become finalized, contracts will close and it changes the level of incentives.
So as we've talked about multiple times, it's the full year that we really think about as something that we feel much better about than quarter to quarter. And on the one hand, we'd love to have things closed sooner. It's not something we try and delay, but it's just it happens in the normal course of business. And on the marketing side, there it just relates to some specific things that we're going to be doing in the second half of the year that really relate to the summertime coming out of the summer into preschool and then eventually leading into the holiday season that relates to how we want to time our marketing spend.
Yes. I just want to highlight that we're not changing anything in terms of our full year expectations on expense growth. So there's really no change. So it's not like we pull the trigger to do something different in the 3rd or 4th quarter. As Charlie said, there's some marketing programs, particularly as it relates to Visa Checkout that we think we can get a lot of traction doing in the back to school period.
That's money that has been coordinated with merchants and things like that that this is the best time to spend it. There are some regional marketing programs that are happening in the second half. There are some technology initiatives that are ramping up that may have been a little slower to start than we might have expected earlier, but are ramping up into the year, but it was all expected. So fundamental and then in terms of the personnel expenses, there's a reasonable sort of predictability in that. It fluctuates from quarter to quarter sometimes based on some noise small items here and there.
But if you look at our Q1 run rate and you assume there's a certain amount of growth with some of the initiatives we have. All in all, I guess the short answer is we're not doing anything specific to ramp up the expense growth and our full year expectation does not change. And as we said in our remarks, if the world changes, we are ready to take a hard look at what remains to be spent and decide whether it needs to be spent.
Next question please.
Yes. Our next question is, I'm sorry, it's James Friedman of Susquehanna.
Susquehanna. Hi, thanks. It's Jamie in Susquehanna. Yes, I want to ask about commercial. So Charlie, any perspective about how you're doing on the commercial side?
1 of your competitors had called out some weakness on the commercial side, at least in North America in the calendar Q1. Do you think that you're taking share? And how are you competing in the commercial market?
Setting aside sort of the share question, I mean commercial payments growth for us in the second quarter was quite healthy at 10%. It's performing well. A lot of interest from non financial institutions, participants to provide value added services. So there's a lot of non traditional people coming in like technology providers, healthcare entities and so on. I don't know Charlie?
No. The only thing
listen I think commercial I think we all talk about commercial across all of the different people that participate in this business is one of the great opportunities.
I mean
the 2 really meaningful opportunities that the industry has that are really meaningful apart from just the business as we know it is P2P and commercial. They're large, large sums of money that we on the commercial space specifically, we compete in. We've worked really hard on our products. We're doing fine in it. I really don't know about share.
It's hard to know about it. But I think the 10% growth has the opportunity to be much, much larger. And that's something that we're working through. And hopefully in the coming quarters, we'll have more to talk about specifically about what we're doing there. But so but as but it's an important business for us today.
And the question is whether or not we can crack a nut and incrementally move it from something which is incremental to which is more of a step function.
Thanks, Jamie. Next question please.
Next is Jim Schneider of Goldman Sachs.
Good afternoon. Thanks for taking my question. Charlie, relative to the China opportunity, I realize that there's a lot of unwritten rules at this point and there's a lot of things still in the air. But can you maybe talk about your operational readiness from a network perspective to enter China and what you need to get to a level of full functionality there and kind of the game plan on that front?
Yes. Again, I would say, I mean, this one that really the devil is going to be in the details in terms of the way the rules are written. I would say it's been our expectation. Well, let me back up I guess. I guess what I said in the remarks is that there was what has been said has been what we've expected.
And so you should assume that we've been planning for that and working towards that. There are different time periods that are laid out in terms of what the State Council announced relative to when things would have to be ready. And we have teams of people around the company that are working to be prepared to enter as soon as we possibly can.
Next question please.
David Hofstede of Buckingham.
Yes. Hi. Thanks. I wonder could you just go back to the international transaction revenue growth and help us understand how much of the change really was attributable to what the change is attributable to the increase in FX volatility as a big gap might be even bigger next quarter? And do you have a currency adjusted growth rate that would help us get back to that?
And I guess also there's mix differences because of changes in cross border spending?
Yes. I think you should look at the there's 3 things going on in that international transactions line. One is, of course, all those transactions are in various currencies. So there's clearly an FX translation impact, which is largely negative. The second is the things we talked about, which is that strong currency markets have outbound commerce that's improving, but the purchasing power of the currency is greater so that you don't get the full volume benefit even though transactions are growing.
And then in weak currency markets, you've got inbound you've got declining outbound commerce and a weaker currency. The net effect of all this is also negative. Offsetting that certainly we've benefited from volatility. I don't think we've really ever publicly quantified those kinds of benefits. They move around.
But clearly there's no question that some of the negative impact of the currency translation has been offset by the widening of the spreads. And the 2 are uncorrelated. You could see the currencies move in the other direction, but the volatilities could don't have to go along with them. So but we'll keep you posted. As I said in the comments or in the question earlier, we're not assuming that volatilities remain at these highs.
We're assuming some moderation in volatilities in the second half of the year, We're also not assuming that currency markets will go back to being sort of as calm as they were around this time last year.
Right. So if they stayed close to these levels, we could see higher revenues than you have built in?
Yes. But it depends what also the fact. Yes, exactly.
I mean there are other things as I said there are 3 things going on in that line. So, yes, I mean higher volatilities will help us on that particular dimension. On the other hand, a move in currencies, which affect the translation line and so on. There are just many things going on in that line. Thanks, David.
Next question?
Ryan Kane of Deutsche Bank.
Hi, guys. Just wanted to hopefully get some a way to quantify the city and into losses. And then is it offset by some of the gains that you've had? Just trying to think about future modeling purposes. And then secondly on tokenization, my understanding is we'll probably suspend charging for any fees even beyond fiscal year 2016.
Just
again, as I said in my remarks, not clear to us what the migration looks like. So it's hard to be very, very specific other than things like Costco and the other positive developments that we have make us feel very good about how those things all fit together. Tokenization what's the question tokenization?
Are we going to continue to charge in 2016?
We'll be charged. Right. So we have the rate card out there. We've waived it through 2016. And we're continuing to look at exactly what we think the right way I would say what the right long term way for people to think about tokenization is.
But
to me
the important thing is no one should expect that to be a monetary driver for us.
And with that Shania, we have time for one more question.
Yes. We have Tien Tsin Huang of JPMorgan. Great. Thanks. Just want to, I guess, ask on Europe with legislation getting close to being finalized.
Does that change the probability to put in any way? What's the latest there, Charlie? And then just on Costco real quick. Just the exclusive merchant acceptance, how critical was that for Costco and I guess Visa? I know that's what's driving a lot of the uniqueness to it.
Thanks.
Yes. So on the first one, listen I don't think it changes the probabilities at all from our perspective because we're not inside their boardrooms to understand exactly what they're saying and what their drivers are. So the everyone it's a consistent question that people ask us in terms of what the probabilities are. And we really don't know because they need the 80% vote. Until they get the 80% then it's not going to happen.
So really don't know, really don't understand what the dynamics are. And again what really matters is how the blocking group of people feel about it. So those that don't want to vote for it and again that's something that we're just we're not privy to because we're not in those boardroom discussions. But again to circle back, we work really closely with Visa Europe. Example, whole group of people here today, Nicola, the CEO is here today as we're just working through all the things that we're doing together to do a great job for our global clients enable them to be as competitive as they can be versus the competition in Europe.
And then the credit acceptance versus Mastercard and American Express hugely relevant. I mean that's why when you talk about the uniqueness of it, it just doesn't exist for a merchant this size that never accepted our product and now all of a sudden doesn't accept our other major competitors here in the United States. So as we think about what that means for all of our clients and for our cardholders, that certainly factored into our thinking and the I'm sure the issuer's thinking in terms of the importance and what it could mean for certainly for our brand.
And with that, we'd like to thank everybody for joining us today. If anybody has any other questions, feel free
to give Investor Relations a call. Thank you.
That concludes today's conference.