Visa Q4 Earnings Call Transcript

123jump.com Staff
06 Nov, 2008
New York City

Visa Inc., the largest retail electronic payments network posted strong fiscal fourth quarter results on higher global volumes and strength of U.S. charges. The adjusted diluted earnings in the fourth quarter was $448 million or 58 cents a share and for the year was $1.7 billion or $2.25 a share.

Visa Inc. ((V))
Q4 2008 Earnings Call Transcript
October 29, 2008, 5:00 p.m. ET

Executives

Jack Carsky – Head of Global Investor Relations
Joseph W. Saunders – Chairman and Chief Executive Officer
Byron Pollitt – Chief Financial Officer

Analysts

Tien-Tsin Huang – JPMorgan
Adam Frisch – UBS
Charlie Murphy – Morgan Stanley
Craig Maurer – Calyon Securities
Julio Quinteros – Goldman, Sachs & Co.
Andrew Jeffrey – SunTrust Robinson Humphrey
Patrick Burton – Citigroup
Christopher Mammone – Deutsche Bank
Daniel Perlin – Wachovia Securities
Gregory Smith – Merrill Lynch & Co., Inc.
Sanjay Sakhrani – Keefe, Bruyette & Woods
Bruce Harting – Barclays Capital

Presentation

Operator

Welcome to Visa Incorporation’s fiscal fourth quarter and full year 2008 earnings conference call. All participants are in a listen-only mode. Today’s conference is being recorded.

I would like to turn the call to your host Mr. Jack Carsky, Head of Global Investor Relations for Visa. Sir, you may begin.

Jack Carsky

Thank you Jose. Good afternoon everyone and welcome to Visa Inc.’s fourth quarter and full year 2008 earnings conference call.

Speaking today are Joe Saunders, Visa’s Chairman and Chief Executive Officer and Byron Pollitt, Visa’s Chief Financial Officer. This call is currently being webcast live 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 site for 30 days. A PowerPoint deck containing highlights of today’s commentary was posted to our website prior to this call.

Let me please remind you that this presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. By their nature forward-looking statements are not guarantees of future performance and as a result of a variety of factors actual results could differ materially from such statements. Additional information concerning those factors is available in the company’s filings with the SEC which can be accessed through the SEC website or the Investor Relations section of the Visa website.

For historical non-GAAP or pro forma 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 our fiscal fourth quarter earnings press release. This release can also be accessed through the Investor Relations section of our website.

With that, I’ll turn the call over to Joe.

Joseph W. Saunders

Thank you Jack, and thanks to all of you for joining us this afternoon. Before I discuss earnings, let me speak to the Discover litigation which as you know, we settled just two days ago. We are obviously very pleased that we were able to put this behind us in a manner quite consistent with our retrospective responsibility plan. An additional component of the Discover settlement is settlement of unasserted claims by MasterCard. And with this settlement, I am delighted to tell you that all disputes between Visa, it’s primary competitors, MasterCard, American Express, First Data and Discover have now been resolved. That’s an important milestone. Although the expense for the Discover settlement did flow through our income statement this quarter, as per the retrospective responsibility plan there is no direct cost to our public Class A shareholders and there is no dilution to their holdings.

With respect to the MasterCard release as previously reported, Visa Inc. had taken a $30 million after-tax reserve in the third quarter since this claim is not covered by the retrospective responsibility plan. As the obligation was connected to the ultimate settlement amount, we recognized an additional $80 million after-tax reserve this quarter.

As a result of the Discover settlement, we will be taking steps this fiscal first quarter to fund our escrow account with an additional $1.1 billion. As per our retrospective responsibility plan, when we fund the escrow, our Class B shareholders will bear this cost via a reduction in their as converted share count.

It is our intention to seek an amendment to our charter to permit us to deposit our own funds into the escrow account and buy down Class B ownership directly. This approach reduces the total number of shares outstanding for EPS calculation purposes, effectively operating as a share repurchase program in the amount of $1.1 billion.

Now, let’s move on to earnings. In the face of a tough US economic environment and increasingly difficult international economic situation as well, the relative resiliency of Visa’s business model is once again reflected in our earnings results. Our adjusted fourth quarter net income was $448 million. This equates to adjusted diluted earnings per share of $0.58. For all of 2008 adjusted net income was $1.7 billion, while adjusted diluted earnings per share was $2.25.

Net operating revenues in the fourth quarter were strong at $1.7 billion, an increase of 17% over the fourth quarter of 2007 on a pro forma basis, as we again saw solid growth across all three categories. For the full year 2008, net operating revenues were $6.3 billion, an increase of 21% over 2007 on a pro forma basis.

As we have signaled in the past earnings calls, we are now seeing operating revenues running more in line with our long-term guidance as the positive effects of earlier pricing adjustments had generally been reflected on a year-over-year comparative basis. We also continued to realize the positive impact of our operating scale on our efforts in reorganizing Visa as a publicly traded company. We maintain good expense control on our fourth fiscal quarter and for all of 2008, and we remain committed to managing our expenses prudently without compromising investments in products and technology necessary to fuel future growth. As a result, we delivered strong operating margins this quarter, in line with our recently increased external guidance of mid to high 40% range and we expect to continue that to be the case in fiscal 2009 and 2010. Though the recent past has been relatively positive, what are we seeing for the future?

From a broad prospective, we are seeing a further slowdown in consumer spending activity in the US as well as in cross-border volumes. Here in the US for the calendar quarter ending September 2008, on which our 2009 first fiscal quarter''s US service fee revenue will be based, aggregate payment volume growth in US has continued to trend at the 10% level seen in the June quarter. Deconstructing this further, credit volume growth averaged in the low single digits in the quarter trending lower through September.
In sharp contrast to credit, debit volume growth was running at low to mid double digits throughout the quarter, pointing out not only the resiliency of this product but the fact that the secularship to plastic continues. Since the beginning of October, we have experienced additional moderation in volume growth in the US credit payment volume which was in the 1% to 2% range for most of the quarter has turned negative through the first three weeks of October. In contrast, debit payment volume has continued to grow at low double digits. While international payment volume growth rates remained stable through September, cross-border volumes are off the high-teen level seen in the June quarter and were running in the high single digits at the end of September. And it is important to remember that despite the current economic turbulence, international growth both in credit and debit continues to offer us very attractive longer term opportunities as economies mature and payment systems evolve around the globe. Visa is in a superior position to benefit from this trend over the long term.

So, working in our favor is our industry leading debit presence here in the US and still positive growth rates in credit and cross-border volumes around the globe through September. This should allow us to meet the high end of our 11% to 15% revenue guidance for our fiscal first quarter of 2009, and based on initial observations in October, the middle of the range for our second fiscal quarter.

Given the uncertainty over the longer term direction of the economy however, in the US and around the globe for the full year of 2009 and 2010, we are targeting the lower end of that 11% to 15% revenue range including the possibility of single digit growth in our fiscal third and fourth quarters with low to flat cross-border volume growth.

But importantly, we remain committed to meeting our guidance of adjusted operating revenue margin in the mid to high 40% range and the 20% plus adjusted diluted earnings per share growth for 2009 and 2010. Even in a downside scenario that saw only mid to high singe digit revenue growth in 2010, we could sustain these targets. Byron will cover additional guidance metrics and other underlying dynamics momentarily.

Finally, let me touch on the current wave of bank consolidation and how I see it affecting Visa over the near and longer return. Well, bank consolidation has accelerated recently. It has been a constant factor in the financial industry for decades. The Visa organization and our strength in both credit and debit has proven to be highly adaptable to the changing marketplace conditions. Past mergers in the industry have not had a negative affect on us. To the contrary, our technology scale and product suites make us an attractive partner to our very largest clients as well as the smaller community banks risk and credit units.

So in the current wave of consolidation, we believe that we are in good shape but that does not mean that we are resting on the positive history of these relationships or that we take them for granted. We will remain focused on serving our clients and adding value to those relationships wherever we can.

With that, let me turn the call over to Byron who will take you through the financial results and I will be back to provide updates around some of our newer business initiatives.

Byron Pollitt

Thank you Joe. Let me begin by highlighting some of the business and revenue drivers from the quarter that are representative of the strength of our business.

Payment volume through the end of June, which drives our fourth quarter service fees, grew 15% to $699 billion over the same quarter of 2007 on a pro forma basis with the US growing at 10% and the rest of the world growing at 25%. In the September ending quarter, US payments volume continued in the 10% range. Through the first three weeks of October, US payments volume growth has moved to mid-single digits with credit turning negative and debit in the low double digits.

Cross-border volume growth in the June-ending quarter was in the high teens moderating to the mid teens in the September quarter though trending lower through the period to end the month of September in the high single digits. In October, cross-border volume growth continued to trend down in all regions except CEMEA.

To put cross-border payment volume in historical context, in the recessionary period of late 2001 and early 2002, monthly payment volume growth fell to low single digits and there were several months that were slightly negative, but the severity differed around the globe and on an annual basis. It remained positive for each of those years and importantly upon an economic recovery, the rebound was swift and meaningful across all regions.

Moving on to transaction growth, payment and cash transactions were up 14% to $14.1 billion in the quarter ending June 2008 versus the prior year. While the US grew approximately 10% during the period, the rest of the world grew at 20% led by our CEMEA region at 27% and Asia Pacific and Latin America at 19% and 23% respectively.

Process transactions or those that we define as being processed over Visa’s network totaled $9.6 billion in the fiscal fourth quarter, an increase of 11% over the similar period a year ago. Globally, which excludes Europe, card growth for the period ending June was up 12% with over 1.6 billion cards carrying the Visa brand. Credit grew 8% to 798 million cards while debit rose 17% to 847 million cards.

Internationally, credit and debit card growth was very strong, each growing 18% year-over-year. While credit in general is a more mature market domestically, you can see that internationally we continue to have a lot of runway. On the debit side, as we have often stated, one of our near-term goals is moving these debit cards from cash at ATMs to the point of sale.

Moving on to the income statement. In the fourth quarter, gross revenues of $2 billion were up 20% from the pro forma prior year. Volume and support incentives increased by $83 million to $299 million representing 15% of gross revenue. For the full year, gross revenues of $7.4 billion were up 26% from the 2007 pro forma period. Volume and support incentives increased by $447 million to $1.2 billion representing 16% of gross revenue.

For 2009, we are expecting volume and support incentives will run in the 16% to 17% range. If we continue to see lower levels of payment volume growth, we would expect to see some offsetting benefit in this line item.

Total net operating revenues were just over $1.7 billion, a 17% increase over the pro forma operating revenues reported for the fourth quarter of 2007. For the full year 2008, total net operating revenues were $6.3 billion, a 21% increase over the pro forma operating revenues of $5.2 billion reported for 2007.

Moving on to the individual revenue line items, service fee revenue was $788 million, up 8% over the pro forma results of the prior year period, reflective of higher year-over-year payment volumes in all regions. For all of 2008, service fees were $3.1 billion, up 19% over 2007 on a pro forma basis. Data processing fee revenue was $548 million, up 18% over the prior year period''s pro forma $463 million. For the full year, data processing fees were $2.1 billion, up 25% over 2007. International transaction fees were up 45% to $512 million. While for the full year 2008, they were up 44% to $1.7 billion. Both time periods continued to benefit from strong, multicurrency payment volume across all regions as well as from pricing adjustments we made in April of this year to cross-border transactions involving US issued cards.

As mentioned earlier, cross-border transactions are currently moderating across the globe though we remain cautiously optimistic that they will continue to post growth and rebound with the economy.

Our adjusted operating margin was approximately 45% this quarter and 46% for the full year consistent with our guidance. On an adjusted basis, operating expenses for the fourth quarter declined $229 million or 20% year-over-year to $943 million, driven primarily by lower cost for marketing and personnel.

For all of 2008, on an adjusted basis, operating expenses were $3.4 billion, a decline of 4% compared to the 2007 pro forma period, again driven by lower cost for advertising and personnel. We expect that advertising and marketing expense in 2009 to be relatively flat to 2008 and we are continuing our focus on driving operating efficiencies across the enterprise.

Capital expenditures were $93 million in the quarter, over half of which were dedicated to the build out of our new data center. Fiscal 2008 capital spending was approximately $415 million. For fiscal 2009, we expect CapEx to be between $300 million and $350 million lower than the 2008 figure, but still elevated as we complete our new data processing center. Post 2009, we expect CapEx to run at around 3% to 4% of gross revenue on an annualized basis.

Moving on to the balance sheet, we ended the fourth quarter with cash, cash equivalents, available for sale investment and restricted cash of $7.5 billion, a decline of approximately $900 million over the prior quarter. This variance was the result of our annual $200 million payment for the retailer’s litigation settlement which runs through 2012, as well as a reclassification of approximately $953 million from the cash line to the other current assets line on our balance sheet. This reclassification was the result of our investment in the Reserve Primary Fund, a previously highly rated money market fund becoming illiquid. This resulted in an impairment charge of $29 million in the fourth quarter. We believe we will receive our net investment of $953 million over the coming months as the fund is liquidated. This charge is reflected in the investment income line on our P&L and it’s the primary reason we saw a decline in that line this quarter.

Of the current $7.5 billion in cash, cash equivalents, available-for-sale investments, and restricted cash, restricted cash of approximately $1.9 billion represents the balance of the $3 billion litigation escrow established at the IPO less the initial payments to American Express of $1.1 billion. Please also note that of the $7.5 billion in year-end cash, that on October 10th, we deployed $2.6 billion to redeem all of the Series II and a portion of the Series III Class C shares that were held by Visa Europe. Thus, on a pro forma basis, cash and cash equivalents should be reduced by this amount for the current fiscal quarter.

Let me remind you that the balance of this C class common stock holdings continue to be locked up until March 2011, while the Class B shares are locked up until the later of March 2011 or upon resolution of all of the covered litigations. Our pro forma share count post this redemption stands at 776 million shares. As we have stated since our IPO road show, given our sizeable free cash flow, we have always anticipated implementing a share repurchase program in keeping with our strong belief in returning excess cash to stockholders. In this context, the action Joe discussed earlier to fund the escrow this quarter directly from our cash balances has the same effect as a stock repurchase since Visa will be buying down Class C shareholdings and reducing the amount of shares outstanding for EPS calculation purposes. The size of the repurchase is expected to be approximately $1.1 billion.

Before I get into our views on 2009 and 2010, let me bring you up-to-date on how we are viewing our evolving capital structure strategy. Simply stated, the key objectives are to reduce our cost of capital over time, ensure adequate liquidity to cover transaction settlement risk and provide sufficient financing capacity to fund future, contractual or other obligations such as a Visa Europe and attractive acquisitions. As part of this strategy, management also intends to identify excess cash on the balance sheet and then further enhance total shareholder return by returning cash to shareholders in the form of dividend and share repurchases.

Under our preferred approach, the reduction in shares associated with the replenishment of the escrow account will be funded from excess cash. Although we have significant debt capacity today, we have no compelling use of proceeds and therefore plan to wait and add that at an appropriate time.

As we enter fiscal year 2009, the company believes that the combination of its cash reserves, bank collateral, credit revolver, and debt capacity is more than sufficient to cover Visa’s liquidity needs from any individual bank disruption or foreseeable financial events. As our capital strategy evolves, we will keep you updated.

Now, let me comment on what we see over the coming year as far as our operating performance is concerned. As Joe already mentioned, payment volume growth is moderating. As a result, on a full year basis, we are projecting revenues to come in at the lower end of our 11% to 15% guidance range. While we expect to achieve the high end of the range in our first fiscal quarter and the middle of the range in the second fiscal quarter, the third and fourth quarters could be more challenging with the possibility of single-digit growth.

We are maintaining our mid to high 40% range for adjusted operating margins in both 2009 and 2010 as we should continue to realize incremental savings from our merger and cost initiatives. We remain on track to deliver annual adjusted diluted earnings per share growth of greater than 20%, again for both 2009 and 2010 while annual free cash flow should exceed 2008’s figure of $1.7 billion. Our normalized tax rate for fiscal 2009 is projected to be 40% and we continue to take actions that are geared towards driving the rate down into a 35% to 36% range over the next four years.

That concludes my comments, so I’ll turn the call back over to Joe.

Joseph W. Saunders

Thanks Byron. Before we begin Q&A, let me give you a quick update on some of our longer term initiatives and their progress. Since our IPO road show, we have repeatedly talked about a series of longer term strategic priorities that we would be investing in to support our growth. Longer term opportunities we’ve identified include money transfer, prepaid, mobile payments, and e-commerce. Many of these innovations already are operational in Visa regions worldwide. A number of Visa’s new structure can be scaled more easily on a global basis.

In late September, we hosted a technology and innovation day in New York for members of the media, trade organizations, and analysts. In conjunction with that event, we announced several new innovative advances in electronic payments and services. First, we announced that we are developing the suite of mobile applications for the Google Android platform, which will be available for download on Android-powered handsets and initially available to select Visa cardholders. The services will allow Visa cardholders to receive notifications to their mobile devices about transaction activity on their accounts, obtain offers from a wide array of merchants, and use the built-in location-based technology developed by Google to quickly map nearby merchants where they can redeem Visa offers and locate ATMs that accept Visa.

We also announced in September that we are working with Nokia, the world’s largest mobile handset manufacturer, to deliver Visa payments and related services for Nokia’s next generation Near-Field Communication handsets. The Visa applications will first be made available for trial use by interested financial institutions. In conjunction with US Bancorp, we have launched the mobile money transfer pilot program to allow participating Visa cardholders to use their mobile phones and PDAs to securely send funds directly to another Visa cardholder. The first phase in the program which is expected to launch in early 2009 will enable domestic money transfers within the U.S. or involve key Visa issuers led by US Bank in as many as 6,000 Visa account holders.

Lastly, we announced the expansion of Visa ReadyLink, a prepaid reload service to enable the reload of eligible Visa prepaid products, products of ATMs across the US. Visa ReadyLink gives consumers a secure and convenient way to purchase and add funds to Visa Reloadable Prepaid Cards, a significant advantage to financially underserved consumers and those without a traditional banking relationship or access to a payment card. Visa estimates that there are more than 80 million financially underserved consumers in the United States.

In addition to the above initiative updates, we have landed a number of new pieces of business recently and although they may not be adding meaningfully to revenue in the near term, they speak volumes to our position in the debit markets around the world.
First, last quarter, we signed a multiyear agreement with the Royal Bank of Scotland Group under which the bank will begin issuing Visa-branded debit cards to all its customers. RBS includes Citizens Financial Group here in the United States. The migration to the Visa brand is expected to take place in the second half of 2009. This is obviously a big win for Visa in a highly competitive marketplace. We appreciate the trust and confidence RBS has placed in Visa and our debit offerings.

Second, we are announcing today that Visa and HSBC are expanding our global relationship to include new debit card programs in a dozen countries and territories throughout Asia Pacific and the first debit Visa payWave-enabled contact-less payment programs in the Middle East. Under the terms of the five-year agreement for Asia Pacific, Visa will become an HSBC partner for consumer debit products with HSBC issuing more than 10 million Visa debit cards in countries including Australia, India, Indonesia and Taiwan.

In addition, HSBC Middle East Limited will begin issuing Visa-branded debit cards in the regions in early 2009. Some of these new cards will be Visa payWave-enabled, allowing consumers to make contact-less payment transactions quickly and securely at the point of sale. The HSBC Visa debit card will be available to all HSBC customers in eight countries, including the United Arab Emirates, Bahrain and Egypt.

We are obviously delighted with our new arrangements with RBS Citizens and HSBC and look forward to working with both partners to help build their respective businesses. Importantly, these agreements deliver on our strategy to expand Visa’s global debit leadership as we seek to further the migration from cash and check to Visa payments.

With that, we’re ready to take questions. Operator?

Question-and-Answer Session

Operator

Yes, thank you. We are now ready to begin the question-and-answer period. In order to get to as many people as possible, please limit yourself to only one question. If you would like to ask a question, please press “*” then “1”. One moment for the first question. First question comes from Tien-Tsin Huang, JPMorgan. You may ask your question.

Tien-Tsin Huang – JPMorgan

Thanks, I appreciate all the disclosure. It’s really helpful. Let me ask a question about pricing. Has your thinking on pricing and the ability to push through price increase has changed at all since last quarter, given your commentary on the macro?

Joseph W. Saunders

I think that our position on pricing remains consistent with where we’ve been up to now, and I think that we’ve indicated that what we do from a pricing standpoint will be consistent with good business practices and our partnerships around the world.

Tien-Tsin Huang – JPMorgan

Okay, very good. May I just make a quick follow-up and just on bank consolidation. Joe, I know you gave some comments there but can you just give some additional insight on how and maybe when network brand decisions are made as a result to consolidation and obviously, how Visa’s decision given some of the known consolidation that’s out there?

Joseph W. Saunders

Well, to say the least, we’re in an extraordinary environment and some of these transfers take on – they’re different and they will happen at different times. We obviously, as I said, are in constant contact with our partners and will continue to be so, but I think it’s inappropriate to talk about contractual relationships.

Tien-Tsin Huang – JPMorgan

Fair enough. Thank you.

Operator

The next question comes from Adam Frisch, UBS. You may ask your question.

Adam Frisch – UBS

Thanks. Good afternoon and great job on the color as well, for what you’re seeing there. I have two questions on credit. First, can you speak to the quality of the 47% of your transactions in the U.S. that are credit? Any metric or set of data point that enables us to more appropriately assess the composition of your credit card holders?

Joseph W. Saunders

I’m not sure that credit card – well, credit cards are not 47% of our –

Adam Frisch – UBS

I’m just talking about the transaction or the GDV really, 47% of your GDV, but anything that speaks to the composition of your cardholders whether it be FICO scores or how many – what percent of them are revolvers or what percent of them are maxed out on credit lines, or anything that gives us some –?

Joseph W. Saunders

We’re seeing a shift, a continued shift in both the debit and the credit to non-discretionary purchases. And indeed, when we’ve gone back and looked at it, it is the more credit-worthy credit cardholders that seem to be driving most of the purchases in the environment today. There’s a very low percentage of those transactions that are being driven by people that are credit-impaired or is in the low end of the cycle bends.

Adam Frisch – UBS

And what percentage of your cardholders would be in that minority that are not generating a lot of this bend.

Joseph W. Saunders

About 5%.

Adam Frisch – UBS

Okay, so that’s great. And then just one other follow-up on the New York Times article today, talking basically about their suggestion of the systemic shrinking of the consumer credit card industry; obviously, more movement than normal than we’re seeing with different issuers, but do you see the entire supply side getting materially smaller? Or is it just some shifts going on between issuers in specific geographies?

Joseph W. Saunders

That’s a good question, and I’m not sure that I’m in a position to amplify on that right now. Hold the thought for a quarter and let me observe what’s happened from all this movement in the last several weeks.

Adam Frisch – UBS

Okay, great. Thanks guys.

Operator

The next question comes from Charlie Murphy, Morgan Stanley. You may ask your question.

Charlie Murphy – Morgan Stanley

Thank you. I was wondering if you could discuss the growth in service fees at 8% this quarter versus the 15% payment volume. Is that an indication of pricing pressure and how you expect that dynamic to play out over the next few quarters?

Byron Pollitt

This is Byron. Thank you for asking Charlie. As I think many of you can appreciate in October at this time last year, we merged together five distinct autonomous regions, and no sooner did we merge them and complete or IPO then we began to standardize all the regions on a common chart of account; and what we realized Charlie, as we began this exercise was that not all of our regions classify the revenue components in quite the same way, in terms of key categories as we report externally.

So as a result, in recent months, we have begun taking steps to standardize our revenue classifications globally and therefore, you’re beginning to see some of the effects of this common reporting format being applied; and therefore, you all are just going to have to bear with us a bit because our 2008 growth rates by-fee category are just not going to normalize until some time next year.

In this particular case, some of the early adjustments we are making are shifting some of what had been classified as service fees to data processing fees; and hence, the difference in the growth rates. I just want to emphasize two things. This has nothing to do with our ability to price or generate strong growth in any of these categories; and secondly, none of these changes impact our recorded total revenue. It’s getting all our regions aligned to report their key categories in a common standardized global format.

Charlie Murphy – Morgan Stanley

Thanks very much.

Operator

The next question comes from Craig Maurer with Calyon. You may ask your question.

Craig Maurer – Calyon Securities

Good afternoon. I wanted to ask if the global slowdown was affecting the level of banks in emerging markets that are looking to add your products or if it’s having any kind of effect on the secular growth in terms of bringing on new economies? Thanks.

Joseph W. Saunders

No. No, it isn’t. It certainly isn’t noticeable to us. We continue to make progress in emerging countries. Some of our biggest successes recently have been and continue to be in that category.

Craig Maurer – Calyon Securities

Okay, thank you.

Operator

The next question comes from Julio Quinteros, Goldman Sachs. You may ask your question.

Julio Quinteros – Goldman, Sachs & Co.

Great. Real quickly, Byron. Can you just go back to the two largest components of your expense, of your operating expenses, looking at personnel, advertising, marketing and promotion, and just walk us through how much further or what levels do you think you can drive those two as you think about the offsets to a slightly lower revenue trajectory over the next two years?

Byron Pollitt

So let me respond in this way. As you all may recall from the road show, management had identified approximately $300 million of expense opportunity across the enterprise that we were committed to achieving as a part of the combination or merger of the five regions. We believe that of that original commitment, we’re about two-thirds of the way through. However, we are also confident that there are additional opportunities beyond the $300 million originally committed, and that conviction is reflected in our guidance for 2009 and 2010, as it relates to our margins.

Julio Quinteros – Goldman, Sachs & Co.

Okay, great. And then just, can you just rehash the buyback commentary that you made with regards to the Class B shares please?

Byron Pollitt

So in the preferred approach that Joe described, what we were –

Julio Quinteros – Goldman, Sachs & Co.

I’m sorry, I’m sorry. I just meant the timing of it, that’s all I really need to hear, just the timing.

Byron Pollitt

I’m sorry. Later second half of the current quarter.

Julio Quinteros – Goldman, Sachs & Co.

Got it. Thank you.

Operator

Next question comes from Andrew Jeffrey, SunTrust. You may ask your question.

Andrew Jeffrey – SunTrust Robinson Humphrey

Hi. Thanks. Could you, Byron, address a little bit the priorities for ad spend and whether you view that as a particular lever, especially given the slowdown in the U.S. I imagine there’s probably a reallocation of advertising and marketing spending priorities here.

Byron Pollitt

Let’s refresh the guidance. The guidance was marketing spending about flat 2009 versus 2008. In previous commentary, we have indicated that we are reallocating against an increasingly rigorous return on investment model that we are deploying in marketing. And so, using that model that is guiding what we have budgeted for 2009, but we will of course pace our expenditures with regards to the economic environment we find ourselves in and the rate of growth we are generating in revenue.

Andrew Jeffrey – SunTrust Robinson Humphrey

Okay.

Joseph W. Saunders

I’d like to add one thing to that. The vast majority of our advertising in 2009 will be targeted at getting people to use plastic when they do whatever they do more frequently than they do today. So in other words, whether the category grows in absolute terms or not, we are dedicated to providing impetus to get people to use the card more. So I want – when you go to Starbucks, when you go to a movie theater, when you go to a – when you park your car, when you go to the Laundromat, when you take a taxi in New York, when you pay your utility bills or any one of the number of other bills, I want you to use a Visa debit card, and we will have advertising that is directed at doing that. That’s not just similar to what we did a year ago when we had people running around in a circle and somebody throwed food in the air when an individual took out cash. That was focused on telling people, it’s okay to use a debit card for a small or medium-sized transaction. It’s cool. It’s the thing to do. It isn’t something that’s odd.

Andrew Jeffrey – SunTrust Robinson Humphrey

Okay.

Joseph W. Saunders

So that''s how we are going to direct our advertising.

Andrew Jeffrey – SunTrust Robinson Humphrey

Thank you. And just to clarify on the comments you made on the contra revenue. Does your second half ’09 net revenue guidance contemplate a deceleration or decline in contra revenue in addition to lower volume, or is that something that could be an increment to the net revenue guidance?

Joseph W. Saunders

It’s inclusive. So when we guided to the revenue levels in the second half, they were net revenue levels reflective of our associated projections of incentives.

Andrew Jeffrey – SunTrust Robinson Humphrey

Thank you.

Operator

As a reminder, please do limit yourself to one question. The next question comes from Pat Burton, Citi. You may ask your question.

Patrick Burton – Citigroup

Hi. Thank you. First, a clarification, Joe, did you say the U.S. payment for credit card was negative in October? It just had turned negative?

Joseph W. Saunders

Yes, I did.

Patrick Burton – Citigroup

Okay. That was a clarification. The second – the question actually is on the international transaction fee, the discussion there, I assume you’re just seeing a lot of fall off in airline travel. Would that be a good leading indicator to look at in terms of just number of physical bodies that are traveling internationally, or is there something else driving that number?

Joseph W. Saunders

I mean, that certainly is a significant component but traditionally there’s always been a lot of cross-border volume between Canada and the United States and that’s people in cars going back and forth, not necessarily in airplanes. There’s always been a lot of cross-border volume between Mexico and the United States, and that maybe coming from Tijuana into San Diego. It isn''t all– it isn''t by any stretch of imagination all airplane travel, I mean, cross-border activity in Asia is also – given where the countries are, it’s not necessary airplane travel. But it is a big component and it''s an indicator.

Patrick Burton – Citigroup

And is it falling globally, or is it just falling as it relates to people traveling to the United States?

Joseph W. Saunders

I think it’s following globally. All of our guidance contemplates it. Right now, it’s a troubled global economy and people are not traveling as much. People are not coming to the United States as much as they did with the dollar strengthening. There’s a number of things going on. I think it’s going to take a little bit of time to get it sorted out. And we’re just putting out guidance that embraces an economy that’s pretty indefinable at this particular point in time. We don’t want to overshoot anything, so we’re trying to be cautious and conservative in what we suggest.

Patrick Burton – Citigroup

Thank you and nice job on the cost side guys.

Joseph W. Saunders

Thank you.

Operator

The next question comes from Chris Mammone, Deutsche Bank. You may ask your question.

Christopher Mammone – Deutsche Bank

Thanks. I guess – first is a couple of housekeeping questions on cross-border. One, what was the growth in cross-border last year? And then two, what is the breakdown in your cross-border base between debit and credit?

Byron Pollitt

I''ll tell you what, on the growth curve last year – let me put it in this context, cross-border volume growth at the beginning of the fiscal year was running in the high 20s globally. As we moved to the third quarter call, we indicated that it had moved down into the high-teens, and now you have cross-border volume, our most recent snapshot, now moderating into the high single-digits. That gives you a one-year continuum. And then, cross-border for us is primarily credit and roughly three quarters credit, 25% debit.

Christopher Mammone – Deutsche Bank

Okay. Thanks. And then, I guess Joe, could you just update us with your thoughts on the possibility for interchange regulation in the U.S. next year, I guess particularly given the likelihood that we’ll have sweeping legislation from Congress probably early ’09.

Joseph W. Saunders

We continue to remain optimistic that things are going well in that regard. That doesn’t mean that there won’t be some noise about it next year. I can’t speak for Congress and so I can’t tell you when it’s going to come up again, but I would think that it would be relatively benign until about the middle of next year. Now, we have a very unique environment that we’re operating in and I’m not sure when this will come up. I continue to believe that it is solvable within the framework of the litigation, and that there’s no need for legislation. And I think that we’re going to work in that direction.

Byron Pollitt

Chris, this is Byron, let me refine the answer. Now that we have the chance to tabulate it, on cross-border, roughly a little over 60% credit, 25% debit, a little over 10% ATM cash.

Christopher Mammone – Deutsche Bank

Okay, great. Thanks for the color.

Operator

The next question comes from Dan Perlin, Wachovia. You may ask your question.

Daniel Perlin – Wachovia Securities

Thanks. Just two parts. One is with credits turning down in U.S. and debit volumes still sounding like they’re running in the mid-teens range, I mean, it sounds like it is falling exactly as it did during the last recession and I’m wondering if you can highlight a few attributes for your business today that are different from that last recession that gives you conviction to be able to maintain even the double digit overall growth rate.

Joseph W. Saunders

I think it’s pretty clear. I mean, that the debit card was in the different part of its evolution in the last recession that we didn’t have anywhere the debit coverage and we continue to expand the merchant categories in which debit cards can be used. And we continue to make information as it relates to that available to consumers and they seem to embrace it. And look, within all of this guidance that we are giving you, we are talking about things that are predicated on what we see out there in the economy, but you can rest assured that in addition to that, we are very, very focused on penetrating cash and checks to a greater degree than we have in the past and we will continue to do that. I think that that will be a little bit or somewhat of a counter balance to what is going in the economy and we are optimistic that that trend is likely to increase rather than decrease.

Byron Pollitt

I would just elaborate by saying that because of the debit phenomena that Joe described, if you go back to the last recession period, the nondiscretionary component of U.S. consumer spend on our Visa cards would have been about 30%. And today, because of the debit penetration, it is over 40% with debit cards themselves generating about 53% nondiscretionary mix of the total spend.

Daniel Perlin – Wachovia Securities

Okay. And then the second part of the question is in the last couple of – when we go back and look at aggregate data in the last several recessions, one of the things that acted as a secular shift was just net new card issuance and I understand the debit shift. I’m wondering what is going to be, with net new card issuance certainly, if 50% of your business not going up next year in the U.S., what is ultimately going to be that secular shift that supports again that kind of double-digit growth?

Byron Pollitt

First of all, we are taking about the double-digit growth primarily coming from the debit product in this environment and I don’t expect that to change in 2009. But we have also talked a lot about our international volume and we talked about the fact that that is continuing to grow at robust rates and frankly, most of that is credit card business. It is not that we do not have the debit penetration outside the United States that we do inside the United States, that is rather an opportunity that we talk about quite frequently on the IPO road trips, we call the filling out the tube if you will, taking technology that’s worked for us and business practices that have worked for us in the United States and moving them into other parts of the world.

I think that what I just talked about in our relationship with HSBC is an example of moving debit cards into other regions. But, the answer is we are growing outside the United States, particularly in credit volume. We have an opportunity to grow debit volume outside of the United States and we have an opportunity to grow debit volume within the Untied States and I would assume that at some point in time, the credit volume is going to stabilize.

Daniel Perlin – Wachovia Securities

Excellent. Thank you.

Operator

Next question comes from Greg Smith, Merrill Lynch. You may ask your question.

Gregory Smith – Merrill Lynch & Co., Inc.

Yes, hi guys. What kind of foreign currency impacts are you expecting on revenues in ''09?

Byron Pollitt

This is Byron. Let me give you a preset. If we look back on the year just completed, 2008, we project that about two percentage points of our revenue growth came from FX movements, a tailwind so to speak. As we look to 2009, recognizing that there has been some significant volatility, and we are not in a position to fully predict how it will play out. But on the revenue growth side, that tailwind will turn into a headwind and we are looking at low single-digit revenue growth impacts in the coming year, 2009, and even smaller impact but still negative on the earnings growth impact since you net the two to get to your ultimate impact on the P&L.

Gregory Smith – Merrill Lynch & Co., Inc.

Okay. And then this buyback that you would like to do, the 1.1 billion, how will that be priced? Is it just going to literally be based off the current stock price at some point in time or is there some liquidity discount that might benefit you?

Byron Pollitt

I would say stay tuned for that, but it is a market-based price and then we will evaluate at that time whether and what level of discount would be appropriate.

Gregory Smith – Merrill Lynch & Co., Inc.

Okay, hopefully big. Thanks.

Operator

Next question comes from Sanjay Sakhrani, KBW. You may ask your question.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Thank you. I appreciate all the color on the updated targets but I want to make sure I''ve got it all. Byron, could you just rehash the stress case on payment volume and cross-border volume derived at the low end of that 11% to 15%? And then maybe you could also stress the top line to get to that 20% EPS growth.

Byron Pollitt

With regards to the guidance that we gave, what we said was that we felt very confident delivering our margins and our earnings growth if the cross-border volumes went as low as flat. So to the extent that that constitutes a stress case that is what we mean by that. Could you repeat the second part of your question?

Sanjay Sakhrani – Keefe, Bruyette & Woods

I just want to make sure I understood the lowest payment volume could go and cross-border could go, and then subsequently how low could the top line go to get to the 20%?

Byron Pollitt

That we did not specifically comment on. We have clearly assessed the environment to the best we can ahead and we are very focused. The environment has a lot to do with revenue. We are very focused with regards to delivering our margins and delivering the net income growth and EPS growth that we have committed, and so management stands ready to take a variety of steps in order to protect their commitment of earnings and EPS growth.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Okay. Because I thought you mentioned like the payment volume in the fiscal second quarter should come in at the midpoint of the range and the second two quarters?

Byron Pollitt

I think your confusing something. What we are referring to was net revenue growth. And what we said in the first fiscal quarter is that we expect net revenue growth to come in at the upper end of our guidance range. What Joe said about the second fiscal quarter is that we expect to come in the midrange of our guidance and that the second half of the year, Qs three and four could potentially find single-digit revenue growth in one or both of those quarters and that collectively that would be consistent with coming in at the lower end of our guidance range on a full-year basis.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Okay, okay. Great, thank you. And Joe, maybe one question.

Joseph W. Saunders

I want to add one thing. Because I did say that – if you’re asking for the stress case, I did say that even in a downside scenario that saw only mid to high single-digit revenue growth in 2010, we could sustain our EPS and our operating margins.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Okay. And that applies to 2009 as well?

Joseph W. Saunders

Yes.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Okay, got it. And then Joe, maybe one thing on integration, I mean where are we with extracting kind of revenue and expense synergies from the consolidation of all the various regions? Thanks.

Joseph W. Saunders

Where are we? I mean, I think to get to a point where you wake up and think everything is going pretty well, it is about a three-year process and I think we are probably further along than that kind of measurement makes you guess, but we are moving there and I think you can expect to see improvement in our expenses over the course of the year as we suggested.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Okay. Great, thank you

Byron Pollitt

Jose, at this point we have time for one more question.

Operator

And for the last question, Bruce Harting, Barclays. You may ask your question.

Bruce Harting – Barclays Capital

Rest of the world credit percentage growth in constant dollars stood reasonably flat quarter-over-quarter while U.S. continued to fall at a fairly rapid rate and you said through October actually credit turned negative. As you look forward into 2009 and early 2010, is it conceivable in terms of your saying that given the quarterly progression where you are saying middle of the range in second quarter, lower end of the range in second half next year that rest of the world credit and debit stays reasonable flat or are they just really lagging the U.S. in terms of the slowdown? And then just how low could U.S. get in terms of credit growth from previous downturns? Thanks.

Byron Pollitt

This is Byron. Let me start by saying the growth rates we gave you for rest of the world payment volume growth were nominal not constant, and we recorded 25% payment volume growth nominal in the fourth quarter. And so, what we have indicated is that those have moderated down and that has been factored into the guidance that we have given. And I think Joe’s answer to the last questions which kind of outlined our stress case as someone described it, is how we are trying to be helpful on this subject. U.S. credit has turned negative but just and that’s happened very few times in our history, even during recession. So we have tried to be helpful without guiding to very specific assumptions with regards to payment volume by line item. We have tried to be helpful by saying where we are positioning our revenue growth in each of our quarters, how we expect to end the year and then how we expect to map that into our earnings growth.

Jack Carsky

Okay, thank you all very much. If anyone has any follow-up questions, please feel free to call Investor Relations.

Operator

Thank you for participating in today’s conference call. The call has concluded, you may go ahead and disconnect at this time.