VISA Q2 25 result -- the metronome continues

 VISA FH25

Solid results, with VAS becoming a significant driver of results. The growth of VAS is important, as I was a bit sceptical about V's ability to grow this business to the size and rate to contribute what it is now contributing. A good result. VAS is several businesses, the most important being security/fraud detection, issuer, and acceptance services, i.e., bringing new and varied clients into the network.

There is a real risk of a cyclical slowdown, and the various macro issues are felt in the economy. There are cyclical, not existential risks. Of course, no one knows the extent of the fallout. V remains an incredibly strong business and management point out its diversity and financial strength.

I currently see solid value around the $280 level. How any economic slowdown works out will impact all share prices. Again, I see this macro risk as a cyclical issue. The current price $335 is around FV, maybe a little on the cheap side. Broad assumptions are 12% 5-year compound eps and 27x exit PE.

FY25 EPS guidance remains low teens

CALL SUMMARY

Ryan McInerney CEO

This quarter, we saw the strength of our business model with $9.6 billion in net revenue, up 9% year-over-year, and EPS up 10%.

In constant dollars, overall payment volume grew 8% year-over-year. US payments volume grew 6%, and international payments volume grew 9%. Cross-border volume, excluding Intra-Europe, rose 13% in constant dollars, and process transactions grew 9% year-over-year.

In consumer payments, we continue to execute the fundamentals, expanding credentials and acceptance, and driving user engagement in order to grow both carded and non-carded volumes. Total credentials grew 7% with generally consistent growth across our regions.

We added 1 billion tokens since last quarter to total 13.7 billion, and now nearly 50% of our e-commerce transactions globally are tokenized. We also crossed 1 billion tokens in Latin America and 0.5 billion in CEMEA.

what gives us confidence in our ability to grow consumer payments is our products and our solutions. They are enabling us to succeed in important high-value consumer payments use cases, innovations such as Tap to Everything, tokens, multi-currency cards, flex credentials, account-to-account solutions, and our differentiated cardholder benefits platforms.

Tap to Pay penetration is now at 76% globally, with the US passing 60% for the first time. Penetration at US drug stores, retailers, and quick-service restaurants is now above 60% as well. Tap to Add Card continued to gain traction, and with the majority of fraud being eliminated as compared to manual entry, it's not surprising that we now have nearly 150 issuers participating globally in more than 35 countries and territories.

Tap to P2P is a Visa product that leverages tokenisation for enhanced security. Visa's tap kernel and SDK technology for seamless contactless data transmission between devices and the convenience of Visa Direct's real-time money movement for funds transfers. We are soon launching our Tap to P2P products in the US with Samsung. .

Another development is in our stablecoin offerings.

commercial and money movement solutions. As we drive further penetration of these opportunities, we have seen strong results in the second quarter with commercial volume up 6% in constant dollars, Visa Direct transactions up 28%, and CMS revenue up 13% year-over-year in constant dollars. In Visa Commercial Solutions this quarter, we made progress on our strategy as we deepened our relationships with a number of existing clients. To capture the accounts receivable and accounts payable opportunity, we are utilising product innovations such as embedded finance solutions to meet payers where they manage their business to drive adoption of cards.

Visa Direct, this quarter we signed an important deal with Jack Henry to offer Visa Direct through their digital applications to facilitate rapid transfers among bank accounts and enable their community and regional financial institution clients to offer Visa Direct to their consumer account holders and SMBs.

These are all examples of our strategic focus to grow our domestic and cross-border business and expand with our existing customers for Visa Direct, the largest money movement platform in the world by transactions, volumes, and endpoints.

In value-added services,  Value-added services revenue grew 22% in constant dollars, powered by strong growth across all portfolios.  In issuing solutions, Pismo brings a holistic offering with credit, debit, prepaid, and commercial issuer processing and core bank processing. We have a strong pipeline, and we are well on our way to enter five new countries across four regions this year.

In acceptance solutions, we recently announced two new product offerings. The first is a completely new version of Authorized.net. It will help businesses analyse data, summarise insights, and adapt to rapidly changing customer trends. The second is the new unified checkout experience, available in the US and in pilot stage in additional markets in Q4. As new ways to pay continue to emerge, merchants want to integrate once to accept all payment types to decrease the likelihood of lost sales at the point of checkout. Because unified checkout is part of the Visa Acceptance Solutions platform, customers also have access to fraud management, 3D secure authentication, and tokenization management.

In risk and identity solutions, since the closing of our acquisition of Featurespace, we have been actively pursuing deals and have signed over 20 clients globally…. This solution utilizes machine-learning and AI solutions to enable clients to build more accurate risk profiles and more confidently detect and block fraudulent transactions, ultimately helping to increase approvals and stop bad actors in real-time.

In advisory and other services, our open banking platform, powered by Tink, provides payment initiation and account information services to sellers and payment providers or PSPs across Europe and the United States. ….to provide their customers the option to pay by bank when checking out.

Across our VAS portfolio, our innovations are designed to address specific challenges in the payments ecosystem and to provide secure, efficient, and scalable solutions for businesses of all sizes.

At Investor Day, I spoke about the evolution of our Visa as a service stack. The foundation of our stack is our global connectivity and the infrastructure that Visa is built on, our network, our network of networks, and access to our credentials and acceptance. Then we have our services architecture, which contains the specific capabilities that we think of as the building blocks for everything that we do, like risk, settlement, and more. Using these services, we create client solutions. We are taking these componentized capabilities and investing in and enhancing them to create new features and capabilities to offer them to a much broader array of customers and partners.

Current trading

Focusing on the US, in Q2 and through April 21, we have not seen any signs of overall consumer spending weakening. While spending growth differs among consumer spend bands, with the most affluent growing the fastest, all spend bands remain resilient and consistent with past quarters. Within spend categories, there are some select areas, such as in travel with airlines and lodging, where growth has decelerated, but overall discretionary and non-discretionary spend remains strong. Outside the US, we see similar stable trends. Within cross-border, volume growth was in line with Q4 2024 levels. We have seen some impacts from currency weakness and travel to specific countries, but the overall growth was above the pre-COVID trend.

Chris Suh CFO

Fiscal second-quarter net revenue was up 9% year-over-year in nominal dollars and 11% in constant dollars, helped by resilient consumer spending, lower-than-expected incentives, and better-than-expected value-added services revenue. EPS was up 10% year-over-year and 11% in constant dollars, better-than-expected, primarily due to stronger operating performance and a lower tax rate than expected.

US payments volume was up 6%, with e-commerce growing faster than face-to-face spend. Credit was up 5% and debit was up 7%.

quarterly spend category data in the US, adjusted for leap year, we saw travel and entertainment growth decelerate, restaurant growth remained stable, and retail and fuel growth improved with strong and stable total discretionary and non-discretionary spend growth, reflecting resilience in consumer spending.

the makeup of our cross-border business. From a geographic mix perspective, our total cross-border volume is fairly well distributed, with no reported region comprising more than 25% of total cross-border issued volume. Both e-commerce and travel issued volume reflect a broad distribution as well. You may also recall that our total cross-border issued volume mix is about 40% e-commerce and 60% travel. So there is diversity by region and by spend type. Total cross-border volume was up 13%; e-commerce was up 14%; and travel was up 12. Some of these factors impacted our intra-quarter trends, which varied slightly from US payment volume trends. While we saw a strong January and a February impacted by leap year, we did see a somewhat softer March.

Service revenue grew 9% year-over-year versus the 9% growth in Q1 constant dollar payments volume. Data processing revenue grew 10% versus 9% process transaction growth, primarily due to value-added services and pricing. International transaction revenue was up 10%, below the 13% increase in constant dollar cross-border volume, excluding Intra-Europe, but in line with nominal volume growth, reflecting the impact of FX.

In addition, while we had higher volatility in Q2, this was offset by a number of factors, including client mix and hedging. Other revenue grew 24%, primarily driven by growth in advisory and other value-added services and to a lesser extent, pricing. Client incentives grew 15%, lower than expected, primarily due to factors related to deal timing.

Now, to our three growth engines. Consumer payments revenue was driven by strong payments volume, cross-border volume, and process transaction growth. Commercial and money movement solutions revenue grew 13% year-over-year in constant dollars, driven by commercial payment volume growth of 6% year-over-year in constant dollars, consistent with last quarter and Visa Direct transaction growth of 28% year-over-year to 3 billion transactions, below Q1 growth, primarily due to the lapping of our initial ramp in Latin America for interoperability among P2P apps and the lapping of leap year. Value-added services revenue growth accelerated to 22% in constant dollars to $2.6 billion, with strength across all portfolios led by issuing solutions and advisory and other, and inclusive of Featurespace.

Forecasts

Now let's move to what we've seen so far in Q3. Through April 21st, driver trends have been strong, with some benefit from Easter and Ramadan timing. US payment volume was up 8%, with debit up 9% and credit up 7% year-over-year. Process transactions grew 12% year-over-year. For constant dollar cross-border volume, excluding transactions within Europe, total travel and e-commerce cross-border volume each grew 13% year-over-year.

Pulling it all together, we expect third-quarter adjusted net revenue growth in the low-double-digits, essentially in line with Q2.

As a result, we expect third quarter adjusted EPS growth to be in the high-teens.

Moving now to the full year. Our full-year guidance for adjusted revenue growth, adjusted operating expense growth, non-operating income, tax rate, and adjusted EPS growth remains unchanged.

Question-and-Answer Session

Current conditions

I think I'll make two points. One is, obviously, the situation is quite fluid, and we're monitoring the data very closely, and we're really relying on facts and facts and the results as we see them. But the second point maybe is even more important is that when we look across our business, we talk about the diversity of our business across -- in many dimensions. Regional is one of them. But certainly, when we look at our cross-border business, whether that's issued or acquired, we also benefit from that diversity. And when it comes to inbound travel into the US, the US specifically actually is one of the smaller regions as measured by cross-border inbound travel volume, even though it does have strong yields. And so we just keep that in mind. We'll have to watch how the data comes in, but we have great diversification in our cross-border business, and we anticipate that we'll be able to navigate this period.

There was some evidence of pull-forward. In certain categories, electronics is one of them, and it was mostly in sort of the first part of April, and we shared with you the data through the 21st. And actually, while I'm speaking about April, I just saw the data through the 28th just this morning, and that's relatively unchanged as well. And so there's no meaningful differences even as we get further into April.

Cross border--But then I spoke to two other factors. One, a broader category around currency weaknesses, and currency weaknesses have an impact on purchasing power, obviously abroad. We had the US dollar weakening, but we also had currency weaknesses in LAC, in Mexico, in different countries throughout Asia. And so that's also impacting the results that we saw in March and April. And then the last one, of course, is Canada. And I referenced it on the call, I could give a little bit more color. I mean, we did see a meaningful slowdown in the Canada to US border. But again, keep in mind the diversification of our business. And so the fact that, as I just mentioned in the last question, the fact that the US is one of the smaller regions as measured by cross-border travel inbound volumes. And so when you add that up, it's really not a -- it's a very small percentage of our global travel volume, and the revenue impact shouldn't be meaningful. And so what we did in terms of assumptions is we took the average of March and April, which we think accounts for all of those items, and we extended that through the remainder of the fiscal year, and that would put cross-border at just below what we finished FY24 at in Q4.

VAS

there's a range of revenue models in their transaction-based, project-based, and recurring/subscription.

And we've said about 65% of our revenue is really about enhancing Visa payments. But we've been really making a lot of progress on the incremental opportunities to enable all different types of payments, not just Visa payments, and the services that then go beyond payments.

Drivers, …the acceptance business, Issuing Solutions business, risk and security solutions business,

But I think part of your question was what could potentially happen to VAS in different sorts of cycles. And the way that I would think about it, the way we think about it is obviously, a lot could happen. We're monitoring that sort of the macro situation, we were not economic forecasters. But the thing I'll say about our business, I made the point about diversity previously, what does that mean with a little bit more color?

We have, for example, our business today, if I compare it to previous economic cycles, we have more exposure to everyday spending. We have a bigger debit business. We have more e-commerce spend. We're more diverse geographically. And so you got to think about sort of how the business might get impacted today, and it might be different from previous cycles, and we do have greater diversification broadly.

And then, as it comes to that, specifically, as Ryan said, there is a 65% of the business has a close correlation to Visa transactions. And so that part, depending on how the business would respond, could have a closer relationship, but there's a great diversification there as well, as we have a good portion of the VAS business that is independent of Visa transactions. And so when I think about that in total, I think there is a good resilience and diversification there as well.

Incentives

In terms of what we expect for the full year and into the second half of the year, we've updated the expectation that in the back half of the year, our growth will be slightly higher than originally expected due to two factors that we called out. One is client-related performance adjustments, and the second is deal timing, which means specifically anticipated early renewals.

And so when we reforecast the second-half of the year, we do expect the second-half to grow higher than the first-half of the year, and we do expect that sequentially to be Q3 a little higher than Q2, and Q4 to be a little higher than Q3. And then maybe the final thing I'll say is, when we look at the volume -- payment volume that was impacted by renewals, we still believe that we have the same expectation that we started the year, which is 20% of the payment volumes being impacted.

Cross Border Biz

on the delta between nominal cross-border volumes and nominal international revenue. …there's the FX volatility. There's the quarter and client mix, there is a pricing aspect. And then, of course, there's the hedging, which impacts the revenue, but not the volumes. I think you touched on the FX volatility, meaning not assuming in the guide that the high levels will persist, which is a good conservative approach. You talked around quarter mix and the yields being higher for US inbound.

The one I was hoping you could drill in a little bit more is pricing, because I know previously the guidance talked a little bit about pricing being a second-half of the fiscal year event. So, whether it'd be specific to cross-border or for the whole business, maybe you could just touch a little bit on that pricing topic.

As you pointed out, we grew 10%, which was in line with the nominal volume growth, but below the 13% constant-currency, that's the impact of FX.

which is our expectations on the full-year on pricing. Just to remind everyone, at the start of the year, we said we would anticipate that the pricing contribution to growth in the full year would be similar to the previous year, but the timing would be a little bit different, where we'd have more back-end loaded pricing. That's still our expectation. We don't have a different view. We do believe that pricing will benefit in the second half more than it did in the first half of this year.

And then to your point, higher volatility, which we said in April was a -- with higher in Q2 and throughout April.

The two items, which I could give a little bit more color on. I called out client mix and hedging. So client mix, we obviously have different clients throughout the portfolio there and different clients have different pricing and different yield dynamics. And so it really depends on specific client performance and which clients are growing and where, and that could have an impact on our revenue yield. And in this case, it was a bit of a drag against the -- against relative to the 13% constant currency volume growth.

And then on hedging, we hedge a portion of our cash flow exposures. This quarter, we did have a gain in Q2. We had a year-over-year gain related to that hedging, but it was lower than the gain that we recognized a year ago in Q2. And so that became -- even though there was a gain, it was a drag, again it was a reconciling item between the two, the 13% and the 10%. So those are the two items that primarily offset the higher volatility that we recognized in international transaction revenue.

De minimis

if we look at sort of the whole situation with China, so far, we're not seeing a material impact from tariffs related to China and specifically spend associated with the de minimis exemption, it's just not a material portion of our volumes and we wouldn't expect any material impact.

Operating in a recession

Obviously, every recession is different. But over the course of time and over history, Visa has proven to be quite resilient even during these economic downturns. We don't know what's going to happen. We're not economic forecasters. But the management team here is ready to move decisively should the need arise. Now our business is resilient. I talked about the diversification of the business, more exposure to everyday spend, more exposure to debit, even our cross-border volume is more e-commerce today than travel than it was, if I think about pre-COVID levels. And so that diversification helps us.

And so if there was a downturn, I think our performance during this potential economic slowdown we would be resilient, and it can impact our business. If you think about it, between volumes and revenue, volumes historically grown faster than PC. Even if PC slows, we're confident that we can continue to grow faster than that for all the reasons I spoke about. And then the one other thing I'd add is on the revenue front, remember that incentives are largely variable. And so to the extent that volume growth does get impacted, there could be an offset on incentives.

On the expense side, I think we've also historically shown we could flex our expenses. We could make -- we obviously want to balance between short and near-term and long-term priorities. We don't want to overreact to anything. We want to be thoughtful about making sure that we're investing in the right areas to ensure that Visa is successful over the long term, but we do have levers, and this is a management team that stands ready to act.