Visa Inc

NYSE:V

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to Visa's Fiscal Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I would like to turn the conference over to your host, Ms. Jennifer Como, Senior Vice President and Head of Investor Relations. Ms. Como, you may begin.

[Jennifer Como, Investor Relations]

Thanks, Jordan. Good afternoon, everyone, and welcome to Visa's fiscal second quarter 2022 earnings call. Joining us today are Al Kelly, Visa's Chairman and Chief Executive Officer; and Vasant Prabhu, Visa's Vice Chair and Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at www.investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website.

Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as the result of many factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of our website.

For non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today's earnings release.

And with that, let me turn the call over to Al.

[Al Kelly, Chairman and Chief Executive Officer]

Good afternoon, everybody, and thank you for joining. Before jumping in, I want to acknowledge that this is Jennifer Como's first earnings call in her new position. About 2 months ago, Jennifer was promoted to Head of Investor Relations, which was a very well-deserved recognition of her work over the last 3 years with us.

I want to start by briefly addressing the situation in Russia and Ukraine. I have seen firsthand the pain brought about by Russia's attack on Ukraine and its people, including our colleagues in both Ukraine and Russia. We are very focused on supporting them. The bravery, strength and resilience of our colleagues is incredibly inspiring, as is the grit of the Ukrainian military. Even with the invasion of Ukraine and lingering impacts of Omicron, volumes, transactions and credentials drove strong second quarter performance. Overall, PB was up 135% versus 3 years ago. Cross-border volumes, excluding inter-Europe, were 112% versus 3 years ago. And it's important to note that travel-related cross-border rose to 82% versus 3 years ago, up 5 points from Q1. Processed transactions were 138% versus 3 years ago.

In terms of the big picture, after the short 4- to 5-week impact of Omnicon in December and January in the United States and many other parts of the world, the recovery continues to be robust. At this stage, in terms of volumes, we have seen no noticeable impact due to inflation, supply chain issues or the war in Ukraine.

In the U.S., payments volume index to 2019 was 144 in the quarter. Volume growth relative to 3 years ago has been stable and strong now for 4 quarters in a row. When looking at specific spend categories for credit cards, we saw greater than a 10 percentage point improvement in the 3-year index from Q1 to 2Q -- Q2 in travel, retail goods, food and drug, restaurant, QSR and fuel.

As a reminder, debit is growing over a quarter in fiscal '21, where there were 2 stimulus distributions. Even as credit continues to recover, debit remains 20% above the prepandemic trend line. Across all products, spend categories representing 88% of PB are over 120% indexed -- over 120 indexed to 3 years ago, and nearly 2/3 are between 1 40 and 1 60. Against this backdrop, Visa's performance was very strong. Net revenues grew 25% year-over-year and non-GAAP EPS was $1.79, up 30%.

As we look ahead, our business will have a reset due to Russia, but we still expect accelerated revenue growth versus pre-COVID over the coming years. This is because there's still ample opportunity around the world across our 3 growth levers of consumer payments, new flows and value-added services, and our strategy is yielding excellent results.

First, in consumer payments, we continue to displace cash at a strong rate. In Q2, we saw debit cash volumes at Visa grow 2%, while debit payments volumes grew 12%. Cash displacement continued around the world. Year-over-year, across debit and credit, there were 7.9 billion more payments transactions and 16 million less cash transactions. Last quarter, I highlighted the shift from cash to payments volume in Latin America, and that trend continued in this quarter. Additionally, CEMEA is experiencing a similar shift. In full year 2019, cash was 59% of total volume. Last year in Q2, it was 50%. And this quarter, it was 46%.

Growth in consumer payments is driven by adding credentials and acceptance and deepening engagement. Our card credentials recently increased to over 3.9 billion, up 9% in 1 year, including 10% growth in the United States. On the acceptance side, we have 80 million merchant locations, including small businesses behind players like Stripe and Square, the number is actually over $100 million.

We have seen very strong performance location growth recently in our Latin America and Asia Pacific regions, up 30% and 20%, respectively.

Let me just highlight a few regional examples of progress in consumer payments. In Europe, overall credentials grew 6%, which is nearly double the historic rate for each of the past 8 quarters, helped by previously announced deals with BNP Paribas Fortis in Belgium contributing more than 4 million credentials since their announcement to issue with Visa.

Across Europe, we continue to strengthen our debit business. We recently announced the [indiscernible] bank, representing a multimillion credential opportunity. We also renewed our business with one of the largest banks in the Nordics, Nordea.

On the acceptance front, we continue to pioneer new areas of acceptance even in mature digital markets. One recent in example in Europe is with electronic -- electric vehicle charging. We were the first payments and financial services company that joined the charging interface initiative and are working with manufacturers to open up what is estimated to represent 3 million potential acceptance points in Europe by 2030.

In Latin America, we saw strong credential growth, up 21% year-over-year. Two renewals to highlight this quarter: Porto Seguro, Brazil's third largest issuer for credit portfolio and digital bank, Neon Pagamentos, one of Brazil's fastest-growing fintechs with over 15 million clients for their credit and prepaid portfolios.

In Africa, Visa has signed a partnership with Vodacom South Africa. This deal, together with previously announced partnerships with M-PESA Africa and Safaricom covers 130 million customers in the entire Vodacom Group in Sub-Saharan Africa. Through this partnership, Vodacom will exclusively issue Visa payment credentials, deploy new payment flows through Visa Direct and utilize cyber source.

In the United States, we renewed and won several partnerships this quarter. First, Visa and USAA have recently renewed our long-standing issuing partnership. Second, we extended our existing relationship agreement with M&T Bank as their issuance partner, including migrating the business resulting from their recently completed acquisition of People's United. Over the past 2 years, merger activity of regional banks has increased, and this is another example of Visa successfully partnering to grow with our clients.

Finally, supporting the U.S. government is an important priority for us, and we retained our business with the financial agent that manages the U.S. debit card program. This Visa-branded program is a key component of Treasury's goal to deliver 99% of federal payments digitally by 2030.

A key vector of growth in consumer payments are cobrand cards, which are particularly attractive to the affluent customer. In Q2, affluent credit card spending was well above 2019 levels in several markets, including the U.S. and the U.K. Our U.S. cobrand active cards were up nearly 30% from 2019 to 2022. And we have 7 of the top 10 cobrands in the United States and 8 of the top 10 cobrands globally.

This past quarter, we renewed our cobrand relationship with AAA, Visa's longest-standing cobrand partner, an over 40-year relationship. In India, we're pleased to have signed a long-term cobrand agreement with Airtel, one of the largest mobile operators in the world with nearly 356 million subscribers. In CEMEA, Emirates NBD, a leading banking group has expanded its long-standing partnership with Visa by introducing the premium cobrand program with Etihad Guest, the loyalty program of Etihad Airlines with 8 million members.

In Uganda, we partnered with the Uganda National Social Security Fund to issue cobrand cards to 2 million beneficiaries. And just a few weeks ago, it was announced that the U.S. Amazon Prime Rewards Visa Signature Card has been renewed with Chase and Visa. Visa is also pleased to have reached a broad global agreement with Amazon. This agreement includes the acceptance of Visa at all Amazon stores and sites today, as well as a joint commitment to collaboration on new product and technology initiatives to ensure innovative payment experiences for our customers into the future.

In Q2, we also continued to enable new ways to pay from installments to crypto. In the installment space, we previously announced a global deal with Klarna. They have now issued their cobranded card in Europe and recently opened a waitlist in the United States, where they have 25 million customers.

In the crypto space, we continue to work with governments globally on potential CBDCs. This quarter, we were selected as the finalist in Brazil's CBDC lift challenge. The concept is a B2B solution that seeks to leverage CBDC to help small businesses access global investors and drive financial inclusion.

On the engagement front, Tap to Pay continues to accelerate growth. In the United States, we are over 20% tap to pay penetration, marking the second largest market by number of tasks. And Target has become the first U.S. retail merchant to pay us 50% tap to pay penetration of face-to-face payments.

Transit is one of the best ways to habituate tapping and the first half of fiscal '22 has set records. We enabled 50 cities around the world, including Thailand, Japan, Turkey, Italy, Switzerland, Norway and Canada, bringing our Tap to Ride footprint to over 500 travel transit authorities. We processed over 500 million Visa tap to ride transactions globally versus 700 million for all of last year.

To summarize, there is significant opportunity in consumer payments, Visa continues to grow credentials and acceptance with deepening engagement and Visa enables innovation and scale for players across the ecosystem from installments to crypto to merchants.

Now moving to new flows, which in Q2 had over 20% revenue growth. In Q2, our commercial payments volume was 138% of 2019. What's more of this recovery is relatively broad-based across segments and spend types. On the B2B carded front, in the U.S., Umpqua Bank announced two commercial solutions for middle market businesses. One, Visa Commercial Preferred, a commercial rewards card designed to help manage daily business spend; and two, Visa Commercial Pay, which will help improve cash flow management, reconciliation and reporting.

In Latin America, we saw a carded progress with B2B fintech, Tribal, which has chosen Visa for card issuance, including virtual cards on its modern corporate card and spend management platform tailored for startups in 9 countries.

Airwallex, a global platform, enabling digital businesses to manage payments and money movement across borders, previously launched programs with Visa in Australia, Hong Kong and the U.K. Recently, they introduced virtual Visa cards in the United States, Netherlands and Singapore to enable businesses to easily make digital card payments around the world.

In our cross-border B2B business, Visa B2B Connect continues to expand its global footprint. And in the first half of 2022, we added banks for the first time in Tanzania, Uganda, Angola, Thailand and Poland.

Now turning to Visa Direct. Transactions in the second quarter grew 20%. Vasant will speak more about this, but Russia was our second largest market for Visa Direct and represented about 17% of our transactions in fiscal 2021. So in short, Visa Direct will -- be impacted by the suspension of Russian operations.

But even with the Russia business -- without the Russia business, we will see growth ahead driven by many use cases and countries. For example, domestic P2P, which accounted for the majority of our Russian business is still a large opportunity, and we continue to expand to new markets. We will soon launch our inaugural Visa Direct use case in Israel for P2P in partnership with Bit, the largest P2P app in the market.

I'll focus on 2 other use cases today, payouts and remittances. First, with payouts, we see -- we're seeing momentum in a number of industries and transactions are up 35% year-over-year.

In travel, we launched Visa Direct with Booking.com to enable customer refunds and loyalty payouts. In the gig economy, Payfare, a leading fintech that has partners such as Uber, Lyft and DoorDash, has added Visa Direct to its platform to help facilitate real-time payment experiences for over 0.5 million gig workers they serve. And digital commerce partner, Payoneer, we use Visa Direct to enable cross-border payments for their 5 million customers, including marketplaces and gig economy players.

Second, cross-border P2P or global remittances, which are higher yielding Visa Direct transactions represent a significant opportunity. While we are just getting started this quarter, transactions grew nearly 50% year-over-year.

After announcing our relationship in fiscal fourth quarter with Paysend, an international card-to-card payments platform, which serves over 6 million customers and 17,000 SMEs, they have now launched their cross-border service with Visa Direct from the U.K. and U.S. to over 100 corridors.

While the U.S. is the top source for remittances, the UAE is the second largest source for country remittances followed by Saudi Arabia according to the World Bank. Altogether, the Gulf Cooperation Council countries account for more than $100 billion in outbound remittances. This past quarter, we added several partnerships to help digitize remittances in the region.

First, AL Muzaini Exchange, the largest exchange house in Kuwait. Second, Enjaz, the remittance and payment arm of Bank Albilad, and market leader for ongoing remittances in the Kingdom of Saudi Arabia. And third, in the UAE with LuLu Money powered by Lulu International Exchange and Network International to enable the 5 million users of Lulu app to send money to cross-border.

[Audion] and Stripe, key Visa Direct enablement partners have both signed agreements to deepen relationships in existing geographies and to expand to net new markets globally across numerous use cases.

In sum, we've made excellent early progress against the $185 trillion new flows opportunity, but there is tremendous room for accelerated growth ahead.

Now let me move to value-added services, which had Q2 revenue growth of over 20% as well. First, we recently closed our acquisition of Tink. Tink is a European open banking platform that connects to more than 3,400 banks that reach over 250 million bank customers across Europe. Through a single API, Tink enables its customers to move money, access aggregated financial data and use smart financial services such as risk insights and account verification. Visa brings proven infrastructure and sustained investment in resilience, cybersecurity and fraud, which will help accelerate the adoption of open banking and create a secure, reliable platform for innovation.

Let me highlight some other progress in value-added services. First, Visa consulting and analytics. Last quarter, I announced the launch of our specialized global crypto advisory practice. We've seen interest from hundreds of clients globally and have committed engagements with 30 already covering their digital currency strategy, product development and their go-to-market plans.

Second, risk identity and authentication. In tokenization, we have now crossed the 3.5 billion token mark across more than 8,600 issuers in over 150 markets at 1.2 million merchants. Tokens have led to a 2.5 point increase in approval rates and a 28% reduction in fraud rates this past quarter in card net payment -- card net present payments. Our key risk solutions, Visa Advanced Authorization and Visa Risk Manager, screened about 30% more transactions in the first half of 2022 versus 2021. Third, CyberSource, our gateway capability has seeing considerable progress, just crossing the milestone of the 1 millionth merchant account onboarded.

I spoke about transit before in CyberSource, which could play a key role in transit acceptance, added nearly 15 projects in the first half in Thailand, Italy and Japan, among others.

So to summarize, our value-added services represent a compelling way to diversify our revenue streams while helping our clients bring in -- in bringing innovation to the payments ecosystem. Our global infrastructure is providing connectivity through our network of networks to power more traditional payment types and newer ways to pay and move money. Our brand is strong. Our network of networks is expanding. Our business is performing well and our people are motivated and passionate. We expect all our efforts will help power accelerated growth in the years to come.

And with that, let me turn it over to Vasant.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Thank you, Al. Good afternoon, everyone. Despite Omicron, Russia and Ukraine, our fiscal second quarter results were very strong with net revenues up 25% and GAAP EPS up 23%. Non-GAAP EPS was up 30%. In constant dollars, net revenue growth was approximately 27% and non-GAAP EPS growth was 30%.

A few key highlights. Global payments volume growth has remained strong and stable relative to pre-COVID levels. In constant dollars, the U.S. index was 2 points higher than the first quarter at 1.44 versus 3 years ago. The international index, ex China, was down 2 points at 1.40 versus 2019 due to the impact of Omicron in early January.

Omicron impact on most domestic volumes was short-lived as we hoped it would be. The robust cross-border travel recovery that started in the fall as borders reopened, resumed in February as Omicron impact faded. Border restrictions were lifted quickly and pent-up demand for travel remains very high.

Index to 2019, cross-border travel, excluding transactions within Europe, jumped from a low of 71 in January to 94 in March. The first 2 weeks of March saw a spike in cross-border volumes from Russia and Ukraine due to displacement caused by the invasion. After we suspended operations in Russia in mid-March, there were no more cross-border transactions in or out of Russia. Adjusted for Russia and the spike from Ukraine, the March cross-border travel index relative to 2019 was around 90.

So far, we are not seeing any material impact on cross-border travel in other corridors as a result of Russia's invasion of Ukraine. Our 3 growth engines: consumer payments; new flows and value-added services, all grew revenues well over 20%. During the quarter, we bought back $2.9 billion in stock at an average price of around $2.10 -- $210. On March 10, we closed on the Tink acquisition.

Finally, our second quarter P&L and balance sheet reflect our best estimates for the impact of suspending operations in Russia. This includes revenues and expenses from terminating all client and supplier contracts, resolution of settlement balances and the deconsolidation of our Russian business.

We have adjusted 2 items from our GAAP earnings, expenses to support our employees in Russia and Ukraine and a charge related to net assets in our Russian legal entity.

Now on to the details. In constant dollars, global payments volume was up 17% year-over-year and 35% versus 2019. Debit spend remained resilient as credit spend continued to improve. Excluding China, total payments volume growth was 18% or 42% higher than 2019. U.S. payments volume grew 16%, up 44% versus 2019, which was 2 points better than the first quarter. Credit grew 27% and improved 4 points to 35% over 2019, helped by the affluent consumer.

Debit grew only 6% year-over-year, reflecting the impact of stimulus last year, but growth remained very strong versus 2019 at 53%. As Al indicated, debit is indexing well above the pre-COVID trend line, benefiting from accelerated cash digitization.

U.S. card presence spend grew 17% and was 21% above 2019 at its highest quarterly level since the pandemic. Card-not-present volume, excluding travel, grew 10% and was 70% above 2019. Relative to 3 years ago, e-commerce levels remain well above the pre COVID trend line even as card-present spend continues to recover.

International constant dollar payments volume, excluding China, grew 22% and was 40% above 2019.

A few regional highlights. Latin America was up 44% year-over-year and 99% higher than 2019 with robust performance across the region, fueled by cash digitization and client wins.

Our CEMEA region grew 18% year-over-year and 76% higher than 2019, led by client wins and cash digitization. Excluding Russia, the CEMEA region was up 100% over 2019.

The Europe was up 21% year-over-year and 31% higher than 2019. Following an Omicron dip in January, we saw a rapid recovery in most European markets. Ex U.K., Europe volumes grew 36% year-over-year and were 54% about 2019. Asia Pacific, excluding China, remains our weakest region, up 16% year-over-year and 25% versus 2019. Due to COVID restrictions, recovery across most of Asia has stalled Hong Kong declined relative to 2019.

India recovered strongly, up almost 20 points from December. India has been our fastest-growing market in Asia, up almost 80% since 2019, fueled by a tripling of e-commerce volumes.

Global process transactions were up 19% year-over-year and 38% versus 2019. Constant dollar cross-border volume, excluding transactions within Europe, were up 47% year-over-year and 12% over 2019. Cross-border card-not-present volume growth, excluding travel, remained strong, up 16% year-over-year and well above the pre-COVID trend line at 67% above 2019.

Cross-border travel-related spend, excluding intra-Europe, grew 111% year-over-year and indexed at 82% of 2019 levels. As I mentioned earlier, after an Omicron driven dip to 71 in January, the cross-border travel index to 2019 rose sharply to 94 in March. Many corridors are now indexing about 90 relative to 2019. Inbound travel to Latin America, the Caribbean and parts of the Middle East has been above 2019 levels for some time now.

There's plenty of recovery to come in one important corridor inbound to the U.S., which indexed only at 70 in Q2. Asia indexed in the high 30s, both inbound and outbound in Q2. The pace of travel recovery to and from Asia will be a key driver of the future trajectory. Most Asian borders are now opened, except for China and restrictions remain in place in Japan, Korea and Taiwan.

Moving now to a quick review of second quarter financial results. Service revenues grew 24%, faster than the 20% nominal growth in Q1 payments volume. We were able to bill and collect service revenues in Russia through early March. As such, in the second quarter, we recorded almost 2 quarters of service revenues related to Russia.

Service revenues were also helped by increasing utilization of card benefits. Data processing revenues grew 16%, below the 19% processed transactions growth mostly due to exchange rate changes. International transaction revenues were up 48% versus the 42% increase in nominal cross-border volumes, excluding intra-Europe. Revenue growth was helped by high currency volatility and select pricing modifications, partially offset by business mix.

Other revenues grew 21%, led by consulting, data and marketing services as well as travel benefits. Revenue growth was robust across our 3 growth engines, each growing well over 20%. Consumer payments growth was led by improving cross-border volumes and continued strong domestic volumes and transactions. New flows growth was driven by Visa Direct and carded B2B recovery. Visa Direct transactions grew by 20% impacted by lapping a strong quarter in the U.S. last year and a suspension of Russian operations. As Al indicated, Russia was the second largest market for Visa Direct, accounting for 17% of transactions. This is an unfortunate setback but the Visa Direct business is ramping fast in other international markets as well as in use cases such as cross-border remittances, earned wage access and other B2C payouts.

Commercial or B2B volumes grew 29% year-over-year, and up 38% versus 2019. Growth was driven by continued strength of small business and the recovery of large businesses across the portfolio of diverse spend categories.

Value-added service growth was led by consulting and marketing services, card benefits as well as risk and identity solutions. Revenue growth drivers include the acceleration of e-commerce, client growth in international markets and select pricing actions. Client incentives were 25.8% of gross revenues at the lower end of expectations. This was driven by a better revenue mix due to the faster-than-expected recovery of our cross-border business and by deal timing, with some Q2 deals being pushed into Q3.

GAAP operating expenses grew 11%. Non-GAAP operating expenses grew 16%. We recorded losses from our equity investments of $127 million. Excluding investment losses, non-GAAP nonoperating expense was $133 million. Our non-GAAP tax rate was 19.6%, GAAP EPS was $1.70, non-GAAP EPS $1.79, up 30% from last year. Including our quarterly dividend of $0.375 per share and our stock buybacks, we returned $3.7 billion of capital to shareholders in the quarter. A few comments on our trends through the first 3 weeks of April.

On a year-over-year basis, U.S. payments volume was up 12%, with debit up 2% and credit up 26%. Debit volumes are lapping the impact of stimulus payments in 2021. U.S. April spend growth versus 3 years ago was up 45%, with debit up a robust 54% and credit up, 37%. These trends are relatively consistent with performance in major markets around the world with the exception of CEMEA where we now have no payments volume from Russia. Processed transactions grew 17% year-over-year, up 36% versus 2019.

Constant dollar cross-border volume, excluding transactions within Europe, grew 47% year-over-year, and were 15% over 2019. Card-not-present nontravel growth was 62% about 2019. Travel-related cross-border volumes were at a 92 index to 2019. The small decline in this index relative to March is mostly due to the loss of Russia. Total cross-border volume was up 28% over 2019.

Moving now to our outlook for the rest of fiscal 2022. Just as 2021 was a year of 2 distinct halves, due to the recovery, 2022 will be a year of 2 halves due to Russia. The suspension of our business in Russia will reduce second half revenues by about 4%. Russia will also negatively impact the payments volume and cross-border volume index to 2019, each by 4 points. The impact on process transactions index to 2019 will be under 1 point since we did not process domestic transactions in Russia. Ex-Russia and Ukraine, our domestic volume growth has stayed robust and stable for the past 4 quarters relative to 2019.

Our outlook for the second half assumes that these trends are sustained. While there are uncertainties created by high inflation, supply chain disruptions, rising interest rates and the invasion of Ukraine, there is no evident impact on our global payments volumes. E-commerce spend, both domestic and cross-border has remained strong and stable relative to 2019 at well above the pre-COVID trend line, even as pandemic effects fade, and we are assuming this will continue.

In line with payments volumes, we expect processed transactions growth relative to 2019 to remain strong and stable with the variability largely driven by the extent to which small ticket card-present everyday spend comes back. It is important to note that year-over-year growth rates will moderate as we lap the strong second half recovery in fiscal year '21.

Ex Russia and Ukraine we're assuming no spillover effects on other corridors in our cross-border business. Given where we ended the second quarter, we now expect cross-border travel ex intra-Europe to fully recover to 2019 levels by the end of our fiscal year despite the loss of Russian business. Including intra-Europe, that would put cross-border travel above 2019 levels.

With these assumptions, third quarter net revenues are expected to grow at the upper end of the mid-teens range in constant dollars. This includes Tink & Currencycloud, which add approximately 0.5 point to net revenues. The dollar has strengthened and the exchange rate drag will likely reduce nominal rate revenue growth by around 2.5 points.

Due to some deals moving into the third quarter from the first half and the expectation that certain milestones will be achieved on some key contracts, incentives will run higher in the third quarter, between 26.5% to 27.5% of gross revenues. We expect non-GAAP operating expenses in constant dollars to grow in the mid-teens, including expense savings from Russia and almost 3 points of added expense from Currencycloud and Tink. Exchange rates will likely reduce nominal operating expense growth by about 1.5 points. Our tax rate is expected to be in the 19% to 19.5% range.

At this point, we expect fourth quarter trends to be generally in line with the third quarter. As always, we will update our fourth quarter outlook in July. Based on results to date and our outlook for the second half, we expect full year net revenue growth in constant dollars in the high teens to 20% range, including approximately 0.5 point of contribution from Tink and Currencycloud.

Exchange rates will likely drag nominal growth rates down by around 2 points. There is no change in our expectation for full year incentives. Incentives as a percent of gross revenues are expected to range between 25.5% to 26.5%. We expect constant dollar non-GAAP operating expense growth at the upper end of mid-teens. This includes savings from the suspension of Russian operations and almost 2 points of added expense from Currencycloud and Tink.

Nominal operating expense growth will be around 1.5 points lower due to the stronger dollar. Our full year tax rate is expected to be in the 19% to 19.5% range.

Despite the uncertainties caused by inflation, interest rates, the invasion of Ukraine and our exit from Russia, we expect fiscal year '22 will be a very strong year of above-trend top and bottom line growth.

As we enter the post-COVID era, we remain confident we can sustain a rate of growth about pre-COVID levels for all the reasons Al outlined, which I will summarize again. First, an acceleration away from cash and check for merchant payments, both domestic and cross-border as digitization becomes pervasive across consumers and businesses globally. Second, acceleration of cash, check and wire transfer displacement as our new flows initiatives penetrate a broad range of new use cases with very large total addressable markets.

Third, sustainable high-teens growth across value-added services, both from existing services and new offerings. As new flows and value-added services become a larger part of our revenue mix, growing faster than consumer payments, the sustainable growth rate will continue to rise. We are and will continue to invest in the capabilities required to capture the extraordinary growth opportunity ahead of us.

With that, I'll turn this back to Jennifer.

[Jennifer Como, Investor Relations]

Thanks, Vasant. And with that, we're ready to take questions, Jordan.

[Operator]

[Operator Instructions] Our first question comes from Harshita Rawat from Bernstein.

[Harshita Rawat, Bernstein]

Vasant, I want to ask about cross-border. So had the pandemic not happened, your cross-border volumes would have been at least 20% to 30% of the 2019 levels, if you just kind of go with historical run rates.

Now clearly, the travel probably has been solid these past few months. My question is how important is it that Asia, specifically China, comes back for you to have cross-border travel, not just going to 2019 levels, but eventually kind of returning to the pre-pandemic rate of growth?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Yes, Harshita, that is a great question. As you know, 2 things we told you on the last call have remained true. One that, generally, countries around the world want to keep borders open, China being 1 exception, and some restrictions in Japan, Korea and Taiwan. And I include Hong Kong also in that list. Other than that, you can travel pretty freely anywhere else in the world. Some of them need tests, some don't even need tests. So that's true.

The second is the pent-up demand for travel remains very high. And early indications on summer bookings, et cetera, as you heard from other people have been very good. So in our sort of calculations, certainly, we've been surprised so far even though we were bullish with how fast things have recovered. As you saw, after January, the recovery has been very robust. At this point, we're pretty optimistic that inbound to the U.S., which is still indexing only at 70 as of the end of March -- as of the end of the second quarter is on a good recovery track. There's still some recovery left in and out of Europe. So those things will certainly help us get back to 2019 levels.

And you're absolutely right, I think the how fast and how far we get to, where we should have been prepandemic will depend on Asia coming back. Asia indexed at under 40 in the second quarter. China is an important part of Asia, it is still incredibly depressed. Japan, Korea and Taiwan are also important parts of Asian cross-border travel. Asia is recovering. We're seeing some good trends in Asia. Certainly travel into parts of Asia, like India, Thailand, Indonesia, et cetera, Australia and New Zealand are picking up fast.

But you're right. I mean, getting all the way to 130 will depend on the remaining big travel components in Asia, which would be China, Japan and Korea, really coming back. And we'll have to wait and see on that, and we'll update you on the next call.

[Operator]

Our next question comes from Lisa Ellis from MoffettNathanson.

[Lisa Ellis, MoffettNathanson]

I had a follow-up call -- a question on commercial cards. I think you called out that your commercial card volumes are running at 138% of 2019 levels, so pretty healthy growth there. Can you talk more broadly, I feel like this is maybe a piece of the business that doesn't get the attention it should, given how much cash and checks and wire and other forms of payment there still are in commercial, can you maybe talk a little bit about the initiatives you've got underway to accelerate the digitization or the converting more of these B2B payments into cards.

[Al Kelly, Chairman and Chief Executive Officer]

Well, thank you, Lisa. This B2B segment is about $122 trillion opportunity, of which $20 trillion is in the carded space and then a $10 trillion in the cross-border space. So in the carded space, we already are the largest provider of commercial card volume. And our focus has continued to be on growing the number of issuers that are issuing commercial cards because it's a lot less than the number of people issue consumer cards.

And we're also very focused on the travel and fuel use cases in addition to obviously purchasing cards and corporate cards, which are a more traditional element of this carded B2B space.

We're also trying to continue to grow acceptance. There are acceptance gaps in the commercial space that hold us back from getting all the volume that we could potentially get. We are making strides, but there's still a ways to go in terms of having an acceptance footprint that mirrors the type of broad-based acceptance footprint that we have on the commercial side.

It's a very important part of the business. It has attractive yields. It's -- generally has the ability to -- it was growing faster than consumer prior to COVID, and we believe that it can grow faster than consumer when we get back to a more normal time post the pandemic and obviously, one big factor there will be the pace at which business travel returns.

In the cross-border space, obviously, our major thrust there is B2B Connect. And our major focus on B2B Connect continues to be to grow out the network by having more and more banks in more and more countries involved in the network, and that has been and continues to be our focus more so than driving transactions at this point.

And our belief is that once we get the network to a level where it is quite robust that transaction flow will happen fairly quickly. So those are some of the things that we're focused on to try to drive this very, very important space, which I continue to believe is an enormous opportunity for us going forward.

[Operator]

Our next question comes from Tien-Tsin Huang from JPMorgan.

[Tien-Tsin Huang, JPMorgan]

Thank you so much. Very strong broad-based results, which is what I want to ask about. With you far exceeding your revenue outlook, it looks like the client incentive planned is at the very low end of your expectations. So I just want to make sure I understand the relative performance there between the 2. Is it something that the upside and revenue brings with it very little incentive pressure? Or is it more complicated than that?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

No, it's 2 things, Tien-Tsin, as I said in the comments. Number one, you saw that our cross-border recovery in the quarter was stronger than we expected. We'd had expect a good recovery, but this was stronger than we expected. That improves our mix, but even with the strong recovery, our mix of cross-border is still lower than it was prepandemic. So the mix affects the percentage. As you know, the percentage is numerator and denominator. When cross-border grows disproportionately, the denominator grows without a commensurate increase in the numerator, just given the nature of how many of our incentives work. And that helps that percentage, and that's why the percentage came at the lower end of the range.

The second reason is there are always timing factors, timing factors in terms of renewals, timing as in when we recognize incentives linked to achieving certain milestones that contracts have, and that has pushed some of those incentives into the third quarter. So we expected third quarter to run above the upper end of the range, so to speak.

For the full year, we still expect to be in the range we gave you. So it's all driven by a combination of mix and timing.

[Al Kelly, Chairman and Chief Executive Officer]

The only thing I would add, Tien-Tsin, you followed us for a while. I mean there's art and science to this, in forecasting. And a lot of times, just dealing with the timing point that Vasant was talking about, we make assumptions about when deals will get done. We then make assumptions about how long it will take to get a deal launched or get a migration going and then we make assumptions about the performance of that deal.

And the odds of us getting all of that right across hundreds of deals that happened during the course of the year. make this not the easiest thing to always forecast. But I think we do a largely good job, but the explanation that Vasant gave about why we came in at the low end this quarter is those main 2 factors of timing and mix, driven by outperformance across the border.

[Operator]

Our next question comes from Sanjay Sakhrani from KBW.

[Sanjay Sakhrani, KBW]

Vasant, you spoke to the 4 percentage point impact in the second half from Russia. And obviously, it seems like you're able to overcome some of that with the stronger cross-border trends. Maybe you could just parse through a little bit of the impact to EPS and the flow through for us? I know there's some expenses that you mentioned that can offset Russia, maybe just help us through that.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Sure. So it is a 4-point revenue impact from Russia. So that's pretty much what the revenue impact would be. We gave you a sense of what our revenue expectations are for the quarter in constant dollars, upper end to mid-teens. If it hadn't been for Russia, you'd have added 4 points to that. So it's still strong despite that. And as you said, it's because the loss of Russia is offset to some degree by the cross-border business being stronger.

We have a similar issue or similar impact on the expense side, mid-teens expense growth helped by Russian expenses going away and there are 2 main Russian expenses that go away. We used to pay the processor in Russia for processing transactions. We no longer have to pay them. Obviously, when you're in business, you do marketing and provide a bunch of other services.

Some of our personnel-related costs in Russia will remain. We've made some commitments to our employees in Russia about other roles. So those don't all go away. So that does reduce our expenses in the second half. Probably, in the range of about 2 to 3 points. On the other hand, we do have Tink and Currencycloud now that are coming in, which were not there last year, and that's about 3 points. So it sort of washes and goes in the other direction. And then finally, exchange rates will help expenses to the tune of about 1.5 points.

So those are all the moving parts. Our expenses would have been probably 2 or 3 points higher if Russia had not been -- if operations in Russia had not been suspended.

[Sanjay Sakhrani, KBW]

Okay. Great. And you probably get more flow-through from the cross-border outperformance, correct?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Well, partially. Mainly, because the incentives would go with it tend to be lower and it's a higher-yielding business. Yes.

[Operator]

Our next question comes from Darrin Peller from Wolfe Research.

[Darrin Peller, Wolfe Research]

Listen, it's great to see your constant currency guidance increase for the full year despite what's obviously happening in Russia, Ukraine in organic and to some degree with a small help from acquisitions. Just to be clear, we're still getting a follow-up from a couple of investors asking to make sure that includes the impact for the full year of Russia as well, right?

And then I just want to double check. I mean, you guys continuously highlight the potential to exit the pandemic at an accelerated growth rate, and I'm sure it has a lot to do with the new flows and some of the new services opportunities you're seeing grow so well. Can you just reiterate on that and just go into a little more detail on what gives you the confidence there? And what kind of growth rates you should be able to achieve?

[Al Kelly, Chairman and Chief Executive Officer]

Well, I think the biggest thing, Darren, for me is we didn't take the last couple of years off in terms of going out and trying to convert business, sign fintechs, increase our business with traditional partners. We also have phenomenally grown our acceptance footprint in certain parts of the world.

So there's actions that we have taken that -- you haven't seen the flow through because of the fact that the pandemic has, in many cases, suppressed spending. But as I think we come out of the pendent you'll see the flow-through of the various actions that we took. And then I think the pandemic itself has accelerated people's usage of card-not-present in e-commerce, and I think that's a sustaining model that's going to help drive growth on a going-forward basis as well. So I think we're going to see ourselves taking advantage of that.

And then, certainly, we have continued to add use cases to things like Visa Direct. We've continued to build out our risk and identity tools. We've continued to grow our Visa consulting service. So I think that my view is that the market hasn't seen the flow-through of a lot of the investments -- the full flow through of a lot of the investments that we've made over the last 27 months-or-so when we've been operating in this kind of odd world driven by the pandemic. And I think that as we start to come into a more normal environment, I think you're going to see it. So that's the biggest factor.

Vasant, do you want to address Darren's first question on I guess it was Russia?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Yes. Yes, Darren. Our full year outlook incorporates the impacts of Russia in the second half. It reflects the fact that the second quarter was as strong as it was. So when you look at the first half and what growth we had in the first half, despite the impact of Russia on the second half, in constant dollars, we still expect to be in the high teens to 20%.

[Operator]

Our next question comes from Ashwin Shirvaikar from Citi.

[Ashwin Shirvaikar, Citi]

I wanted to just shift gears away from cross-border and ask about Tink and how you intend to use Tink to grow it, including both geographical growth and functional proliferation as it relates to debit -- Visa Direct broad payments functionality, things like that.

[Al Kelly, Chairman and Chief Executive Officer]

Well, thank you. Just as a reminder for everybody, I highlighted Tink in my remarks, but I didn't talk about the fact that it's got thousands of developers on the other side of the 3,400 banks that I did cite. And today, it operates in 18 markets across Europe.

Its revenue model is largely a per API call, although there are some subscription basis on some of its value-added services. Our goal is to position ourselves in the middle of open banking in a place -- in a world where it's most advanced, which is Europe. And we believe that our complementary capabilities will help drive adoption of Tink's capabilities and provide incremental value to clients.

Clearly, our -- maybe not clearly, but I'll make it clear. Our focus initially is going to be on Europe. That's where Tink is strong, that's where it's got a large presence, and that's where we could -- we think that we could be additive in terms of driving their business forward. But certainly, we will -- we anticipate and anticipated when we looked at Tink and made the decision to buy it, that we will leverage its capabilities and extended their capabilities to other markets.

But we want to make sure that our investment is focused. We never like to kind of peanut our investment across too many places at one time. So it's better, we think, to perfect our partnership together in the place where we both have strength, which is Europe, and we'll go from there.

[Operator]

Our next question comes from Jason Kupferberg with Bank of America.

[Jason Kupferberg, Bank of America]

So I was just curious, for the quarter itself here in Q2, I think you would expected net revenue growth to be at the high end of high teens. Obviously, that was before the war started. You ended up in the mid-20s. So I'm just curious in terms of order of magnitude, like which revenue lines really surprised you the most to the upside? To what extent was inflation a meaningful contributor?

And then it sounded like maybe you pulled forward some Russia service revenue, I think Vasant you made a comment there. I was hoping you could maybe quantify that piece as well.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Sure. So the primary factors that allowed the quarter to be stronger than we expected was clearly international revenues. And international revenues were not only stronger in terms of cross-border volumes being stronger than we expected. The recovery was from 71 to about 94 index to '19 between the end of January and March, which was clearly very, very strong. So that definitely was 1 of the outperformers. Because of the war in Ukraine, currency volatility was also high, and the fact that the cross-border business helps volumes add-in currency volatility and our treasury revenues were also higher than we expected. So those were 2 major contributors.

And on the service line, as you know, we recognize service fees with a lag. In the case of Russia, because operations were being suspended, we were able to bill and collect revenues for the second quarter through when we suspended operations, and that added probably -- it would be less than 1 point to revenues, maybe a little over 0.5 point. So that did help. But other than that, it was all driven by just strength across the board. Value-added services performed very well, too.

[Operator]

Our next question comes from Bob Napoli with William Blair.

[Bob Napoli, William Blair]

I mean, Visa has obviously been consistently active on the M&A front and on venture investing. With valuations down, would we -- should we expect to see Visa being more active in both areas? And if so, what areas, products, geographies, I guess, verticals would be most attractive for Visa incrementally to add to invest?

[Al Kelly, Chairman and Chief Executive Officer]

Well, Bob, I'll start and Vasant can add any color he wants. We still have a stated preference for whatever we could do ourselves to do it ourselves. That said, we have a very robust and qualified corporate development function that looks at all kinds of various possibilities. And we're in constant review of various lists to determine what might be of interest and what might not be of interest. Will we can do it faster and get people who have unique skills that we might not have, and we could build that -- it's just much faster than building the capability ourselves, we'll certainly look to buy.

And without getting too specific, I think that continuing to grow our toolbox as it relates to new flows and value-added services and things that would help us do that would be certainly areas that would be attractive to us. I probably wouldn't want to say more than that at this point.

The only other thing I'd say is that we're really not -- we don't really look to be an active venture investor. Many of our -- and most of our investments or things where we're following on a commercial agreement, and often, when we do a commercial agreement with a smaller player, they ask us for us to endorse them a bit by making a small investment so they can add up to the roster of players that are investors in their company.

But we're not out there speculating and looking for just venture investments where the vast majority of them, and Vasant can add or delete, almost 100% of them are because we've got a commercial deal in place first, that's the most important aspect to us.

Vasant, anything you want to add?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

No. I think what you will see in the future is more of what you've seen in the past. Acquisitions that can add to our capabilities like Tink did, like Currencycloud did expand the suite of services we can offer, which is what both Tink and Currencycloud do. Acquisitions where we decide it's faster or cheaper to buy than to build. In some cases, it could be acquisitions that expand the scope of an existing service like Earthport did with our payouts business around the world.

And yes, to the extent that the correction we're seeing in public markets carries over to private markets over a period of time, certainly, we expect to be more active. And we have no specific objectives in terms of we're going to do X amount in acquisitions every year. It's going to be based on what makes sense to do and where we can create value.

[Operator]

Our next question comes from Timothy Chiodo with Credit Suisse.

[Timothy Chiodo, Credit Suisse]

I want to touch on Visa Direct. Clearly, it's a much bigger but still fast-growing portion of your business. You talked a little bit about the growth this quarter and the Russia impact. And you also mentioned it as the second largest geographic market. Maybe you could talk a little bit about that geographic mix? And less on maybe the other large markets, but more importantly, maybe the markets where there's a big opportunity? And the brief follow-up would be if you could just recap the mechanic around, your ability to, of course, send to Visa Credentials, but also how does it work when you want to send to a Mastercard credential and that capability.

[Al Kelly, Chairman and Chief Executive Officer]

The -- for competitive reasons, I'd be reluctant to get too into the weeds on this. But obviously, our biggest market is the United States. Russia was our second largest market. And then there's a number of markets across the world that are maybe a half dozen to 10 that are somewhat together in terms of size that they represent. And our focus at this stage is to: A, build greater penetration of the use cases that we have today; secondly, to develop new use cases; and thirdly, to grow the geographic footprint of all of our use cases. And we have built up a team completely focused on Visa Direct. We do utilize our account executives around the world as our frontline sales agents. And then from there, we'll bring in solution experts who know much more about the specifics of Visa Direct.

But we're -- so basically, I talked about payouts and remittances. We're continuing to look at the ability to pay gig economy workers, which is a growing and hugely growing segment around the world. We're looking at global money movement use cases beyond the ones that I've talked about in P2P, which we've talked about before. We're looking at digitizing disbursements by replacing checks and slow ACH wherever we can around the world.

The reality is that I think there are applications everywhere and one of our challenges, especially as we look to replace some of the volume from Russia is going to be determined where to invest versus having to find places to invest. There are plenty of places to invest, which is the great news. We're just going to have some work to do to figure out exactly where the hottest opportunities are to drive transaction growth for us as we look forward at various use cases.

[Timothy Chiodo, Credit Suisse]

Excellent. And were you able to help on that mechanical one around maybe the difference in terms of mechanics or economics when you send to a Mastercard credential?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Yes. It's part of our network or network's approach. So we're network agnostic and acquisitions like YellowPepper and what we did with Earthport are the kinds of capabilities that allow us to send to any credential, including a bank account as part of -- we'll get your money there and part of the way maybe on the rail that's not ours.

[Operator]

Our next question comes from James Faucette from Morgan Stanley.

[James Faucette, Morgan Stanley]

I appreciate all the details and color. Wanted to -- gotten a few questions from investors, just around the impact that inflation may be having. And A, can you help quantify it? Maybe how that's benefiting Visa? But also and maybe more importantly, can you talk about if you're seeing any shift in spending behavior by consumers and that mix between discretionary and nondiscretionary spend. And if that has any impact at all on how you're formulating your outlook.

[Al Kelly, Chairman and Chief Executive Officer]

So there are -- inflation has some puts and takes on our business. Service fees and international fees are basis points on volume. So inflation typically lifts transaction size, but we’re offsetting that and incentives are also tied to volume, so there's some offset to that lift.

Fuel prices go up, but then on the other hand, sometimes consumers tend to moderate their buying in times of large increases in gas to the degree that, over time, if it was to happen, the dollar was to weaken, that increases inbound cross-border flows and the U.S. inbound corridor is one of our largest and higher-yielding corridors.

Expenses for personnel and marketing, professional fees could go up. But I'd say 2 things and then ask Vasant to add anything he wants. So far, we're not -- as I said and I think what Vasant said in his remarks, we're really not seeing much impact that's causing us any concern in our numbers.

And then the last thing I'd say, net-net, historically, inflation has been positive for us.

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Yes. Just to add to what Al said, I mean we clearly have seen -- we've seen ticket sizes go up in the U.S., in particular, in Europe, but it's not all inflation. Some of it is mix. It's mix driven by the fact that the card-present transactions, which often tend to be smaller transactions, have not yet fully come back. It's mix also because e-commerce transactions, even when you do everyday purchases, can be larger ticket sizes. We could even see ticket sizes go down in inflationary times as card-present comes back.

So as Al said, there's multiple impacts from inflation. Net-net, it's a positive for us. We have not seen any impact on discretionary spending that we can discern. If anything, discretionary spending, especially from affluent consumers and credit cardholders has been going up quite healthily. So in general, there isn't any evidence impact -- evident impact on inflation, but obviously, we'll keep looking for it.

[Al Kelly, Chairman and Chief Executive Officer]

James, I'll just share 1 quick data point with you. We recently looked at restaurant spending by various strata and the highest-performing strata in terms of growth is the $100 to $300 ticket price, and the second best performing strata was over $300. So that just gives you some sense. That's very recent data of the Affluent being back in the market and not afraid to spend in an important spend category.

[Operator]

Our final question comes from Jamie Friedman with Susquehanna.

[Jamie Friedman, Susquehanna]

Vasant, I may be misremembering this, but my recollection was that you had contemplated returning to 90% travel index by September. I apologize if I got that wrong, you had -- you were going kind of quick with the updated assumptions. Can you repeat what you were contemplating now in terms of where travel would end the fiscal year?

[Vasant Prabhu, Vice Chairman and Chief Financial Officer]

Yes. So we talk about cross-border travel ex intra-Europe, and we are now expecting, given where it ended the second quarter to be at or about likely 2019 by the end of our fiscal year. And you’re absolutely right, the last time we talked to you, we said we'd probably be around 90%. We're running better than we expected so far, so we've definitely raised our view of that.

Now inclusive of intra-Europe, that would put us above 2019 levels by the end of our fiscal year. So yes, I think you got it right.

[Jennifer Como, Investor Relations]

Great. And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to call or e-mail our Investor Relations team. Thanks again, and have a great day.

[Operator]

Thanks for your participation in today's conference. You may disconnect at this time.