Earnings conference calls are largely designed for the benefit of analysts. Analysts ask management about particular line items in a company's quarterly report, then use the answers to improve their own models on the future of a company's earnings.
Visa's (V 0.95%) recent conference call gave investors a great look into the business, along with some trends impacting the top and bottom lines.
Here are the five most important items in the latest call.
1. Cross-border transactions are affecting revenue growth
Few of us consider the complexities of using a U.S.-issued card in a nation such as Mexico or Canada, but cross-border transactions make up a big piece of Visa's earnings pie.
On the conference call, CEO Charles Scharf explained how cross-border transactions affect Visa:
Every year, if we look back over the past year, we will have performed currency translations services for over a $150 billion in value. [W]e earn a very small spread on those transactions.
The way the spread is calculated, it's an algorithm that is based on the actual volatility of our currency in a given day. So we would expect what we're seeing and as example if we were to look at the month of June, June had the lowest volatility that we have seen in 15 years.
In other words, lower foreign exchange volatility is resulting in a lower spread that Visa earns exchanging currencies for its cardholders. And according to Scharf, an important variable in the computation -- volatility -- has recently reached lows not seen in 15 years.
This lines up with the fact that cross-border transaction volumes increased 6% year over year during the quarter, but revenue from those transactions grew only 1% during the same period.
2. Apple Pay and similar products expand the platform
Apple Pay was announced as a feature of Apple's (AAPL 0.51%) new iPhone 6 well after the Visa conference call, but Scharf's comments on new mobile payment technologies explain how his company looks at emerging technologies and their role in the processing business.
We are exposing the capabilities so that different parties including merchants can embed Visa payments into their experiences but very importantly it preserves the role that issuers, acquirers play in the system today.
To recap, issuers are banks that provide the credit or debit cards. Acquirers are the banks that work on behalf of the merchant -- the company accepting the payment. Visa is the all-important payment network -- the glue that holds all the players together.
In the future, Visa sees opportunities such as Apple Pay as a way to build its network and increase payment volume, while ensuring that it can continue to collect its "toll" for using the collection of issuers, acquirers, and merchants built up over its history.
3. Visa is doubling down on Checkout
Visa's Checkout is a relatively new product designed to keep customers using their Visa-branded cards online.
The tool is simple: Sign up once, submit your Visa card's information, and with one set of log-in credentials you can automatically make a payment through Checkout, without having to find your wallet each time you want to make a purchase online.
According to Scharf, Visa intends to make this a big part of its marketing going forward:
We intend to spend a significant amount in marketing including TV as we go into the back-to-school season and then again for the leading up to the Christmas. So, it's going to be hard not to know what Visa Checkout and why you should have it.
4. Incentives remain a top concern
Financial incentives to encourage the use of Visa's network have historically consumed about one-sixth of the company's revenue. The company guided for incentives to be in the range of 16.5%-17% of revenue for the full year.
Byron Pollitt, Visa's CFO, made some interesting comments about the level of incentives for the full year:
[W]e are narrowing our full year guidance for client incentives as a percent of gross revenue to around 17% from the prior range of 16.5% to 17.5%. Let me also point out that mathematically this puts the fourth quarter at north of 19%.
What's notable here is the fourth-quarter assumption that incentive spending would top 19% of revenue. Later in the conference call, management suggested that a higher level of incentives is partly due to up-front payments at the time the company renegotiates its contracts with issuers. While this seems logical, investors should watch this carefully, as growing incentives suggest Visa is losing pricing power.
5. Company guidance didn't include improvements
The conference call was full of references to recent "headwinds," or difficulties underlying the company's financial performance.
In clarifying the Visa's forecast margins, incentive spending, and earnings-per-share growth, Scharf noted that the company wasn't expecting robust improvements in making those projections.
But as we sit here and just think about from this quarter to next quarter, we are not assuming any kind of meaningful change in these headwinds that we've talked about which, again are possible and will happen. We just don't know the timing and just given the math that Byron said next quarter's incentives will be higher than this quarter's incentives.
In other words, an uptick in foreign exchange volume could help Visa beat its own guidance in the fourth quarter. Likewise, a reduction in expected up-front incentive spending during contract renegotiations -- contracts typically span five years or more -- could add to the company's fourth-quarter report.
