Visa Inc. — Fiscal 2020 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2020; filed July 30, 2020. Amounts are in U.S. dollars unless otherwise noted. Visa operates a global payments technology network and does not issue cards or extend credit.
Financial performance and position
| Metric | Three months ended June 30, 2020 | Year-over-year change | Nine months ended June 30, 2020 | Year-over-year change |
|---|---|---|---|---|
| Net revenues | $4.837 billion | Down 17% | $16.745 billion | Down 1% |
| Operating income | $2.999 billion | Down 23% | $10.939 billion | Down 3% |
| Net income | $2.373 billion | Down 23% | $8.729 billion | Down 4% |
| Diluted Class A EPS | $1.07 | Down 22% | $3.92 | Down 1% |
Third-quarter operating margin was approximately 62%, versus 67% a year earlier; net margin was approximately 49%, versus 53%. These are calculated from reported operating income and net revenues, and are not separately stated filing measures. Non-GAAP net income was $2.347 billion and non-GAAP diluted Class A EPS was $1.06 for the quarter; Visa’s non-GAAP methodology excludes specified investment gains and losses, acquired-intangible amortization and acquisition-related costs.
- Revenue mix: Quarterly service revenue was nearly flat at $2.409 billion; data processing revenue declined 5% to $2.525 billion; international transaction revenue fell 44% to $1.102 billion. For nine months, service and data processing revenue grew 6% and 7%, respectively, while international transaction revenue declined 12%.
- Cash flow: Nine-month operating cash flow was $8.344 billion, versus $8.742 billion. Investing activities provided $2.308 billion; financing activities used $4.723 billion.
- Liquidity: June 30 cash and cash equivalents were $13.898 billion; cash, cash equivalents and restricted cash totaled $16.934 billion. Current assets were $25.011 billion and current liabilities $16.100 billion.
- Debt: Debt carrying value was $20.879 billion, including $2.999 billion current maturities. Visa issued $4.0 billion of senior notes in April and had no commercial paper outstanding at quarter-end. $3.0 billion of notes was due in December 2020.
- Capital returns: Visa repurchased $6.572 billion of shares and paid $2.002 billion in dividends in the first nine months. The board declared a $0.30-per-Class A share dividend payable September 1, 2020.
Material changes versus prior comparable periods
- COVID-19-related restrictions sharply affected the quarter: processed transactions fell 13%, and cross-border volumes were particularly weak. Visa said spending improved month by month as restrictions eased, but travel-related cross-border activity remained heavily impaired.
- International transaction revenue was the largest quarterly revenue decline. U.S. quarterly revenue fell 8%, while international revenue fell 24%.
- Quarterly operating expenses declined 5%, reflecting lower marketing and other cost reductions; nine-month operating expenses rose 4%, primarily due to personnel and higher depreciation and amortization.
- For the nine months, nominal payments volume grew 6% through March 31, while processed transactions grew 1% through June 30. Visa’s reported service revenue in a period reflects payments volume from the preceding quarter.
Outlook, risks and unusual items
- Visa provided no specific numerical financial guidance. Management said the duration and eventual business effects of COVID-19 remained difficult to predict, citing uncertainty around the outbreak, restrictions, treatments and effects on clients and partners. Most employees were expected to continue working remotely for the rest of 2020.
- Management said current and projected liquidity sources should meet needs for more than 12 months, while noting access to cost-effective capital could be affected by credit-market conditions.
- A proposed $5.3 billion acquisition of Plaid, including approximately $4.9 billion cash consideration, remained subject to regulatory reviews; closing was expected by year-end 2020. Visa intended to fund it with cash, investments and new debt.
- Visa expects a one-time, non-cash tax expense in fiscal Q4 2020 following the UK’s repeal of a planned tax-rate reduction; the filing says the change is not expected to significantly increase the ongoing effective tax rate.
- Litigation remains a material uncertainty. Accrued litigation was $1.156 billion at June 30. Visa disclosed extensive U.S. interchange litigation and more than 400 outstanding European merchant claims. The UK Supreme Court found Visa’s UK domestic interchange restricted competition; further proceedings will determine the lawful rate and potential recovery. Visa also received an FTC information demand and notice of an EC preliminary investigation into staged digital-wallet rules.
- Visa’s settlement guarantee exposure varies daily: maximum daily exposure was $97.3 billion and average daily exposure $54.4 billion during the first nine months. Visa said historical losses were minimal, but future obligations could be material and are not determinable.
Important facts for investors to verify
- Whether transaction, payments and cross-border volumes continued to recover after June 30, particularly as travel patterns and restrictions changed.
- Progress and regulatory status of the Plaid acquisition, its final funding mix and expected financial contribution.
- Developments in U.S. and European interchange litigation, regulatory investigations and the adequacy of related accruals.
- Visa’s capacity to meet the December 2020 debt maturity while maintaining buybacks, dividends and funding for the proposed acquisition.
- The amount and timing of the expected UK-related non-cash tax charge and any changes in the effective tax rate.