Visa Inc. — Q1 FY2020 Form 10-Q
Business context and reporting period. Visa operates a global electronic payments network and provides payment processing and related services; it generally does not issue cards or extend credit. This unaudited quarter ended December 31, 2019, compared with the three months ended December 31, 2018. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenues | $6.054 billion | $5.506 billion | +10% |
| Operating expenses | $2.038 billion | $1.789 billion | +14% |
| Operating income | $4.016 billion | $3.717 billion | +8% |
| Net income | $3.272 billion | $2.977 billion | +10% |
| Diluted EPS, Class A | $1.46 | $1.30 | +12% |
| Operating margin | Approximately 66.3% | Approximately 67.5% | Down about 1.2 percentage points |
| Net margin | Approximately 54.1% | Approximately 54.1% | Broadly unchanged |
| Operating cash flow | $3.875 billion | $3.294 billion | +18% |
Net revenue growth reflected increased payments volume, cross-border volume and processed transactions, partly offset by higher client incentives. Reported revenue growth was reduced by approximately one percentage point by foreign-exchange movements, partly mitigated by hedging. Processed transactions rose 11% year over year. Service revenue increased 9%, data processing revenue 16%, international transaction revenue 9%, and client incentives increased 20% to $1.748 billion.
Personnel expense rose 22%, reflecting headcount growth and higher incentive compensation; professional fees rose 16%, depreciation and amortization 15%, and general and administrative expense 13%. Management attributed higher costs to business investment, acquisition activity, product enhancements and indirect taxes. Net interest expense declined to $111 million from $145 million, partly due to derivatives lowering borrowing costs. The effective tax rate was 18% in both periods.
At December 31, 2019, total assets were $74.781 billion, current assets $22.319 billion, and current liabilities $17.579 billion. Cash and cash equivalents were $8.768 billion; an additional $1.634 billion was restricted in the U.S. litigation escrow. Reported debt carrying value was approximately $16.7 billion, including $3.0 billion due in December 2020. Visa generated $3.875 billion in operating cash flow and used $3.133 billion in financing activities, including $2.370 billion for share repurchases and $671 million for dividends.
Material changes, outlook and risks
- Performance and operating trends: Management described continued global consumer spending growth amid uneven economic conditions. Service revenue reflects prior-quarter payments volume; the volume growth table in this filing is for the quarter ended September 30, 2019, not the December quarter. That table reported 7% nominal payments-volume growth and 10% international growth on a constant-dollar basis. December-quarter processed transactions grew 11%.
- Capital returns and debt: Visa repurchased 13 million shares for approximately $2.4 billion during the quarter. The January 2019 repurchase authorization had $1.7 billion remaining at quarter-end; in January 2020 the board authorized a further $9.5 billion program. The company declared a $0.30-per-share quarterly dividend payable March 3, 2020. It said it had sufficient liquidity for the $3.0 billion debt maturity due December 2020.
- Plaid acquisition: On January 13, 2020, Visa agreed to acquire Plaid for $5.3 billion, comprising approximately $4.9 billion cash and $0.4 billion in retention and deferred equity consideration. The transaction remained subject to customary closing conditions, including regulatory approvals, and was expected to close within three to six months. Visa expected to fund it with cash, cash equivalents and investments, and new debt.
- Litigation and contingencies: The company recorded a $467 million reestablishment of a prior accrual related to opt-out claims in the U.S. Interchange MDL; it also received a roughly $467 million takedown payment into its restricted litigation escrow. Accrued litigation totaled $1.629 billion. More than 400 European merchants had outstanding claims relating primarily to interchange rates, with more claims threatened. Visa cautioned that future judgments, fines or settlements could materially affect financial position, results or cash flows, and that some potential losses were not reasonably estimable.
- Other risks and disclosures: Visa’s settlement guarantee exposure varies daily; maximum daily exposure was $97.3 billion and average daily exposure $59.2 billion during the quarter. It held $3.770 billion in collateral and reported historically minimal losses from settlement risk. Management stated projected liquidity was sufficient for needs beyond the next 12 months. It reported no significant change in market risks, effective disclosure controls, and no material change in internal control over financial reporting. The filing provides no specific earnings or revenue guidance.
Key facts for investors to verify
- How revenue growth, transaction growth and client-incentive growth evolve, especially as incentives on long-term contracts vary with performance and contract terms.
- The quarter distinction in volume disclosures: September-quarter payment volumes inform December-quarter service revenue, while processed transactions are reported for the December quarter.
- Final cost, financing, regulatory approvals and closing timing for the Plaid acquisition, including the amount of any new borrowing.
- Developments in U.S. Interchange MDL opt-out claims and European merchant litigation, and whether accrued amounts and escrow funding remain adequate.
- Cash available for general use versus restricted cash, and Visa’s capacity to meet the December 2020 $3.0 billion maturity while funding acquisitions, dividends and repurchases.