Visa Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended December 31, 2015. Comparisons are with the three months ended December 31, 2014 unless stated otherwise. Amounts are in U.S. dollars.
Business context
Visa operates a global payments technology network and facilitates payment authorization, clearing and settlement; it does not issue cards or extend credit. The quarter included progress toward the planned acquisition of Visa Europe, which remained subject to regulatory approvals and other closing conditions.
Financial performance and liquidity
| Metric | Q1 FY2016 | Prior period / change |
|---|---|---|
| Operating revenue, net of client incentives | $3.565 billion | $3.382 billion; up 5% |
| Operating income | $2.396 billion | $2.238 billion; up 7% |
| Operating margin | 67.2% | 66.2% |
| Net income | $1.941 billion | $1.569 billion; up 24% |
| Diluted Class A EPS | $0.80 | $0.63; up 26% |
| Adjusted net income / diluted EPS | $1.686 billion / $0.69 | Up 7% / 10%, respectively |
| Cash from operating activities | $1.979 billion | $1.761 billion |
| Cash and cash equivalents at quarter end | $12.837 billion | $3.518 billion at September 30, 2015 |
| Long-term debt at quarter end | $15.877 billion carrying value | No debt reported at September 30, 2015 |
The $255 million non-cash, non-taxable gain from revaluing the Visa Europe put option materially increased reported earnings. Visa excluded it in its non-GAAP adjusted results. The reported effective tax rate was 26%, versus 31% a year earlier; the adjusted rate excluding the put-option gain was 29%.
Revenue growth reflected higher processed transactions and nominal payments volume, partly offset by larger client incentives and currency effects. Visa processed 18.986 billion transactions, up 8%. Nominal payments volume for the quarter used in the revenue analysis (the three months ended September 30, 2015) grew 4% overall; international growth was 15% on a constant-currency basis. A stronger U.S. dollar reduced reported operating-revenue growth by about three percentage points.
Operating expenses increased 2% to $1.169 billion. Personnel and marketing costs declined, while network and processing costs rose 12% and general and administrative costs rose 24%. Operating cash flow exceeded the prior-year quarter; investing cash outflow was $6.194 billion, principally reflecting purchases of available-for-sale securities, and financing cash inflow was $13.534 billion, largely from the debt issuance.
Visa issued $16.0 billion of fixed-rate senior notes in December, with maturities from 2017 to 2045 and coupon rates of 1.20%–4.30%. Net proceeds were $15.9 billion. At quarter end, it also held $1.061 billion in restricted litigation escrow cash. Management said operating cash generation and other liquidity sources should meet projected needs for more than 12 months. On January 27, 2016, Visa entered a new $4.0 billion unsecured revolving credit facility, with no borrowings outstanding at the filing date.
Material changes and notable items
- Visa Europe acquisition: Agreement signed November 2, 2015 to acquire all of Visa Europe for consideration of up to €21.2 billion: €11.5 billion cash and preferred stock valued at approximately €5.0 billion at closing, plus contingent cash consideration of up to €4.0 billion and up to €0.7 billion interest after 16 fiscal quarters. Closing was expected in fiscal Q3 2016.
- Repurchases and dividends: Visa repurchased approximately 26 million Class A shares for about $2.0 billion during the quarter and paid $340 million in dividends. It reported $5.8 billion remaining under its repurchase authorizations at December 31, 2015.
- Pension plan: The company discontinued employer credits to its qualified defined benefit plan after December 31, 2015; it recorded an $8 million curtailment gain and a $56 million actuarial gain in other comprehensive income.
- Litigation: Accrued litigation was $1.012 billion at quarter end; the U.S. covered-litigation escrow held approximately $1.1 billion. Visa noted that litigation accruals may not equal ultimate losses and that some claims’ possible losses were not reasonably estimable.
- Controls: Management concluded disclosure controls were effective at the end of the period and reported no material change in internal control over financial reporting.
Outlook, risks and contingencies
The filing provides no specific numerical guidance for future revenue, earnings or margins. Management described economic growth as uneven and tepid, and cited continued electronic-payment migration and international markets as growth opportunities. The Visa Europe transaction remained conditional; the notes also provide for redemption of specified notes if the acquisition is not completed by the applicable deadline. The acquisition could bring integration, regulatory and litigation-related risks, including Visa Europe interchange-fee claims. Other identified risks include regulation, competition and technological change, system disruption, fraud or data breaches, currency fluctuations, and economic conditions. Visa also reported ongoing tax examinations and said their timing and outcomes were uncertain.
Most important facts for investors to verify
- Whether the Visa Europe acquisition received required approvals, closed on the expected timetable, and was completed on the disclosed consideration and financing terms.
- How much of reported earnings growth came from the $255 million put-option gain; adjusted results are non-GAAP measures.
- Whether payment-volume, transaction and revenue trends persist, particularly after foreign-exchange effects and client incentives.
- Future debt service, cash deployment, share repurchases and dividends following the $16.0 billion note issuance.
- Developments in U.S. and European interchange litigation, related accruals and potential acquisition-related loss protections.