Visa Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. Visa is a global payments technology company operating in more than 200 countries and territories; it is not a bank and does not issue cards or extend credit. Visa has one reportable segment, Payment Services.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net operating revenue | $15.082 billion | $13.880 billion | +9% |
| Operating income | $7.883 billion | $9.064 billion | -13% |
| Operating margin, reported | 52% | 65% | -13 percentage points |
| Net income | $5.991 billion | $6.328 billion | -5% |
| Diluted Class A EPS, reported | $2.48 | $2.58 | -4% |
| Net income, adjusted (non-GAAP) | $6.862 billion | $6.438 billion | +7% |
| Diluted Class A EPS, adjusted (non-GAAP) | $2.84 | $2.62 | +8% |
Revenue growth reflected transaction and payment-volume growth, Visa Europe’s fiscal fourth-quarter contribution, and pricing changes; currency movements reduced revenue growth by three percentage points. Processed transactions rose 17% to 83.2 billion. Nominal payment volume grew 16% overall, including Visa Europe, while constant-dollar international payment-volume growth was 37% for the 12 months ended June 30, 2016.
Data processing revenue increased 13% to $6.272 billion; international transaction revenue increased 14% to $4.649 billion; service revenue increased 7% to $6.747 billion. Client incentives, recorded principally as a revenue reduction, rose 19% to $3.409 billion.
Reported operating expenses increased 49% to $7.199 billion, primarily due to a $1.877 billion Visa Europe Framework Agreement loss and $152 million of acquisition-related costs. Adjusted operating margin was 66%, versus 65% in FY2015. FY2016 also included a $110 million severance charge, an $88 million deferred-tax remeasurement gain, and acquisition-related foreign-exchange gains. The filing’s non-GAAP adjustments exclude specified items; they are not substitutes for GAAP results.
Fourth-quarter revenue was $4.261 billion, operating income $2.625 billion, net income $1.931 billion and diluted Class A EPS $0.79. The prior-year quarter had revenue of $3.571 billion, operating income of $2.283 billion and net income of $1.512 billion.
Cash flow, balance sheet and capital allocation
- Operating cash flow was $5.574 billion, down from $6.584 billion; investing cash outflow was $10.916 billion, including the Visa Europe acquisition; financing cash inflow was $7.477 billion. Cash and cash equivalents ended the year at $5.619 billion, up $2.101 billion.
- Total assets were $64.035 billion and total equity $32.912 billion. Current assets were $14.313 billion and current liabilities $8.046 billion. These balances include Visa Europe and increased substantially following the acquisition.
- Long-term debt was $15.882 billion carrying value ($16.0 billion principal). Visa issued $16.0 billion of senior notes in December 2015, with maturities from 2017 to 2045 and coupon rates of 1.20% to 4.30%. Interest expense was $427 million, compared with $3 million in FY2015.
- Visa reported $5.619 billion of cash and $7.179 billion of available-for-sale investments. It also had an undrawn $4.0 billion revolving credit facility and no commercial-paper borrowings. Management said projected liquidity sources were sufficient for needs beyond the next 12 months.
- Visa repurchased 91 million Class A shares for $6.987 billion and paid $1.350 billion in dividends during FY2016. The quarterly dividend was $0.14 per share; in October 2016 the board declared $0.165 per share for payment in December.
Material changes, outlook and risks
- Visa Europe acquisition: Completed June 21, 2016, for €12.2 billion ($13.9 billion) cash, preferred stock valued at approximately $6.1 billion, and deferred consideration of €1.0 billion plus 4% annual compound interest due in 2019. FY2016 included Visa Europe’s results for the quarter ended September 30; reported net revenue included $554 million from Visa Europe for that quarter. Management cited potential scale and integration benefits, but stated there was no guarantee they would be achieved. Integration, interoperability, regulatory separation requirements and legacy litigation are key risks.
- Reported versus pro forma: Management estimated the acquisition reduced FY2016 consolidated net income by approximately $872 million after acquisition-related items. Supplemental pro forma results, assuming acquisition and related debt issuance from October 1, 2014, showed FY2016 revenue of $16.090 billion and net income of $7.072 billion; these are not actual reported results and are not forecasts.
- Litigation: On June 30, 2016, the Second Circuit vacated class certification and reversed approval of the 2012 U.S. interchange settlement, remanding the case. The outcome and whether the settlement can resolve the class claims remained uncertain. If terminated without a replacement arrangement, Visa said approximately $3.0 billion could return to its litigation escrow, with taxes increasing by about $1.1 billion. The U.S. litigation escrow held $1.027 billion at year-end; the accrued U.S. covered litigation balance was $978 million.
- Other exposures: Visa disclosed substantial merchant interchange claims in the U.S. and Europe, regulatory investigations and proceedings, tax examinations and uncertain tax positions. The company’s maximum estimated settlement exposure was $67.8 billion at September 30, 2016, including Visa Europe; collateral covered $2.9 billion of exposure. Visa warned that simultaneous settlement defaults or operational failures could exceed available resources.
- Business and market risks: Management described uneven, tepid economic growth. Risks include intense competition and payment disintermediation, interchange and routing regulation, foreign-exchange movements, cyberattacks or outages, client concentration, Brexit-related uncertainty, and execution risks from the Visa Europe integration. Nearly half of operating revenue was earned outside the U.S.
- Outlook: The filing provides no specific revenue or EPS guidance. Visa expected to issue about $2.0 billion of additional debt by the end of the first quarter of FY2017, subject to market conditions, and planned continued investment in technology and payments infrastructure. CEO Alfred Kelly was announced to succeed Charles Scharf effective December 1, 2016.
Investor facts to verify
- Reconcile reported FY2016 earnings with the $1.877 billion acquisition-related Framework Agreement loss and management’s non-GAAP adjustments.
- Track the interchange litigation appeals, settlement status, opt-out merchant claims and adequacy of litigation protections and escrow funding.
- Assess Visa Europe integration, post-acquisition operating performance, regulatory requirements and the €1.0 billion deferred payment.
- Monitor growth in client incentives, which represented 18% of gross operating revenue, and their effect on revenue yield and margins.
- Review debt service, planned borrowing, share repurchases and dividends alongside cash generation and settlement-risk exposure.