Visa Inc. — Form 10-Q Summary
Business context and reporting period. Visa operates a global payments technology and processing network; it does not issue cards or extend credit. This unaudited filing covers the fiscal quarter and six months ended March 31, 2016, compared with the periods ended March 31, 2015. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Operating revenue | $3.626 billion, up 6% | $7.191 billion, up 6% |
| Operating income | $2.434 billion | $4.830 billion |
| Operating margin | 67.1%, versus 66.9% | 67.2%, versus 66.5% |
| Net income | $1.707 billion, up 10% | $3.648 billion, up 17% |
| Diluted Class A EPS | $0.71, up 13% | $1.51, up 20% |
| Operating cash flow | Not provided as a quarterly figure | $2.819 billion, versus $2.739 billion |
Reported net margin was approximately 47.1% for the quarter and 50.7% for the six-month period; the six-month result includes significant non-operating gains. Management’s non-GAAP adjusted net income was $1.626 billion for the quarter and $3.312 billion for six months; adjusted diluted EPS was $0.68 and $1.37, respectively. These measures exclude specified Visa Europe-related gains.
- Revenue drivers: Service revenue increased 8% for the quarter and 7% for six months; data processing revenue increased 10% and 8%; international transaction revenue increased 8% and 7%. Client incentives, recorded as a revenue reduction, rose 17% and 14%, respectively.
- Activity: VisaNet processed transactions rose 9% in the quarter and 8% in six months. Payments volume growth was 5% nominally for the quarter and 4% for six months; exchange-rate movements reduced reported revenue growth by about three percentage points.
- Costs and earnings quality: Operating expenses rose 6% in the quarter and 4% in six months. Six-month non-operating income included a $255 million non-cash gain from revaluing the Visa Europe put and $116 million of unrealized currency-forward gains; the currency contracts were subsequently offset. Interest expense increased following the December 2015 debt issuance.
- Liquidity and cash flow: Cash and cash equivalents were $15.943 billion at March 31, 2016, versus $3.518 billion at September 30, 2015. Available-for-sale securities totaled $7.462 billion. Six-month operating cash flow was $2.819 billion; investing cash use was $1.846 billion and financing cash provided was $11.452 billion, largely reflecting debt proceeds.
- Debt and capital returns: Long-term debt was $15.876 billion carrying value, following issuance of $16.0 billion in senior notes. The company repurchased $3.765 billion of shares and paid $676 million in dividends during the six months. A $4.0 billion repurchase authorization remained at quarter-end. A $4.0 billion revolving facility was available with no borrowings outstanding.
- Other exposures: Accrued litigation was $1.013 billion; the U.S. litigation escrow balance was approximately $1.061 billion. Maximum estimated settlement exposure was $43.8 billion, with collateral held against client settlement risk.
Material changes versus the prior comparable period
- Revenue and transaction processing expanded, while client incentives and several operating cost categories also increased.
- Six-month net income and diluted Class A EPS grew 17% and 20%, respectively. Some reported growth reflected non-operating Visa Europe-related gains; adjusted net income and EPS rose 6% and 9%.
- Visa issued $16.0 billion of senior notes to help fund the planned Visa Europe acquisition, increasing interest expense and changing the capital structure. Cash also increased substantially from the financing proceeds.
- Share repurchases were $3.765 billion, compared with $1.855 billion in the prior six-month period; dividends paid increased to $676 million from $591 million.
Outlook, commentary, risks and unusual items
- Management cited uneven, tepid economic growth but said continued transaction growth and migration to electronic payments supported performance. It stated that projected liquidity sources should meet needs for more than 12 months. No specific numerical earnings or revenue guidance is provided in the filing text.
- The Visa Europe acquisition remained subject to regulatory approval and definitive documentation. On April 21, 2016, after quarter-end, the parties reached a preliminary agreement to replace the earn-out with an additional €1.75 billion of cash consideration: €750 million at closing and €1.0 billion plus 4% annual compound interest on the third anniversary. Closing could extend beyond fiscal Q3.
- The acquisition’s euro cash consideration creates foreign-exchange exposure: a hypothetical 10% decline in the U.S. dollar against the euro from the March 31 rate would increase anticipated cash consideration by about $1.5 billion, including interest. If the acquisition is not completed by the specified deadline, certain notes are subject to mandatory redemption provisions.
- Material risks include competition and technological change, payment-system disruption or data breaches, regulation, litigation, currency and economic conditions, and execution and integration risks related to Visa Europe. The filing discusses ongoing interchange, competition, ATM access fee, tax and other proceedings; outcomes and potential losses may be uncertain.
- The company reported effective tax rates of 30% for the quarter and 28% for six months, versus 32% and 31% a year earlier. Management attributed changes principally to tax items including prior-year tax adjustments and the non-taxable Visa Europe put revaluation.
Most important facts for investors to verify
- Progress, final consideration, regulatory approvals, timing and financing of the Visa Europe acquisition, including the effect of the amended terms and possible note redemption.
- Whether underlying revenue and EPS growth persists after excluding currency effects and the non-recurring or non-cash gains; monitor client incentives relative to revenue.
- Debt servicing, cash deployment, repurchases and dividends after the acquisition, including liquidity held by foreign subsidiaries.
- Developments in interchange and other litigation, tax examinations, and the adequacy of litigation accruals and settlement protections.
- Settlement guarantee exposure, collateral coverage, foreign-exchange risk and any changes in economic, regulatory or network-security conditions.