Visa Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended December 31, 2012. Unaudited results are compared with the three months ended December 31, 2011, unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Visa operates a global electronic payments network and does not issue cards, extend credit, or set cardholder fees. Management described the global recovery as tepid; growth reflected ongoing electronic-payment adoption, transaction growth, and pricing changes.
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net operating revenue | $2.846 billion | $2.547 billion | +12% |
| Operating income | $1.800 billion | $1.618 billion | +11% |
| Operating margin | 63.2% | 63.5% | Down about 0.3 percentage points |
| Net income attributable to Visa | $1.293 billion | $1.029 billion | +26% |
| Diluted Class A EPS | $1.93 | $1.49 | +30% |
| Operating cash flow | $(2.824) billion | $1.286 billion | Primarily affected by litigation payments |
| Cash and cash equivalents at period end | $1.334 billion | $1.942 billion | Down from September 30, 2012 |
Revenue by source: service revenues rose 13% to $1.300 billion; data processing revenues rose 17% to $1.115 billion; international transaction revenues rose 8% to $805 million. Client incentives, recorded as a revenue reduction, increased to $553 million from $481 million. Net income benefited from a lower effective tax rate—28% versus 36%—including a $76 million tax benefit related to California apportionment guidance. Net margin was approximately 45.5%, versus 40.4%.
Operating trends and changes
- Nominal payments volume increased 4% to $1.008 trillion for the three months ended September 30, 2012, the volume period used to determine the quarter’s service revenues. Consumer credit volume rose 8%; consumer debit fell 3%, primarily reflecting lower U.S. debit volume.
- Visa processed transactions increased 4% to 14.159 billion; CyberSource billable transactions increased 28% to 1.581 billion. Interlink processed transaction growth fell 44%, which management attributed to anticipated U.S. debit effects of the Dodd-Frank Act.
- Operating expenses increased 13% to $1.046 billion, led by personnel costs (+17%) and professional fees (+25%), partly reflecting investment in growth, technology and infrastructure, and costs associated with the new CEO’s equity awards.
- Reported operating cash flow included approximately $4.4 billion of litigation-related payments from the escrow account. The corresponding escrow release appears in financing cash flows; financing cash flow was $2.949 billion. Excluding the litigation payment, operating cash flow would have been approximately $1.6 billion. Investing cash flow was $(865) million; cash decreased by $740 million.
Liquidity, capital and obligations
At December 31, 2012, total assets were $35.859 billion and total liabilities were $8.271 billion. The balance sheet reports no borrowings. Cash, cash equivalents and short- and long-term available-for-sale securities totaled approximately $6.1 billion, including $3.6 billion held by foreign subsidiaries. Visa stated that operating cash generation and other liquidity sources were expected to meet projected needs for more than 12 months. A new unsecured $3.0 billion, 364-day revolving credit facility was entered into on January 31, 2013.
Visa repurchased $1.253 billion of Class A shares during the quarter and paid $220 million in dividends. At quarter-end, $1.1 billion remained under the then-current repurchase authorization; the board authorized an additional $1.8 billion program in January 2013. A quarterly dividend of $0.33 per share was declared in January, payable March 5, 2013.
Outlook, legal matters and risks
- Management expected full-year fiscal 2013 operating revenue growth in the low double digits, client incentives of 18%–18.5% of gross revenues, and an annual effective tax rate of 30%–32%. The filing provided no specific EPS or cash-flow guidance.
- Visa paid approximately $4.0 billion into a settlement fund for the interchange multidistrict litigation and $350 million to individual merchants. The class settlement remained subject to final court approval and appeals; Visa said approval could not be assured. The quarter-end litigation accrual was $5 million, down from $4.386 billion at September 30, 2012, following payments and settlement developments.
- Visa Europe can exercise a perpetual put requiring Visa to acquire all of its outstanding shares. The recorded fair-value liability was $145 million, but the actual purchase obligation could be several billion dollars or more and could require external financing.
- Other risks cited include regulation and Dodd-Frank debit provisions, litigation and enforcement, economic and currency conditions, competition and technology change, transaction-system disruption, data breaches and fraud, and potential Visa Europe matters. An Australian competition regulator commenced proceedings in February 2013 concerning dynamic currency conversion policies; any fine was not estimable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts to verify
- Final approval and appeal status of the interchange class settlement, and any further litigation cash requirements or accrual changes.
- Whether revenue, client-incentive and tax-rate guidance was achieved for fiscal 2013.
- Drivers of U.S. debit and Interlink declines, and subsequent payment-volume and transaction trends.
- Cash-flow normalization after the litigation payments, and availability and use of liquidity, including the revolving facility.
- Potential cost, timing and financing implications if Visa Europe exercises its put option.