Visa Inc. — Q1 FY2011 Form 10-Q
Business context and period. Visa is a global payments technology and processing network; it does not issue cards or set cardholder interest rates. This unaudited filing covers the three months ended December 31, 2010, compared with the three months ended December 31, 2009. Financial figures are in U.S. dollars.
Financial performance
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Operating revenue, net of client incentives | $2.238 billion | $1.960 billion | +14% |
| Operating income | $1.366 billion | $1.217 billion | +12% |
| Operating margin | 61.0% | 62.1% | Down 1.1 percentage points |
| Net income attributable to Visa | $884 million | $763 million | +16% |
| Net margin | 39.5% | 38.9% | Up 0.6 percentage points |
| Class A diluted EPS | $1.23 | $1.02 | +21% |
| Cash from operating activities | $1.006 billion | $(29) million | Improved $1.035 billion |
| Cash and cash equivalents at period end | $3.684 billion | $3.867 billion at Sep. 30, 2010 | Down $183 million |
| Total debt at period end | $41 million | $44 million at Sep. 30, 2010 | Down $3 million |
At December 31, 2010, total assets were $33.989 billion, total liabilities $8.445 billion, and current assets $9.355 billion versus current liabilities of $3.679 billion. Operating cash flow exceeded net income; cash generation benefited from the absence of the prior-year $682 million Retailers’ litigation prepayment. Investing activities used $73 million, principally for property, equipment and technology. Financing activities used $1.121 billion, including the litigation-escrow funding, share repurchases and dividends.
Drivers and changes versus prior period
- Revenue growth reflected higher payments volume, processed transactions and cross-border activity, pricing changes, and CyberSource revenue following its July 2010 acquisition. U.S. revenue rose 9%, rest-of-world revenue 24%, and Visa Europe revenue fell 4%.
- Service revenue increased 22%; data processing revenue 10%; and international transaction revenue 14%. Other revenue declined 15%, while client incentives rose 8% to $405 million.
- Visa reported 12.580 billion processed transactions, up 15%. CyberSource billable transactions were 987 million versus 707 million in the prior-year quarter.
- Operating expenses rose 17% to $872 million. Personnel expense increased 30%, partly due to CyberSource and higher headcount; general and administrative expense increased 42%. Lower network/processing and marketing expenses partly reflected presentation and contractual changes.
- Reported revenue and expense no longer include certain pass-through non-Visa processing transactions and Visa Extras activity on a gross basis. These changes reduced reported revenue and expense equally and did not affect operating income or net income; management expected them to moderate reported growth comparisons during FY2011.
- Last year’s quarter included a $43 million litigation-provision credit, primarily reflecting a $41 million gain from prepaying the Retailers’ litigation obligation. There was no significant litigation provision activity in the current quarter.
Outlook, risks and unusual items
- Management expects client incentives to be 16.0%–16.5% of gross revenue for FY2011. It expects currency fluctuations to have no significant impact for the remainder of the fiscal year, citing substantial hedging.
- Management stated that the proposed U.S. debit regulations could adversely affect U.S. debit volumes, revenues, pricing and client profitability if implemented as proposed and not offset by permitted business practices. Visa expected potential effects to begin in Q4 FY2011, while noting that final rules and impacts were uncertain and that it expected to mitigate some effects.
- Management believes projected liquidity sources will meet needs for more than 12 months. Visa had $3.684 billion of cash and cash equivalents, plus $2.666 billion of restricted litigation-escrow cash; escrowed funds are not ordinary available liquidity.
- Visa’s perpetual Visa Europe put option had a recorded fair value of $267 million. The actual purchase obligation, if exercised, could be several billion dollars or more and may require external financing. Visa Europe may exercise the option at its discretion.
- Visa’s estimated maximum settlement exposure was $40.6 billion, of which approximately $3.2 billion was covered by collateral. The company provides an unlimited-term and unlimited-amount settlement indemnification; the recorded fair value of the guarantee was less than $1 million.
- Legal and regulatory matters include continuing European Commission scrutiny of credit and deferred-debit interchange, a Canadian competition proceeding challenging merchant rules, and U.S. merchant-rule changes under a settlement awaiting court approval. Visa warned that litigation or regulatory outcomes could materially affect results, financial position or cash flows.
- Visa funded $800 million into the litigation escrow account during the quarter; escrow stood at $2.666 billion at December 31. Total reported repurchases were $1.1 billion, including that funding and $306 million of open-market purchases. The board declared a $0.15 per-share dividend for payment in March 2011.
- After quarter-end, Visa sold its 10% CBSS stake for gross proceeds of $103 million, subject to Brazilian regulatory approval. Visa estimated an approximately $85 million pretax gain and $44 million after-tax gain upon approval.
Most important facts for investors to verify
- Final U.S. debit regulations, implementation timing, and any effects on Visa’s debit volumes, revenues, client pricing and earnings.
- Whether payments-volume and transaction growth continue, and how incentive spending and pricing affect revenue growth and margins.
- Progress and potential cost of litigation and regulatory proceedings, including the Visa Europe put option and settlement-guarantee exposure.
- Approval and recognition of the CBSS sale gain, and the extent to which repurchases, dividends and escrow funding affect cash and capital allocation.
- Reported growth comparability: confirm the effects of CyberSource inclusion and the net presentation of non-Visa processing and Visa Extras activity.