Visa Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended March 31, 2013. Visa operates a global electronic-payments network and does not issue cards or extend credit. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net operating revenue | $2,958 | $2,578 | $5,804 | $5,125 |
| Operating income | $1,860 | $1,606 | $3,660 | $3,224 |
| Net income attributable to Visa | $1,270 | $1,292 | $2,563 | $2,321 |
| Diluted Class A EPS | $1.92 | $1.91 | $3.86 | $3.40 |
| Operating margin | 62.9% | 62.3% | 63.1% | 62.9% |
- Quarterly revenue rose 15%; service revenue increased 10%, data processing 25%, and international transaction revenue 13%. Six-month revenue rose 13%.
- Quarterly operating income increased 16%, while reported net income fell 2%. The prior-year quarter included a one-time $208 million non-cash tax benefit. Excluding it, prior-year Q2 net income was $1,084 million and diluted EPS was $1.60; on that adjusted basis, current-quarter net income rose 17% and EPS rose 20%. Six-month adjusted prior-year net income was $2,113 million and diluted EPS $3.09, versus $2,563 million and $3.86 in FY2013.
- Quarterly net margin was approximately 42.9%, versus 50.1% reported a year earlier; the comparison reflects the prior-year tax benefit. FY2013 six-month net margin was approximately 44.2%.
- Visa processed 13.85 billion transactions in Q2, up 6%; CyberSource billable transactions rose 25%. Nominal payment volume for the quarter ended December 31, 2012, which drives reported service revenue, increased 8% overall: U.S. volume rose 3% and rest-of-world volume 14%.
Cash, liquidity and capital
- Cash and cash equivalents were $1.377 billion at March 31, 2013, down from $2.074 billion at September 30, 2012. Total assets were $35.059 billion and total liabilities $8.164 billion.
- Operating cash flow was negative $1.180 billion for the first half, largely reflecting $4.4 billion of litigation payments from escrow. Management said operating cash flow would have been $2.6 billion absent the related litigation and tax effects, versus $2.383 billion in the prior-year period.
- Investing cash outflow was $449 million; financing cash inflow was $932 million, including $4.4 billion of escrow-related funding and offset by $3.073 billion of share repurchases and $437 million of dividends. Cash declined by $697 million.
- No commercial paper or revolving-credit borrowings were outstanding. Visa had a $3.0 billion revolving credit facility expiring January 30, 2014, and a $3.0 billion commercial paper program. Management expected available liquidity to meet needs for more than 12 months.
- Visa repurchased 20 million Class A shares for $3.073 billion in the first half; $1.0 billion remained authorized for repurchases through January 2014. The board declared a $0.33 per-share dividend payable June 4, 2013.
Changes, outlook and management commentary
- Growth reflected higher payment volume, processed transactions, cross-border activity, and pricing changes. Management cited a tepid global recovery and continued growth in electronic payments, particularly outside the U.S.
- U.S. consumer debit was a headwind following Dodd-Frank changes: U.S. debit payment volume fell 6% for the six-month comparable period, and Interlink processed transactions declined 38%. Credit and international volumes grew. Higher client incentives partly offset revenue gains from pricing and growth.
- Management expected FY2013 operating-revenue growth in the low double digits; client incentives of 16%–17% of gross revenue; and marketing spend below $1 billion. It anticipated higher marketing spending in the second half and said currency hedging should continue to limit exchange-rate effects.
- The effective tax rate was 32% for Q2 and 30% for the first half, compared with 20% and 28% a year earlier. Differences reflected prior-year foreign tax credits and California tax benefits, as well as the absence of the prior-year $208 million deferred-tax remeasurement benefit.
Material risks, contingencies and unusual items
- The interchange MDL settlement involved approximately $4.0 billion paid into a settlement fund, plus $350 million paid to individual merchants. Class settlement final approval and appeals remained unresolved at filing; the escrow balance was $49 million and accrued litigation was $6 million.
- European Commission proceedings alleged competition-law violations involving interchange rates and network rules and indicated potential fines that could be substantial but were not estimable. Visa believes Visa Europe must indemnify it, but Visa Europe had expressed an initial contrary view. A threatened European merchant action raised a similar indemnification dispute.
- Visa Europe may exercise a perpetual put requiring Visa to acquire all of its shares. The recorded fair-value liability was $145 million, but the potential purchase price could be several billion dollars or more and depends on future negotiated inputs.
- Other legal and regulatory matters included Australian competition proceedings concerning dynamic currency conversion and a CFPB inquiry into foreign-currency conversion practices. Potential fines or losses were not estimable in the filing text.
- Key risks identified include regulation and pricing constraints, litigation, economic and currency conditions, competition and technology shifts, processing disruption, fraud or data compromise, and Visa Europe-related exposures.
Important facts for investors to verify
- Final court approval and appeal outcomes for the U.S. interchange class settlement, and whether any additional litigation accrual or payment is required.
- Resolution of Visa Europe indemnification disputes, potential European proceedings and the size and timing of any put-option obligation.
- Whether transaction growth and pricing gains continue to offset U.S. debit declines and rising client incentives.
- Progress against revenue-growth, incentive-rate and marketing-spend outlook, alongside operating cash generation after litigation effects.
- Developments in uncertain tax positions, including the $338 million increase in gross unrecognized tax benefits during Q2.