Visa Inc. Form 10-Q Summary
Business context and reporting period. Visa operates a global electronic-payments network and provides payment processing and related services; it does not issue cards or extend credit. This unaudited report covers the quarter and six months ended March 31, 2015, the second quarter and first half of fiscal 2015. Financial amounts below are in U.S. dollars; income statement and cash flow amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Quarter ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Operating revenue | $3,409; +8% year over year | $6,791; +7% |
| Operating income | $2,281; +11% | $4,519; +10% |
| Operating margin | 66.9%, versus 64.7% | 66.5%, versus 65.3% |
| Net income | $1,550; down 3% | $3,119; up 4% |
| Diluted Class A EPS | $0.63; flat | $1.26; up 7% |
- Quarterly revenue growth came from service revenue (+8%), data processing (+9%), international transactions (+11%) and other revenue (+12%). Client incentives, recorded as a reduction to revenue, rose 15% to $676 million. For the first half, they rose 17% to $1,389 million.
- VisaNet processed 16.98 billion transactions in the quarter, up 11%; first-half processed transactions rose 10%. Nominal payments volume grew 7% in both the quarter and first half, while cross-border volume grew 2% and 3%, respectively.
- The quarterly effective tax rate was 32%, versus 22% a year earlier; first-half rates were 31% and 27%. The prior-year comparison included a one-time $201 million tax benefit. This largely explains why quarterly net income declined despite revenue and operating-income growth.
- For the six months, operating cash flow was $2,739 million, investing cash outflow $557 million and financing cash outflow $2,115 million. Cash and cash equivalents increased $68 million to $2,039 million. Management said operating cash flow excluding litigation-related timing effects was approximately $3.0 billion, versus $2.6 billion in the prior-year period.
- At March 31, total assets were $38.8 billion, total liabilities $10.6 billion and equity $28.2 billion. Cash was $2.0 billion; restricted litigation escrow cash was $1.178 billion. Cash and short- and long-term available-for-sale securities held by foreign subsidiaries totaled $6.2 billion, with potential U.S. tax upon repatriation.
- Visa reported no borrowings under its $3.0 billion revolving credit facility, which expires January 27, 2016. No separate debt balance is clearly shown in the provided balance-sheet text. Management said projected liquidity sources should meet needs for more than 12 months.
Material changes and capital allocation
- U.S. dollar strength reduced reported revenue growth by approximately 2.5 percentage points in the quarter and 2 points in the first half, net of hedging.
- Operating expenses increased 1% for the quarter and 4% for the first half. Higher personnel, depreciation and amortization, and general and administrative costs were partly offset by lower marketing costs after the prior-year Winter Olympics and FIFA World Cup campaigns.
- Operating cash flow was lower year over year, principally reflecting litigation escrow cash-flow timing. Investing cash outflow increased mainly because proceeds from sales and maturities of investment securities declined.
- Visa repurchased 29 million Class A shares for $1.855 billion during the first half and paid $591 million in dividends. It had $3.8 billion remaining under the October 2014 repurchase authorization. A four-for-one Class A stock split took effect March 18, 2015; historical share and per-share data were adjusted.
Outlook, risks and contingencies
- Management expected foreign exchange movements to reduce fiscal 2015 operating-revenue growth by about 2 percentage points, net of hedges, and expected client incentives to be 17.5%–18.5% of gross revenue for fiscal 2015.
- Visa identified ongoing risks from regulation, litigation and government enforcement, economic conditions, currency movements, competition and technological change, systems disruption, fraud and data breaches, and interoperability with Visa Europe.
- Visa’s litigation accrual was $1.135 billion at March 31, compared with $1.456 billion at September 30; the litigation escrow held $1.178 billion. Visa had paid $321 million from escrow to settle claims by opt-out merchants. It reported settlement agreements with merchants representing about 24% of Visa-branded sales volume among merchants that opted out. Other interchange and antitrust litigation remains, including a Texas case in which the court granted plaintiffs partial summary judgment on standing and set a September 2015 trial date.
- Visa Europe may exercise a perpetual put requiring Visa to acquire all of Visa Europe. The recorded fair-value liability was $145 million, but management estimated the purchase price under current conditions could exceed $10 billion; the amount is subject to significant uncertainty and could require external financing.
- Tax examinations remain uncertain; Visa said it could recognize up to $300 million of tax benefits over the next six to twelve months from a decrease in unrecognized tax benefits. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether transaction, payments-volume and cross-border growth continue to offset currency headwinds and rising client incentives.
- How the higher effective tax rate and absence of the prior-year $201 million tax benefit affect year-over-year earnings comparisons.
- Developments, settlement costs and accrual adequacy in interchange, merchant opt-out and other antitrust litigation.
- Potential timing, valuation and financing implications if Visa Europe exercises its put option, whose potential cost substantially exceeds its recorded liability.
- Foreign cash repatriation tax implications, continued share repurchases and dividend payments, and liquidity under the revolving facility.