Visa Inc. Form 10-K Summary
Business context and reporting period
Visa operates a global electronic payments network, providing payment brands, transaction processing and related services to financial institutions and other customers. Revenue is primarily based on payments volume, processed transactions and cross-border activity; Visa does not issue cards or set cardholder interest rates or merchant fees. This annual filing covers the fiscal year ended September 30, 2009. Fiscal 2009 results include the consolidated Visa business, while fiscal 2008 is the main comparable period.
Financial and operating performance
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Operating revenue | $6.911 billion | $6.263 billion |
| Operating income | $3.538 billion | $1.232 billion |
| Net income | $2.353 billion | $804 million |
| Class A diluted EPS | $3.10 | $0.96 |
| Cash from operations | $558 million | $531 million |
| Cash from investing activities | $1.830 billion | $554 million |
| Cash from financing activities | $(2.751) billion | $3.624 billion |
Operating margin was approximately 51.2% versus 19.7%; net margin was approximately 34.0% versus 12.8%. The comparison is heavily affected by litigation: operating expenses included only $2 million of litigation provision in fiscal 2009, versus $1.470 billion in 2008, which included the Discover settlement provision. Fiscal 2009 net income also included a $473 million pretax gain on the sale of VisaNet do Brasil.
- Revenue increased 10%. Data processing revenue rose 17% to $2.430 billion, international transaction revenue rose 11% to $1.916 billion, and service revenue rose 4% to $3.174 billion. Volume and support incentives reduced revenue by $1.234 billion, compared with $1.161 billion in 2008.
- Reported nominal payments volume grew 1% to $2.679 trillion for the 12 months ended June 30, 2009: debit rose 8%, while credit fell 3%. Processed transactions increased 8% to 39.885 billion. Cross-border nominal payments volume declined 11%, while international transaction revenue rose due primarily to pricing changes.
- Total assets were $32.281 billion, down from $34.981 billion. Cash and cash equivalents were $4.617 billion; restricted litigation escrow cash was $1.715 billion. Current assets totaled $9.241 billion and current liabilities $4.442 billion.
- Debt was low: $56 million carrying value ($44 million long-term). Visa had no borrowings on its $3.0 billion revolving credit facility or $500 million commercial paper program; ratings were A+ from S&P and A1 from Moody’s, both with stable outlooks.
Material changes and unusual items
- Visa sold its 10% VisaNet do Brasil stake for approximately $1.0 billion in proceeds, recognizing a $473 million pretax gain.
- Visa funded the litigation escrow with an additional $1.8 billion during fiscal 2009 and made $2.0 billion in covered-litigation payments, primarily for Discover. The escrow balance was $1.715 billion at year-end.
- Cash flow from investing included the VisaNet do Brasil sale and $884 million of Reserve Primary Fund distributions; cash from financing reflected stock redemptions, escrow funding and dividends. Cash declined $362 million year over year.
- Visa completed a new U.S. east coast data center and formed processing and commercial-payments joint ventures. It also authorized a $1.0 billion share repurchase program in October 2009.
Outlook, commentary and risks
Management expected weak economic conditions to continue moderating consumer and commercial spending and payments-volume growth in the near term. It viewed the ongoing shift from cash and checks to electronic payments, particularly debit, as a partial buffer. Management expected fiscal 2010 effective tax rate to fall below 40% due to geographic income mix and anticipated volume and support incentives to increase somewhat.
- Interchange fees and related network rules faced substantial legal and regulatory scrutiny in the U.S. and internationally. Approximately 55 merchant actions were consolidated in U.S. interchange litigation; plaintiffs alleged potential damages in the tens of billions, with treble damages sought. The retrospective responsibility plan may not cover all exposure or non-monetary business restrictions.
- Visa’s unlimited settlement guarantee exposed it to customer failures. Estimated maximum settlement exposure was $41.8 billion at year-end, of which $3.7 billion was covered by collateral. Management reported no material settlement-risk losses in recent years.
- Visa Europe could exercise a perpetual put option requiring Visa to acquire all of Visa Europe. The recorded fair value was $346 million, but the potential purchase price could be several billion dollars or more and was not reliably estimable.
- Other risks include customer concentration (top five customers generated 32% of revenue; JPMorgan Chase accounted for 10%), pricing incentives, economic and cross-border travel weakness, data security and processing disruptions, foreign exchange exposure, and regulatory or tax changes.
- Visa had $69 million remaining in the Reserve Primary Fund at year-end, reflecting a $29 million impairment; recovery remained dependent on liquidation distributions. A further $19 million was received in October 2009.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the much lower litigation provision and the VisaNet do Brasil gain.
- Developments, potential liability and funding sufficiency under the interchange litigation and retrospective responsibility plan.
- Visa Europe put-option valuation assumptions and the company’s financing capacity if exercised.
- Whether payment-volume growth, cross-border activity and customer incentives support revenue and margin trends amid economic weakness.
- Liquidity availability after settlement obligations, the $682 million October 2009 retailers’ settlement prepayment, dividends and the authorized buyback.
KPMG gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of September 30, 2009.