Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2017. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. Visa operates a global electronic payments network and generally does not issue cards or extend credit. Results include Visa Europe, acquired in June 2016, so year-over-year comparisons reflect the acquisition as well as underlying growth.
Key financial results
| Metric | Three months ended June 30, 2017 | Year-over-year | Nine months ended June 30, 2017 | Year-over-year |
|---|---|---|---|---|
| Net operating revenue | $4.565 billion | +26% | $13.503 billion | +25% |
| Operating income | $3.024 billion | Compared with $428 million | $8.932 billion | Compared with $5.258 billion |
| Operating margin | 66% | Compared with 12% | 66% | Compared with 49% |
| Net income, reported | $2.059 billion | Compared with $412 million | $4.559 billion | +12% |
| Diluted Class A EPS, reported | $0.86 | Compared with $0.17 | $1.90 | +12% |
| Operating cash flow | Not separately provided for the quarter | — | $6.441 billion | Compared with $3.122 billion |
Adjusted results: Visa reported nine-month adjusted net income of $6.195 billion and adjusted diluted EPS of $2.58, up 25% from $4.947 billion and $2.06, respectively. Adjusted operating margin was 68%, versus 67% in the prior-year period. There were no comparable adjustments for the June 2017 quarter; adjusted quarterly net income was $2.059 billion and adjusted diluted EPS was $0.86.
Revenue drivers: For the quarter, service revenue rose 19% to $1.948 billion, data-processing revenue rose 29% to $1.984 billion, and international-transaction revenue rose 45% to $1.571 billion. Client incentives, which reduce revenue, increased 37% to $1.147 billion. Management attributed growth to Visa Europe, higher payment volume, processed transactions and cross-border volume. Currency movements reduced revenue growth by approximately 1.5 percentage points for the quarter and 2.5 points for the nine-month period.
Margins and expenses: Quarterly operating income benefited substantially from the absence of the $1.877 billion Visa Europe Framework Agreement loss recorded in the prior-year quarter. On an adjusted basis, quarterly operating expenses increased 31% and nine-month expenses increased 24%, primarily reflecting Visa Europe’s inclusion and higher personnel costs. Nine-month reported operating expenses also included a $192 million non-cash expense related to a charitable contribution of Visa shares.
Cash, debt and liquidity
- At June 30, 2017, cash and cash equivalents were $7.437 billion; restricted cash in the U.S. litigation escrow was $1.030 billion. Available-for-sale securities totaled $4.791 billion.
- Total debt carrying value was $15.891 billion, including $1.749 billion due in December 2017. Visa said it intended to refinance that maturity, market conditions permitting. It extended its $4.0 billion credit facility through January 2022.
- Nine-month investing cash flow was positive $1.587 billion; financing cash flow was negative $6.304 billion, including $5.170 billion of share repurchases and $1.189 billion of dividends.
- Visa said operating cash flow and other liquidity sources were expected to cover projected needs for more than 12 months. Cash and investment securities held by foreign subsidiaries totaled $6.9 billion; most undistributed foreign earnings were intended to remain invested abroad.
Material changes, unusual items and outlook
- Visa’s February 2017 legal-entity reorganization generated a non-recurring, non-cash $1.5 billion income-tax provision, primarily from eliminating deferred tax balances established in the Visa Europe acquisition. This contributed to the nine-month reported effective tax rate of 47%; the adjusted rate was 29.5%.
- The acquisition makes reported growth comparisons less like-for-like. Visa reported 44% growth in processed transactions for the quarter and 43% for the nine months; Visa Europe was included in 2017, but not materially included in the comparable 2016 operating results.
- Visa reported nominal payments-volume growth of 38% for the quarter and 41% for the nine months, with Visa Europe inclusion contributing to international growth. Management also cited uneven global economic growth and consumer spending as factors affecting performance.
- No specific earnings or revenue guidance was provided in the filing. Management said client incentives in future periods could vary with contract activity and client performance, and that it expected to continue quarterly cash dividends subject to board approval. A $0.165-per-share dividend was declared in July for payment in September.
- Litigation: U.S. merchant interchange litigation remains a material uncertainty. Proposed damages claims were described as being in the tens of billions of dollars, subject to trebling; an injunctive-relief class also seeks changes to network rules and fees. Visa said losses could materially affect results, financial position or cash flows, although the timing and amount are uncertain. The U.S. covered-litigation accrual was $978 million, against a $1.030 billion escrow balance. More than 175 U.K. merchants had outstanding claims. A Canadian merchant-class settlement was subject to court approval.
- Other risk areas include settlement guarantees, foreign-exchange movements, tax examinations and regulatory investigations. Visa’s estimated maximum settlement exposure was $69.6 billion for the quarter, with $3.2 billion covered by collateral. Management reported no significant change in market risks and stated disclosure controls were effective.
Most important facts for investors to verify
- How much of reported growth reflects Visa Europe acquisition effects versus underlying organic growth, particularly in cross-border revenue and processed transactions.
- The normalized earnings and tax outlook after the $1.5 billion non-cash reorganization charge, and the basis for management’s adjusted measures.
- Developments in U.S. interchange litigation, including class certification, potential damages, settlements and the adequacy of accrued amounts.
- Whether Visa refinances the $1.749 billion December 2017 maturity and how continued repurchases and dividends affect liquidity and capital allocation.
- Future client-incentive levels, which increased faster than revenue in the quarter and can vary with customer contracts and performance.