Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; comparisons are with the same periods in 2013. Amounts are in U.S. dollars.
Business context
Visa operates a global payments network and provides payment processing and related services; it does not issue cards or extend credit. Management cited continued growth in payments volume and processed transactions, supported by the ongoing shift from paper to electronic payments.
Financial performance
| Metric | Three months ended June 30, 2014 | Year-over-year change | Nine months ended June 30, 2014 | Year-over-year change |
|---|---|---|---|---|
| Operating revenues, net of client incentives | $3.155 billion | +5% | $9.473 billion | +8% |
| Operating income | $2.020 billion | +11% | $6.145 billion | +12% |
| Net income | $1.360 billion | +11% | $4.365 billion | +15% |
| Diluted Class A EPS | $2.17 | From $1.88 | $6.89 | From $5.74 |
| Operating margin | 64.0% | From 60.9% | 64.9% | From 62.3% |
| Net margin | 43.1% | From 40.8% | 46.1% | From 43.0% |
For the quarter, service revenues rose 9% and data processing revenues rose 11%; international transaction revenues increased 1%. Client incentives, which reduce reported revenue, increased 22% to $638 million. For the nine months, client incentives rose 11% to $1.824 billion.
Visa processed 16.662 billion transactions in the quarter, up 11%; CyberSource billable transactions increased 15%. Nominal payments volume grew 8% year over year in the comparable quarter, and 9% over the comparable nine-month period. Currency movements, partly offset by hedging, reduced reported revenue growth by two percentage points in both the quarter and nine-month period.
Cash flow, balance sheet and capital
- Cash flow: Nine-month operating cash flow was $5.412 billion, versus $977 million in 2013; investing cash outflow was $442 million, and financing cash outflow was $5.098 billion. The operating cash flow comparison is substantially affected by litigation-related escrow receipts and payments in the prior-year period and the current-year return of approximately $1.1 billion to escrow.
- Liquidity: Cash and cash equivalents were $2.058 billion at June 30, 2014. The company reported $5.2 billion of cash and available-for-sale securities held by foreign subsidiaries, most of which it intends to keep invested abroad. Management said projected liquidity was sufficient for needs beyond the next 12 months.
- Debt and facilities: Visa reported no borrowings under its $3.0 billion revolving credit facility during the nine months. The facility expires January 28, 2015. The filing does not provide a separate total-debt figure in the presented balance sheet.
- Capital returns: Visa repurchased $3.362 billion of Class A stock and paid $758 million in dividends during the nine months. The October 2013 repurchase program had $1.9 billion remaining at June 30. A $0.40-per-share quarterly dividend was declared in July.
- Other balance-sheet items: Total assets were $37.675 billion and total liabilities were $10.389 billion. Accrued litigation was $1.060 billion, compared with $5 million at September 30, 2013, primarily reflecting the opt-out claims accrual.
Outlook, commentary and material risks
- Management expected fiscal 2014 revenue growth to be reduced by about two percentage points by currency movements, net of hedges; client incentives were expected to be about 17% of gross revenue.
- Management expected full-year fiscal 2014 free cash flow of about $5 billion. Approximately $290 million of tax on the litigation takedown payments had been paid; the remaining tax payable was expected to be paid by fiscal year-end.
- The interchange class settlement remained subject to appeals. Visa had received approximately $1.1 billion in opt-out takedown payments, deposited the funds into litigation escrow, and recorded a related accrued litigation obligation. Numerous merchant opt-out cases and other litigation remain pending; Visa said potential losses in certain proceedings were not reasonably estimable.
- European merchant claims seek damages exceeding several billion dollars in served cases. Visa disputes Visa Europe’s position on whether it must indemnify Visa Inc. and Visa International for European competition proceedings.
- Visa Europe may exercise a perpetual put requiring Visa to acquire all of Visa Europe. The recorded fair value was $145 million, but the potential purchase price could be several billion dollars or more and may require external financing.
- Other stated risks include regulation of interchange and payment networks, litigation and enforcement, economic and foreign-exchange conditions, competition and technology shifts, processing disruption, data breaches and fraud, and integration of acquisitions.
Most important facts for investors to verify
- Developments and appeals in the interchange class settlement, opt-out merchant litigation, and the related escrow and accrual obligations.
- Whether Visa Europe’s put option is exercised, the potential purchase price, and the unresolved indemnification dispute.
- Actual fiscal 2014 free cash flow and the effect of remaining litigation-related tax payments.
- Revenue growth after client incentives and currency effects, including whether transaction and payments-volume growth persists.
- Progress on the remaining share repurchase authorization and the impact of regulatory, competitive, cybersecurity and operational risks.