Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2011; filed May 5, 2011. Unaudited consolidated results. Visa operates a global payments network and provides payment processing; it does not issue cards or set cardholder interest rates.
Financial performance
| Metric | Three months ended March 31, 2011 | Three months ended March 31, 2010 | Six months ended March 31, 2011 | Six months ended March 31, 2010 |
|---|---|---|---|---|
| Operating revenue | $2.245 billion | $1.959 billion | $4.483 billion | $3.919 billion |
| Operating income | $1.383 billion | $1.122 billion | $2.749 billion | $2.339 billion |
| Net income attributable to Visa | $881 million | $713 million | $1.765 billion | $1.476 billion |
| Diluted EPS, Class A | $1.23 | $0.96 | $2.46 | $1.99 |
| Operating cash flow | Not stated for the quarter | $1.609 billion | $580 million |
- Quarterly revenue increased 15%, operating income 23%, and Visa-attributable net income 24% year over year. Six-month increases were 14%, 18%, and 20%, respectively.
- Quarterly operating margin was approximately 61.6%, versus 57.3% a year earlier; net margin was approximately 39.2%, versus 36.4%. For the six months, operating margin was approximately 61.3% versus 59.7%, and net margin approximately 39.4% versus 37.7%.
- Quarterly revenue growth reflected service revenue up 24%, data processing up 13%, and international transaction revenue up 14%. Client incentives, deducted from revenue, increased to $451 million from $372 million. Six-month increases in these categories were 23%, 12%, and 14%.
- Quarterly operating expenses rose 3% to $862 million; six-month expenses rose 10% to $1.734 billion. Personnel, professional fees, and general and administrative expenses increased, while network/processing and marketing expenses declined.
- Six-month cash from operating activities was $1.609 billion; investing used $196 million and financing used $1.779 billion. Cash and cash equivalents declined $355 million to $3.512 billion. The prior-year operating cash flow was affected by a $682 million retailer-litigation prepayment.
- At March 31, cash and cash equivalents were $3.512 billion, plus $2.997 billion of restricted litigation escrow cash. Total assets were $34.422 billion; total liabilities $8.268 billion; total equity $26.154 billion. Long-term and current debt totaled $37 million.
- Visa stated projected liquidity sources should meet needs for more than 12 months. The filing does not provide a specific operating earnings or revenue forecast.
Material changes and notable items
- Nominal payments volume rose 17% in the December 2010 quarter and 16% for the six months; VisaNet processed transactions grew 13% and 14%, respectively. CyberSource billable transactions increased 38% for the quarter and 39% for the six months.
- Visa acquired PlaySpan on March 1 for $180 million cash, with up to $40 million potential earn-out; accounting purchase consideration was $204 million. The acquisition added $141 million of preliminary goodwill. Management estimated EPS dilution of $0.01 for Q2 and $0.04 for fiscal 2011.
- Visa sold its 10% stake in Brazil’s CBSS for $103 million gross proceeds, subject to regulatory approval. Upon approval, Visa estimated an $85 million pretax gain, or $44 million after tax.
- Visa deposited $1.2 billion into its litigation escrow during the half-year. The escrow balance reached $2.997 billion. No additional covered-litigation accrual was recorded in the period.
- Visa effectively repurchased 24.0 million shares for $1.7 billion during the first half, including $536 million of open-market purchases and $1.2 billion through escrow deposits that reduce Class B shares’ as-converted count. A further $1.0 billion repurchase authorization was announced May 5, after quarter-end.
- Visa changed its annual goodwill and indefinite-lived intangible impairment testing date from July 1 to February 1; its February 2011 review found no impairment. It also changed presentation of certain pass-through revenues and costs to net reporting; this reduced reported revenue and expense but did not affect operating or net income.
Outlook, risks, and contingencies
- Management described business performance as reflecting a modest global recovery and cited continued growth in electronic payments. It said the U.S. financial reform law and proposed debit interchange caps could pressure U.S. debit revenues, client economics, pricing, and transaction volumes. Final rules and timing remained uncertain; management expected possible effects beginning in fiscal Q4 2011 if implemented as proposed, and said it expected to mitigate some impact.
- Client incentives as a percentage of gross revenue were within previously stated guidance through the first half; management said this guidance could change depending on regulatory developments. Visa was substantially hedged through fiscal 2011 and did not expect significant currency impact for the remainder of the year.
- Visa Europe holds a perpetual put requiring Visa to acquire all outstanding Visa Europe shares if exercised. The recorded fair value was $267 million, but the potential purchase price could be several billion dollars or more and may require financing. The option’s valuation depends on significant unobservable assumptions and negotiated inputs.
- Interchange and merchant-practice litigation and regulatory matters remain material uncertainties. Visa disclosed a U.S. interchange-litigation agreement allocating covered monetary settlement or judgment amounts 66.7% to Visa and 33.3% to MasterCard, with Visa’s portion allocated under its retrospective responsibility plan. Visa stated that litigation outcomes could materially affect results, financial position, or cash flows.
- Other cited risks include regulatory change, competition and client pricing pressure, economic conditions, currency movements, settlement exposure, system disruption, data breaches and fraud, technology changes, and acquisition integration. Estimated maximum settlement exposure was $44.5 billion at March 31; $3.3 billion was covered by customer collateral under the filing’s measure.
Most important facts for investors to verify
- Whether final U.S. debit regulations, implementation timing, and permitted business responses affect Visa’s debit revenue, pricing, incentives, or volumes.
- Underlying payment-volume and transaction growth, including the contribution from CyberSource and PlaySpan and the effect of pricing and client incentives.
- The development and allocation of interchange litigation exposure, escrow funding, and any required additional accruals or payments.
- Visa Europe put-option assumptions and the potential funding required if Visa Europe exercises its option.
- Regulatory approval and actual realized proceeds and gain from the CBSS sale, and PlaySpan’s integration, earn-out, and earnings impact.
- Cash generation and capital allocation after escrow deposits, repurchases, dividends, and planned technology investment.