Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; compared with the three months ended December 31, 2016 unless otherwise noted. Visa operates a global electronic payments network and does not issue cards or extend credit.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net operating revenue | $4.862 billion | $4.461 billion | +9% |
| Operating income | $3.327 billion | $3.100 billion | +7% |
| Operating margin | 68.4% | 69.5% | Down 1.1 percentage points |
| Net income, reported | $2.522 billion | $2.070 billion | +22% |
| Diluted Class A EPS, reported | $1.07 | $0.86 | +25% |
| Net income, adjusted | $2.536 billion | $2.070 billion | +23% |
| Diluted Class A EPS, adjusted | $1.08 | $0.86 | +26% |
| Operating cash flow | $2.762 billion | $2.508 billion | +10% |
Revenue growth reflected higher payments volume, processed transactions and cross-border volume. Service revenue rose 12%, data processing revenue 13%, and international transaction revenue 12%. Client incentives, recorded as a reduction of revenue, increased 27% to $1.326 billion. Processed transactions increased 12% to 30.508 billion. The company reported 10% year-over-year growth in total payments volume for the quarter ended September 30, 2017, the volume period underlying the reported service revenues.
Operating expenses rose 13% to $1.535 billion, faster than revenue, largely due to higher personnel costs (+19%) and general and administrative costs (+27%) as Visa invested in growth. Interest expense increased to $154 million from $140 million. The effective tax rate was 22%, versus 31%; the reported rate and net income were affected by U.S. tax reform.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $8.138 billion at December 31, 2017, down from $9.874 billion at September 30, 2017. Total assets were $67.154 billion and total liabilities were $33.753 billion.
- Total debt was $16.621 billion, down from $18.367 billion after repayment of $1.75 billion of notes due December 2017. Long-term debt had a carrying value of $16.621 billion.
- Cash flow from investing activities was negative $707 million; financing activities used $3.871 billion, including $1.778 billion of share repurchases, $1.750 billion of debt repayment and $458 million of dividends. Cash declined by $1.736 billion during the quarter.
- Management said operating cash flow and other liquidity sources were expected to be sufficient for projected needs for more than 12 months. Foreign-subsidiary cash and short- and long-term available-for-sale securities totaled $6.3 billion at quarter-end.
- Visa repurchased 16 million Class A shares for $1.8 billion during the quarter. In January 2018, the board authorized an additional $7.5 billion repurchase program. A quarterly dividend of $0.21 per Class A share was declared, payable March 6, 2018.
Material changes, outlook and risks
- Tax Act: The company recorded a provisional, non-cash $1.133 billion benefit from remeasuring deferred tax liabilities and a provisional $1.147 billion transition-tax expense on foreign earnings. Together, these items reduced reported net income by approximately $14 million; excluding them, adjusted net income was $2.536 billion. Visa intends to pay the transition tax over eight years. The tax accounting remained provisional and could change as the company completed its analysis, no later than Q1 FY2019.
- Business conditions and outlook: Management cited continued uneven global economic growth and identified consumer spending and overall economic conditions as business drivers. It provided no quantified earnings or revenue guidance in the supplied filing text. Management expects continued investment to support growth and says client incentives can vary with contract terms and client performance.
- Litigation: Accrued litigation totaled $830 million at quarter-end; the U.S. covered-litigation accrual was $828 million, with a separate $883 million restricted litigation escrow balance. Visa said the accrual may differ from escrow needs. UK merchant interchange claims remain ongoing: more than 200 merchants had outstanding claims at filing, and an appeal followed a favorable November 2017 judgment for Visa. The filing warns that future judgments, fines or settlements could materially affect results, financial position or cash flows.
- Settlement exposure: Estimated maximum settlement exposure reached $71.3 billion during the quarter; $4.5 billion was covered by collateral at December 31. Visa’s guarantee is limited to unsettled transactions but exposes it to client funding failures.
- The company adopted certain accounting updates with no material impact. It expects to adopt the new revenue standard on October 1, 2018; it anticipated effects mainly on recognition timing and classification of some client incentives, but had not quantified the full impact.
Most important facts for investors to verify
- How the provisional Tax Act accounting, including the transition-tax estimate and deferred-tax remeasurement, is finalized and affects subsequent-period earnings and cash taxes.
- Whether revenue growth and transaction trends continue, and how rising client incentives and operating expenses affect margins.
- Developments in U.S. and European litigation, including merchant claims, appeals, settlements and the adequacy of accrued amounts and escrow resources.
- Cash generation, debt service, repurchases and dividends relative to management’s liquidity expectations and investment needs.
- The eventual financial-statement impact of adopting the new revenue recognition standard.