Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; comparative results are for the three months ended December 31, 2012. Visa operates a global payments technology and processing network and does not issue cards or extend credit.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Operating revenue, net of client incentives | $3.155 billion | $2.846 billion | +11% |
| Operating income | $2.077 billion | $1.800 billion | +15% |
| Operating margin | 65.8% | 63.2% | +2.6 percentage points |
| Net income | $1.407 billion | $1.293 billion | +9% |
| Diluted EPS, Class A and C | $2.20 | $1.93 | +14% |
| Operating cash flow | $1.541 billion | $(2.824) billion | Improved |
| Cash and cash equivalents at period end | $2.121 billion | $2.186 billion at Sept. 30, 2013 | Down $65 million |
Service revenue increased 9%, data processing 13%, and international transaction revenue 11%. Client incentives rose 8% to $599 million, reducing reported revenue. Visa processed 15.985 billion transactions, up 13%; CyberSource billable transactions rose 20%. The reported operating margin is calculated from the figures above.
Net income growth was slower than operating income growth in part because the effective tax rate increased to 32% from 28%. The prior-year quarter included a $76 million California tax benefit that did not recur.
Cash, liquidity and capital
- Cash from operations was $1.541 billion; investing activities used $276 million and financing activities used $1.330 billion. The year-over-year operating cash-flow comparison is heavily affected by the prior-year litigation settlement cash flows, including $4.4 billion paid from escrow.
- At December 31, total assets were $36.248 billion and total liabilities were $9.234 billion. The balance sheet reports no separate debt amount. A new $3.0 billion, 364-day revolving credit facility was entered into after quarter-end; there were no borrowings under it when disclosed.
- Visa reported $4.6 billion of cash and available-for-sale securities held by foreign subsidiaries, with most intended to remain invested abroad; repatriation of most of these funds would generally incur U.S. income tax.
- Visa repurchased approximately $1.1 billion of Class A shares during the quarter and paid $254 million in dividends. The October 2013 repurchase authorization was $5.0 billion, with $4.2 billion remaining at quarter-end. A quarterly dividend of $0.40 per as-converted share was declared in January.
Outlook, risks and unusual items
- Management expected fiscal 2014 client incentives to be 16.5%–17.5% of gross revenue and annual free cash flow to be about $5 billion.
- Management expected U.S. dollar strength to reduce full-year fiscal 2014 operating revenue growth by about two percentage points, net of hedges. Currency movements had already reduced year-over-year revenue growth by two percentage points in the quarter.
- Management described the global recovery as slow-moving. It cited continued growth in payment volumes and processed transactions, but noted exposure to consumer spending, economic conditions, competition, technology changes, regulation, system disruptions, fraud and data security.
- The interchange class settlement received final court approval on January 14, 2014, but appeals remained pending. Visa received approximately $1.1 billion in opt-out merchant takedown payments on January 27, deposited them into litigation escrow, and expected to record the deposit and a related increase in accrued litigation in fiscal Q2. The receipt also increases current taxable income; Visa estimated a related $387 million income-tax payable, which would weigh on remaining-year free cash flow.
- More than 25 opt-out cases had been filed, alongside other interchange-related litigation. European merchant claims also present potential exposure; Visa disputes whether Visa Europe must indemnify it for relevant European competition proceedings.
- Visa Europe can exercise a perpetual put requiring Visa to acquire its members’ shares. The recorded fair value was $145 million, but the actual purchase obligation could be several billion dollars or more and depends on negotiated inputs.
- Visa reported an estimated maximum settlement exposure of $53.2 billion, largely relating to unsettled transactions; collateral covered $3.0 billion of that exposure. This is a contingent settlement guarantee, not reported debt.
Most important facts for investors to verify
- Progress and appeal outcomes for the interchange class settlement, opt-out claims, and the timing and accounting for the Q2 escrow deposit and litigation accrual.
- Whether full-year free cash flow remains near management’s approximately $5 billion estimate after the settlement-related tax payment.
- Revenue growth against the effects of client incentives and foreign exchange, including whether incentives remain within the stated 16.5%–17.5% range.
- Any change in the probability, valuation or potential cost of Visa Europe exercising its put option, and the related indemnification dispute.
- Developments in European and U.S. competition litigation, regulation, cybersecurity, fraud and payment-network reliability.