Business context and reporting period
Visa Inc. is a global payments technology company that operates payment processing networks; it does not issue cards or set cardholder interest rates. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2012, the second quarter and first half of fiscal 2012.
Financial results and position
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Operating revenue | $2.578 billion, up 15% year over year | $5.125 billion, up 14% |
| Operating income | $1.606 billion, up from $1.383 billion | $3.224 billion, up from $2.749 billion |
| Operating margin | Approximately 62.3%, versus 61.6% | Approximately 62.9%, versus 61.3% |
| Net income attributable to Visa | $1.292 billion, versus $881 million | $2.321 billion, versus $1.765 billion |
| Diluted Class A EPS | $1.91, versus $1.23; $1.60 excluding the $208 million deferred-tax benefit | $3.40, versus $2.46; $3.09 excluding that benefit |
First-half operating cash flow was $2.383 billion, compared with $1.609 billion a year earlier. Investing activities used $770 million and financing activities used $1.702 billion, including a $1.565 billion litigation-escrow deposit, $300 million of dividends and $75 million of share repurchases. Cash and cash equivalents were $2.042 billion at March 31, 2012; restricted litigation escrow cash was $4.282 billion. Available-for-sale securities totaled $2.545 billion across current and non-current assets. Total liabilities were $8.325 billion. The filing text does not provide a clear value for outstanding debt.
Material changes versus the prior comparable period
- Revenue growth reflected higher payments volume, processed transactions and cross-border volume, alongside acquired-business contributions. Client incentives also increased, partly to address regulatory changes and secure routing preference.
- For the quarter, service revenue rose 13%, data processing revenue 12% and international transaction revenue 17%. Visa-reported processed transactions increased 8%; CyberSource billable transactions rose 26%.
- First-half operating expenses rose 10% to $1.901 billion, including higher personnel, network processing and technology-related costs; marketing expense declined 5%.
- The reported tax rate fell to 20% for the quarter and 28% for the half-year, from 36% in both 2011 comparison periods. California tax-rule changes produced a one-time, non-cash $208 million benefit. Excluding the remeasurement, management reported adjusted effective tax rates of 32.6% and 34.6%, respectively.
- Cash used in financing was lower than the prior-year period, when Visa repurchased $536 million of shares; first-half 2012 repurchases were $75 million. A new $500 million repurchase authorization was unused at quarter-end.
Outlook, commentary and risks
- Management expected fiscal 2012 operating revenue growth in the low double digits, client incentives at 17%–18% of gross revenue, and an adjusted annual effective tax rate of 33%–34%. It expected marketing spending to increase in the second half and stated operating cash flow should be sufficient for ongoing needs.
- Visa said U.S. debit interchange caps and network-routing rules could pressure pricing, transaction volumes and revenue, and prompt client contract renegotiations and higher incentives. Management expected the rules to moderate U.S. revenue growth, with some mitigation from pricing changes and merchant routing preference.
- Covered interchange litigation remained under mediation. Visa said the $4.28 billion escrow balance was consistent with its estimate of its share of the lower end of a reasonably possible loss in a negotiated settlement; it could not estimate a potential trial loss. The accrued litigation balance was $286 million.
- Visa Europe can exercise a perpetual put requiring Visa to acquire its members’ shares. The recorded liability was $145 million, but the potential purchase price could be several billion dollars or more and might require external financing.
- The Department of Justice issued a civil investigative demand concerning Visa debit and competitive responses to the Reform Act, including the Fixed Acquirer Network Fee. Visa said it was cooperating. Other risks include economic and currency conditions, competition, technology or network disruption, data breaches and further regulatory or legal developments.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported EPS and earnings growth with the $208 million non-cash tax benefit; assess the adjusted figures separately.
- Monitor client incentives, debit routing changes and U.S. debit transaction and revenue trends against management’s fiscal 2012 outlook.
- Track the status, potential settlement terms and escrow adequacy of the interchange litigation, including the unestimable trial exposure.
- Assess the possible timing, valuation and funding requirements if Visa Europe exercises its put option.
- Review the DOJ inquiry and other legal proceedings for developments that could materially affect results or cash flows.