Visa Inc. — Form 10-Q Summary
Business context and reporting period
Visa is a global payments technology network; it does not issue cards or set cardholder interest rates. This unaudited filing covers the quarter and nine months ended June 30, 2010 (Visa fiscal Q3 and year to date), compared with the same periods in 2009. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $2,029, up 23% from $1,646 | $5,948, up 18% from $5,032 |
| Operating income | $1,137, up 38% from $822 | $3,476, up 30% from $2,669 |
| Net income attributable to Visa | $716, down 2% from $729 | $2,192, up 19% from $1,839 |
| Class A diluted EPS | $0.97 vs. $0.96 | $2.96 vs. $2.41 |
| Operating margin | Approximately 56% vs. 50% | Approximately 58% vs. 53% |
| Net margin | Approximately 35% vs. 44% | Approximately 37% vs. 37% |
Margins are calculated from reported figures. Quarterly net income was slightly lower despite strong revenue growth, principally because prior-year results included substantial investment income. Nine-month operating cash flow was $1,798 versus $767; investing cash flow was $(10) versus $955; financing cash flow was $(1,202) versus $(2,491). Capital expenditure was $144, making operating cash flow less capital expenditure approximately $1,654 (calculated). Cash and cash equivalents were $5,205 at June 30, compared with $4,617 at September 30, 2009. This excludes restricted litigation escrow cash.
Total assets were $32,696 and total liabilities $8,016. Debt was $47 ($12 current and $35 long term), versus $56 at September 30, 2009. Current assets of $9,850 included $1,865 of restricted litigation escrow cash; current liabilities were $3,482. The litigation escrow balance, including its long-term portion, was $2,005. Visa reported $24,680 in total equity.
Material changes versus the prior comparable period
- Quarterly revenue gains were led by data processing (+31%), international transaction revenue (+25%) and service revenue (+13%). Processed transactions rose 14% in the quarter and 13% year to date.
- Reported nominal payments volume rose 21% in the quarter and 12% year to date, based on customer data through March 31. Rest-of-world volume growth outpaced U.S. growth.
- Quarterly operating expenses increased 8%, to $892, including higher advertising and marketing spending, network costs and professional fees. Year-to-date expenses increased 5%, to $2,472.
- Quarterly other income shifted from $475 of income to $15 of expense. The prior-year period included a $473 gain related to the sale of Visa’s VisaNet do Brasil investment. Year-to-date investment income fell to $29 from $557, largely reflecting that prior-year gain and lower interest income.
- Year-to-date litigation expense included a $41 pre-tax gain from prepaying the remaining Retailers’ litigation obligation for $682, below its $800 carrying obligation. The payment was made in October 2009.
Outlook, management commentary, risks and unusual items
- Management cited gradual global economic recovery and expected consumer and commercial spending, and payment-volume growth, to increase in the near term if recovery continued. It offered no specific earnings or revenue guidance in the supplied filing text.
- Management expected volume and support incentives at 16%–17% of gross revenue for fiscal 2010, potentially at the higher end. It cautioned that fiscal Q4 data-processing revenue growth would moderate as prior pricing actions anniversary and yield compression from new or converted contracts and volume thresholds takes effect.
- Management expected currency movements and hedging to have a neutral-to-slightly-positive effect on full-year 2010 revenue growth. It also expected the effective tax rate to rise in fiscal Q4, including a potential one-time increase from non-deductible CyberSource transaction costs and a state-tax remeasurement.
- Visa completed its CyberSource acquisition on July 21, 2010, after quarter-end, for approximately $2.0 billion in cash. It expects the acquisition to expand online payment, fraud and security capabilities; integration and eCommerce growth are identified risks.
- The U.S. Wall Street Reform and Consumer Protection Act will regulate debit interchange and affect network selection and transaction routing. Visa said the financial impact was unknown pending implementation details; increased routing competition could reduce debit processing fees.
- The Department of Justice was considering a civil antitrust lawsuit concerning rules prohibiting credit-card surcharging and network discrimination. Visa reported ongoing discussions but said the outcome was uncertain. Other material legal matters include merchant interchange litigation, currency-conversion appeals, and regulatory inquiries. The company warned that adverse outcomes could materially affect results, financial position or cash flows.
- Visa’s perpetual Visa Europe put option had a recorded fair value of $346, but Visa said the actual purchase obligation if exercised could be several billion dollars or more. Exercise is at Visa Europe’s discretion; the obligation’s amount depends on future financial and valuation inputs.
- Visa’s estimated maximum settlement exposure was $44.1 billion, of which approximately $3.7 billion was covered by collateral. Total collateral held or available was $4.548 billion. The filing describes this as settlement risk arising from transaction timing, not as funded debt.
- Visa funded $500 million into the litigation escrow during the period and repurchased $664 million of Class A shares in the first half of fiscal 2010; $336 million remained under its $1 billion repurchase authorization at June 30. A quarterly dividend of $0.125 per as-converted share was declared after quarter-end.
- Management stated that projected liquidity was sufficient for needs beyond 12 months, while noting the acquisition cash outlay and potential Visa Europe put payment. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether payment-volume and transaction growth persist, particularly in the U.S., and how pricing actions and customer incentives affect revenue yield and margins.
- The implementation and eventual financial impact of U.S. debit regulation, including changes in routing, interchange and network fees.
- Progress and potential outcomes of the DOJ inquiry, merchant interchange litigation and other regulatory proceedings, including any changes in litigation accruals or escrow funding.
- CyberSource integration, actual purchase-related costs, and contribution to growth following the July 2010 acquisition.
- The potential size, timing and funding requirements of a Visa Europe put exercise; the $346 million recorded fair value is not the potential purchase price.
- Cash generation and capital allocation after the $2.0 billion acquisition, escrow funding, share repurchases and dividends; distinguish unrestricted cash from restricted litigation escrow.
- Fiscal Q4 tax-rate effects and the sustainability of the favorable tax rate reported for the first nine months.