Visa Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010. This is an annual filing; quarterly figures are included for the quarter ended September 30, 2010. Unless noted, amounts are in U.S. dollars.
Business context
Visa operates a global, open-loop payments network, connecting financial institutions, merchants, consumers, businesses and governments. It earns fees mainly from payments volume, transactions processed and related services; it does not issue cards, extend consumer credit, or receive interchange fees. Fiscal 2010 benefited from recovery-driven growth in payments volume, cross-border activity and processed transactions. Visa acquired online-payments provider CyberSource in July 2010 for approximately $2.0 billion.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Operating revenues | $8.065 billion | $6.911 billion | +17% |
| Operating income | $4.589 billion | $3.538 billion | +30% |
| Operating margin | 56.9% | 51.2% | +5.7 percentage points |
| Net income attributable to Visa Inc. | $2.966 billion | $2.353 billion | +26% |
| Diluted Class A EPS | $4.01 | $3.10 | +29% |
| Cash from operating activities | $2.691 billion | $558 million | +$2.133 billion |
| Capital expenditures | $241 million | $306 million | −21% |
| Cash and cash equivalents | $3.867 billion | $4.617 billion | −16% |
| Total debt | $44 million | $56 million | −21% |
| Total assets | $33.408 billion | $32.281 billion | +3% |
Operating cash flow less property, equipment and technology purchases was approximately $2.450 billion. Current assets were $8.734 billion against current liabilities of $3.498 billion. Cash and restricted litigation escrow are separate: restricted escrow totaled approximately $1.936 billion at year-end. The $3.867 billion cash balance excludes that escrow. The company had a $3.0 billion revolving credit facility and no borrowings under it at year-end.
Nominal payments volume grew 13% for the 12 months ended June 30, 2010, with 21% growth outside the U.S.; VisaNet processed transactions rose 14% to 45.4 billion. By revenue category, data processing revenue increased 29%, international transaction revenue 20%, and service revenue 10%. Volume and support incentives, recorded as a reduction of revenue, rose 26% to $1.560 billion. The effective tax rate declined to 36% from 41%.
Material changes and unusual items
- Operating expenses increased 3% to $3.476 billion. The fiscal 2010 litigation provision was a $45 million credit, including a $41 million pretax gain from prepaying the Retailers’ settlement; FY2009 recorded a $2 million provision. The much higher FY2008 expense included a major litigation provision, so that year is not directly comparable.
- Other income fell to $49 million from $462 million, chiefly because FY2009 included a $473 million pretax gain on the sale of VisaNet do Brasil. FY2010 included $79 million of non-cash income from revaluing the Visa Europe put option.
- CyberSource contributed results only from its July acquisition date. Its purchase-price allocation was preliminary; the acquisition added approximately $1.2 billion of goodwill.
- Visa repurchased $1.0 billion of Class A shares in FY2010 and paid $368 million in dividends. The board authorized a further $1.0 billion repurchase plan after year-end.
Outlook, commentary and risks
- Management described the global recovery as gradual and expected near-term consumer and commercial spending and payments volume to grow if recovery continued. It gave no specific full-year revenue or EPS guidance in the provided filing text.
- Management expected FY2011 volume and support incentives to equal 16.0%–16.5% of gross revenues, and capital expenditures of approximately $250–$275 million. It expected service revenue to increase and noted that FY2010 data-processing growth was not necessarily sustainable; a full year of CyberSource activity would contribute in FY2011.
- The U.S. Wall Street Reform and Consumer Protection Act will regulate debit interchange and routing. Visa said the financial impact was unknown pending implementation details, with effects expected to begin in Q4 FY2011. Routing to competing networks could reduce processing fees.
- Significant legal exposure includes merchant interchange litigation, whose plaintiffs alleged damages in the tens of billions of dollars before potential trebling. The retrospective responsibility plan addresses specified covered litigation, but does not eliminate all monetary or business-practice risks. Other proceedings and regulatory investigations also remain.
- Visa Europe may exercise a perpetual put requiring Visa to acquire its outstanding shares. The recorded fair value was $267 million, but this is not the exercise price; the potential purchase obligation could be several billion dollars or more and cannot be reliably estimated.
- Visa guarantees client settlement obligations without a stated limit. Estimated maximum settlement exposure was $38.7 billion at year-end, of which $3.0 billion was covered by collateral under the exposure measure disclosed; total collateral held across forms was $4.041 billion. Visa reported no material settlement-risk loss in recent years.
- Other material risks include pricing and incentive pressure, client and revenue concentration (top five clients generated about 30% of FY2010 revenue), competition and disintermediation, cybersecurity and system outages, foreign-exchange and economic conditions, and possible regulatory changes. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Investor verification priorities
- Track final debit interchange and routing rules, and assess their effects on network fees, volumes and incentives.
- Review developments, accruals, escrow funding and potential non-monetary remedies in interchange and other litigation.
- Assess Visa Europe put-option valuation assumptions and the company’s financing capacity if exercised.
- Verify CyberSource integration, revenue contribution, purchase accounting and goodwill/intangible-asset assumptions.
- Monitor incentive commitments and realization, including the FY2011 range, alongside client concentration and contract renewals.
- Reconcile cash generation with acquisition spending, repurchases, dividends, restricted escrow and settlement-liquidity needs.