Visa Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018; filed January 31, 2019. Visa operates a global electronic payments network and provides processing and related services. It does not issue cards or extend credit.
Financial results
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $5.506 billion | $4.862 billion | +13% |
| Operating income | $3.717 billion | $3.327 billion | +12% |
| Net income, reported | $2.977 billion | $2.522 billion | +18% |
| Diluted Class A EPS | $1.30 | $1.07 | +21% |
| Operating cash flow | $3.294 billion | $2.813 billion | +17% |
- Approximate operating margin was 67.5%, versus 68.4% a year earlier; approximate net margin was 54.1%, versus 51.9%.
- Operating expenses rose 17% to $1.789 billion, led by personnel (+19%), marketing (+24%) and general and administrative expenses (+17%).
- Investing cash outflow was $70 million and financing cash outflow was $3.018 billion. The latter included $2.393 billion of share repurchases and $572 million of dividends. Capital expenditures were $157 million.
- Cash and cash equivalents were $8.289 billion; restricted cash and equivalents were $2.826 billion. Current assets were $20.107 billion and current liabilities $13.389 billion. Long-term debt was $16.633 billion.
- Total assets were $71.655 billion, total liabilities $37.560 billion and equity $34.095 billion at quarter-end.
Business performance and changes
- Revenue growth reflected higher payments volume, cross-border volume and processed transactions. Transactions processed increased 11% to 33.931 billion. Management cited continued strong global consumer spending despite uneven economic conditions.
- Revenue by category: data processing +15% to $2.470 billion; service +9% to $2.342 billion; international transaction +11% to $1.851 billion; and other revenue +30% to $299 million. Client incentives, recorded as a reduction to revenue, increased to $1.456 billion from $1.326 billion.
- International revenue grew 15% to $2.998 billion; U.S. revenue grew 11% to $2.508 billion. Foreign exchange movements, partly offset by hedging, reduced revenue growth by approximately 0.5 percentage point.
- The company adopted a new revenue standard on October 1, 2018. It reduced reported current-quarter revenue by $52 million and net income by $15 million compared with the prior standard; the prior-year quarter was not restated. The standard also changed classification and timing for certain client incentives and marketing-related amounts.
- Reported prior-year net income included unusual tax items related to U.S. tax reform: a $1.1 billion deferred-tax remeasurement benefit and approximately $1.1 billion transition-tax expense. Excluding these items, prior-year net income was $2.536 billion and diluted EPS was $1.08; on that adjusted basis, current-quarter net income rose 17% and EPS 21%.
Liquidity, outlook and risks
- Management said projected liquidity sources should be sufficient for needs for more than the next 12 months. S&P upgraded Visa’s short-term unsecured rating to A-1+ and long-term rating to AA-, both with stable outlooks.
- No specific revenue or earnings guidance was provided. The filing identifies economic conditions and consumer spending, payments-industry developments, foreign exchange, litigation and regulatory matters as factors that may affect results.
- Visa repurchased 17 million Class A shares for $2.393 billion during the quarter. Remaining authorization at December 31 was $1.8 billion; the board authorized an additional $8.5 billion program in January 2019. The board also declared a quarterly $0.25-per-share dividend.
- Litigation accruals totaled $1.489 billion, including $1.428 billion for U.S. covered litigation and $55 million for Europe-territory covered litigation. The U.S. litigation escrow held $1.496 billion. Visa disclosed more than 350 outstanding UK merchant claims and ongoing interchange-related proceedings. Proposed European Commission commitments to cap certain inter-regional interchange rates were subject to formal adoption; Visa said they would involve no fine or finding of infringement.
- Visa’s settlement guarantee exposure averaged $56.1 billion per day and peaked at $88.2 billion during the quarter. The filing says historical losses have been minimal, but future obligations could be material and are not determinable.
Important facts for investors to verify
- Assess revenue and earnings growth on a comparable accounting basis, given the new revenue standard’s $52 million revenue impact and the unadjusted prior-year tax items.
- Review current payment-volume and cross-border trends; service revenue in this quarter was assessed using the prior quarter’s volume data.
- Monitor client incentive levels, expense growth and the sustainability of margins as Visa invests in growth.
- Track the UK merchant litigation, U.S. covered litigation and the outcome of the European Commission’s proposed commitments, including potential financial or operating effects.
- Consider capital returns alongside the $16.6 billion debt balance, settlement-guarantee exposure and restricted cash balances.