Visa Inc. Form 10-Q Summary
Business context and reporting period. Visa operates a global payments technology network, VisaNet, across more than 200 countries and territories; it does not issue cards or extend credit. This unaudited report covers the fiscal third quarter and first nine months ended June 30, 2018. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Net operating revenue | $5.24 billion, up 15% | $15.18 billion, up 12% |
| Operating income | $2.89 billion, down 5% | $9.55 billion, up 7% |
| Operating margin | 55%, versus 66%; 67% adjusted | 63%, versus 66%; 67% adjusted |
| Net income | $2.33 billion, up 13%; $2.79 billion adjusted | $7.46 billion, up 64%; $7.93 billion adjusted |
| Diluted EPS | $1.00, up 16%; $1.20 adjusted | $3.19, up 68%; $3.39 adjusted |
| Operating cash flow | Not presented quarterly | $9.22 billion, versus $6.44 billion |
Quarterly operating expenses rose 53% to $2.36 billion, principally reflecting a $600 million litigation provision; excluding that provision, adjusted expenses rose 14%. Nine-month reported expenses increased 23%, while adjusted expenses increased 15%. Revenue growth was supported by transaction growth and nominal payments and cross-border volume; processed transactions increased 12% in both the quarter and nine-month period. Currency movements contributed approximately 1.5 percentage points to net revenue growth.
At June 30, 2018, cash and cash equivalents were $8.51 billion, restricted U.S. litigation escrow cash was $1.49 billion, and total debt was $16.63 billion. Total assets were $68.18 billion and total liabilities $34.86 billion. Visa repaid $1.75 billion of notes due in 2017. The company said projected liquidity sources should meet needs for more than 12 months; cash and available-for-sale securities held by foreign subsidiaries totaled $7.8 billion.
Changes versus prior periods
- Quarterly data-processing revenue rose 19%, service revenue 13%, and international transaction revenue 16%. Client incentives, which reduce revenue, increased 20% in the quarter and 24% year to date.
- Quarterly reported operating income declined despite revenue growth, mainly because of the $600 million interchange-litigation provision. Excluding that provision, quarterly adjusted operating margin was 67%.
- Reported nine-month net income and EPS increased sharply, but comparisons are affected by unusual tax items: 2017 included a $1.5 billion non-cash tax provision, while 2018 included an approximately $1.1 billion deferred-tax benefit and an approximately $1.1 billion transition tax.
- Nine-month operating cash flow improved to $9.22 billion. Cash declined $1.37 billion after $9.19 billion of financing outflows, including $5.60 billion in share repurchases, $1.44 billion in dividends, debt repayment, and litigation escrow funding.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific revenue, earnings, or EPS guidance. Management cited continued global economic growth and investment to support business growth, and stated that operating cash flow and other liquidity sources should cover projected needs for more than 12 months.
- Visa accrued $1.43 billion for U.S. covered litigation, including a $600 million provision for interchange multidistrict litigation, and deposited $600 million into the related escrow account. A damages-class settlement was agreed in principle but remained subject to a written agreement; Visa could not estimate potential trial losses if negotiated resolutions fail.
- After quarter-end, on July 4, 2018, the U.K. Court of Appeal overturned lower-court rulings on a merchant interchange claim, finding Visa’s U.K. domestic interchange restricted competition and remanding exemption and damages issues. Visa said it intended to seek permission to appeal; more than 300 merchant claims remained outstanding.
- Tax Act accounting amounts remained provisional. Visa expected to finalize the analysis no later than the first quarter of fiscal 2019; the transition tax is intended to be paid over eight years. Certain new tax provisions take effect in fiscal 2019 and their impacts were not yet recorded.
- Visa’s estimated maximum settlement exposure was $73.2 billion during the quarter, with $2.8 billion of exposure covered by collateral. The company reported historically minimal losses, but future obligations depend on events and could be material.
- The board authorized an additional $7.5 billion share-repurchase program in January 2018; $5.8 billion remained authorized at June 30. A quarterly dividend of $0.21 per Class A share was declared in July, payable September 4, 2018.
Most important facts for investors to verify
- Whether the U.S. interchange litigation settlement is completed and whether the $1.43 billion accrual adequately reflects eventual exposure.
- Developments in U.K. merchant litigation, including the remanded claim, appeal prospects, and potential additional claims.
- Final Tax Act accounting and the effects of fiscal 2019 tax provisions on the effective tax rate and cash taxes.
- Underlying operating performance apart from litigation and tax adjustments, particularly client-incentive growth, expense growth, payment volumes, and transaction growth.
- Cash deployment through repurchases, dividends, litigation funding, and debt service, alongside liquidity held by foreign subsidiaries.