Visa Inc. — Form 10-Q Summary
Business context and period: Global payments technology and transaction-processing network operating in more than 200 countries and territories. This report covers the fiscal quarter and six months ended March 31, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise. Visa Europe was acquired in June 2016, so its results are included in 2017 but not in the comparable 2016 reported results.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net operating revenue | $4.477 billion, up 23% from $3.626 billion | $8.938 billion, up 24% from $7.191 billion |
| Operating income | $2.808 billion, versus $2.434 billion | $5.908 billion, versus $4.830 billion |
| Operating margin | 63%, versus 67%; adjusted margin 67% | 66%, versus 67%; adjusted margin 68% |
| Net income, as reported | $430 million, down 75% from $1.707 billion | $2.500 billion, down 31% from $3.648 billion |
| Diluted Class A EPS, as reported | $0.18, versus $0.71 | $1.04, versus $1.51 |
| Adjusted net income and diluted EPS | $2.066 billion and $0.86; each up 27% | $4.136 billion and $1.71; up 25% and 25%, respectively |
Adjusted figures are non-GAAP measures. They exclude specified unusual items, principally the 2017 tax charge and charitable contribution, and 2016 currency-forward gains and Visa Europe put-option revaluation.
- Revenue drivers: For the six months, service revenue rose 17%, data-processing revenue 27%, and international-transaction revenue 42%. Client incentives, which reduce revenue, increased 31% to $2.072 billion. Growth reflects Visa Europe, higher payment volume and processed transactions, partly offset by incentives and foreign exchange; currency movements reduced reported revenue growth by approximately 3 percentage points for the six-month period.
- Network activity: Processed transactions rose 42% in the quarter and 43% for six months, including Visa Europe. Reported nominal payments volume for the six months increased 42%, with international growth substantially affected by the addition of Visa Europe.
- Cash flow: Six-month operating cash flow was $2.904 billion, versus $2.819 billion. Investing activities provided $2.268 billion, versus $1.846 billion used in 2016. Financing used $4.243 billion, chiefly for $3.469 billion of share repurchases and $795 million of dividends. Cash and cash equivalents ended at $6.427 billion, up from $5.619 billion at September 30, 2016.
- Liquidity and debt: At March 31, cash was $6.427 billion and available-for-sale securities totaled $4.299 billion. Debt carrying value was $15.888 billion, including $1.748 billion current; $14.140 billion was long-term. A $4.0 billion revolving credit facility was extended to January 2022. Management said liquidity sources should meet projected needs for more than 12 months.
- Balance sheet: Total assets were $63.227 billion and total liabilities $32.444 billion. Settlement receivables and payables were elevated at quarter-end because of a European processing and settlement delay involving $1.6 billion of volume; the filing says balances returned to historical levels in early April.
Material changes and unusual items
- Reported quarterly net income was sharply lower primarily because a February 2017 legal-entity reorganization triggered a non-recurring, non-cash $1.5 billion income-tax provision. The reported effective tax rate was 84% for the quarter and 56% for six months; adjusted rates were 28.6% and 29.6%, respectively.
- The reorganization also led to a $192 million non-cash general and administrative expense for donating Visa shares to the newly formed Visa Foundation; a related $71 million tax benefit was recorded.
- Visa repurchased 41 million shares for $3.469 billion during the six months. The board authorized an additional $5 billion repurchase program in April 2017. A $0.165-per-share quarterly dividend was declared in April, payable June 6, 2017.
- A February 2017 acquisition cost approximately $302 million net of cash acquired; the filing says its impact was not material to reported results.
Outlook, risks and contingencies
- The filing provides no specific quantified earnings or revenue guidance. Management cited continued uneven economic growth globally and sensitivity to consumer spending, exchange rates, payment volumes, client incentives and transaction activity.
- Significant litigation remains a risk. U.S. merchant interchange class-action claims seek damages alleged to be in the tens of billions of dollars, potentially subject to trebling, as well as injunctive relief. The Supreme Court denied review of the reversal of the 2012 settlement approval; related class and individual merchant proceedings continue. Visa reported settlements with merchants representing approximately 34% of opted-out Visa-branded sales volume.
- More than 130 U.K. merchant claims relating to interchange fees remained outstanding at the report date; a trial had concluded and a decision on one remaining merchant was pending. Canadian merchant class actions were subject to an agreement in principle to settle, requiring final documentation and court approval.
- Other proceedings and inquiries include ATM access-fee litigation, an EMV chip liability-shift action, a Korean competition investigation and an Ohio Attorney General information demand. Visa said it was cooperating with the regulators. The FTC had closed its investigation into EMV chip debit cards.
- Accrued litigation was $996 million at March 31. The company cautioned that some potential losses cannot be reasonably estimated and that judgments, fines or settlements could materially affect financial position, results or cash flows.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. It reported no significant change in market risks during the six-month period.
Most important facts for investors to verify
- Reconcile reported versus adjusted earnings, especially the $1.5 billion non-cash tax provision and $192 million share-donation expense, and assess which adjustments are genuinely non-recurring.
- Separate Visa Europe acquisition effects from underlying organic growth in revenue, volume and processed transactions; assess the impact of client incentives and currency movements.
- Monitor the merchant interchange litigation, related accruals and potential effects of damages or injunctive relief, particularly after the 2012 settlement was overturned.
- Review the December 2017 $1.75 billion debt maturity and management’s stated intention to refinance, subject to market conditions.
- Confirm the resolution of the European settlement delay and track settlement guarantee exposure; Visa’s estimated maximum settlement exposure was $68.5 billion for the quarter, with $3.1 billion covered by collateral.