Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. Visa is a global payments technology company operating VisaNet; it does not issue cards or extend credit. On June 21, 2016, Visa acquired Visa Europe. The quarter’s reported results include only ten days of Visa Europe operations, an impact the company deemed immaterial.
Financial results and position
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Operating revenue | $3.630 billion, up 3% | $10.821 billion, up 5% |
| Operating income | $428 million | $5.258 billion |
| Net income, reported | $412 million, versus $1.697 billion | $4.060 billion, versus $4.816 billion |
| Diluted Class A EPS, reported | $0.17, versus $0.69 | $1.69, versus $1.96 |
| Net income, adjusted | $1.635 billion, down 10% | $4.947 billion, essentially flat |
| Diluted EPS, adjusted | $0.69, versus $0.74 | $2.06, up 3% |
Adjusted figures are non-GAAP and exclude specified Visa Europe-related items. Reported operating margin was 12% for the quarter and 49% for nine months; adjusted operating margin was 68% and 67%, respectively. The adjusted quarter’s revenue growth did not translate into year-over-year adjusted earnings growth.
- Revenue drivers: quarterly data processing revenue rose 10%, service revenue 6%, and international transaction revenue 4%. Client incentives, recorded as a reduction to revenue, rose 25% to $839 million. Growth reflected higher processed transactions and payment volume; currency movements reduced revenue growth by three percentage points.
- VisaNet processed 19.778 billion transactions in the quarter, up 10%, and 57.238 billion over nine months, up 9%. Total nominal payments volume for the March quarter rose 7%; constant-dollar volume rose 12%.
- Cash from operations was $3.122 billion for nine months, down from $4.850 billion. Management said operating cash flow excluding the nonrecurring Framework Agreement loss was $5.0 billion. Investing cash use was $10.159 billion, largely reflecting the Visa Europe acquisition; financing cash provided was $9.468 billion, including debt proceeds.
- At June 30, cash and cash equivalents were $5.887 billion; total current assets were $14.374 billion and current liabilities $7.783 billion. Long-term debt was $15.879 billion. A $4.0 billion revolving credit facility was undrawn. Available liquidity also included investment securities; $8.0 billion of cash and short- and long-term available-for-sale securities was held by foreign subsidiaries.
- Visa repurchased $5.3 billion of Class A shares and paid $1.0 billion in dividends during the nine months. The board authorized an additional $5.0 billion repurchase program in July 2016.
Material changes and unusual items
- Visa Europe consideration comprised $13.9 billion cash, preferred stock valued at $5.692 billion for accounting purposes, and deferred cash consideration with a June 30 fair value of $1.236 billion, payable after three years with 4% annual compound interest. Visa also assumed substantial assets and liabilities; purchase allocation remained preliminary.
- The acquisition generated a $1.877 billion operating loss from the effective settlement of the Visa Europe Framework Agreement, plus $152 million in acquisition-related costs. These items materially depressed reported quarterly earnings. The quarter also included a $145 million foreign-exchange gain on euro deposits and a $42 million loss on currency forwards. Nine-month results included a $255 million noncash gain from revaluing the Visa Europe put option.
- The reported effective tax rate was 2.3% for the quarter, mainly reflecting a $693 million tax benefit associated with the Framework Agreement loss; the adjusted rate was 30.4%. The nine-month reported and adjusted rates were 26.2% and 29.9%.
- Visa issued $16.0 billion of fixed-rate senior notes in December 2015, with coupons of 1.20%–4.30% and maturities from 2017 to 2045, principally to fund the acquisition. The first principal payment, $1.75 billion, is due in December 2017. Visa reported compliance with debt covenants and no borrowings under its revolving facility.
Outlook, commentary and risks
Management cited uneven, tepid economic growth, but said continued transaction and payment-volume growth supported revenue. It expects increased advertising and promotional spending in the fourth quarter for the 2016 Rio Summer Olympics. Management stated projected liquidity would cover needs for more than 12 months; it provided no quantified revenue or EPS guidance in the supplied filing text.
- The Second Circuit vacated certification of the merchant class and reversed approval of the U.S. interchange MDL settlement on June 30, 2016, remanding the case. The outcome and Visa’s eventual exposure remain uncertain; the accrued litigation balance was $978 million. Visa’s U.S. litigation escrow held $1.027 billion, but the accrual may be higher or lower than escrow.
- Europe interchange litigation protections rely on preferred-stock conversion-rate reductions and, for specified U.K. claims, a loss-sharing agreement; unlike the U.S. plan, there is no litigation escrow. Protections do not cover all European litigation, and a large covered loss could still affect cash flows.
- Other exposures include merchant opt-out claims and new or pending disputes involving Walmart, Kroger, Home Depot, EMV liability shift, ATM access fees and European competition matters. Several proceedings have uncertain or unestimable outcomes.
- Visa identified risks from Brexit-related economic and currency volatility, increased regulation of interchange and payment systems, data privacy and security requirements, competition and technological change, and integration/interoperability of Visa Europe systems. A hypothetical 10% euro weakening against the dollar would create an estimated $2.1 billion translation adjustment in other comprehensive income; a 10% dollar decline against the euro would increase deferred consideration by about $125 million, including interest.
Key facts for investors to verify
- Track Visa Europe integration, final purchase accounting, realized synergies and the impact of including its operating results in subsequent periods.
- Assess the merchant interchange MDL appeal/remand, opt-out settlements, European interchange cases and whether litigation protections adequately limit cash and earnings exposure.
- Monitor underlying growth in transactions and constant-currency payment volume alongside client incentives, which are growing faster than reported revenue.
- Review debt service, the deferred acquisition payment, cash held overseas and the pace of repurchases and dividends.
- Follow Brexit, regulatory changes and foreign-exchange movements, including their effects on reported growth and the acquired European business.