Business context and reporting period
Visa Inc. operates VisaNet, a global electronic payments network, and provides payment processing and related services. Visa does not issue cards or extend credit. This Form 10-Q covers the fiscal second quarter and six months ended March 31, 2019; financial statements are unaudited. Unless otherwise stated, amounts are in U.S. dollars.
Financial results and key metrics
| Metric | Three months ended March 31, 2019 | Year-over-year change | Six months ended March 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $5.494 billion | +8% | $11.000 billion | +11% |
| Operating income | $3.641 billion | +9% | $7.358 billion | +10% |
| Net income | $2.977 billion | +14% | $5.954 billion | +16% |
| Diluted Class A EPS | $1.31 | +18% versus $1.11 | $2.61 | +19% |
| Operating margin | 66.3% | Up from 65.8% | 66.9% | Up from 67.1%? See note below |
The six-month operating margin was approximately 66.9%, compared with approximately 67.1% in the prior-year period, based on reported operating income and revenue.
Revenue growth reflected higher payments volume and processed transactions. For the six months, data processing revenue rose 15%, service revenue 8%, and international transaction revenue 7%. Visa processed 66.5 billion transactions, up 11%. Nominal payments volume grew 8% for the six months through December 31, 2018; constant-dollar growth was 11%. Foreign-exchange movements reduced revenue growth by approximately 1.5 percentage points in the quarter and 1 point for the six-month period.
Six-month operating cash flow was $5.358 billion, down from $5.729 billion. Investing activities used $396 million and financing activities used $5.486 billion. Cash, cash equivalents and restricted cash totaled $10.282 billion at period-end, including $7.648 billion of unrestricted cash and cash equivalents. Investment securities totaled $7.382 billion. Long-term debt was $16.630 billion; total liabilities were $35.590 billion and equity was $34.275 billion.
Operating expenses rose 7% in the quarter and 11% for the six months, including higher personnel and general and administrative costs. The effective tax rate was 19% in both 2019 periods. The prior-year six-month comparison included significant Tax Act-related deferred-tax and transition-tax items; Visa reported adjusted prior-year net income of $5.141 billion versus reported net income of $5.127 billion.
Material changes versus the prior comparable period
- Revenue growth was led by transaction processing and continued payment-volume expansion. Total operating expenses grew broadly in line with revenue for the first half.
- Reported six-month net income increased 16%; the prior-year period was affected by one-time tax items, making reported tax and earnings comparisons less representative of recurring performance.
- Visa adopted a new revenue accounting standard on October 1, 2018. Prior periods were not restated. For the six months ended March 31, 2019, the standard reduced reported revenue by $91 million and net income by $7 million relative to results under the prior standard, while also changing the classification and timing of certain client incentives and expenses.
- Visa repurchased 31 million Class A shares for $4.331 billion in the first half, compared with $3.850 billion in the prior-year period, and paid $1.141 billion in dividends, up from $948 million.
- Standard and Poor’s upgraded Visa’s short-term unsecured debt rating to A-1+ and long-term rating to AA-, both with stable outlook, from A-1 and A+, respectively.
Outlook, commentary, risks and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management said projected liquidity sources should be sufficient for more than the next 12 months and expected to continue quarterly cash dividends, subject to board approval. The board authorized an additional $8.5 billion repurchase program in January 2019; $8.4 billion remained available at March 31.
Management cited continued global consumer spending growth amid uneven economic conditions and investment in headcount and products to support growth. Key exposures include currency movements, economic and consumer-spending trends, client incentive estimates, market interest-rate fluctuations and legal or regulatory outcomes. March 2019 interest-rate and cross-currency swaps on part of the 2025 notes reduce borrowing costs but expose Visa to interest-rate movements and convert some dollar fixed-rate payments to euro floating-rate payments.
Legal matters remain a significant contingency. The accrued litigation balance was $914 million at March 31, including $828 million for U.S. covered litigation and $61 million for Europe territory covered litigation. The U.S. litigation escrow held $899 million after a $600 million payment during the quarter. In Europe, Visa recorded $162 million of covered losses in equity for the first half and recovered $6 million through preferred-stock conversion-rate adjustments. More than 350 UK merchants had outstanding claims, with over 30 additional merchants threatening similar proceedings. A proposed European Commission commitment would cap certain inter-regional interchange rates for five years if adopted; the Commission was expected to decide in the first half of calendar 2019. Visa stated that litigation outcomes and potential losses may be material and in some matters are not reasonably estimable.
Visa’s settlement guarantee exposure was as high as $92.0 billion and averaged $55.3 billion daily during the six-month period; collateral held totaled $3.953 billion. Management reported effective disclosure controls and procedures.
Investor verification priorities
- Review payment-volume and transaction growth alongside currency effects, and confirm the period alignment: service revenue reflects prior-quarter payment volume.
- Assess comparability after adoption of the revenue standard, particularly the treatment of client incentives and un-restated prior periods.
- Track U.S. and European litigation developments, escrow adequacy, accrual changes and potential effects of interchange commitments.
- Monitor the pace of repurchases, dividends, deferred Visa Europe purchase consideration and debt-related swap exposure.
- Validate the margin trend: the filing reports operating income of $7.358 billion on revenue of $11.000 billion for the first half, implying an operating margin of approximately 66.9%, versus approximately 67.1% in the prior-year period.