Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013. Unaudited results; amounts are U.S. dollars.
Business context and results
Visa operates a global electronic payments network and provides payment processing services; it does not issue cards or extend credit. Management cited continued growth in electronic payments, alongside a tepid global economic recovery. U.S. debit activity was affected by Dodd-Frank Act changes.
| Metric | Three months ended June 30, 2013 | Nine months ended June 30, 2013 |
|---|---|---|
| Operating revenue | $3.001 billion; up 17% year over year | $8.805 billion; up 14% |
| Operating income | $1.828 billion | $5.488 billion |
| Operating margin | 61%, versus 58% adjusted in 2012 | 62%, versus 61% adjusted in 2012 |
| Net income attributable to Visa | $1.225 billion, versus a reported loss of $1.839 billion in 2012 | $3.788 billion, versus $482 million reported in 2012 |
| Diluted Class A EPS | $1.88, versus reported loss of $2.74 and adjusted EPS of $1.56 in 2012 | $5.74, versus reported $0.71 and adjusted EPS of $4.66 in 2012 |
| Operating cash flow | $977 million for the nine-month period, versus $3.640 billion in 2012 |
The prior-year comparison is distorted by a $4.098 billion litigation provision recorded in 2012. Excluding that provision and applicable tax effects, prior-year net income was $1.055 billion for the quarter and $3.168 billion for the nine months. The 2012 nine-month adjusted comparison also excludes a one-time $208 million deferred-tax benefit.
Revenue drivers, cash flow, and liquidity
- Quarterly revenue growth reflected data processing revenue up 15%, international transaction revenue up 14%, and service revenue up 7%. Processed transactions rose 14% in the quarter and 8% year to date; CyberSource billable transactions increased 27% in both periods.
- Nominal payment volume grew 7% in the quarter and 6% over the nine months based on the volume periods used for revenue assessment. U.S. consumer debit volume declined 4% year to date, while rest-of-world payment volume grew 10% in the quarter.
- Client incentives reduced revenue by $521 million in the quarter and $1.641 billion year to date. Management attributed year-to-date growth in incentives partly to long-term merchant and acquirer contracts related to its Dodd-Frank response.
- Nine-month operating cash flow was affected by litigation escrow settlements and related tax timing. Management said operating cash flow would have been $4.3 billion absent these impacts. Investing cash use was $1.354 billion; financing cash use was $244 million, including share repurchases and dividends, partly offset by escrow-related cash flows.
- Cash and cash equivalents were $1.453 billion at June 30, 2013, down from $2.074 billion at September 30, 2012. Available-for-sale investments totaled $5.011 billion. Management stated liquidity sources were sufficient for projected needs for more than 12 months.
- Visa had no commercial paper outstanding and no borrowings under its $3.0 billion revolving credit facility at quarter-end. No other outstanding debt balance is identified in the provided filing text.
Material changes, outlook, and risks
- Visa repurchased $4.054 billion of Class A shares in the first nine months, versus $536 million in the prior-year period, and paid $653 million in dividends. The board authorized a new $1.5 billion repurchase program in July 2013.
- Management expected fiscal 2013 revenue growth of around 13%, client incentives of 16%–17% of gross revenue, free cash flow of about $6 billion, and an effective tax rate of 30%–32%. Marketing spend was expected to be under $1 billion. These are management expectations, not guarantees.
- The approximately $4.0 billion interchange MDL class settlement remained subject to final court approval and appeals. Merchants had objected or opted out; the administrator reported 7,953 opt-out requests. Potential takedown payments could be up to $1.0 billion and could reduce the tax deduction, negatively affecting free cash flow when final approval is rendered. Visa had paid $4.0 billion into the settlement fund and $350 million to individual merchants.
- Visa disclosed European Commission proceedings concerning interchange rates and network rules, with potential fines that could be substantial but were not estimable. Visa disputed Visa Europe’s initial position that it was not required to indemnify Visa Inc. for these claims. Related threatened merchant litigation presented similar indemnification uncertainty.
- Visa Europe may exercise a perpetual put requiring Visa to acquire all of Visa Europe. The recorded fair value was $145 million, but the actual purchase obligation could be several billion dollars or more and may require external financing.
- Other risks include competition and technology disruption, transaction-system outages, data compromises, regulation, economic conditions, and settlement risk. Estimated maximum unsettled transaction exposure was $52.1 billion; $3.6 billion was covered by collateral.
Important facts for investors to verify
- Final court approval, appeals, opt-outs, and any takedown payment under the interchange MDL settlement.
- Whether fiscal 2013 revenue, incentive, free-cash-flow, tax-rate, and marketing expectations were achieved.
- Trends in U.S. debit activity and the effects of Dodd-Frank-related pricing, routing, and client incentives.
- Developments in European interchange proceedings, Visa Europe indemnification disputes, and the put-option exposure.
- Operating cash flow and liquidity after litigation-related tax and settlement effects, as well as the pace of repurchases and dividends.