Visa Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing also presents unaudited fourth-quarter results. Visa operates a global, open-loop payments network and earns revenue mainly from payment volume, processed transactions, cross-border activity and related services; it does not issue cards or extend cardholder credit.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Operating revenues | $9.188 billion | $8.065 billion | +14% |
| Operating income | $5.456 billion | $4.589 billion | +19% |
| Operating margin | 59.4% | 56.9% | +2.5 percentage points |
| Net income attributable to Visa | $3.650 billion | $2.966 billion | +23% |
| Diluted Class A EPS | $5.16 | $4.01 | +29% |
| Operating cash flow | $3.872 billion | $2.691 billion | +$1.181 billion |
Net margin was approximately 39.7%, versus 36.8% in FY2010. Revenue growth reflected higher payments volume, transaction processing and cross-border activity, pricing changes and acquired businesses. Client incentives, recorded mainly as a reduction to revenue, rose 21% to $1.880 billion.
- Revenue components: service $4.261 billion (+22%); data processing $3.478 billion (+11%); international transactions $2.674 billion (+17%); other $655 million (-8%).
- Nominal payments volume increased 16% to $3.530 trillion for the 12 months ended June 30, 2011; VisaNet processed transactions increased 12% to 50.922 billion.
- Operating expenses rose 7% to $3.732 billion. Personnel expense increased 19%, partly reflecting acquisitions and investment; marketing expense declined 10%.
- Reported net income included $122 million of non-cash income from revaluation of the Visa Europe put option and an $85 million pretax gain on the sale of the CBSS investment. Excluding the put-option revaluation, adjusted net income was $3.528 billion and adjusted diluted EPS was $4.99.
- FY2011 fourth quarter: revenue $2.383 billion, operating income $1.362 billion, net income $880 million and diluted Class A EPS $1.27.
Cash, debt and capital
- Cash and cash equivalents were $2.127 billion at year-end, down from $3.867 billion. Total assets were $34.760 billion and equity was $26.437 billion.
- Current assets were $9.190 billion and current liabilities $3.451 billion (reported current ratio approximately 2.7x). Current assets include restricted litigation escrow cash and customer collateral; these are not freely available for general use.
- Visa had no outstanding debt at September 30, 2011, having prepaid all outstanding debt during September. It also reported no borrowings under its $3.0 billion revolving facility or $500 million commercial paper program.
- Cash provided by operations was $3.872 billion; cash used in investing was $2.299 billion and in financing was $3.304 billion. Financing uses included $2.024 billion of open-market share repurchases, $1.2 billion deposited into litigation escrow and $423 million in dividends.
- Litigation escrow held $2.857 billion at year-end. Visa reported maximum settlement exposure of $47.5 billion, of which $3.2 billion was covered by collateral; the estimated fair-value liability for the settlement guarantee was approximately $1 million.
Changes, outlook and key risks
- Management forecast FY2012 operating-revenue growth in the high-single- to low-double-digit range, client incentives at 17%–18% of gross revenue, marketing expense below $1 billion and capital expenditures of $350–$400 million. It expected U.S. revenue growth momentum to begin recovering in FY2013 and the effective tax rate to decline to 33%–34% in FY2012.
- New U.S. debit rules effective October 1, 2011 capped interchange fees for regulated issuers and required at least two unaffiliated debit networks per card, with merchants able to route transactions across enabled networks. Visa expected pressure on U.S. debit pricing, routing, volume and revenue, plus client contract renegotiations and higher incentives.
- Visa cited a modest global economic recovery and ongoing migration from cash and checks to electronic payments as growth drivers. It pursued digital and mobile expansion through its Fundamo and PlaySpan acquisitions and a broader eCommerce strategy.
- The Visa Europe perpetual put option could require Visa to acquire all of Visa Europe for potentially several billion dollars or more, payable within 285 days of exercise. Its recorded fair value was $145 million; that amount is not an estimate of the potential purchase price.
- Material legal exposure includes merchant interchange litigation, with alleged damages described by plaintiffs as tens of billions of dollars before trebling. Visa stated a loss was reasonably possible but not probable and reasonably estimable; it could not estimate trial losses. The $2.7 billion uncommitted escrow balance was described as consistent with its estimate of the low end of a negotiated settlement.
- Other risks include expanding payment-industry regulation, competitive and client-pricing pressure, cross-border and currency fluctuations, cybersecurity and system outages, client settlement failures, tax examinations and Visa Europe interoperability or indemnity obligations. The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and controls.
Investor verification priorities
- Track the actual revenue and earnings impact of U.S. debit interchange caps, routing rules, contract renewals and rising client incentives against management’s FY2012 outlook.
- Review developments and potential funding needs for interchange and other litigation, including how escrow funds and the retrospective responsibility plan apply.
- Assess the Visa Europe put-option exposure independently of its $145 million carrying value, including potential purchase price, financing and dilution implications.
- Reconcile cash generation with restricted escrow balances, repurchases, dividends, capital spending and the availability of foreign-held funds.
- Check the assumptions behind reported growth and adjusted results, including acquisition contributions, the CBSS gain and non-cash put-option revaluation.