Visa Inc. — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018. Visa operates a global electronic payments network across more than 200 countries and territories; it does not issue cards or extend credit. Financial amounts are in U.S. dollars.
Financial performance and position
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Net operating revenues | $5.073 billion, up 13% | $9.935 billion, up 11% |
| Operating income | $3.336 billion | $6.663 billion |
| Operating margin | Approximately 65.8%, calculated | Approximately 67.1%, calculated |
| Net income, reported | $2.605 billion | $5.127 billion |
| Diluted Class A EPS, reported | $1.11 | $2.19 |
| Net income, adjusted (non-GAAP) | $2.605 billion, up 26% | $5.141 billion, up 24% |
| Diluted Class A EPS, adjusted (non-GAAP) | $1.11, up 30% | $2.19, up 28% |
- Revenue growth reflected higher payments volume and processed transactions, as well as cross-border growth. Service revenue rose 13% and data processing revenue rose 15% in the quarter; international transaction revenue rose 19%.
- Processed transactions increased 12% in both the quarter and six-month period. Nominal payments volume grew 13% in the quarter and 11% over the six-month period; foreign exchange movements contributed about 1.5 percentage points to net revenue growth.
- Quarterly operating expenses were $1.737 billion, up 4%; six-month expenses were $3.272 billion, up 8%. Personnel, marketing, network investment and professional fees increased. Prior-year general and administrative expense included a $192 million non-recurring Visa Foundation share donation charge.
- Six-month cash from operations was $5.582 billion, versus $2.904 billion a year earlier. Investing used $1.137 billion, versus providing $2.268 billion; financing used $6.383 billion, versus $4.243 billion. Cash and cash equivalents ended at $8.142 billion, down from $9.874 billion at September 30, 2017.
- At March 31, 2018, total assets were $69.042 billion, current assets $18.536 billion and current liabilities $9.551 billion. Long-term debt was $16.624 billion, with no current maturities; total liabilities were $34.939 billion.
Changes versus prior comparable periods
- Reported net income and EPS rose sharply versus Q2 FY2017, when results included a $1.5 billion non-cash tax provision related to the Visa Europe reorganization. The adjusted comparison is more indicative of underlying growth: quarterly adjusted net income increased 26%, and six-month adjusted net income increased 24%.
- FY2018 six-month reported results include provisional Tax Act impacts: an estimated $1.133 billion non-cash deferred-tax remeasurement benefit and an estimated $1.147 billion transition-tax expense. The company said the related accounting remained provisional.
- Visa repaid $1.75 billion of notes in October 2017. Six-month interest expense increased 12% to $307 million, primarily reflecting debt issued in September 2017.
- Visa repurchased 33 million Class A shares for $3.85 billion in the six-month period and reported $7.5 billion of remaining authorized repurchases at March 31. It paid $948 million in dividends during the period.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the filing. Management cited continued economic growth, growth in electronic payments and ongoing investments for growth. It stated that projected liquidity sources should cover needs for more than 12 months.
- The company expects to adopt the new revenue-recognition standard on October 1, 2018. It anticipated changes primarily to timing and classification of certain client incentives; applying it to existing contracts through March 31 would not have had a material impact.
- Legal proceedings remain a material uncertainty. The litigation accrual was $830 million, including $828 million for U.S. covered litigation; the U.S. litigation escrow held $884 million. Visa disclosed ongoing U.S. merchant matters, more than 200 outstanding UK merchant claims, and European Commission proceedings. The company stated that outcomes and potential losses in some matters cannot be reasonably estimated.
- Visa’s estimated maximum settlement exposure was $72.7 billion during the quarter; $2.7 billion was covered by collateral at March 31. The company reported historically minimal losses but said future obligations under settlement guarantees could be material and are not determinable.
- Other risks include uncertain final tax determinations, currency movements, economic and consumer-spending conditions, and client incentives that vary with contract terms and performance. The filing reported effective disclosure controls and no significant change in market-risk disclosures.
Investor verification priorities
- Separate operating growth from the substantial prior-year tax charge and current-year Tax Act adjustments; review both GAAP and non-GAAP reconciliations.
- Track whether transaction, payments-volume and cross-border growth persist, and assess the contribution of foreign exchange to reported revenue growth.
- Review final Tax Act accounting, including transition-tax and deferred-tax estimates, and the impact of future tax provisions.
- Monitor legal developments, especially UK merchant claims, U.S. merchant litigation and European Commission investigations, alongside the litigation accrual and escrow balance.
- Assess capital allocation and liquidity after buybacks, dividends and debt repayment, and monitor the substantial settlement-guarantee exposure relative to collateral.