Visa Inc. — Form 10-Q Summary
Business context and reporting period
Visa is a global payments technology company operating the VisaNet network; it does not issue cards or extend credit. This unaudited report covers the three months ended December 31, 2016, Visa’s fiscal first quarter of 2017. Visa Europe, acquired in June 2016, is included in this quarter’s results but not in the prior-year reported results, affecting comparability.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Net operating revenue | $4.461 billion | $3.565 billion | +25% |
| Operating income | $3.100 billion | $2.396 billion | +29% |
| Net income | $2.070 billion | $1.941 billion | +7% |
| Diluted Class A EPS | $0.86 | $0.80 | +7.5% |
| Cash from operating activities | $2.508 billion | $1.979 billion | +$529 million |
- Revenue components: service revenue $1.918 billion (+17%); data processing $1.892 billion (+28%); international transaction revenue $1.489 billion (+44%); other revenue $203 million (+2%); client incentives reduced revenue by $1.041 billion, up 32% from $788 million.
- Operating expenses were $1.361 billion, up 16%, primarily reflecting Visa Europe. Operating margin was approximately 69.5%, versus 67.2% in the prior-year quarter.
- Interest expense was $140 million versus $29 million, mainly due to the $16.0 billion senior-note issuance in December 2015. Other non-operating income was $19 million versus $272 million; the prior-year result included a $255 million non-cash gain from revaluing the Visa Europe put option.
- Effective tax rate was 31% versus 26%. Adjusted for the prior-year put-option gain, Visa reported adjusted prior-year net income of $1.686 billion and diluted EPS of $0.69; on that non-GAAP basis, both net income and EPS increased 23%.
- Cash and cash equivalents were $5.824 billion at quarter-end. Investing cash outflow was $417 million and financing cash outflow was $1.730 billion. The company repurchased $1.893 billion of shares and paid $399 million in dividends.
- Total debt carrying value was $16.451 billion, including $2.313 billion classified as current debt. Cash, cash equivalents, and short- and long-term available-for-sale securities held by foreign subsidiaries totaled $9.0 billion; repatriation of most undistributed foreign earnings could incur U.S. tax.
Operating trends and changes versus prior period
- Management attributed revenue growth to Visa Europe, continued growth in processed transactions and nominal payments volume, partly offset by higher client incentives. Currency movements, partly mitigated by hedging, reduced revenue growth by 3 percentage points.
- VisaNet processed 27.329 billion transactions, up 44%, including Visa Europe. Nominal payments volume for the three months ended September 30, 2016, the volume period used to assess current-quarter service revenue, was up 47% overall; the increase included Visa Europe and was particularly strong internationally.
- Management described global economic growth as uneven. It cited higher personnel costs, marketing investment supporting growth strategies and new products, and increased general and administrative costs associated with business growth.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management stated projected liquidity sources should meet projected needs for more than 12 months and that operating cash flow, investments, and borrowing access were expected to support ongoing needs.
- Visa intends to refinance the $1.8 billion principal payment due on its 2017 notes before maturity, market conditions permitting. Its $4.0 billion credit facility was extended in January 2017 to expire January 27, 2022. Visa expected to continue quarterly cash dividends subject to board approval.
- Legal matters include U.S. interchange multidistrict litigation, where plaintiffs sought Supreme Court review after a prior settlement was vacated, and European merchant interchange claims. A U.K. merchant trial that began in November 2016 was expected to continue through February 2017; more than 30 additional merchants had threatened similar proceedings.
- Accrued litigation was $994 million, including $978 million for U.S. covered litigation. The U.S. litigation escrow held $1.028 billion. Visa also recorded $128 million in equity as a right to recover for Visa Europe territory covered losses; preferred-stock conversion rates had not been adjusted during the quarter. Visa cautioned that judgments or settlements could materially affect results, financial position, or cash flows, and some proceedings lack estimable loss ranges.
- Other exposures include an estimated maximum settlement exposure of $68.7 billion for the quarter, partly supported by collateral, and ongoing tax examinations and uncertain tax positions. Visa was also cooperating with a Korean competition investigation into pricing changes. The FTC closed its investigation regarding EMV chip debit cards.
- Visa early adopted share-based payment accounting guidance, recording $26 million of excess tax benefits in income taxes. Management reported no significant change in market risks and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported growth reflects Visa Europe’s inclusion versus underlying comparable-business growth, and how yields and client incentives evolve.
- The timing and financing of the $1.8 billion 2017 note maturity, and the company’s debt, cash, and foreign-held liquidity position.
- Developments in U.S. and European interchange litigation, including potential losses beyond recorded accruals and the effect of European covered losses on preferred-stock conversion rates.
- Whether foreign exchange, tax-credit restrictions, tax examinations, or changes in client incentives materially affect future results.
- Capital allocation execution: remaining share-repurchase authorization was approximately $3.9 billion at December 31, 2016; the next declared quarterly dividend was $0.165 per Class A share.