Visa Inc. 10-Q Summary
Business context and period: Visa is a global payments technology and processing network, not a bank or card issuer. This unaudited report covers the quarter and nine months ended June 30, 2015, the third quarter of fiscal 2015. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2015 | Year-over-year change | Nine months ended June 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net operating revenue | $3.518 billion | +12% | $10.309 billion | +9% |
| Operating income | $2.262 billion | +12% | $6.781 billion | +10% |
| Operating margin | 64.3% | Versus 64.0% | 65.8% | Versus 64.9% |
| Net income | $1.697 billion | +25% | $4.816 billion | +10% |
| Diluted Class A EPS | $0.69 | +28% | $1.96 | +14% |
Revenue growth reflected higher transaction processing and payment volumes, select pricing changes, and increased international transaction revenues. Processed transactions rose 8% in the quarter and 10% for the nine-month period. Nominal payments volume grew 5% and 8%, respectively, in the comparable periods reported through March 31. A stronger U.S. dollar reduced revenue growth by approximately 3 percentage points for the quarter and 2 points for the nine months.
Operating expenses increased 11% for the quarter and 6% for the nine months. Higher personnel costs, technology-related depreciation and amortization, and general and administrative expenses were partly offset by lower marketing and network-processing costs. Operating margin improved modestly.
Reported quarterly net income included a $110 million non-cash, non-operating expense from revaluing the Visa Europe put option. Excluding that item, Visa reported non-GAAP adjusted net income of $1.807 billion and adjusted diluted Class A EPS of $0.74, up 33% and 36%, respectively. For nine months, adjusted net income was $4.926 billion and adjusted diluted EPS was $2.00, up 13% and 16%. These are company-defined non-GAAP measures.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $4.850 billion, versus $5.412 billion a year earlier. Visa said cash flow excluding specified litigation-related movements increased to approximately $5.1 billion from $4.6 billion.
- Investing cash outflow was $1.276 billion; financing cash outflow was $3.399 billion. Cash and cash equivalents ended the period at $2.147 billion.
- Total assets were $39.429 billion and total liabilities were $10.802 billion at June 30. The filing reports no borrowings under its $3.0 billion revolving credit facility; Visa said it was in covenant compliance. The filing does not present a material funded-debt balance in the balance sheet.
- Visa repurchased $2.910 billion of Class A shares and paid $885 million in dividends during the nine months. The October 2014 repurchase authorization had $2.8 billion remaining at June 30. A quarterly dividend of $0.12 per as-converted share was declared in July.
- Cash, cash equivalents, and available-for-sale securities held by foreign subsidiaries totaled $6.7 billion. Visa intends to leave most of these funds invested abroad; repatriation of most of the amount could trigger U.S. income taxes, which were not practicably determinable.
Material changes, outlook and risks
- A $280 million tax benefit from resolving uncertain tax positions lowered the quarterly effective tax rate to 22%, versus 33% a year earlier. The nine-month rates were 28% and 29%, respectively. The prior-year period included a separate $189 million tax benefit.
- Management expected client incentives to be at the low end of 17.5%–18.5% of gross revenues for fiscal 2015. It expected currency movements, net of hedges, to reduce full-year revenue growth by about 2.5 percentage points. No broader numerical earnings or revenue guidance is provided in the supplied filing text.
- The Visa Europe put option is exercisable at Visa Europe’s discretion. Its recorded fair value was $255 million, but Visa said the potential purchase price under current conditions would likely exceed $15 billion and could require external financing. The valuation depends on significant unobservable assumptions; Visa and Visa Europe were discussing a possible combination, with no assurance of an agreement.
- Visa had $1.097 billion of accrued litigation liabilities and $1.143 billion in litigation escrow. The filing describes continuing interchange-related merchant opt-out cases and other litigation; Visa had reached settlements with merchants representing approximately 27% of opted-out Visa-branded sales volume. The company says outcomes and potential losses in some matters remain uncertain.
- Other cited risks include regulation of interchange and payments, litigation and tax proceedings, foreign-exchange and economic conditions, competition and technological change, transaction-system disruption, data breaches and fraud, and the possibility of a Visa Europe transaction.
Management stated that projected liquidity sources should cover needs for more than 12 months. It also reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Investor verification priorities
- Assess the sustainability of revenue and EPS growth after separating the $280 million tax benefit and the Visa Europe put-option revaluation.
- Track foreign-exchange effects, payment and processed-transaction growth, and whether client incentives remain within management’s stated range.
- Review developments in interchange litigation, settlement payments, and the adequacy of litigation accruals and escrow.
- Evaluate the potential size, timing, financing needs, and negotiation status of any Visa Europe transaction or put-option exercise.
- Confirm capital-return pace, remaining repurchase authorization, and liquidity available after considering foreign-held funds and potential tax costs of repatriation.