VISA INC. annual report, FY2015

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Visa Inc. Form 10-K Summary

Business context and reporting period

Visa is a global payments technology company operating VisaNet, an electronic payments processing network, in more than 200 countries and territories. It does not issue cards, extend credit, or set cardholder rates and fees. This 10-K reports the fiscal year ended September 30, 2015; quarterly figures below identify the quarter ended September 30, 2015.

Financial performance and liquidity

  • Fiscal 2015: Operating revenue was $13.88 billion, up 9% from $12.70 billion. Net income was $6.33 billion, up 16%, and diluted Class A EPS was $2.58, up 20%.
  • Profitability: Operating income was $9.06 billion, versus $7.70 billion; reported operating margin was 65%, versus 61%. Fiscal 2015 adjusted net income was $6.44 billion and adjusted diluted EPS was $2.62. Fiscal 2014 adjusted operating margin was 64%.
  • Revenue drivers: Service revenue rose 9% to $6.30 billion; data processing revenue rose 7% to $5.55 billion; international transaction revenue rose 14% to $4.06 billion. Client incentives, recorded mainly as a revenue reduction, increased 10% to $2.86 billion.
  • Volume and transactions: Payments volume grew 7% nominally (13% in constant dollars) for the 12 months ended June 30, 2015. VisaNet processed 70.97 billion transactions during fiscal 2015, up 9%. A stronger U.S. dollar reduced reported revenue growth by about 2.5 percentage points.
  • Fiscal fourth quarter: Revenue was $3.57 billion, operating income $2.28 billion, net income $1.51 billion, and diluted Class A EPS $0.62. In the year-earlier quarter, these were $3.23 billion, $1.55 billion, $1.07 billion, and $0.43, respectively; the prior-year quarter included a $450 million litigation provision.
  • Cash flow: Operating cash flow was $6.58 billion, down from $7.21 billion. Management said operating cash flow excluding specified litigation-related effects was approximately $6.9 billion, versus $6.5 billion in fiscal 2014. Investing cash outflow was $1.44 billion and financing cash outflow $3.60 billion. Cash and cash equivalents ended the year at $3.52 billion.
  • Balance sheet and debt: Total assets were $40.24 billion, total liabilities $10.39 billion, and equity $29.84 billion. Current assets were $10.89 billion versus current liabilities of $5.37 billion. Visa had no commercial paper outstanding and no borrowings under its $3.0 billion revolving credit facility at year-end.
  • Capital returns: Visa repurchased 44 million shares for $2.91 billion and paid $1.18 billion in dividends. The annual dividend was $0.48 per share, following a four-for-one Class A stock split during the year.

Material changes and unusual items

  • Reported operating expenses declined 4% to $4.82 billion, mainly because fiscal 2014 included the $450 million litigation provision. Excluding that provision, fiscal 2015 expenses increased 6%, reflecting personnel, technology depreciation, and general and administrative costs.
  • Fiscal 2015 included a $296 million tax benefit from resolutions of uncertain tax positions, including $239 million relating to prior years. The effective tax rate was 30%. Fiscal 2014 also included a tax benefit related to the U.S. domestic production activities deduction.
  • A $110 million non-cash expense reflected remeasurement of the Visa Europe put option. Its fair value was $255 million at September 30, 2015, but Visa cautioned that this was not the potential purchase price under the option’s then-unamended terms.
  • Visa paid $426 million from the litigation escrow account during fiscal 2015 for settlements with opt-out merchants. The year-end accrued litigation balance was $1.02 billion, largely related to U.S. covered litigation.
  • In November 2015, after fiscal year-end, Visa agreed to acquire Visa Europe for up to €21.2 billion, subject to approvals and other conditions. Consideration includes €11.5 billion cash, preferred stock valued at approximately €5.0 billion, and contingent cash of up to €4.0 billion plus potential interest. Visa expected closing in fiscal Q3 2016.

Outlook, commentary, and risks

  • Management cited uneven, tepid economic growth but continued expansion in payments volume and processed transactions. It expects growth opportunities from the global shift to electronic payments, digital commerce, and new products.
  • Visa expected the Visa Europe acquisition to be mildly accretive to adjusted EPS in fiscal 2017, before one-time integration costs. It planned to issue $15–$16 billion of senior unsecured debt in the first half of fiscal 2016 to fund the cash consideration and support share repurchases; expected initial gross debt to EBITDA was 1.4–1.5 times.
  • Key business risks include regulation of interchange and transaction routing, competitive pressure on client pricing and incentives, competition from alternative and mobile payment providers, and slower cross-border activity or adverse foreign-exchange movements.
  • Material legal and contingent exposures include U.S. merchant interchange litigation and opt-out claims, European interchange proceedings and merchant claims, tax examinations, and settlement guarantees to financial institution clients. Visa’s estimated maximum settlement exposure was $43.5 billion; collateral covered $2.2 billion of exposure at year-end. Management reported minimal historical losses, but the indemnification can expose Visa to substantial liquidity risk in a severe client failure.
  • Other risks include cyberattacks, data breaches, processing interruptions, and failure to maintain interoperability with Visa Europe. In Russia, domestic transactions had been transferred to a government-owned processor. Visa also reported an Australian court-ordered penalty of AUD 18 million plus AUD 2 million costs in a dynamic currency conversion matter.
  • Management stated projected liquidity sources were sufficient for needs beyond the next 12 months. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.

Investor verification priorities

  • Track the Visa Europe transaction’s closing, financing terms, integration costs, expected synergies, preferred-share conversion and dilution, and contingent consideration.
  • Monitor the appeals and opt-out settlements in U.S. interchange litigation, remaining escrow funds, and the adequacy of accrued litigation and related protections.
  • Assess whether payments-volume and transaction growth can continue to offset rising client incentives, pricing pressure, foreign-exchange headwinds, and regulatory limits.
  • Review the resolution of U.S., Canadian, and European litigation and tax disputes, including the potential scope of unreserved claims.
  • Verify future debt issuance, leverage, credit ratings, cash availability, and the sustainability of repurchases and dividends after the planned acquisition.