Visa Inc. — Q1 FY2010 Form 10-Q
Reporting period: Unaudited quarter ended December 31, 2009; comparisons are with the quarter ended December 31, 2008 unless stated otherwise. Visa operates a global electronic payments network and provides payment-processing services; it does not issue cards or set cardholder interest rates.
Financial results and position
Amounts are in millions of dollars except per-share data. Revenue and expense figures are for the three months ended December 31.
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Operating revenues | $1,960 | $1,739 | +13% |
| Operating income | $1,217 | $966 | +26% |
| Operating margin | 62.1% | 55.6% | +6.5 percentage points |
| Net income attributable to Visa | $763 | $574 | +33% |
| Net margin | 38.9% | 33.0% | +5.9 percentage points |
| Diluted EPS, Class A | $1.02 | $0.74 | +38% |
| Cash from operating activities | $(29) | $185 | Down $214 |
- Data processing revenue rose 38% to $765, principally reflecting 12% growth in processed transactions and pricing changes. International transaction revenue rose 9% to $552; service revenue rose 4% to $827. Volume and support incentives, deducted from revenue, increased 39% to $374.
- VisaNet processed 10.924 billion transactions, up 12%. Payment-volume data used for service revenue relates to the prior quarter ended September 30, 2009: nominal payments volume increased 3% overall, with consumer debit up 8%, consumer credit up 1%, and commercial and other down 3%.
- Operating expenses fell 4% to $743. This included a $43 litigation-provision credit, primarily reflecting a $41 pretax gain on prepayment of the Retailers’ litigation obligation and releases of other accruals. The effective tax rate fell to 37% from 40%, partly due to geographic income mix and Singapore tax incentives.
- Cash and cash equivalents were $4.160 billion at December 31, down from $4.617 billion at September 30. Restricted litigation escrow was $1.645 billion ($1.365 billion current and $280 million long-term). Total debt was $53 million, comprising $12 million current and $41 million long-term, versus $56 million at September 30.
- Operating cash flow was negative despite $763 million net income, primarily because of the $682 million Retailers’ litigation prepayment and other operating cash movements. Investing cash flow was positive $22 million; financing cash flow was negative $452 million, including $432 million of share repurchases and $93 million of dividends.
- Total assets were $31.715 billion and total liabilities $8.238 billion at December 31. The company reported $23.477 billion of total equity.
Material changes and capital allocation
- Revenue growth reflected moderate payment-volume growth, more processed transactions, pricing changes and foreign-exchange effects; higher customer incentives partly offset revenue gains. U.S. operating revenue increased 18%, rest-of-world revenue 6%, while Visa Europe revenue declined 4%.
- Visa prepaid the remaining $800 million Retailers’ litigation obligation for $682 million in October 2009, satisfying the obligation and generating the reported pretax gain.
- Under a $1 billion repurchase authorization, Visa bought 5.5 million Class A shares for $432 million at an average $78.78 per share; approximately $568 million remained authorized at quarter-end. The company paid $93 million in quarterly dividends and declared a further $0.125 per-share dividend for payment in March 2010.
- In January 2010, Visa received a further $66 million distribution from the Reserve Primary Fund and reported that a $16 million pretax gain would be recorded in Q2 FY2010. The company said the distribution substantially represented its remaining pro-rata ownership, subject to a reserve for fund expenses and claims.
Outlook, commentary and risks
- Management expects soft economic conditions to continue moderating consumer and commercial spending and near-term payment-volume growth. It cited the ongoing shift to electronic payments, particularly debit, as a potential buffer. U.S. regulatory measures expected to take effect in Q2 FY2010 could affect financial-institution customers and, if credit offerings contract, consumer spending and Visa volumes.
- Management believes projected liquidity sources should meet needs for more than 12 months. It expected capital expenditures to increase in the remaining quarters of FY2010 and anticipated higher advertising spending in Q2 and Q3 for the 2010 Winter Olympics and FIFA World Cup.
- Visa Europe holds a perpetual put option exercisable at its discretion that could require Visa to acquire all Visa Europe shares. The recorded fair value was $346 million, but the potential purchase price could be several billion dollars or more; Visa said financing could be needed. The recorded fair value is not an estimate of the eventual purchase price.
- Visa’s settlement-loss indemnification to customers is unlimited. Estimated maximum settlement exposure was $43.8 billion at December 31, of which $3.9 billion was covered by customer collateral; total collateral maintained was $4.595 billion. The estimated fair value of the guarantee was less than $1 million.
- Accrued litigation was $929 million at quarter-end. Visa disclosed multiple ongoing proceedings and state attorney general information demands concerning merchant acceptance policies. It said some claims have uncertain or unestimable damages; future judgments, fines or settlements could materially affect results, financial position or cash flows. The company stated it believed it had strong defenses.
- Management reported no significant change in market-risk exposure and said disclosure controls were effective, with no material quarter-period change in internal control over financial reporting.
Investor verification points
- Verify how sustainable the sharp increase in data-processing revenue and operating margin is, including the effects of pricing and customer incentives.
- Assess the underlying operating cash generation separately from litigation payments, incentive payments and settlement-related working-capital movements.
- Review the potential scale and funding implications of the Visa Europe put option; the $346 million recorded fair value does not cap the possible purchase price.
- Track litigation accruals, escrow balances, the customer settlement guarantee exposure and the outcomes of pending proceedings and regulatory inquiries.
- Confirm the timing and effect of remaining authorized repurchases, dividends, planned capital expenditures and the Reserve Primary Fund distribution.