Business context and reporting period
Visa Inc. is a global payments technology and processing network; it does not issue cards or set cardholder fees or interest rates. This unaudited Form 10-Q covers the fiscal second quarter and six months ended March 31, 2010, compared with the corresponding 2009 periods. Unless stated otherwise, financial figures are in U.S. dollars.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $1.959 billion, up 19% | $3.919 billion, up 16% |
| Operating income | $1.122 billion, up 27% | $2.339 billion, up 27% |
| Operating margin | 57.3%, versus 53.5% | 59.7%, versus 54.6% |
| Net income attributable to Visa | $713 million, versus $536 million | $1.476 billion, versus $1.110 billion |
| Class A diluted EPS | $0.96, versus $0.71 | $1.99, versus $1.45 |
| Operating cash flow | $580 million for six months, versus $418 million | |
| Cash and cash equivalents | $4.560 billion at March 31, versus $4.617 billion at September 30, 2009 | |
| Debt | $50 million total: $12 million current and $38 million long-term, versus $56 million at September 30 |
Six-month capital spending was $79 million; operating cash flow less this spending was approximately $501 million. Cash decreased $57 million over the six months. Total assets were $32.068 billion and total liabilities $8.081 billion. Current assets of $9.115 billion included $1.365 billion of restricted litigation escrow cash, which should not be treated as freely available liquidity. Management said projected liquidity sources should meet needs for more than 12 months.
Material changes and operating drivers
- Quarterly processed transactions rose 14% to 10.648 billion; six-month transactions increased 13% to 21.572 billion. Nominal payments volume increased 14% in the quarter and 8% for six months, with stronger growth outside the U.S.
- Data processing revenue rose 34% for the quarter and 36% for six months, reflecting transaction growth and pricing actions implemented in the second half of fiscal 2009. Management cautioned that this revenue growth rate is not representative of sustainable future growth.
- Quarterly service revenue rose 10% and international transaction revenue 22%. Volume and support incentives, which reduce reported revenue, increased to $372 million for the quarter and $746 million for six months.
- Advertising, marketing and promotion expense increased 22% for the quarter, partly for the Winter Olympics and FIFA World Cup campaigns. Six-month operating expenses rose 3%, while operating income increased 27%.
- The effective tax rate was 36% for both the quarter and six months, compared with 40% in the prior-year periods, primarily due to geographic income mix and Singapore tax incentives.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expected spending and payments-volume growth to improve in the near term if the global recovery continued, and cited the ongoing shift from cash and checks to electronic payments as a growth support.
- Management warned that U.S. regulatory measures effective in the second quarter could prompt financial institutions to restrict credit offerings, potentially affecting consumer spending and payments volume.
- Visa agreed after quarter-end to acquire CyberSource for approximately $2.0 billion in cash, funded from cash on hand. Closing remained subject to customary conditions, including shareholder and regulatory approvals.
- Visa Europe may exercise a perpetual put option requiring Visa to buy its members’ shares. The recorded fair-value liability was $346 million, but the potential purchase price could be several billion dollars or more and may require external financing.
- Visa’s maximum estimated settlement exposure was $46.1 billion, of which $4.0 billion was covered by collateral. Total collateral maintained was $4.804 billion. These figures relate to settlement guarantees and are not recorded as ordinary funded debt.
- Litigation remains a material uncertainty. Accrued litigation was $866 million at March 31; the separate litigation escrow held $1.575 billion. The filing notes that some proceedings have uncertain outcomes and unestimable potential losses.
- A $41 million pre-tax gain from discounting and prepaying the remaining Retailers’ litigation obligation reduced six-month litigation expense. The company paid $682 million to settle the remaining $800 million obligation. A $16 million gain from a Reserve Primary Fund distribution also benefited investment income.
- A pension-plan remeasurement and census update reduced accumulated other comprehensive loss by $96 million pre-tax and reduced pension cost. Management reported no significant change in market risks and stated disclosure controls were effective.
Important facts for investors to verify
- Whether payments-volume and transaction growth continue, and whether data-processing growth moderates as management cautioned.
- How incentive payments and planned marketing spending affect net revenue growth and operating margins.
- The cash impact and closing status of the CyberSource acquisition, alongside ongoing share repurchases and dividends.
- Developments in U.S. regulatory inquiries and litigation, including the adequacy and availability of escrow relative to potential obligations.
- Any change in Visa Europe’s put-option assumptions or exercise likelihood; the $346 million recorded value is not an estimate of the eventual purchase price.
- The quality and sustainability of operating cash flow, considering litigation payments, incentives, and restricted escrow funds.