Visa Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2009. Unaudited results are compared with the periods ended June 30, 2008; balance-sheet figures are compared with September 30, 2008. Visa operates a global electronic payments network.
Key financial results
| Metric | Three months ended June 30, 2009 | Year-over-year change | Nine months ended June 30, 2009 | Year-over-year change |
|---|---|---|---|---|
| Net operating revenue | $1.646 billion | +2% | $5.032 billion | +11% |
| Operating income | $822 million | +27% | $2.669 billion | +59% |
| Net income | $729 million | +73% | $1.839 billion | +59% |
| Class A diluted EPS | $0.97 | vs. $0.51 | $2.41 | vs. $1.44 |
| Operating margin | Approximately 50% | vs. approximately 40% | Approximately 53% | vs. approximately 37% |
Margins are calculated from reported revenue and operating income. Nine-month operating cash flow was $767 million, compared with $257 million a year earlier. Investing activities provided $955 million; financing activities used $2.491 billion. Capital spending on property, equipment and technology was $205 million. Cash and cash equivalents were $4.200 billion at June 30, versus $4.979 billion at September 30, 2008.
Total debt was approximately $98 million ($52 million current and $46 million long-term), compared with $106 million at September 30, 2008. Current assets were $9.562 billion and current liabilities $4.435 billion, including $1.141 billion of current restricted litigation escrow cash and $1.348 billion of current accrued litigation.
Drivers and changes versus prior periods
- Quarterly revenue growth reflected data-processing revenue (+12%), international transaction revenue (+2%), and service revenue (+3%). Volume and support incentives, which reduce revenue, rose to $344 million from $274 million.
- Visa processed 10.266 billion transactions in the quarter, up 8%. Reported payments volume for the three months ended March 31, 2009 (the volume basis for service revenue) declined 5% worldwide: consumer credit fell 10%, while consumer debit grew 4%.
- Operating expenses declined 15% in the quarter and 18% for the nine months. Lower personnel, advertising, professional fees and litigation provisions contributed; network/EDP costs increased.
- Net income benefited materially from a $473 million pretax gain on the sale of Visa’s 10% VisaNet do Brasil investment. The after-tax gain was $237 million. The sale proceeds, approximately $1 billion net of fees, arrived in July and were not included in June 30 cash.
- Reported earnings also benefited from lower litigation provisions: $1 million in the quarter and nine months, versus $50 million and $342 million, respectively, in the comparable 2008 periods. The litigation accrual remained substantial at $2.253 billion at June 30.
Outlook, risks and unusual items
- Management gave no specific numerical revenue or earnings guidance. It expected weak economic conditions to continue moderating consumer and commercial spending and near-term payments-volume growth. Management said the shift toward electronic payments, especially debit, may buffer the impact.
- U.S. legislation enacted during the quarter was scheduled to take effect in February 2010. Management warned that customer responses, including constricted credit offerings, could affect spending and Visa volumes.
- Management said projected liquidity sources should cover needs for more than 12 months. It expected approximately $104 million of pension and postretirement contributions in fiscal 2009, down from $190 million the prior year, but warned that continued market deterioration could require additional contributions.
- Visa’s perpetual Visa Europe put option had a recorded fair value of $346 million, but potential purchase consideration could be several billion dollars or more and could require external financing. Exercise is at Visa Europe’s discretion; the ultimate obligation cannot be reliably estimated.
- Litigation and regulatory matters include merchant interchange/antitrust cases, proceedings in Europe and Canada, intellectual-property claims, and the Reserve Primary Fund recovery action. Visa said outcomes could materially affect results, financial position or cash flows, and many exposures were not reasonably estimable. Visa Europe is obligated to indemnify Visa for specified costs and fines in the European Commission proceeding.
- Visa funded an additional $700 million into its litigation escrow on July 16, 2009, after the quarter end. The filing also reported a declared $0.105-per-share dividend payable September 1, 2009.
- The Reserve Primary Fund balance was $70 million at June 30. Visa estimated a further distribution of about $82 million could result under the proposed pro-rata plan; recovery remained subject to the fund liquidation process.
Most important facts for investors to verify
- How much of earnings growth is sustainable after excluding the $473 million VisaNet do Brasil gain and considering the lower litigation provision.
- Current trends in payments volume, transaction growth, cross-border activity, incentives and customer pricing, particularly as economic conditions and U.S. legislation affect spending and credit.
- Progress and potential costs of interchange, antitrust, regulatory and other legal proceedings, alongside the adequacy and timing of litigation reserves and escrow funding.
- The possible timing and scale of a Visa Europe put exercise and the financing implications of a multi-billion-dollar payment.
- Actual recovery from the Reserve Primary Fund, cash generation after litigation and incentive payments, and any change to management’s liquidity or pension-funding expectations.