Visa Inc. — Form 10-Q Summary
Business and period: Visa operates a global electronic payments network and provides payment processing services; it does not issue cards or set cardholder interest rates. This unaudited report covers fiscal Q3 and the nine months ended June 30, 2011, compared with the same 2010 periods. Balance-sheet comparisons are to September 30, 2010. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $2.322B | $2.029B | $6.805B | $5.948B |
| Operating income | $1.345B | $1.137B | $4.094B | $3.476B |
| Net income attributable to Visa | $1.005B | $716M | $2.770B | $2.192B |
| Diluted Class A EPS | $1.43 | $0.97 | $3.89 | $2.96 |
| Operating margin | 58.0% | 56.0% | 60.2% | 58.4% |
- Q3 revenue rose 14%; operating income rose 18%; Visa-attributable net income rose 40%. Nine-month revenue increased 14%, operating income 18%, and net income 26%.
- Revenue growth reflected higher payments volume, transaction processing and cross-border activity, pricing changes, and CyberSource contribution. Q3 service revenue rose 21%, data processing 12%, and international transaction revenue 15%; client incentives, which reduce revenue, rose 14% in both the quarter and nine-month period.
- Reported Q3 earnings included $122M of non-cash, non-operating income from a decrease in the estimated fair value of the Visa Europe put option and an $85M pretax gain from selling the CBSS investment. Management’s adjusted figures excluding the put-option revaluation were Q3 net income of $883M and diluted EPS of $1.26; nine-month net income of $2.648B and diluted EPS of $3.72. These are management-adjusted, not reported GAAP results.
- Operating cash flow was $3.004B for the nine months, versus $1.798B; the prior-year period included a $682M payment to settle retailer litigation. Investing cash outflow was $425M and financing outflow was $2.854B. Cash and cash equivalents ended at $3.600B, down from $3.867B at fiscal year-end.
- At June 30, total assets were $34.447B, total liabilities $8.395B, and equity $26.052B. Debt was $35M ($13M current and $22M long-term). Restricted litigation-escrow cash was $2.927B, reported separately from cash and cash equivalents.
Changes, outlook and risks
- Payments volume for the three months ended March 31, 2011—the volume used to calculate Q3 service revenue—increased 16% globally year over year; processed Visa transactions rose 11% in Q3 and 13% for the nine months. CyberSource billable transactions rose 38% for both periods.
- Visa repurchased 37.8M shares effectively for $2.8B in the nine months, including $1.6B of open-market purchases and $1.2B deposited into litigation escrow under the retrospective responsibility plan. It paid $320M in dividends. In July, it authorized a new $1.0B buyback through July 20, 2012, and declared a $0.15-per-share dividend.
- Management expected U.S. debit interchange caps and network-routing rules to pressure U.S. debit revenue, volumes and client pricing through fiscal 2012, with U.S. revenue growth momentum expected to begin recovering in fiscal 2013. U.S. debit revenues affected by regulation represented just over 20% of global net revenue. Management expected operating cash generation to remain sufficient for operating needs and projected liquidity needs for more than 12 months.
- Visa’s perpetual Visa Europe put option could require it to acquire Visa Europe; its $145M fair-value liability is not the potential purchase price, which could be several billion dollars or more and might require external financing. Exercise is at Visa Europe’s discretion.
- Material risks include interchange and merchant-rule litigation, regulatory changes, competition and client contract renegotiations, economic and currency conditions, settlement exposures, processing disruption, data security and fraud, and successful integration of acquisitions. Visa reported maximum estimated settlement exposure of $44.6B, of which $3.1B was covered by collateral. Several legal matters remained unresolved; the company said potential losses were not estimable or probable in many cases. No additional accrual for covered litigation was recorded in fiscal 2011 through June 30.
- Acquisitions of PlaySpan and Fundamo were completed in March and June 2011, respectively; purchase-price allocations were preliminary. Management estimated their fiscal 2011 EPS dilution at $0.04 and $0.01, respectively.
Investor verification priorities
- Assess the sustainability of revenue and EPS growth after excluding the put-option revaluation and CBSS disposal gain, and track client incentives and acquisition contributions.
- Monitor the effect of U.S. debit regulation on routing, client contracts, transaction volumes, pricing and revenue, including management’s fiscal 2013 recovery expectation.
- Review developments in interchange and other legal proceedings, escrow funding and accrued litigation; compare potential obligations with the $2.927B escrow balance.
- Evaluate the Visa Europe put-option exposure and potential funding needs; the recorded fair value is not an estimate of the ultimate purchase price.
- Reconcile cash generation with buybacks, dividends, acquisitions and restricted escrow balances, and verify final acquisition valuations and integration performance.