Visa Inc.‘s (V) fiscal third-quarter earnings of 97 cents per share were substantially ahead of the Zacks Consensus Estimate of 93 cents.
Visa’s GAAP net income for the quarter came in at $716 million, marginally down 1.8% from $729 million in the year-ago quarter. However, operating income substantially increased 38.3% year over year to $1.14 billion. Total operating revenues for the reported quarter were $2.03 billion, up 23.3% from $1.65 billion in the year-ago quarter.
Service revenues increased 13.5% year over year to $873 million and are recognized based on payments volume in the prior quarter. All other revenue categories are recognized based on current quarter activity. Data processing revenues rose 30.9% over the prior year period to $792 million.
International transaction revenues, which are driven by cross-border payments volume, grew 25.3% over the prior year quarter to $574 million. Other revenues, which include the Visa Europe licensing fee, were $183 million, up 15.8% over the year-ago quarter. Volume and support incentives were $393 million, representing 16% of gross revenue.
On a constant dollar basis, payments volume increased 14% year over year to $803 billion. Total processed transactions carrying the Visa brand increased 14% year over year to 11.7 billion. Cross border volume, on a constant dollar basis, grew 17% year over year.
Total GAAP operating expenses for the reported quarter increased 8% year over year to $892 million. The increase was primarily a result of rising communication, marketing, depreciation and personnel expenses.
As of June 30, 2010, cash and equivalents, restricted cash and available-for-sale investment securities were $7.4 billion, which includes $1.9 billion of restricted cash for litigation escrow. Visa’s operating cash flow substantially improved to $1.8 billion while total shareholders’ equity was recorded at $24.68 billion.
Business Update
On July 21 2010, Visa closed the acquisition of CyberSource Corporation, a leading provider of electronic payment, risk management and payment security solutions to online merchants, for a cash payment of approximately $2.0 billion, valuing at $26 per share. With over 295,000 merchants and clients (including British Airways, Home Depot, Facebook, Google Inc. (GOOG)), CyberSource processes approximately 25% of all eCommerce dollars transacted in the U.S.
Guidance
For fiscal 2010, Visa reiterated its annual net revenue growth projections in the range of 11-15%; annual operating margin in the mid to high 50% range; the GAAP tax rate was revised to be in the range of 37-38%; and capital expenditures of about $200 million. Further, the company re-affirmed its volume and support incentives to be in the range of 16-17% of gross revenue; advertising, marketing and promotional expenses to be less than $1 billion; annual earnings per share growth of greater than 20% and annual free cash flow to exceed $2 billion in fiscal 2010.
For fiscal 2011, Visa continues to project that annual earnings per share growth will exceed 20% and annual free cash flow to surpass $2 billion.
Dividend Update
On July 22, the Board of Visa announced a quarterly dividend of $0.125 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis), which will be paid on September 1, 2010 to all holders of record as of August 13, 2010.
Our Take
The results for the reported quarter primarily benefited from transaction growth, driven by Visa’s payments network and processing capabilities. Also, the ongoing economic recovery and new U.S. regulations have led to increased use of debit cards along with the improvement in the credit card industry. As a result, revenue and operating income rose across all categories. Growth in data processing and international transaction revenues was significant during the reported quarter. In addition, Visa has delivered growth by generating strong cash flow and maintaining a healthy capital position.
However, Visa is being challenged by higher expenses and the new regulatory compliances for debit cards, compelling Visa to snip its debit processing fees, as a result of the ongoing financial overhaul reform in the U.S. The impact of the new regulation is expected to be more severe on Visa than its peers such as MasterCard Inc. (MA) since the former is more exposed to the debit processing market and generates a chunk of the revenue from there. Hence, it is likely to put Visa through a bumpy ride in the upcoming quarters.
Nevertheless, the recent CyberSource acquisition is a part of Visa’s long-term growth strategy, which would provide greater exposure in the rapidly-developing eCommerce industry. This is not only expected to boost revenue growth but will also increase the company’s merchant and clientele base across the globe, ensuring reduction in monetary loss from fraud. It would also provide them with fast and efficient connectivity to multiple payment networks. Hence, CyberSource is expected to be a feather in Visa’s cap in the long run.
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