Yesterday, Visa Inc.’s (V) fiscal fourth quarter 2010 (ended September 30, 2010) operating earnings of 95 cents per Class A common share were in line with the Zacks Consensus Estimate but came in substantially ahead of 74 cents reported the year-ago quarter on lower share count.
Visa’s GAAP net income for the quarter came in at $774 million or $1.06 per share, dramatically increasing 50.6% from $514 million or 69 cents per share in the year-ago quarter. Operating income substantially increased 28.1% year over year to $1.11 billion. Total GAAP operating expenses for the reported quarter decreased about 1% year over year to $1.0 billion.
Total operating revenues for the reported quarter were $2.12 billion, up 26.7% from $1.88 billion in the year-ago quarter and higher than the Zacks Consensus Estimate of $2.08 billion. While growth was driven by strong performance across segments, currency fluctuations contributed a positive 1% to the top line.
Service revenues increased 12.9% year over year to $912 million and are recognized based on payment volume in the prior quarter. All other revenue categories are recognized based on current quarter activity.
Data processing revenues rose 15.5% over the prior-year period to $840 million. International transaction revenues, which are driven by cross-border payments volume, grew 22.1% over the prior-year quarter to $619 million. Other revenues, which include the Visa Europe licensing fee, were $167 million, marginally up 2.5% over the year-ago quarter. Volume and support incentives, which are a contra-revenue item, were $421 million, representing 17% of gross revenues.
On a constant dollar basis, payments volume increased 14% year over year to $828 billion. Total processed transactions carrying the Visa brand increased 16% year over year to 12.1 billion. Cross border volume, on a constant dollar basis, grew 16% year over year.
Fiscal 2010 Highlights
For full fiscal 2010, Visa reported operating earnings of $3.91 per share compared with $2.92 per share in fiscal 2009, though only a cent higher than the Zacks Consensus Estimate of $3.90 per share. GAAP net income increased 26% year over year to $3.0 billion or $4.01 per share.
Total operating revenues increased 16.7% year over year to $8.07 billion, which is also higher than the Zacks Consensus Estimate of $8.02 billion. Currency fluctuations contributed a positive 1% to the top line. Total GAAP operating expenses increased 3% over fiscal 2009 to $3.5 billion. Total processed transactions carrying the Visa brand increased 14% year over year to 45.4 billion.
As of September 30, 2010, cash and equivalents, restricted cash and available-for-sale investment securities were $6.0 billion, almost flat from the year-ago period, and including $1.9 billion of restricted cash for litigation escrow. Visa’s operating cash flow improved dramatically to $2.7 billion from $558 million at the end of fiscal 2009, while total shareholders’ equity was recorded at $25.0 billion, up from $23.2 billion as of September 30, 2009.
Share Repurchase Update
Concurrent with the earnings release, the board of Visa announced the authorization of a new $1.0 billion share buyback program, which is expected to be completed by September 30, 2011, but could be expanded or extended depending on the market conditions and the board’s approval.
Besides, during the reported quarter, Visa bought back 4.6 million shares of Class A common stock at an average price of $72.29, thereby completing its $1.0 billion share repurchase plan commenced in October 2009. Visa bought back 12.9 million shares at an average price of $77.48.
Guidance
For fiscal 2011, Visa anticipates annual net revenue growth in the range of 11%-15%; annual operating margin of about 60%; GAAP tax rate of 36.5%-37.0% and capital expenditures of $250-$275 million.
Further, the company re-affirmed its volume and support incentives to be in the range of 16.0%-16.5% of gross revenue; advertising, marketing and promotional expenses to be less than $900 million; annual earnings per share growth to surpass 20% and annual free cash flow to exceed $3 billion in fiscal 2011.
Dividend Update
On October 20, Visa increased its quarterly dividend by a substantial magnitude of 20%, thereby increasing it to 15 cents from the prior 12.5 cents. The newly raised dividend will be paid on December 7, 2010, to the company’s Class A, Class B and Class C common shareholders on record as of November 19, 2010.
This is the second consecutive dividend increment, raising its annual dividend to 60 cents from 50 cents. In 2009, Visa increased its annual dividend by about 19% from 2008, thereby hiking it annually from 42 cents to 50 cents.
Comparison with Competitors
Rival card company American Express Co. (AXP) reported third quarter operating income of 90 cents per share on October 21, well ahead of the Zacks Consensus Estimate of 85 cents and year-ago earnings of 54 cents.
Another peer, Discover Financial Services (DFS) also reported a third quarter profit from continuing operations of 47 cents per share on September 20, well ahead of the Zacks Consensus Estimate of 35 cents. However, this was below the $1.07 per share recorded in the year-ago quarter.
Visa’s prime competitor, MasterCard Inc. (MA) is slated to report its third quarter earnings before market opens on November 1, 2010.
Our Take
Visa continues to drive growth through increased payment volumes along with consistent growth in processed transactions. The company benefits from strong secular demand growth, meaningful international exposure, high barriers to entry, excellent pricing power and impressive operating leverage.
Although regulatory compliances as a result of the ongoing financial overhaul reform in the U.S. and litigation could weigh on the financials of the company in fiscal 2011 and ahead, Visa has been delivering growth by minimizing expenses, generating strong cash flow and maintaining a healthy capital position.
Nevertheless, the CyberSource acquisition in fiscal 2010 is part of Visa’s long-term growth strategy, which would provide greater exposure in the rapidly developing eCommerce industry.
Hence, we maintain a Neutral recommendation on Visa with a Zacks Rank #3 for the short term.
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