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Visa Beats but Lawsuit Spoils

MA V

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Visa Inc.’s (V - Analyst Report) fiscal third-quarter 2012 (ended June 30, 2012) operating earnings of $1.56 per Class A common share outpaced the Zacks Consensus Estimate of $1.45. Additionally, the earnings substantially exceeded prior-year quarter’s earnings of $1.26 per share, primarily based on lower share count. Consequently, operating net income escalated 19.5% year over year to $1.06 billion.

However, on GAAP basis, Visa recorded a net loss of $1.84 billion or $2.74 per share against a net income of $1.01 billion or $1.43 per share in the year-ago quarter. The loss was primarily attributable to a litigation settlement payment of $4.1 billion or $4.30 per share, related to the recent multi-district litigation case.

Subsequently, Visa’s operating loss stood at $2.61 billion versus an operating income of $1.35 billion in the year-ago period. Meanwhile, excluding the litigation charge, total operating expenses rose 9.9% year over year to $1.07 million. Effective tax rate was 29.2% in the reported quarter against 32.9% in the year-ago period.

Alongside, total operating revenues for the reported quarter were $2.57 billion, up 10.5 % year over year and breezed past the Zacks Consensus Estimate of $2.54 billion. Growth was driven by strong performance across all segments.

Service revenues increased 15.3% year over year to $1.22 billion 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 spiked 17.4% over the prior-year period to $1.04 billion.

Additionally, International transaction revenues, which are driven by cross-border payments volume, increased 13.0% over the prior-year quarter to $748 million. Other revenues, earned through Visa Europe’s licensing fee, were $175 million, climbing 4.6% over the year-ago quarter. Client incentives, which are a contra-revenue item, came in at $614 million, and accounted for 19.3% of gross revenues.

On a constant dollar basis, payments volume increased 6% year over year to $979 billion. Total processed transactions carrying the Visa brand increased 1% year over year to 13.1 billion. Cross border volume, on a constant dollar basis, grew 14% year over year.

Financial Update

As of June 30, 2012, cash and cash equivalents, restricted cash and available-for-sale investment securities totaled $9.4 billion, up from $6.9 billion as of September 30, 2011, including $4.28 billion of restricted cash for litigation escrow. Nevertheless, long-term debt remained nil.

Total shareholders’ equity was recorded at $28.16 billion, down from $26.4 billion as of September 30, 2011. Further, Visa’s operating cash flow surged to $3.64 billion in the reported quarter from $3.0 billion as of June 30, 2011.

Stock Update

During the reported quarter, Visa repurchased about 4.0 million class A common shares, at an average price of $115.51 per share, for a total cost of $461 million.

Additionally, the board of Visa also sanctioned a new share repurchase program worth $1.0 billion, which is set to expire by July 2013.

Litigation Update

On July 13, 2012, Visa and MasterCard Inc. (MA - Analyst Report) entered into a formal agreement with the federal court of Brooklyn to settle a multi-state U.S. merchant lawsuit. About 7 million merchants or retailers had charged the card companies in 2005 for fixing prices and unduly increasing processing or interchange fees on transactions made through debit and credit cards.

Accordingly, Visa and MasterCard have agreed to pay about $6.6 billion to the retailers, of which Visa has incurred cash settlement charge of $4.4 billion. This will be paid from the company’s litigation escrow account following Visa’s Retrospective Responsibility Plan (RRP).

Subsequently, on July 24, 2012, Visa deposited $150 million to its litigation escrow account established under its RRP. This deposit has the same economic effect on earnings per share as repurchasing the company's class A common stock as it reduces the as-converted class B common stock share count. On an as-converted basis, Visa’s common stock was reduced to 103.3 million from 104.5 million, while the conversion rate, from class B to class A, was decreased from 0.4254 to 0.4206.

Guidance

Visa also revised its financial outlook for fiscal 2012, and now is anticipating annual earnings per share to grow in the low twenties from the prior high teens-to-low twenties band.

Nonetheless, Visa reiterated other financial projections for 2012. Annual net revenue growth is expected to be in the low double-digits range. The company also continues to estimate annual operating margin of about 60%, capital expenditure within $350–400 million and annual free cash flow of over $4 billion.

Further, the company expects client incentives within the range of 17–18% of gross revenues and marketing expenses to be less than $1.0 billion. While GAAP tax rate is expected within 30–31%, adjusted tax rate is projected within 33–34%.

Dividend Update

On July 19, 2012, the board of Visa declared a quarterly dividend of 22 cents per share of class A common stock payable on September 4, 2012, to the company’s Class A, Class B and Class C common shareholders of record as on August 17, 2012.

Additionally, on June 5, 2012, Visa paid a quarterly dividend of 22 cents per share to the shareholders of record as on May 18, 2012.

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 in the U.S. and litigation settlements are expected to weigh on the financials of the company in fiscal 2012, Visa aims to retain its strength by exploring newer growth avenues that include mobile, eCommerce and money transfer services. Besides, expansion into emerging international markets also supports growth. The company is also generating strong cash flow and maintains a healthy capital position. Visa carries a Zacks Rank #3, implying a short-term Hold rating and long-term Neutral recommendation.

Meanwhile, Visa’s prime peer, MasterCard is scheduled to report its second quarter earnings before the bell on August 1, 2012.

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