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Mark Vickery

Visa Exits Fiscal 2012 Fairly


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Visa Inc.’s (V - Analyst Report) fiscal fourth-quarter 2012 (ended September 30, 2012) operating earnings of $1.54 per Class A common share came in modestly ahead of the Zacks Consensus Estimate of $1.50. Additionally, the earnings substantially exceeded prior-year quarter’s earnings of $1.27 per share, primarily due to lower share count. Consequently, operating net income escalated 13.6% year over year to $1.0 billion.

Meanwhile, on a GAAP basis, Visa recorded a net income of $1.66 billion or $2.47 per share. This included the reversal of a previously recorded special item related to tax reserves that inflated the net income by $627 million.

Alongside, total operating revenues for the reported quarter were $2.73 billion, up 14.6% year over year and topped the Zacks Consensus Estimate of $2.67 billion. Growth was driven by strong performance across all segments.

Service revenues increased 14.4% year over year to $1.26 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 14.8% over the prior-year period to $1.06 billion.

Additionally, International Transaction revenues, which are driven by cross-border payments volume, climbed 5.0% over the prior-year quarter to $796 million. Other revenues, earned through Visa Europe’s licensing fee, were $172 million, marginally improving from $171 million in the year-ago quarter. Client Incentives, which are a contra-revenue item, came in at $563 million, and accounted for 17.1% of gross revenues.

On a constant dollar basis, payments volume increased 6% year over year to $1.0 trillion. Total processed transactions carrying the VisaNet brand increased 2% year over year to 14.0 billion. Cross border volume, on a constant dollar basis, grew 10% over prior-year quarter.

However, total operating expenses surged 18.4% year over year to $1.21 billion. Subsequently, Visa’s operating income stood at $1.52 billion versus $1.36 billion in the year-ago period.

Full-Year Highlights

For full-year of fiscal 2012, Visa reported operating earnings of $6.20 per Class A common share beat the Zacks Consensus Estimate of $6.16. Additionally, the earnings substantially exceeded prior fiscal year’s earnings of $4.99 per share. Consequently, operating net income escalated 19.1% year over year to $4.2 billion.

However, on GAAP net income stood at $2.14 billion or $3.16 per share versus $3.65 billion or $5.16 per share in fiscal 2011. The decline was primarily attributable to a net litigation settlement payment of $2.59 billion or $3.82 per share, related to the recent multi-district litigation case. This expense was partially offset by reversal of tax reserves of $326 million or 48 cents per share and positive impact of deferred tax adjustment of $208 million or 31 cents a share.

Alongside, total operating revenues for the reported quarter were $10.42 billion, up 13.4% year over year and breezed past the Zacks Consensus Estimate of $10.37 billion. On a constant dollar basis, payments volume increased 6% year over year to $979 billion. Total processed transactions carrying the VisaNet brand increased 5% year over year to 53.0 billion. Results came within management’s guidance.

Excluding the litigation expense of $4.1 billion, total operating expenses rose 12.1% year over year to $4.18 million. Operating margin climbed to 60% from 59% in the prior fiscal year, although GAAP operating margin reduced to 21% in fiscal 2012. Effective tax rate was 32.9% in fiscal 2012 against 36.0% in fiscal 2011.

Financial Update

As of September 30, 2012, cash and cash equivalents, restricted cash and available-for-sale investment securities amounted to $10.5 billion, up from $6.9 billion as of September 30, 2011, including $4.43 billion of restricted cash for litigation escrow. Nevertheless, long-term debt remained nil.

Total shareholders’ equity was recorded at $27.63 billion, up from $26.4 billion as of September 30, 2011. Further, Visa’s operating cash flow surged to $5.0 billion in fiscal 2012 from $3.87 billion recorded in fiscal 2011.

Stock Update

During the reported quarter, Visa repurchased about 2.5 million class A common shares for a total cost of $324 million. Of these, $174 million worth of shares were bought back through open market operation.

Additionally, the board of Visa sanctioned a new share repurchase program worth $1.5 billion, which is set to expire by October 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.


Visa also provided the financial outlook for fiscal 2013, anticipating annual earnings per share to grow in the high teens range. Annual net revenue growth is expected to be in the low double-digit range. The company estimated annual operating margin of about 60%, capital expenditure within $425–475 million and annual free cash flow of about $5 billion.

Further, the company expects client incentives within the range of 18.0–18.5% of gross revenues and marketing expenses to be less than $1.0 billion. Meanwhile, tax rate is expected within 30–32%.

Dividend Update

On October 24, 2012, the board of Visa declared a 50% hike in its quarterly dividend to 33 cents per share of class A common stock from the prior 22 cents.

Consequently, the company will pay the hiked quarterly dividend on December 4, 2012 to the company’s Class A, Class B and Class C common shareholders of record as on November 16, 2012. This takes the annual cash dividend of Visa to $1.32 per share, compared with 88 cents paid earlier.

On July 19, 2012, Visa declared a quarterly dividend of 22 cents per share of class A common stock, which was paid on September 4, 2012, to the company’s common shareholders of record as on August 17, 2012.

Peer Take

Yesterday, Visa’s arch-rival, MasterCard reported its third quarter operating earnings per share of $6.17 outpacing the Zacks Consensus Estimate of $5.93 and the year-ago quarter’s earnings of $5.63. Net income for the reported quarter stood at $772 million, climbing 7.8% from $717 million in the prior-year quarter.

The better-than-expected results were largely due to better pricing, increased number of processed transactions, strong gross dollar value (GDV) growth and lower tax rate. However, higher-than-expected operating expenses partially limited the margins’ upside.

Visa carries a Zacks Rank #2, implying a short-term Buy rating and long-term Neutral recommendation.

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