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Visa Inc.’s (V - Analyst Report) fiscal second-quarter (ended Mar 31, 2013) operating earnings of $1.92 per Class A common share were modestly ahead of the Zacks Consensus Estimate of $1.81. Additionally, the result substantially exceeded the prior-year quarter earnings of $1.60 per share.

Net income increased 17.2% to $1.27 billion from $1.08 billion in the year-ago quarter. Including a deferred tax adjustment, reported net income in the year-ago quarter stood at $1.29 billion or $1.91 per share.

Alongside, total operating revenues for the reported quarter were $2.96 billion, up 14.7% year over year and outpaced the Zacks Consensus Estimate of $2.85 billion. Growth was driven by strong performance across most segments.

Service revenues increased 10.3% year over year to $1.37 billion and are recognized based on payments volume in the prior quarter. All other revenue categories are recognized based on the current quarter activity. Data processing revenues spiked 24.7% over the prior-year period to $1.15 billion.

Additionally, International transaction revenues, which are driven by cross-border payments volume, climbed 13.4% over the prior-year quarter to $831 million. Other revenues, earned through Visa Europe’s licensing fee, were $175 million, slipping from $179 million in the year-ago quarter. Client incentives, which are a contra-revenue item, came in at $567 million, and accounted for 16% of gross revenue.

On a constant dollar basis, payment volume increased 9% year over year to $1.0 trillion. Total processed transactions carrying the VisaNet brand increased 6% year over year to 13.9 billion. Cross border volume, on a constant dollar basis, grew 10% over the prior-year quarter.

However, total operating expenses jumped 13% year over year to $1.1 billion. Subsequently, Visa’s operating income grew 15.8% to $1.86 billion versus $1.61 billion in the year-ago period.

Financial Update

As of Mar 31, 2012, cash and cash equivalents and available-for-sale investment securities amounted to $4.4 billion, down from $5.4 billion as of Sep 30, 2012. Nevertheless, long-term debt remained nil.

Total shareholder equity was recorded at $26.9 billion, down from $27.63 billion as of Sep 30, 2012. Further, Visa’s operating cash outflow stood at $1.18 billion at the end of Mar 2013 against operating cash inflow of $2.34 billion recorded at the end of Mar 2012.

Stock Update

During the reported quarter, Visa repurchased about 12.0 million class A common shares for a total cost of $1.8 billion.

In Feb 2013, the board sanctioned a new share repurchase program worth $1.75 billion, which is set to expire by Jan 2014. Currently, the company has $1.0 billion available for repurchases.

Guidance

Visa revised the financial outlook for fiscal 2013, anticipating the annual operating earnings per share to grow about 20% from the prior estimate of high-teens range. Annual net revenue growth is expected in the low double-digits range. The company estimated annual operating margin of about 60% and capital expenditure within $425–475 million.

Further, Visa expects client incentives within the range of 16–17% of gross revenue and marketing expenses to be less than $1.0 billion. Meanwhile, tax rate is expected within 30–32%. Visa continues to project annual free cash flow of about $6 billion. This includes tax benefits to be realized during fiscal 2013 related to non-recurring litigation escrow payments of approximately $4.4 billion that was made during the fiscal first quarter.

Dividend Update

On Apr 24, 2013, the board of Visa declared a quarterly dividend of 33 cents per share of class A common stock, which will be paid on Jun 4, 2013, to the company’s common shareholders of record as on May 17, 2013.

On Mar 5, 2013, Visa paid a quarterly dividend of 33 cents per share to the company’s common shareholders of record as on Feb 15, 2013. In Oct 2012, Visa declared a 50% hike in its quarterly dividend to 33 cents per share from the prior 22 cents.         

Others

Concurrently, arch rival MasterCard Inc. (MA - Analyst Report) reported first-quarter 2013 operating earnings per share of $6.23, which comfortably surpassed the Zacks Consensus Estimate of $6.19 and the year-ago quarter’s earnings of $5.36 as well. Improved top line and modest growth in operating expenses supported the growth in margins, bottom line and cash flow.

Both Visa and MasterCard carry a Zacks Rank #3 (Hold). Other strong performers in the financial sector include Employers Holdings Inc. (EIG - Snapshot Report) and Stancorp Financial Group Inc. (SFG - Analyst Report), both of which carry a Zacks Rank #1 (Strong Buy).

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