Visa Begins Fiscal '11 with Zeal - Analyst Blog

Visa Inc.'s (V) fiscal first quarter 2011 (ended December 31, 2010) operating earnings of $1.23 per Class A common share came in a couple ahead of the Zacks Consensus Estimate of $1.21 per share but substantially exceeded $1.02 reported in the year-ago quarter on lower share count.

Visa's GAAP net income for the quarter came in at $884 million, increasing 15.9% from $763 million in the year-ago quarter. Besides, operating income climbed 12.2% year over year to $1.37 billion. However, total GAAP operating expenses also surged 17.4% year over year to $872 million, in the reported quarter.

Total operating revenues for the reported quarter were $2.24 billion, up 14.2% from $1.96 billion in the year-ago quarter and slightly higher than the Zacks Consensus Estimate of $2.23 billion. While growth was driven by strong performance across segments, currency fluctuations contributed a positive 1% to the top line.

Service revenues increased dramatically by 22% year over year to $1.0 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 grew 10% over the prior-year period to $844 million. International transaction revenues, which are driven by cross-border payments volume, climbed 14% over the prior-year quarter to $630 million.

Other revenues, earned through Visa Europe's licensing fee, were $161 million, declining 15% over the year-ago quarter. Volume and support incentives, which are a contra-revenue item, were $405 million, representing 15% of gross revenues.

On a constant dollar basis, payments volume increased 15% year over year to $897 billion. Total processed transactions carrying the Visa brand increased 15% year over year to 13.0 billion. Cross border volume, on a constant dollar basis, grew 15% year over year.

As of December 31, 2010, cash and equivalents, restricted cash and available-for-sale investment securities were $6.5 billion, up from $5.9 billion as of September 30, 2010, including $2.7 billion of restricted cash for litigation escrow. Total shareholders' equity was recorded at $25.5 billion, up from $25.0 billion as of September 30, 2010.

Visa's operating cash flow improved dramatically to $1.01 billion from a cash outflow of $29 million as of December 31, 2009.

Stock Update

During the reported quarter, the board of Visa approved a class C share release program, according to which all the remaining 55 million class C shares will be held for sale on February 7, 2011.

Once the class C shares are released in the open market for sale, it will automatically get converted into class A common share. However, management does not expect the stock-conversion process to be dilutive to the class A share count since it is done an as-converted basis.

Besides, during the reported quarter, Visa also repurchased about 15.3 million shares at an average price of $72.08, for a total of $1.1 billion. Of the $1.1 billion, $800 million of shares were effectively repurchased through the funds of the litigation escrow account in October 2010.

On an as-converted basis, 11 million shares of class A common stock were effectively repurchased at $72.74 per share. The balance of the repurchase, $306 million of class A common stock, was conducted in the open market and a total of 4.3 million shares were bought at an average price of $70.40.

The share repurchases were made under the previously announced $1.0 billion share repurchase plan. As of December 31, 2010, Visa had $694 million remaining under the authorized share repurchase plan.

Business Update

Yesterday, Visa joined hands with the leading money transfer service provider, MoneyGram International Inc. (MGI) to launch the latter's first cash-to-Visa account program for remittances from the U.S. to Mexico. Consumers in U.S. can now send funds from any of the 35,000 MoneyGram agent locations directly to Visa account holders in Mexico, making the security and reliability of Visa digital currency available to consumers on both sides of the border.

In 2010, Mexico received an estimated $22.6 billion in remittance according to the World Bank, claiming the top position in Latin America and globally the third position, after India and China.

Guidance

Visa reiterated its projections for fiscal 2011, anticipating 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 within 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

Concurrent with earnings release, the board of Visa announced a quarterly dividend of 15 cents, which will be paid on March 1, 2011, to the company's Class A, Class B and Class C common shareholders on record as of February 11, 2011.

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 are expected to weigh on the financials of the company in fiscal 2011 and ahead, Visa aims to retain its strength by exploring newer growth avenues that include mobile, eCommerce and money transfer services. The CyberSource acquisition in fiscal 2010 is part of Visa's long-term diversified growth strategy, which would provide greater exposure in the rapidly developing eCommerce industry. The company is also generating strong cash flow and maintains a healthy capital position.

 

Hence, we maintain a Neutral recommendation on Visa with a Zacks Rank #3 for the short term.

 
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