Visa Outperforms, Sanctions Buyback

Zacks

Visa Inc.’s (V) fiscal first-quarter 2013 (ended Dec 31, 2012) operating earnings of $1.82 per Class A common share came in modestly ahead of the Zacks Consensus Estimate of $1.78. Additionally, the earnings substantially exceeded the prior-year quarter’s earnings of $1.49 per share, primarily due to lower share count.

Meanwhile, on a GAAP basis, Visa recorded a net income of $1.29 billion or $1.93 per share in the reported quarter. This included a catch-up tax benefit effect of approximately 11 cents per share.

Alongside, total operating revenues for the reported quarter were $2.85 billion, up 11.7% year over year and topped the Zacks Consensus Estimate of $2.81 billion. Growth was driven by strong performance across all segments.

Service revenues increased 12.9% year over year to $1.3 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 17.2% over the prior-year period to $1.12 billion.

Additionally, International transaction revenues, which are driven by cross-border payments volume, climbed 7.6% over the prior-year quarter to $805 million. Other revenues, earned through Visa Europe’s licensing fee, were $179 million, marginally improving from $178 million in the year-ago quarter. Client incentives, which are a contra-revenue item, came in at $553 million, and accounted for 16% of gross revenues.

On a constant dollar basis, payments volume increased 9% year over year to $1.1 trillion. Total processed transactions carrying the VisaNet brand increased 4% year over year to 14.2 billion. Cross border volume, on a constant dollar basis, grew 11% over the prior-year quarter.

However, total operating expenses surged 12.6% year over year to $1.05 billion. Subsequently, Visa’s operating income grew 11.3% to $1.8 billion versus $1.62 billion in the year-ago period.

Financial Update

As of Dec 31, 2012, cash and cash equivalents, restricted cash and available-for-sale investment securities amounted to $6.1 billion, down from $10.5 billion as of Sept 30, 2012, which included $4.43 billion of restricted cash for litigation escrow. Nevertheless, long-term debt remained nil.

Total shareholders’ equity was recorded at $27.59 billion, down from $27.63 billion as of Sept 30, 2012. Further, Visa’s operating cash outflow stood at $2.82 billion in the reported quarter against operating cash inflow of $1.29 billion recorded in the year-ago quarter.

Stock Update

During the reported quarter, Visa repurchased about 9.0 million class A common shares for a total cost of $1.3 billion.

Concurrently, the board sanctioned a new share repurchase program worth $1.75 billion, which is set to expire by Jan 2014. Previously in Oct 2012, Visa had authorized a share buyback program worth $1.5 billion, which is slated to expire in Oct 2013. Including this, the company currently has $2.9 billion available for repurchases.

Litigation Update

In Dec 2012, Visa paid $4.0 billion through its litigation escrow account to settle the multi-state U.S. merchant lawsuit, which was agreed by the company and MasterCard Inc. (MA) in Jul 2012. 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. Previously, in Oct 2012, the company also paid $350 million to the individual plaintiffs' settlement fund

Guidance

Visa also reiterated the financial outlook for fiscal 2013, anticipating the annual earnings per share to grow in the high teens range. Annual net revenue growth is expected 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%. Visa also projected 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 Jan 30, 2013, the board of Visa declared a quarterly dividend of 33 cents per share of class A common stock, which is payable on Mar 5, 2013, to the company’s common shareholders of record as on Feb 15, 2013.

On Oct 24, 2012, Visa declared a 50% hike in its quarterly dividend to 33 cents per share from the prior 22 cents. The hiked quarterly dividend was paid on Dec 4, 2012 to the company’s Class A, Class B and Class C common shareholders of record as on Nov 16, 2012. This took the annual cash dividend of Visa to $1.32 per share, compared with 88 cents paid earlier.

Others

Both Visa and MasterCard carry a Zacks Rank #3 (Hold). Other strong performers in the financial sector include Heartland Payment Systems Inc. (HPY) and Moody’s Corp. (MCO), both of which carry a Zacks Rank #1 (Strong Buy).

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