Once again Visa Inc. (V) was able to maintain its strong momentum with the fiscal third-quarter earnings, marking three straight quarters of earnings beat, averaging 3.1% in fiscal 2014.
Operating earnings for the quarter ended Jun 30, 2014 were $2.17 per Class A common share, outpacing the Zacks Consensus Estimate of $2.09 and the prior-year quarter figure of $1.88 per share. Operating net income jumped 11% to $1.36 billion from $1.23 billion in the year-ago quarter.
Total operating revenue was $3.16 billion, up 5.1% year over year and 7% on constant currency basis, and came in line with the Zacks Consensus Estimate. The year-over-year uptick was driven by higher card spending and modest performance across all segments. However, currency fluctuations in the U.S. negated growth by 2%, reflecting difficult comps for most of fiscal 2014.
Service revenues increased 9.2% year over year to $1.42 billion and are realized based on payments volume in the prior quarter. All other revenue categories are recognized based on the current quarter activity. Data processing revenues climbed 10.9% from the prior-year period to $1.32 billion.
Additionally, International transaction revenues, which are driven by cross-border payments volume, inched up 0.7% from the prior-year quarter to $860 million. Other revenues, earned through Visa Europe’s licensing fee, grew 8.9% to $195 million. Client incentives, which is a contra-revenue item, came in at $638 million, and accounted for about 16.8% of gross revenue.
On a constant dollar basis, payment volume increased 11% year over year to $1.2 trillion. Total processed transactions carrying the VisaNet brand increased 11% year over year to 16.7 billion. Cross border volume, on a constant dollar basis, grew 7% from the prior-year quarter.
Meanwhile, total operating expenses dropped 0.3% year over year to $1.14 billion. Consequently, Visa’s operating income grew 10.5% to $2.02 billion, while operating margin increased to 64.0% from 60.9% in the year-ago period.
As of Jun 30, 2014, cash and cash equivalents as well as trading and available-for-sale investment securities totaled $4.06 billion, down from $4.26 billion as of Sep 30, 2013. Long-term debt remained nil, while total assets ascended to $37.68 billion from $35.96 billion at fiscal 2013-end. Total equity was $27.29 billion, up from $26.87 billion as of Sep 30, 2013.
Further, Visa’s operating cash flow surged to $5.41 billion at the end of fiscal third-quarter 2014 from $977 million recorded in the year-ago period.
Stock Repurchase Update
During the reported quarter, Visa repurchased about 5.6 million class A common shares for a total cost of $1.2 billion.
In Oct 2013, the board had sanctioned a new share repurchase program worth $5.0 billion, while shares worth $1.9 billion were available for buybacks at the end of Jun 2014.
On Jul 23, 2014, the board declared a quarterly dividend of 40 cents per share to class A common stock, payable on Sep 3, 2014, to shareholders of record as on Aug 15.
On Jun 3, 2014, Visa paid a quarterly dividend of 40 cents per share to shareholders of record as on May 16.
Visa detailed the financial outlook for fiscal 2014, whereby it anticipates annual operating earnings per share to grow in 17.5–18.5% range. Annual net revenue growth is now expected to be within low double digits (9–10%), including an adverse foreign currency impact of about 2%. Further, Visa expects client incentives about 17% of gross revenues.
Meanwhile, the company reaffirmed annual operating margin in the low-60% range. Additionally, annual free cash flow is estimated to be around $5 billion in fiscal 2014, while tax rate is projected around 30–31%.
With three quarters down in fiscal 2014, Visa’s growth is likely to be limited by strengthening of the dollar and lukewarm growth from cross-border transactions. Nonetheless, a debt-free balance sheet, strong liquidity, diversified product portfolio along with strategic acquisitions and alliances position the company well to generate double-digit revenue growth in the long term.
Visa currently bears a Zacks Rank #2 (Buy). Other stocks to consider in the same sector include Total System Services Inc. (TSS), VeriFone Systems Inc. (PAY) and Qiwi Plc (QIWI), all of which sport a Zacks Rank #1 (Strong Buy).