Lower Expenses Boost Visa's Earnings & Margins - Analyst Blog

Visa Inc.'s V second-quarter fiscal 2014 (ended Mar 31, 2014) operating earnings of $2.20 per Class A common share beat the Zacks Consensus Estimate by a penny and outpaced the prior-year quarter figure of $1.91 per share. Operating net income spiked 29% to $1.38 billion from $1.07 billion in the year-ago quarter.

Including tax benefits from prior periods of $218 million in the reported quarter and $201 million in the year-ago quarter, reported net income stood at $1.6 billion or $2.52 per share against $1.27 billion or $1.92 a share.           

Alongside, total operating revenue for the reported quarter stood at $3.16 billion, up 6.9% year over year but lagged the Zacks Consensus Estimate of $3.2 billion. 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%, while difficult comps are expected to continue in the third-quarter of fiscal 2014.

Service revenues increased 6.8% year over year to $1.46 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 climbed 7.3% from the prior-year period to $1.23 billion.

Additionally, International transaction revenues, which are driven by cross-border payments volume, rose 4.8% over the prior-year quarter to $871 million. Other revenues, earned through Visa Europe's licensing fee, grew 4.6% to $183 million. Client incentives, which is a contra-revenue item, came in at $587 million, and accounted for about 15.6% of gross revenues.

On a constant dollar basis, payment volume increased 12% year over year to $1.1 trillion. Total processed transactions carrying the VisaNet brand increased 11% year over year to 15.4 billion. Cross border volume, on a constant dollar basis, grew 8% over the prior-year quarter.

Meanwhile, total operating expenses edged up 1.5% year over year to $1.12 billion. Consequently, Visa's operating income grew 10.1% to $2.05 billion, while operating margin escalated to 64.7% from 62.9% in the year-ago period.

Financial Update

As of Mar 31, 2014, cash and cash equivalents as well as trading and available-for-sale investment securities totaled $3.49 billion, down from $4.26 billion as of Sep 30, 2013. Nevertheless, long-term debt remained nil, while total assets ascended to $37.26 billion from $35.96 billion at fiscal 2013-end. Total equity was $27.3 billion, up from $26.87 billion as of Sep 30, 2013.

Further, Visa's operating cash flow surged to $3.47 billion at the end of fiscal second-quarter 2014 against a cash outflow of $1.18 billion recorded in the year-ago period.

Stock Repurchase Update

During the reported quarter, Visa repurchased about 5.1 million class A common shares for a total cost of $1.1 billion.

In Oct 2013, the board had sanctioned a new share repurchase program worth $5.0 billion, while shares worth $3.0 billion were available for buybacks at the end of Mar 2014.

Dividend Update

On Apr 23, 2014, the board declared its quarterly dividend of 40 cents per share to class A common stock, payable on Jun 3, 2014, to the shareholders of record as on May 16.

On Mar 4, 2014, Visa paid a quarterly dividend of 40 cents per share to the shareholders of record as on Feb 14.

Guidance

Visa reiterated the financial outlook for fiscal 2014, anticipating annual operating earnings per share to grow in mid-to-high teens range. Annual net revenue growth is expected to be within low double digits (10−11%), with an adverse foreign currency impact of about 2%.

Meanwhile, the company reaffirmed annual operating margin of low-60% range. Further, Visa expects client incentives within 16.5−17.5% of gross revenues. Additionally, annual free cash flow is estimated to be around $5 billion in fiscal 2014, while tax rate should be around 30%.

Others

On Apr 16, arch rival American Express Co. AXP first-quarter 2014 operating earnings per share of $1.33. The result outpaced both the Zacks Consensus Estimate of $1.30, and the year-ago quarter figure of $1.15 a share. Improved cardmember spending coupled with reduced expenses and loan loss provisions supported growth.

Meanwhile, MasterCard Inc. MA is slated to release its first-quarter 2014 earnings before the opening bell on May 1. While Visa, AmEx and MasterCard carry a Zacks Rank #3 (Hold), American Express, and peer, Green Dot Corp. GDOT, bear a Zacks Rank #2 (Buy).