Visa Overview
Headquartered in San Francisco, CA, Visa Inc. operates retail electronic payments network worldwide. The company went public in March 2008 via an initial public offering (IPO).
Visa has evolved and grown over the course of the last six decades:
• It provides transaction processing services (primarily authorization, clearing and settlement) to financial institutions and merchant clients through VisaNet, its global processing platform.
• It offers a wide range of Visa-branded payment products, which its financial institution clients would develop and offer core business solutions, credit, debit, prepaid and cash access programs for account holders (individuals, businesses and government entities).
• It provides other value-added services to its clients including fraud and risk management, debit issuer processing, loyalty services, dispute management, digital services like tokenization as well as consulting and analytics.
• It manages and promotes its brands to the benefit of its clients and partners through advertising, promotional and sponsorship initiatives with the Olympic Games, FIFA and the National Football League among others.
In recent years, the company has evolved its organization to accelerate the migration of digital payments across new channels including eCommerce, mobile and wearables.
• The company has adopted new digital payment and security technologies, such as contactless and tokenization.
• It has accelerated the pace of change in digital payments by making application programming interfaces (APIs) available in an effort to increase access to its network, products and services, offering innovation opportunities at its 10 global innovation network locations and building partnerships with new players, such as financial technology companies, commonly known as fintech.
The primary revenue segments are Service revenues (36% of gross revenues in fiscal 2019), Data Processing revenues (34%), International Transaction revenues (25%) and Other revenues (5%).
Visa Buy Side
Visa continues to benefit from Visa Europe acqusition, increasing business volumes, investment in digital technology and a solid balance sheet.
- Share Price Movement: Visa’s shares have outperformed its industry, in a year’s time. Given the company’s robust fundamentals, the share price is expected to perform well in the coming quarters.
- Consistent Revenue Growth: Revenues have been growing consistently over the years witnessing 10-year CAGR (2009–2019) of 12.8%. In the first nine months of 2020, the same was, however, down 1% year over year. We believe that the company will get back its revenue growth in the coming quarters on the back of its strong market position and an attractive core business that continues to be driven by new deals, renewed agreements, accretive acquisitions, increasing spending via cards, shift to digital form of payments and expansion of service offerings. Though the COVID -19 will likely create some pressure on the revenues, the metric should maintain its rising trend once normalcy returns.
- Visa Europe Acquisition Delivering Strong Value: Visa acquired Visa Europe in June 2016. Reuniting with Visa Europe was one of its most important long-term growth strategies. The company expects to gain a competitive edge from a robust business model and increased scale with the acquisition of Visa Europe as it projects Europe to be a $3.3 trillion payments market and high growth region in the future. The deal has been accretive to the company, having contributed to its top line by bolstering payments volume, cross-border volume and processed transactions.
- Inorganic Growth: For Visa, mergers and acquisitions, partnerships, and minority investments are some of the ways to achieve growth. These moves have helped the company to maintain its leading position in the payment network space with 50% more payments volume than its closest competitor, Mastercard. Recently, Visa has acquired Earthport, Payworks, Verifi, and the ticketing and token services business of Rambus. These acquisitions and investments will accelerate its progress and extend the boundaries of its capabilities and network. The company is on track to acquire Plaid, which will be closed by the end of 2020.
- Technological Innovations: Visa continues to invest in technology to further boost its already leading position in the payments market and to minimize the impact of fraud, and protect consumer and merchant information. One of the main purviews of Visa is to ensure security of payments as these move from physical to digital environments. VisaNet, Visa Token Service, Visa Direct, and Visa Checkout are some of the platforms that have been developed by the company in the recent years to advance its digital platform. The company is also pushing technologies, including contactless and scan-to-pay, tap-to-pay, and secure remote commerce, which should be the main modes of payment in the near future. With only 15% of global payments occurring digitally, Visa has a huge runway for growth in the emerging payments industry in the years to come.
- Strong Balance Sheet Position: Visa enjoys strong cash and available-for-sale investment position along with strong free cash flow. Its strong balance sheet enables it to make acquisition and fund capital expenditure that drives long-term growth. Backed by its strong cash position, the company remains committed to boosting shareholders’ value. Visa has increased its dividend each year since 2009, with the latest being a 20% hike in October 2019.
- Strong Solvency Position: Visa’s total debt is 50% of its total equity, down from 48.2% as of Sep 30, 2019, and lower than the industry average of 61.5%. Though its long-term debt as of Jun 30, 2020, was $17.88 billion, lower than its cash and cash equivalents $13.89 billion, it has ample liquidity with access to the commercial paper market on favourable terms and a $5-billion revolver credit facility that remains undrawn. Thus, the company is well-equipped with sufficient resources to service its indebtedness. Also, its interest coverage ratio of 30.42 is substantially higher than its industry average of 17.97 and further improved 33.2 from its last-quarter level. Thus, the company’s solvency status looks impressive.
Visa Sell Side
Higher client incentives, increase in operating expenses, remain headwinds for Visa.
- Weakness in Cross Border Business: The coronavirus outbreak is likely to impact Visa’s cross-border e-commerce growth. Visa’s cross-border volumes were negatively impacted by the coronavirus outbreak. International transaction revenues were down 12% in the first nine months of 2020. We expect the company’s cross border business to remain under pressure for the next few quarters.
- Higher Client Incentives: Visa has been facing increased client incentives, which are paid to financial institutions, merchants and strategic partners to build payments volumes, increase Visa’s product acceptance, win merchant routing transactions over its network and drive innovation. The same was up 10.8% in the first nine months of 2020 formed 29% of total revenues. Increase in client incentives, which is a contra revenue item, will be a drag on the top line.
- Increasing Operating Expenses: Visa has been witnessing a flare-up in operating expenses over the last many quarters and the same is weighing on its operating margin expansion. Operating expenses in the first nine months of fiscal 2020 were up 4%, primarily due to higher personnel-related expenses. The company undertook measures to control expenses to save margins. Cost-saving measures include scaling back hiring plan, redeploying existing resources to high-priority areas, reducing and re-implementing marketing spends, prioritizing projects to lower professional fees, and optimally using external resources.
Visa’s Earnings and Revenue
Visa Q3 Surprise Earnings Beat
Visa Inc. reported third-quarter fiscal 2020 earnings of $1.06 per share. However, the bottom line declined 23% year over year.
Further, Visa had net operating revenues of $4.8 billion but, the top line fell 17% year over year.
A contraction in payments volume and processed transaction, and lower cross-border revenues primarily attributable to the COVID-19 pandemic has impacted the company’s results. However, the top line was partially driven by a decline in client incentives, which is a contra revenue item.
Strong Financial Performance
On a constant-dollar basis, payments volume in the quarter was down 10% year over year. Processed transactions declined 13% from the prior-year quarter to 30.7 billion.
Visa’s cross-border volumes including transactions within Europe (which drives its international transaction revenues) plunged 37% year over year on a constant-dollar basis.
Service revenues remained flat year over year at $2.4 billion on lower payments volume. On a year-over-year basis, data processing revenues declined 5% to $2.5 billion and international transaction revenues plunged 44% to $1.1 billion. Other revenues fell 8% year over year to $314 million.
Client incentives of $1.5 billion decreased 2% year over year.
Total operating expenses declined 5% year over year to $1.8 billion, primarily due to lower marketing, and general and administrative expenses.
Interest expense increased 10.9% year over year to $142 million.
Visa Share Buyback and Dividend Update
During the quarter, the company made share repurchases to the tune of $0.9 billion.
On Jul 20, 2020, the company declared a quarterly cash dividend of 30 cents per share, payable Sep 1, 2020 to its shareholders of record as of Aug 14, 2020.
Visa Balance Sheet Position
The company’s long-term debt as of Jun 30, 2020, was $12.5 billion, up 46% from the level as of Dec 31, 2019, because a $4-billion long-term debt was issued in March. However, cash and cash equivalents of $11.1 billion soared 59.4% from the level as of Dec 31, 2019.
Valuation Metrics of Visa
Visa’s Long Term Outlook
Visa has a strong foothold in a payments market, with over 50% more payments volume than their closest competitor, Mastercard.
Overtime the payment volumes will increase as more consumers move online and this trend can be seen by their recent “Card not present, Excluding Travel” data.
Overall, Visa’s still in its early innings as the company only serves 3.7% of the total addressable market of $235 Trillion and with over $60 Trillion worth of transactions happening worldwide with cash, there’s lots of room for growth. Their acquisition of plaid and the recent partnership with PayPal is exciting to see as this allows the company to send money cross border, facilitate faster P2P and B2C payments as well as initiate new ventures into the Fintech space.
Summary
Shares of Visa have outperformed the industry in a year’s time. Numerous acquisitions and alliances plus technology upgrades paved the way for long-term growth and consistently drove revenues. A shift in payments to new methods such as mobile, cards, online and via wearables bodes well for the long haul. The acquisition of Visa Europe is a growth strategy as well. Its strong balance sheet enables it to make acquisitions and fund capital expenditure. Its strong cash position enables effective capital deployment measures for its shareholders. Also, Visa’s second-quarter earnings beat estimates. However, high operating expenses owing to personnel-related costs put operating margins under pressure. Ramped-up client initiatives will dent the top line. It is likely to see a slowdown in cross-border business due to the coronavirus outbreak.
Referred Sources:
Visa’s Q3 2020 Results, Visa’s 2019 10-K, Visa’s Operational Performance Data 2020, Zacks.com and predictions made by the Author’s understanding of the company.
Disclosures:
This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.
