Saturday, February 1, 2014

Visa Profit Beats Estimates on Higher Card Spending- 02/19/2014

V Visa, Inc. Credit Services USA
http://www.bloomberg.com/news/2014-01-30/visa-profit-beats-estimates-on-higher-card-spending.html

8 comments:

  1. Sources:
    Annual report, quarterly earnings report, company press releases, Google finance, Ycharts.com, Internet resources

    Intro:
    VISA Inc. headquarters in San Francisco, CA. It facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit card and debit cards. Visa does not issue cards, extend credit or set rates and fees for consumers; rather, Visa provides financial institutions with Visa-branded payment products that they then use to offer credit, debit, prepaid and cash-access programs to their customers.

    Revenue Breakdown—
    The company has one reportable segment that is Payment Service. However, the operating revenue consists of four units:
    1Q, 2014 In million dollars
    Service Revenue Data Processing Revenue International Transaction Revenues Other Revenue
    Revenue 1419 1264 891 180
    Percentage 38% 34% 24% 5%

    Operating Margin increase from 63% to 66%
    Operating revenue 5,352 4,642 3,389 -1605
    Percentage 45% 39% 29% -14%

    Source: 2014 first quarter earning report (revenue);2013 annual report (operating profit).

    FCF—
    1Q, 2013 2Q, 2013 3Q, 2013 4Q, 2013
    FCF 1.533 2.035 1.907 1.421
    Revenue 11.1 11.54 11.78 12.09
    FCF/Rev. 14% 18% 16% 12%
    CFO 1.644 2.157 2.045 1.541
    FCF/CFO 93% 94% 93% 92%
    Source: Ycharts.com

    Usage of FCF—Annual FCF of 2013 is about 5 billion.
    1, repurchase class A common stock in the open market
    2, pay cash dividend on class A common stock declared on the beginning of 2014
    3, CapEx: Mainly invest in the technology assets and self-development
    4, Covered Litigations
    5, Visa Europe put option.

    Risks—
    1, foreign currency exchange:
    Quote from 2014 outlook: 2% negative impact on dollar basis.
    2, The business is affected by overall economy and global spending. A downturn will drop the sales revenue and profit margin.
    3, Liquidity is crucial to VISA. Anything affects the liquidity will potentially affects the business

    Summaries from the first quarter earning call—
    • Strong operating revenues of $3.2 billion, up 11% over prior year
    • Quarterly net income of $1.4 billion and diluted earnings per share of $2.2, up 9% and 14%, respectively, over prior year
    • Repurchased 5.5 million shares of class A common stock in the open market at an average price of $199.56 per share, using $1.1 billion of cash on hand
    • Continued positive secular trends and spending momentum contributed to growth in key underlying business drivers

    ReplyDelete
  2. Sources: Bloomberg, Company 10K& 10Q, Trefis
    (13 Rev 11.8 B, OCF 3 B)
    Operating segments: (% of total revenue and % of NI): Services (earned for providing financial institutions clients with support services) 45%, Data processing (earned for facilitation of transactions) 39%, International transactions (for cross-board transactions) 29%, Client incentives (incentives to build VISA network and attract customers) -20%, others 6%
    Rev 5-y growth 9%, NI 21%
    Profitability ratios: Operating margins 61% up 1 % from 2012, NI %, 42% up 21% from 2012.
    Peers average (OPM 44% and NIM 26%): Master card 55% and 37%, American Express 30% and 15%, Discover 48% and 26%

    FCF conversion:
    2013 FCF 2.6 B( 22% of Rev, 87% of OCF)

    Sources and uses of cash
    1. CapEx, outflow 15% of OCF, stable overtime, It was used for purchase of fixed assets and technology 2. Investing in mkt securities, outflow, 29% of OCF, seasonal
    3. Dividends and share repurchase, outflow, 179% of OCF, returned 4 times more cash back to shareholders , 4.Other financing activities, inflow, 144% of OCF, payment from litigation escrow agreement (Note 3, 13, 10K) 5. Immaterial change in LT borrowings

    Value drivers
    - Transaction volumes, fees per transaction,consumer confidence, and macro economic environment

    Upside
    - Card shares of purchases paid for by cards is projected to grow to 63 of US volume by 2016, from 51% in 2011. More transactions will generate more revenue for Visa.
    - Projected global payment opportunity 5 year CAGR ending in 2016, mainly driven by emerging markets growth. However, those markets are hard to penetrate due to regulatory barriers: e.g., China only allows Unipay to handle cash payments.

    Downside
    - Fees per transactions: regulations such as the Dodd-Frank financial reforms capped the fees that card issuers can charge and prohibited network exclusivity. This will squeeze Visa's revenue and future growth.

    Competitors, global spending networks volume totaled 11.7 T in 2012, market shares
    Visa 54%
    Master card 31%
    American Express 8%
    Discover 5%
    JCB and Paypal 2%

    Valuation
    1Q14 median BI NA payment companies P/E 20.6, Visa P/E 28.8, P/FCF Comps 12.2, Visa 21.3.

    Thesis- Hold

    ReplyDelete
  3. Source: Bloomberg, 10k, 10q seeking alpha
    Visa is the largest retail electronic payments network in the world based on payments volume, total volume and number of transactions

    Segments
    Service fee: 45% of operating revenues
    Data processing fees: 39%
    International transaction fees: 29%
    Other: 6%
    Client incentives: -20%

    Revenue 5 yr CAGR: 11%
    NI 5 yr CAGR: 16%; 132%; in 2013

    Geographic segment:
    US 54% of total revenue
    International: 44%
    Europe: 2%

    Network spending volume: 57% debit and 43% credit
    Number of transaction: 63% debit and 37% credit
    Number of account: 64% debit and 36% credit
    Number of cards: 63% debit and 37% credit

    Global Market share in 2012:
    VISA: 55%
    Mastercard: 31%
    American Express: 8%
    Discover: 5%

    Profit Margins:
    VISA: 42.28%
    Mastercard: 37.34%
    American express: 15.34%
    Discover: 26.36%

    ROE:
    VISA: 18.28%
    Mastercard: 43.27%
    American express: 28.04%
    Discover: 24.11%

    FCF/REV:
    21.7% in 2013, 44.5% in 2012, 38.3% in 2011
    FCF/CFO:
    84.4% in 2013, 92.5% in 2012, 90.9% in 2011

    Use of FCF:
    864M pay dividends: 34% of FCF
    5.4B to share repurchase, over 200% of FCF

    1Q14: volume growth rate: 11%
    transactions growth rate: 13%

    Guidance for FY2014
    Annual net revenue growth: Low double-digits growth rate
    Annual free cash flow: About $5 billion.
    “Winter Olympics rapidly approaching and World Cup soon to follow, we expect a significant uptick in marketing spend in Q2 and Q3 versus our spend in Q1, followed by a downshift in Q4."

    Thesis: hold for FY2014

    ReplyDelete
  4. Sources:
    - Visa 2013 10K
    - Bloomberg terminal
    - Seeingalpha.com
    - morningstar.com

    Business Overview:
    Visa is a world’s leading global payments technology company. It facilitates electronic funds transfers throughout the world and has four primary revenue segments and one other segment accounting for as reductions to operating revenues.
    - Service revenues: 45% of 2013 revenue; 10% increase versus 2012.
    - Data processing revenues: 39% of 2013 revenue;17% increase versus 2012
    - International transaction revenue: 29% of 2013 revenue;12% increase versus 2012
    - Other revenue:6%of 2013 revenue;2% increase versus 2012
    - Client incentives: -20% of 2013 revenue;8% increase versus 2012
    Largest revenue contributor service revenues consist of revenues earned for providing financial institution clients with support services for the delivery of Visa-branded payment products and solutions. Service revenues increased in fiscal 2013 primarily due to 8% growth in nominal payments volume.

    Financial Overview:
    - Financial results from the latest quarter which released in the end of January: Net income increased 9% compared to the year-ago quarter and total operating revenue increased 11% YOY. Service revenues increased 9% YOY; Data processing revenues grew 13% from the prior-year period; International transaction revenues rose 11% over the prior-year quarter; Other revenues kept flat.
    - Free cash flow: 2.6b as of 2013 year-end, increased since 2008, but decrease 45% last year from year 2012, mainly because of high litigation expenses
    • FCF as % of sales: 4% in 2013, 3.61% in 2012, 3.84% in 2011, 2.99% in 2010. Improving its free cash flow generating ability.
    • FCF as % of operating cash flow: 84% in 2013, 92% in 2012, 91% in 2011&2010. Overall speaking, Visa has outstanding financial strength.
    • Use of free cash: largest use was shares buyback, totaled 5.4b in FY 2013; paid 864M dividend, and increased dividend by 21% in FY2013; repaid debt by 6 M; no acquisition happened in 2013
    - Margins: industry leading positions. Operating margin 61% V.S. MasterCard 54%; Net Margin 41% V.S. MasterCard 37%; EBITDA margin 66% V.S. MasterCard 57%. All the margins have trends of growing
    - ROA: 13% V.S. MasterCard 23%; ROE: 18% V.S. MasterCard 43%. Not as good as its competitor, while shows a growth potential.
    - Debt position: no long-term debt as end of FY 2013

    Guidance for FY 2014:
    - Annual operating earnings per share are expected to grow in mid-to-high teens range.
    - Annual net revenue growth is expected to be within low double digits, with a negative foreign currency impact of about 2%.
    - Annual operating margin is anticipated to be of low 60% range
    - Client incentives within 16.5 to 17.5% of gross revenues
    - Annual free cash flow is estimated to be around $5 billion in fiscal 2014

    Other positives:
    - Industry leading position in terms of total payments volume, total transactions and total number of cards in circulation, all of which are business drivers for Visa. Kept consistently two digit increase in the last four years.

    Concerns:
    - Fierce competition, leading to increase in marketing expenses, affecting Visa’s market share and profit.
    - Government regulation in payments industry

    ReplyDelete
  5. Business structure

    Sources: 2014 Q1 earning report; 2013 annual report; MorningStar. com

    By business segment
    • Service revenues 45.4% 10% growth
    • Data processing revenues 39% 17% growth
    • International transaction revenues 29% 12% growth
    • Other revenues 6% 2% growth
    • Client incentives -20% 8% growth

    By geographic area
    • United States $6,379 12% growth
    • International $5,177 11% growth
    • Visa Europe $222 decrease less than 1%

    Competitor comparison from MD&A (page 38)
    • Largest retail electronic payments network in the world; leading position
    • Payments volume 50% more than 2nd in 2012; 8% increase in 2013; 11% over the prior year in Q1 2014
    • Number of processed transactions 76% more than 2nd in 2012; 10% increase in 2013; 13% increase over the prior year in Q1 2014

    Free cash flow
    • 2013 22% (Revenue) 84%(CFO)
    • 2012 44% 92%
    • 2011 38% 91%
    • Decrease due to unusual recognition of Accrued liabilities (121%) 7% for 2012
    • Share buyback (2,024)(710)(5,365)
    • Dividend paid (423)(595)(864)
    • Capital expenditure (353)(376)(471)
    • No major acquisition cash outflow in 2013

    Guidance for 2014
    • Annual net revenue growth: Low double-digits, 2% negative foreign currency impact
    • Client incentives as a percent of gross revenues: 16.5% to 17.5% range; 20% for 2013
    • Annual operating margin: Low 60s, 61.5% for 2013
    • EPS growth: Mid to high teens; and
    • Annual free cash flow: About $5 billion

    Comments
    • Visa has an established network and brand, and has only to adopt new technologies for its own purposes in order to fend off competition.
    • Pricing power issue. The company's ability to set interchange fees at an optimal rate has been reduced by the Dodd-Frank Act in the U.S.

    ReplyDelete
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