Visa Gains Big Year Over Year

Visa Inc.’s (V) fiscal second quarter 2011 (ended March 31, 2011) operating earnings of $1.23 per Class A common share were three pennies ahead of the Zacks Consensus Estimate of $1.20 per share, but substantially exceeded 96 cents reported in the year-ago quarter on lower share count.

Visa’s GAAP net income for the quarter came in at $881 million, increasing 23.6% from $713 million in the year-ago quarter. Operating income climbed 23.3% year over year to $1.38 billion. Meanwhile, total GAAP operating expenses jumped 3.0% year over year to $862 million, in the reported quarter.

Total operating revenues for the reported quarter were $2.25 billion, up 14.6% from $1.96 billion in the year-ago quarter and slightly higher than the Zacks Consensus Estimate of $2.23 billion. While growth was driven by strong performance across segments, currency fluctuations contributed a positive 2% to the top line.

Service revenues increased dramatically by 23.5% year over year to $1.09 billion and are recognized based on payments volume in the prior quarter. All other revenue categories are recognized based on current quarter activity.

Data processing revenues grew 13.0% over the prior-year period to $823 million. International transaction revenues, which are driven by cross-border payments volume, climbed 14.5% over the prior-year quarter to $624 million. Other revenues, earned through Visa Europe’s licensing fee, were $156 million, declining 9.8% over the year-ago quarter. Client incentives, which are a contra-revenue item, were $451 million, representing 20% of gross revenues.

On a constant dollar basis, payments volume increased 13% year over year to $861 billion. Total processed transactions carrying the Visa brand increased 13% year over year to 12.0 billion. Cross border volume, on a constant dollar basis, grew 13% year over year.

As of March 31, 2011, cash and equivalents, restricted cash and available-for-sale investment securities were $6.6 billion, up from $5.9 billion as of September 30, 2010, including $3.0 billion of restricted cash for litigation escrow.

Long-term debt reduced to $25 billion from $32 billion at the end of September 2010. Total shareholders’ equity was recorded at $26.2 billion, up from $25.0 billion as of September 30, 2010.

Visa’s operating cash flow improved dramatically to $1.61 billion from $580 million as of March 31, 2010.

Share Repurchase Update

Besides, during the reported quarter, Visa also repurchased about 8.7 million shares at an average price of $72.58, for a total of $630 million. Of the $630 million, $400 million of shares were effectively repurchased through the litigation escrow account funded in March 2011. On an as-converted basis, 5.4 million shares of class A common stock were effectively repurchased at $73.81 per share.

The balance of the repurchase, $230 million of class A common stock, was conducted in the open market and a total of 3.3 million shares were bought at an average price of $70.53. However, management does not expect the stock-conversion process to be dilutive to the class A share count since it is done on an as-converted basis.

The share repurchases were made under the previously announced $1.0 billion share repurchase plan announced in October 2010. As of March 31, 2011, Visa had $64 million remaining under the authorized share repurchase plan.

Concurrently, the board of Visa also sanctioned a new $1 billion class A share repurchase program, which is scheduled to expire on April 20, 2012.

Dividend Update

On April 25, 2011, the board of Visa declared a quarterly dividend of 15 cents per share of class A common stock payable on June 7, 2011, to the company’s Class A, Class B and Class C common shareholders of record as on May 20, 2011.

Separately, on March 1, 2011, Visa paid a quarterly dividend of 15 cents to the company’s Class A, Class B and Class C common shareholders on record as of February 11, 2011.

Guidance

Visa reiterated its projections for fiscal 2011, anticipating annual net revenue growth in the range of 11%-15%; annual operating margin of about 60%; GAAP tax rate of 36.5%-37.0% and capital expenditures of $250-$275 million.

Further, the company re-affirmed its client incentives within the range of 16.0%-16.5% of gross revenue; advertising, marketing and promotional expenses to be less than $900 million; annual earnings per share growth to surpass 20% and annual free cash flow to exceed $3 billion in fiscal 2011.

Our Take

Visa continues to drive growth through increased payment volumes along with consistent growth in processed transactions. The company benefits from strong secular demand growth, meaningful international exposure, high barriers to entry, excellent pricing power and impressive operating leverage.

Although regulatory compliances as a result of the ongoing financial overhaul in the U.S. and litigation are expected to weigh on the financials of the company in fiscal 2011 and ahead, Visa aims to retain its strength by exploring newer growth avenues that include mobile, eCommerce and money transfer services. The company is also generating strong cash flow and maintains a healthy capital position.

Meanwhile, Visa’s prime peer, MasterCard Inc. (MA) reported its first quarter earnings on Tuesday, with operating earnings per share of $4.29 that were significantly ahead of the Zacks Consensus Estimate of $4.10 and $3.46 in the year-ago quarter.

MASTERCARD INC (MA): Free Stock Analysis Report

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