Image source: Visa.
Visa (V +0.77%) reported fiscal third quarter results on July 21. The global payments giant closed its acquisition of Visa Europe during the quarter, and costs related to the deal had a significant impact on the company's financial results.
The raw numbers
| Metric |
Q3 2016 |
Q3 2015 |
Growth (YOY) |
|---|---|---|---|
|
Operating Revenue |
$3.630 billion |
$3.518 billion |
3% |
|
Net income |
$0.412 billion |
$1.697 billion |
(76%) |
|
Earnings per share |
$0.17 |
$0.69 |
(75%) |
YOY = year over year. Data source: Visa Q3 2016 earnings press release.
What happened with Visa this quarter?
Net operating revenue rose 3% year over year to $3.6 billion, driven by growth in processed transactions and payments volume. Excluding the effects of foreign exchange rate fluctuations, revenue increased 6%.
Service revenue grew 6% to $1.6 billion, as payments volume increased 12% on a constant dollar basis to $1.3 trillion. Data processing revenue rose 10% to $1.5 billion, with the number of transactions process on Visa's network increasing 10% to 19.8 billion. International transaction revenue grew 4% to $1.1 billion, and other revenue came in at $209 million, an increase of 5% over the third quarter of 2015.
Client incentives, which are a contra revenue item, were $839 million. That represented 18.8% of gross revenue, up from 16% in the prior-year period.
Total operating expenses surged 155% to $3.2 billion due to charges related to the acquisition of Visa Europe. Excluding these non-recurring items, adjusted operating expenses were $1.2 billion, a 7% decline from the year ago quarter, primarily due to lower personnel and marketing expenses.
All told, adjusted net income -- which excludes the special items related to the Visa Europe deal -- fell 10% to $1.6 billion, mainly as a result of a $280 million tax benefit that positively impacted Visa's Q3 2015 results. And adjusted earnings per share, helped somewhat by share buybacks, declined 7% to $0.69.
Visa Europe
Visa acquired 100% of Visa Europe on June 21. The company believes the deal "positions Visa to create additional value through increased scale, efficiencies realized by the integration of both businesses, and benefits related to Visa Europe's transition from an association to a for-profit enterprise." For these anticipated benefits, Visa agreed to pay $13.9 billion in up-front cash and an additional $1.2 billion, plus 4% compound annual interest, on the third anniversary of the closing. Visa also issued approximately $6.1 billion in convertible preferred stock to finance the deal.
What management had to say
"While little has changed in the global economic environment, and cross-border commerce continues to be challenged by a strong U.S. dollar, domestic consumer spend across the globe remains strong and resilient," said CEO Charlie Scharf in a press release. "Furthermore, we are delighted to have closed our purchase of Visa Europe and remain confident that operating as a unified global business will quickly bring meaningful value to our clients and the economies in Europe."
Scharf also highlighted the decision by Visa's board of directors to boost to the size of the company's share repurchase program.
"Reflective of our continued confidence in the business and our desire to offset dilution from the preferred stock issuance, we have repurchased $5.5 billion in common stock year-to-date and our board has increased our buyback authorization by $5.0 billion to $7.3 billion," said Scharf. "This also delivers on our ongoing commitment to return excess cash to shareholders."
Looking forward
Visa updated its outlook for fiscal 2016 to include Visa Europe. The company now expects full-year revenue growth of 7% to 8% on a constant currency basis, with Visa Europe expected to add an additional 3 to 4 percentage points of growth.
Visa also reaffirmed its guidance for "low double digit" adjusted EPS growth and about $7 billion in annual free cash flow.
"Looking ahead, we expect next quarter results to improve modestly, similar to first-half of the year results," added Scharf. "As we look toward fiscal full-year 2017, our underlying business is strong, and with the lapping effect of several items, based on what we know today and assuming similar consumer spending patterns, we feel good about our ability to produce stronger revenue and earnings growth."
