Visa's Third Quarter: What Investors Need to Know

In the third quarter, Visa (V -0.59%) saw overall payment volume increase on its network, but revenue and earnings were both down year over year. The reason? Fewer international money transfers. In this Fool Live video clip from our Nov. 2 Industry Focus show, host Jason Moser and Fool.com contributor Matt Frankel, CFP discuss the numbers and what investors should know about the current condition of Visa's business, and when things could get back to normal. 

Jason Moser: Let's talk a little bit about some of these earnings reports that came out last week. We have the two big payments providers there in Visa and MasterCard (MA -0.23%) reported middle of last week and very similar reports. Matt, the market seemed to receive them the same way as well. I mean, one great week for either stock and they've done a good job treading water here this year, given everything that's been going on. But I think in at least my perspective, and looking through these reports and going through the calls, it seemed like there was plenty of optimism in there. So let's go ahead and start with Visa at least and talk about how they're viewing things here. The quarter itself, I mean, top-line revenue was down. It looked like about 17 percent, felt a little bit more than $5.1 billion in net revenue. They're down a little bit for some obvious reasons. But it was interesting to me the language they've used in the call when they talk about this U-shaped versus V-shape recovery and whatnot. They're seeing this playing out a little bit differently, whether it's domestic or whether it's cross-border. They've talked about seeing more of a V-shaped recovery for domestic payment volumes. But when we get into the cross-border market where these companies are making lots of investments, they're still really witnessing more of an L-shape recovery and that has to do for, obviously, borders that are being locked down now and there's just less travel going on. But what's stood out to you in the quarter for Visa?

Matt Frankel: Well, you actually just hinted that one of the big things that stood out is cross-border payments. You mentioned revenue down. Revenue fell 17 percent year-over-year, but interestingly enough, total payment volume for the quarter rose by four percent in Visa's network.

Jason Moser: Yeah.

Matt Frankel: It may sound weird, like don't they make their percentage of transactions and that's where they get their money, which yes, that's the case. But the biggest fees come from cross-border transfers. If you've a credit card that might probably charge the foreign transaction fee, for example.

Jason Moser: Yeah.

Matt Frankel: So this is one way that they make their money. Those in Visa's case, excluding money transfers that just happened within European countries. Excluding that, cross-border transfers were down 41 percent year-over-year.

Jason Moser: Wow.

Matt Frankel: Not surprising because there's no cross-border movement going on.

Jason Moser: Yeah.

Matt Frankel: No one's crossing borders, so there are fewer reasons to send money across borders. That's one of the big trend that really stood out to me. That's why revenue was down. Interesting, worth pointing out, Visa is still very profitable. Earnings were down 23 percent. Another way to say that is they're still making more than three quarters of their previous profit. So take it with a big grain of salt.

Jason Moser: I think so.

Matt Frankel: The other big thing that stood out is the mix of payment volume. I mentioned that Visa's payment volume was up four percent year-over-year. Debit card payment volumes were up 20 percent year-over-year. Credit card payment volumes were down 10 percent year-over-year. So people are more hesitant to put money on their credit cards it seems, as opposed to debit cards. Debit cards have a much lower interchange fees. It's worth pointing out.

Jason Moser: Yeah, and I mean, that debit versus credit. Obviously, that's a function of one essentially being pulled directly out of an account versus another where you're not necessarily paying for it all at once. Let's talk for a minute about Visa's acquisition strategy, because there are a couple of things that stood out here to me and I wanted to get your take on both of them here. One, we're seeing that Visa is acquiring this company called YellowPepper. It's a company that they've partnered with for a while now. The acquisition, you typically don't give lots of information regarding the terms of the deal and whatnot. So this could be just another little bolt-on acquisition perhaps. But I think the bigger one really is the status of the Plaid deal. We've talked a little bit about this Plaid acquisition. It seems like at least that the DOJ is giving it a closer look.

Matt Frankel: This is to be expected. Right now, we're seeing M&A activity heat up all over the financial services space. We've talked about this. A lot of it is the function of consumers want lower fees, the big gradual toward this zero fees. That's one big reason you are seeing so much consolidation. We've talked about this in the context of the brokerage business, where commissions have gone away. The way you make your money is to be more efficient than the other guy, and the way you get more efficient is to acquire things. In the credit card space, with Visa, you're seeing a lot of acquisitions intended to prevent them from being disrupted, I guess you'd say. Which is I think were the Plaid thing comes in and especially the YellowPepper, which we'll talk about in just a second. But in terms of the Plaid acquisition, when you have something like this, you're always going to see the DOJ investigate when you have a deal of this size that could potentially be a needle mover. The fact that they are investigating, it really shows you the value of this could add to Visa's business, in my opinion.

Jason Moser: Yeah, that strikes me too this, at least the Plaid acquisition doesn't seem like an acquisition that is based on eliminating a potential competitor. I think looking back at Facebook (NASDAQ: FB) and Instagram, it's become clear based essentially on the language that was used at the time when the deal was presented, that Facebook was looking at that acquisition as really eliminating a potential competitor. It was probably about making Facebook stronger business, but it was also very much in part, eliminating a potential competitor there. So in hindsight, they probably should have kept that under the microscope. I don't think that's really what's going on with the Plaid deal, but it has the potential to certainly make it a much stronger business. I don't know, what were your thoughts on the YellowPepper acquisition? That's a big presence in Latin America.

Matt Frankel: That's an obvious move to increase the international presence. The big growth potential for both Visa and MasterCard is internationally. We're used to both of them being almost universally accepted in the US, especially in the past few years. Ever since companies like Square (NYSE: SQ) and PayPal (NASDAQ: PYPL) made credit card acceptance so easy, it's pretty much a universal here. That's not the case in a lot of markets, especially Latin America. It's not surprising to see Visa invest a lot of money to get to more the inner workings of the fintech markets in Latin America. I liked the deal. I wanted to see the price. I'm pretty sure that one was an undisclosed price or at least I couldn't find one.

Jason Moser: Yeah.

Matt Frankel: These acquisitions are going for a lot more money than I would've thought. Like I would never have thought PayPal was going to pay almost four billion dollars for Honey, or whatever it was.

Jason Moser: Yeah.

Matt Frankel: Or the Visa was going to pay $5.3 billion for Plaid. I want to see what the price of the deal is before I say whether it's a good move or not. Because, sometimes in this market, I feel like I'm the only person in the world who still thinks that price matters.

Jason Moser: Well, you're not the only person that feels that way, I definitely feel that way. To me, it wasn't price always matters. I don't think I'll ever get past that now. There are different ways to view that, and certainly valuation, it is something that you want to look at in relation to the company's growth prospects. But I absolutely do believe that price matters and it does feel like right now nobody out there really cares about it. 

Matt Frankel: Here's the million-dollar question, is Plaid worth $5.3 billion as a stand-alone business? Absolutely not. The question is, will it add that much value or more to Visa's business?

Jason Moser: Yeah. Well, and that's it. Visa has got something like four billion cards out there now or something? You're plugging it into obviously the biggest payments network and that is something that they can factor in. The price becomes a little bit more justifiable, I think, to them at least, because they're viewing it from the size of the network. But regardless, it is a matter of you still got to do something with it.

Matt Frankel: If you remember when the Plaid deal was announced, Visa's stock went down.

Jason Moser: Yeah, I do remember.

Matt Frankel: My big theory on why is because of the price of the deal, not necessarily because of the deal itself. It's because they're spending over five billion dollars of their capital, as opposed to putting it to use with buybacks or dividends or something like that. That's a big chunk of change and it's really unclear what Visa is going to do with Plaid.