Source: Seeking Alpha
Visa Inc. (NYSE:V)
Q3 2014 Results Earnings Conference Call
July 24, 2014, 05:00 PM ET
Jack Carsky – Head, Global IR
Byron Pollitt – CFO
Charles W. Scharf – CEO
Welcome to Visa Inc.’s Fiscal Third Quarter 2014 Earnings Conference Call. All participants are in a listen-only mode, until the question-and-answer session of today’s call. Today’s conference is also being recorded, if you have any objections you may disconnect at this time. I would now like to turn the conference over to your host, Mr. Jack Carsky, Head of Global Investor Relations. Mr. Carsky, you may begin.
Jack Carsky – Head, Global IR
Thanks, Charles. Good afternoon everybody and welcome to Visa’s earnings conference call today. With us today are Charlie Scharf, Visa’s Chief Executive Officer, and Byron Pollitt, Visa’s Chief Financial Officer.
This call is currently being webcast over the Internet. It can be accessed on the Investor Relations section of our website at www.investor.visa.com. A replay of the webcast will also be archived on our site for 30 days. A PowerPoint deck containing financial and statistical highlights of today’s commentary was posted to our website prior to this call.
Let me also remind you that this presentation may include forward-looking statements. These statements aren’t guarantees of future performance and our actual results could materially differ as the result of a variety of factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and Q, which you can find on the SEC’s website in the Investor Relations section of our website.
For historical non-GAAP or pro forma related financial information disclosed in this call, the related GAAP measures and other information required by Reg G of the SEC are available in the financial and statistical summary accompanying today’s press release. This release can also be accessed through the IR section of our website.
With that, I’ll now turn the call over to Byron.
Byron Pollitt – CFO
Thanks, Jack. Let me begin with my usual callouts and observations. First, we continue to experience solid constant dollar payment volume payment volume growth in the low double-digit range both in the US and in internationally. That said, we see no signs yet of any acceleration in economic recovery and cross-border volume growth remained soft in the mid-single-digits.
Turning to revenue, as expected and previewed on our call last quarter, revenue growth further moderated growing 7% year-over-year on a constant dollar basis or 5% nominally which reflects the two percentage points of FX headwind we have experienced since the beginning of the fiscal year.
As a reminder, the current Q3 is lapping 17% nominal revenue growth in the prior year quarter which benefited from a number of favorable one-time adjustments.
It is worth noting that the international revenue grew it only 1% this quarter despite cross-border constant dollar volume growth of 7%. While unfavorable FX is a partial explanation, the bigger impact is the significant reduction in currency volatility which has a direct impact on our international revenues. We expect both of these factors to reverse overtime.
Looking ahead to Q4, we expect a rebound in nominal revenue growth on the order of 2 to 3 percentage points compared to Q3. This rebound is about 2 percentage points than we anticipated at the time of our last earnings call primarily due to a 1 percentage point drop in cross-border transaction growth and unusually low levels of volatility across a broad range of currencies.
So, that means for the full fiscal year 2014, we now expect revenue growth in the 9% to 10% range on a constant dollar basis with guarded optimism that the moderation in cross-border volume growth has dropped. After FX impacts that translates into nominal revenue growth of 7% to 8%.
Client incentives for the fiscal third quarter came in lower than we had anticipated at our last earnings call due primarily to the timing associated with several major deals which have now been either signed or we expect to sign in the fiscal fourth quarter. With this in mind, we are narrowing our full year guidance for client incentives as a percent of gross revenue to around 17% from the prior range of 16.5% to 17.5%. Let me also point out that mathematically this puts the fourth quarter at north of 19%.
In terms of EPS, on a fiscal year 2014 basis, we are narrowing our guidance for diluted earnings per share to be in the 17.5% to 18.5%. Lastly, we remain confident in our future growth prospects and fully committed to returning excess cash to our shareholders. To this end, we repurchased a total of $5.6 million shares during the quarter at an average price per share of $207 in change resulting in a total cost of $1.2 billion. This leaves an outstanding open to buy of $1.9 billion at the end of June and as always we will take advantage of market movements to repurchase at attractive prices.
Now, let’s turn to payment volume and transaction growth. Let me start with what I stated last quarter though we are seeing a sustained economic recovery, there are no signs yet of acceleration either domestically or internationally. Global payment volume growth for the June quarter in constant dollars was 11%, a 1 percentage point decline from the March quarter, the U.S. grew 10% and international grew 13%.
Drilling down further for the June quarter, U.S. credit growth was 12% slight improved to 14% growth. U.S. debit was 8% in Q3, a 1 percentage point improvement compared to Q2 through July 21st, U.S. debit is flat at 8% growth. Taking together U.S. payment volume growth through July 21 was 11%, up 1 percentage point from the Q3 level.
Global cross-border volume delivered a 7% constant dollar growth rate in the June quarter slightly down from 8% in the March quarter. U.S. and international both grew at 7%. Through July 21st, cross-border volume on a constant dollar basis held steady at 7% growth with the U.S. growing 6% and international registering 7% growth.
For the June ending quarter, the sequentially downtick of 1 percentage point in cross-border was broad-based and spread across China, Russia, Ukraine, Venezuela, Argentina and the Middle East as you might expect, given political tensions and the early on-set of Ramadan.
Speaking of Ramadan, when interpreting to Q4 cross-border trends keep in mind that the timing of Ramadan in 2014 benefits August at the expense of July.
Transactions processed over Visa’s network totaled $16.7 billion in the fiscal third quarter, an 11% increase over the prior year period, same growth rate as Q2. The U.S. grew 9% while international delivered 20% growth. Through July 21st, processed transaction growth moderated to a 9% growth rate. The notable drop in July is largely due to the lapping of significant debit wins in Brazil in June 2013 where our debit processing penetration went from zero to well above 50%.
Now, turning to the income statements. Net operating revenue in the quarter was $3.2 billion, a 5% increase year-over-year, driven primarily by growth in service and data processing globally and as mentioned earlier, negatively impacted by a 2 percentage point foreign currency headwind.
Moving to the individual revenue line items, service revenue was $1.4 billion, up 9% over the prior year and was driven by moderating global payment volume growth. Data processing revenue was $1.3 billion, up 11% over the prior year’s quarter based on solid growth rates in Visa processed transactions both in the U.S. and internationally.
As highlighted earlier, international transaction revenue was up 1% to $860 million versus 7% constant dollar volume growth over the prior year period, as a result of a broad range of currencies experiencing volatility well below the 10 year trend line in contrast to the year ago quarter when volatility was near record highs. We would expect a return to a more normal volatility pattern in the coming quarters.
Total operating expenses for the quarter were $1.1 billion, down 3% from the prior year. Certain expenses have slipped to the fiscal fourth quarter while some specific personnel and professional fees those sequentially higher than the prior quarter were comping off of higher levels of the expense in the year ago period. We expect elevated marketing investments in the Q4 more comparable to Q2 levels tied to the FIFA World Cup in combination with significant investments in the support of the recent rollout of Visa Checkout. Operating margin was 64% for the third quarter, in line with our annual guidance of low to mid 60s. Capital expenditures were $109 million in the quarter.
At the end of the June quarter, we had $624 million shares of Class A common stock outstanding on an as converted basis. The weighted average number of fully diluted shares outstanding for the quarter totaled $628 million.
Finally, given our year-to-date results and our outlook for the balance of the year, let me recap our 2014 full year guidance. Constant dollar net revenue growth of 9% to 10% which when combined with 2 percentage points of negative FX impact; yield nominal revenue growth of 7% to 8%. Client incentives around 17%; operating margin in the low to mid 60s; tax rate between 30% and 31%; EPS growth in the 17.5% to 18.5% range and free cash flow of about $5 billion.
Before I turn the call over to Charlie, let me provide some early perspective on fiscal 2015. In short, we are approaching 2015 bullish on the long-term but cautious in the short term. Here are some of the underlying observations and assumptions in forming our planning for next year.
First, while we expect U.S. and international payment volume growth to remain healthy, we have not yet seen acceleration in global economic growth. Cross-border transactions appear to be troughing in the 6% to 7% growth range on a constant dollar basis. As a perspective, we know that these growth rates can recover significantly without notice and that the notable declines in Latin American growth rates lap in January of 2015 and the market declines related to the Russian-Ukraine will lap in March, everything else equal once these events anniversary to pick up in cross-border growth could be in the 2 to 3 percentage point range.
As the currency volatility, not sure when this trend reverses. We only know from an historical perspective we are overdue for a correction and such shifts and trend can be quick and sizable. Consistent with past strategies, we remained focused on growing revenues for converting more cash volume to electronic payments with a growing emphasis on digital.
In addition, we expect the successful growth in our client payment volumes for both issuers and merchants to result in higher levels of planned incentives as measured by percent of gross revenues.
Turning to Russia, while this situation is still very much influx, we anticipate being a part of a commercial solution that will be implemented in 2015 which will likely resolve in the loss of about 50 million in domestic Russian processing revenue.
Looking further down the income statement, we see no step function change in our tax rate at this time. That said, we are working diligently on a more fully realizing our opportunities related to foreign tax credits.
Finally, consistent with past practice, we expect to deploy our excess cash flow in 2015 to service our dividend and to repurchase our shares. In sum, we remain bullish on the future but recognize that in today’s economic environment we must work through several challenges before we can once again resume more normalized rates of growth. As is our practice on the Q4 earnings call, we will provide more color on 2015.
And with that, I’ll turn the call over to Charlie.
Charles W. Scharf – CEO
Thank you very much, Byron. Byron did cover the financial results in a fair amount of detail but I just thought I’d just pass on a few quick thoughts.
First of all, the quarterly results did come in where we expect. The revenue growth being impacted by the year-over-year comps with the strong U.S. dollar and the tepid growth from cross-border payment volume in these specific geographies was what we expected. And we reiterate that we are confident that these headwinds we do not feel are permanent.
More importantly for the long-term, global payments volume and processed transactions remained healthy and strong. Also our issuer contract pipeline is very strong. So, all in all we are gratified to be able to deliver 50% earnings per share growth given the environment and what we’ve discussed.
Let me turn out for a second and talk about Russia. As you all know by reading the newspapers and watching the news, the situation continues to evolve. The recent additional sanctions have not forced us to curtail business with additional clients and as of today, our domestic and international business continues.
This concludes completing term sheets and contracts regarding our brand relationships during this quarter with significant Russian clients which we’re gratified about but we continue to focus on developing a domestic processing solution and we’re actively engaged with the Russian government and the Russian banks to develop a commercial solution which will allow us to continue serve our Russian clients.
Most limiting provisions of the new law going to effect in October and we are working to have a solution implemented by that time. Having said that and as Byron mentioned, we do expect to lose a portion of our domestic processing revenues over the next year which will reset our base from which we expect to achieve good growth.
Now, let me turn for a second and talk about what we’re seeing in our client activity around the globe. We did have a good quarter regarding issuing co-brand contracts just a few significant examples. In U.S. we renewed our credit card relationships with the American Eagle Outfitters and high hotels and resorts.
In Canada earlier this month, we launched a new relationship with CIBC for Tim Hortens which is the largest QSR in Canada. It’s a significant co-brand offering and a no fee rewards space reported by innovative product features and real-time awards. It’s called the Double Double Visa Card, it leverages the first of its kind dual button technology that combines a CIBC Visa Credit Card for payments with a classic Tim Card for rewards. Cardholders simply press CIBC Visa button on the front of the card to pay for their everyday purchases anywhere Visa accepted or they can choose to press the Tim Card button and then use the same card to redeem their Tim cash for their favorite coffee and menu items at Hortens. New card is also, also offers the convenience of Visa payWave and the security of chip and pin technology that consumers in Canada enjoy today. On the issuing side, we also renewed a multiyear agreement with the Royal Bank of Canada an important and long-standing client of Visa.
We also signed a number of other significant new multiyear agreements around the globe. In Australia, we will be the exclusive card net worth for a Woolworths money credit card partnership. Woolworths is Australia’s larger retailer. In China, we renewed our credit partnership deals with China Industrial Bank, China Minsheng Banking Corporation, and Shanghai Pudong Development Bank. In Korea, we signed a new debit partnership agreement with [Pona SK] and a new credit debit agreement with [Woori] card. In Saudi Arabia, the Saudi British Bank will convert their debit card portfolio to Visa from a competitor and bank Saudi frenzy has renewed their credit, debit and prepaid agreement. In the UAE, Visa signed new credit deal with Mashreq Bank including an exclusive card for high net worth individuals.
Turning to CyberSource for a second. We have discussed the weaker growth over the past few quarters increasing our rate of growth here it will take some time it’s one account at a time and as Byron mentioned we are investing here to rebuild the higher growth rates.