First quarter revenue rose 10% to $6.1bn, that's slightly slower than last quarter and a little softer than expected. Net income also rose 10% to $3.3bn, while the ongoing share buyback programme supported a 12% increase in the earnings per share - which rose 12% to $1.46.
The shares fell 2.5% in aftermarket trading.
Visa is the world's largest payment processor, handling payments worth $8.8trn across 138.3bn transactions in 2019.
Despite appearances, Visa isn't a 'credit card company'. It doesn't lend consumers money or run accounts, so it's not on the hook for the money if a customer defaults. Nor does it, generally, take direct fees from businesses who accept Visa cards for payment. Instead, Visa charges the banks for transferring funds.
Service revenues are charged to card issuers, and are calculated based on the value of the transactions. Data processing revenues depend on the number of transactions that take place, and are charged to the bank of both the customer and the receiving business. Cross border transactions are even more lucrative, with additional fees and currency conversion revenues.
That's a very attractive business model.
Additional transactions are virtually costless to Visa, so extra revenue turns straight into profit. Capital expenditure is limited, meaning profits convert well into cash.
With net debt substantially less than one times cash profits, that surplus cash can be returned to shareholders through a combination of dividends and share buybacks. The emphasis is on the latter, meaning the prospective yield is a modest 0.6%.
The payments industry is going through a lot of change at the moment, with competition from start-ups and more established rivals. Visa's been prepared to acquire newer rivals to grow its position in key markets - and is set to pay $5.3bn for fintech group Plaid. But the group sees organic opportunities too, and that's driving expansion into new payment technologies and geographies.
Contactless payment has been a major opportunity, increasing card use in small transactions. And with the contactless rollout in the US just getting started, there's still years of growth potential.
The shares are trading on 31.8 times expected earnings, a 41% premium to the longer-term average. That creates significant short term volatility risk if the stock were to de-rate, and means investors will need to be prepared to take a long term view.
First Quarter Results
Revenue growth was driven by an 8% increase in payment volumes, 9% increase in cross border volumes and 11% increase in processed transactions.
Service revenues, which are based on payment volumes in the prior quarter, rose 9% to $2.6bn. Data processing revenues rose 16% to $2.9bn and international transaction revenues rose 9% to $2.0bn. Incentives paid to clients were worth $1.7 billion and represent 22.4% of gross revenues.
Operating expenses rose 14% year-on-year to $2bn, or 13% if you exclude one-off expenses.
Visa generated free cash flow of $3.7bn during the quarter. Share buybacks and dividends totalled $3.0bn during the quarter. Net debt fell 13.7% to $4.0bn, although the pending acquisition of fintech group Plaid will see it rise in the future.
The group expects to deliver underlying revenue growth in the low double-digits for the full year, with earnings per share growth in the mid-teens.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.