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Visa - double digit revenue growth

Third quarter net revenue rose 19% to $7.3bn.

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Visa's third quarter net revenue rose 19% to $7.3bn, reflecting double digit increases across payment volumes, cross-border volumes, and processed transactions. Underlying net income rose 29% to $4.2bn.

The board declared a $0.375 dividend, payable on 1 September.

The shares were broadly flat in pre-market trading.

View the latest Visa share price and how to deal

Our view

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. Instead, Visa charges 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 come with additional fees and currency conversion revenues.

That's always been 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. Of course, the reverse is also true - so short-term revenue falls have a direct effect on profit.

Net debt's easily covered by expected free cash flow this year, meaning there's plenty of spare cash to go around. Surplus cash is being returned to shareholders through a combination of dividends and share buybacks. The emphasis is on the latter, meaning the prospective yield is a modest 0.8%.

Competition from start-ups and more established rivals has become a greater risk recently. A dispute with Amazon earlier this year highlighted the group's shrinking moat. While the decision to remove Visa as a payment option on Amazon turned out to be temporary, it underscores that Visa's no longer the only game in town.

That's partly why Visa may have upped its acquisition activity, with the latest additions to the fold including Tink and Currencycloud. These are more digital focussed financial tools, and we're supportive of Visa's efforts to broaden its revenue streams in this way.

Looking to the rest of the year, management expects a continued recovery in cross-border travel which would be a nice boost to revenue. Arguably more important though, is the lack of impact higher inflation's having on spending patterns.

We continue to see payments in general, and Visa in particular, as an attractive business. The valuation's not as demanding as it's been in the past, in part due to inflationary concerns and their impact on future earnings. But we're still mindful that near-term volatility is possible, especially if a global economic downturn starts to impact spending.

Visa key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Third Quarter Results

Excluding currency movements, payments volumes rose 17% and total cross-border volumes were up 40%. Performance has been helped by a rebound in international revenue, with international transaction revenues rising 51% to $2.6bn.

Service and Data Processing revenue rose 13% and 8% to $3.2bn and $3.6bn respectively.

Underlying operating expenses were up 15% at $2.4bn, reflecting a broad increase across expense items.

Free cash flow came in at $5.0bn, while net debt stood at $9.7bn at the end of June.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Article history
Published: 27th July 2022