Visa Inc (V) USD0.0001 'A'

Visa's third quarter revenue rose 27% year-on-year to $6.1bn. That reflects a recovery in cross border transactions as part of an increase in overall volumes. Underlying earnings per share rose 41% to $1.49.

The board has declared a quarter dividend of $0.23 per share.

The shares fell 1.2% in after-market trading.

Our view

The current crisis will change the world in many ways. One likely shift is an acceleration of the shift away from cash and cheque towards card payments. Not only has online shopping gained at the expense of traditional high street stores, but the increased infection risk associated with handling cash has spurred a shift towards card payment as shops reopen.

As the world's largest payment processor, handling payments worth $11.3trn across 140.8bn transactions in 2020, that's good news for Visa. It helps that contactless payment is a particular area of strength. Wider uptake would increase card use in small transactions, and with the contactless rollout in the US just getting started, there's still years of growth potential.

However, the group hasn't escaped the coronavirus unscathed. Far from it.

The almost complete collapse in international travel undermined lucrative cross border transactions, but they're starting to bounce back now. The good news is that, 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 although that's been mitigated by good cost control.

With net debt substantially lower than last year's cash profits, 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 - however it's started running into competition concerns. A $5.3bn deal with Plaid was abandoned after regulators lodged complaints arguing the deal would reduce competition. Fortunately, the group sees organic opportunities too, and that's driving expansion into new payment technologies and geographies.

We continue to see payments in general, and Visa in particular, as an attractive business. However, at 36.6 times expected earnings, the shares trade at a nearly 50% premium to the longer-term average. That creates significant short-term risk if the company were to disappoint, and means investors need to be prepared to take a long-term view.

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Second Quarter Results

Visa reported a 34% rise in payments volume as the number of processed transactions rose 39% to 42.6bn, led by domestic transactions. Cross-border volumes excluding transactions within Europe rose 53%, and cross-border volumes rose 47% overall.

Visa's service revenues, which are based on payment volumes in the prior quarter, rose 17% year-on-year to $2.8bn. Data processing revenues rose 32% to $3.3bn and international transaction revenues fell 54% to $1.7bn. Other revenue rose 31% to $409m. Incentives paid to clients were $2.1bn and represent 25.8% of gross revenues.

Quarterly operating expenses rose 12% year-on-year to $2.1bn, which includes some acquisition costs. Excluding these, operating costs also rose 12%, mainly driven by increased staff and marketing costs.

In the first nine months of the year Visa generated $10.8bn in free cash, compared to $7.8bn a year ago. Net debt currently stands at $1.8bn compared to $4.0bn a year ago.

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