Visa Inc (V) USD0.0001 'A'

Visa reported first quarter revenue fell 2% year-on-year to $5.7bn. That reflects the continued decline in cross border transactions, which were partially offset by higher overall transaction volumes. Earnings per share were flat at $1.38.

The group bought back $1.7bn worth of its stock in the second quarter and the board recently declared a quarterly dividend of $0.32 per share.

The shares rose 1.0% 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 has undermined lucrative cross border transactions and that looks set to continue for some time. 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 36.3 times expected earnings, the shares trade at a nearly 50% premium to the longer-term average. That creates significant short-term risk if the stock were to de-rate, and means investors need to be prepared to take a long-term view.

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Second Quarter Results

Visa reported a 11% rise in payments volume as the number of processed transactions rose 8% to 37.6bn. Cross-border volumes excluding transactions within Europe fell 21%, and cross-border volumes fell 11% overall.

Visa's service revenues, which are based on payment volumes in the prior quarter, rose 8% year-on-year to $2.8bn. Data processing revenues rose 11% to $3.0bn and international transaction revenues fell 19% to $1.5bn. Incentives paid to clients rose 17% to $2.0bn and represent 25.8% of gross revenues.

Quarterly operating expenses rose 11% year-on-year to $2.1bn, which includes some exceptional expenses related to indirect taxes and acquisition costs. Excluding these, operating costs rose 3%, mainly driven by increased staff costs.

In the first six months of the year Visa generated $6.5bn in free cash, compared to $4.9bn a year ago. The group reported net debt of $4.5bn, compared to net debt of $7.8bn a year ago.

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