Highlights From V's Q4 Conference Call; CEO and CFO Comments on Current Trends and Outlook Through 2011
October 28, 2009 11:12 AM EDT
Last night, Visa (NYSE: V) reported Q4 EPS of $0.74, ex-items, 2 cents better than the analyst estimate of $0.72. Revenue for the quarter was $1.9 billion, which compares to the estimate of $1.78 billion. Today, share are up 3.86%.
Highlights From V's Q4 Conference Call:ul>
To buyback up to $1 billion in common shares. Boots dividend by 19%.
(CEO) While the U.S. and the rest of world were still picking themselves up from the economic storm of the past year, we are beginning to see some very early signs of stabilization and some positive trends in aggregate payment volume.
Several metrics even exceeded our expectations.
For all of 2009, adjusted earnings were $3.23, and were positively impacted by the sale of our nearly 10% equity ownership in VisaNet Brasil last quarter. On an adjusted pro forma basis that excludes this gain, Visa earned $2.92 per diluted share, a 30% increase over 2008, and well above our stated earning goal.
Net operating revenues in Q4 were almost $1.9 billion, a 10% increase over the year-ago period and above our guidance of mid-single digit growth due to the better than expected processed transaction growth, cross-border volumes, and our previously announced pricing modification on domestic processed transactions.
Net operating revenues for fiscal 2009 were $6.9 billion, a 10% increase over 2008 and moderately higher than we had reforecast earlier this year.
Our adjusted operating margin was 49% for the fourth quarter, modestly diluted due to the reorganization charges and marketing investments related to creative development for the Olympics, FIFA World Cup, and our recently announced Currency of Progress campaign.
For full year 2009, our operating margin was 53%, consistent with our guidance of low 50s. For fiscal 2010, we are increasing our margin guidance to the mid-50% range. Byron will speak to this further momentarily.
Adjusted Q4 income was $552 million, a 23% increase over the year-ago period.
For the full fiscal year 2009, adjusted net income was $2.4 billion. Excluding VisaNet do Brasil, pro forma adjusted net income was $2.2 billion, representing a 26% increase over the adjusted 2008 period.
For the September quarter, we reported processing 10.5 billion transactions, a 9% increase over the prior-year period as the migration to electronic payments continues on a global basis.
Just in the month of September, the growth rate expanded to 10%, and that has been the trend through the 18th of October.
We expect to maintain a similar or slightly elevated level of marketing spend in 2010 over that of 2009, given the importance of staying ahead of the curve as key economies across the globe begin to rebound.
Record free cash flow in fiscal 2009 of $3.3 billion, inclusive of the VisaNet do Brasil sale, which allowed us to return over $2.1 billion of excess cash to our shareholders over the course of the year.
Last week we announced an increase to our annual dividend of 19%, and today announced the authorization of a share repurchase program totaling $1 billion.
In addition to the mid-50s operating margins mentioned earlier, as we look ahead to fiscal 2010, we are increasingly confident that we can regain the low end of our 11 to 15% annual net growth target, and deliver another year of better than 20% adjusted EPS growth.
We are also establishing a similar EPS growth target for 2011.
We've continued to make good progress in Washington, and believe that the interchange debate increasingly is viewed as a business to business issue that it is, not the consumer issue the merchants lobby has attempted to portray it as.
We also recently re-signed our sponsorship with the NFL through 2014.
(CFO) Accordingly, total payment volume growth for Visa, Inc. through the end of June in nominal dollars was a negative 2% over the same quarter in 2008, an improvement over the negative 5% reported in the March quarter.
On a constant dollar basis, payment volume grew a positive 2% in the June quarter, unchanged from the March period.
In the U.S., payment volume in the June quarter was a negative 3% over the prior year, unchanged from the March period. Debit delivered a positive 5% growth, while credit growth was a negative 10%, both unchanged from the March quarter.
Debit payment volume continues to account for an ever-greater percentage of total U.S. volume, although credit remains the prevailing choice in the rest of our region.
On a constant dollar basis, rest of world payment volume grew at 8% in the June quarter, moderating from the 10% growth exhibited in the March quarter, but still solidly positive.
Cross-border volume growth remained negative in the June quarter, posting an 8% decline on a constant dollar basis over the prior year period. This represented a moderate decline from the negative 6% reported in the March period.
As in the previous quarters, the slowdown remained broad based. Transactions processed over Visa's network, which are reported on a real-time basis, totaled 10.5 billion in the Q4, an increase of 9% over the similar period a year ago, and up slightly from the 8% growth rate we saw in the June quarter, an encouraging sign.
Turning to the income statement, in Q4, gross revenues of 2.2 billion were up 10% from the similar period in 2008.
Volume and support incentives as a percentage of gross revenues came in at 15%, down from Q3's elevated level of 17%.
For fiscal 2009, gross revenues were 8.1 billion, up 10% over fiscal 2008.
Volume and support incentives rose only 6% as a result of the lower payment volume we experienced over the course of the period.
Volumes and support incentives represented 15% of gross revenue for the year.
Based on our expectation for increased volumes and revenue in 2010, we are expecting volume and support incentives to increase modestly to the 16 to 17% range of gross revenue.
Service revenue was $808 million, up 3% over the prior year period, and reflective of still relatively depressed payment volumes in all regions for the quarter ending June.
Data processing revenue reported on a current quarter basis was $727 million, up 33% over the prior year period based on strong process transaction growth of 9% and the effect of recently announced pricing actions.
International transaction revenues, also reported on a current quarter basis, were down 1% to $507 million due to moderating cross border volumes in the period. Our adjusted operating margin was 49%, slightly below our quarter guidance of low 50s.
For the entire fiscal year, the adjusted operating margin was 53%, in line with our yearly guidance.
On an adjusted basis, total operating expenses for the fourth quarter were $960 million, an increase of $17 million or 2% year-over-year, primarily driven by higher personnel costs. For all of 2009, adjusted total operating expenses were $3.2 billion, a 4% decline from the level of fiscal 2008.
While our focus on efficiency gains will continue into 2010, our expectation is that with the major restructuring initiatives behind us, expenses for the coming year will generally be flat to those of 2009.
Overall, in 2010, we anticipate spending less than $1 billion on marketing and advertising. In aggregate, our total expenses in Q1 of 2010 should look more like the third quarter of fiscal 2009 rather than Q4.
For fiscal 2010, we expect capital expenditures to be in a range of 200 to $250 million.
As a point of reference, we expect that depreciation and amortization will incrementally rise by approximately $30 million for all of fiscal 2010.
Moving on to the balance sheet, we ended Q4 and the year in very strong shape with negligible debt and cash, cash equivalents, investments and restricted cash of $6.6 billion. Of this total, 1.7 billion is restricted cash, which represents amounts sufficient to fully pay out the American Express (NYSE: AXP) settlement with another $1 billion that is currently uncommitted.
Now, let me comment on the trends we saw through the end of September and through the first three weeks of October. On a real-time basis, U.S. payment volume growth showed some positive signs of life during the September quarter, with the overall growth rate coming in at a negative 1%, a solid improvement from the negative 3% of the June quarter.
The individual month of September came in at a positive 1%, the first positive growth in a year, which was due in part to the lateness of the Labor Day holiday weekend versus the prior year.
More recently, through the 21 of October, aggregate U.S. payment volume growth was a positive 3%.
We are also seeing the benefits of receding headwinds in the year-over-year gasoline comparables, which will continue to unfold as we move through our first fiscal quarter of 2010. While we draw some encouragement from this data, it is still not enough for us to call an inflection point in the U.S. economy.
De-constructing the U.S. payment volume results on a real-time basis, credit volume growth ended the September quarter at a negative 9%, a slight improvement from the negative 10% posted in the June quarter. For the individual month of September, credit payment volume improved to a negative 7% rate; and through 21 of October, improved to a negative 4%.
Debit payment volume growth ended the September quarter in positive territory, posting a 7% gain, up from 5% in the June quarter. The month of September improved to a positive 9%, and through October 21, has improved further to a positive 11%. Again, very encouraging trends, but too early to call an inflection point.
On a real-time basis, cross-border volume growth also showed some signs of improvement in the September quarter, with payment volume on a constant dollar basis moving from June's 8% decline to a negative 5% decline. Through the 21 of October, this improved further to a negative 2%. The improvement was led by North America.
Processed transaction growth ended the September quarter at 9%, an improvement over the 8% we reported in the June quarter. In the month of September, that rate was a positive 10%. October to date has maintained that same level of growth, and continues to be a barometer of the strength and resilience of plastic.
We are increasingly comfortable with achieving the low end of our 11 to 15% net revenue growth target in 2010, and delivering better than 20% earnings per share growth in 2010, excluding the VisaNet Brasil gain in 2009.
We are establishing a 2011 earnings per share growth goal of better than 20%, and we will provide additional color at our March Investor meeting. We expect our full year 2010 operating margin to be in the mid-50s, up slightly from the low 50s we achieved this year.
(Q&A) Nice to see the top line upside here, and we appreciate the initial look at fiscal 2011. Just a quick question, and a follow-up, if I can. First of all, with regard to the fiscal '10 net revenue growth guidance, can you talk about the amount of pricing lift that's assumed in there? I recognize you're going to have the U.S. acquirer price increase continue to help you for the first three quarters of fiscal '10. If you can help us get an understanding of how much pricing is assumed in the low end of the 11 to 15% range, that would be great. (A)The amount of pricing impact, we would describe as modest, less than what we experienced in 2009, but a little higher than the long-term steady rate, normalized rate, of one to two percentage points that we have described earlier. The particular pricing action that you mentioned was initiated at the beginning of fiscal '09's fourth quarter, and will anniversary through the third quarter of
fiscal year '10.
And then just a quick follow-up on volumes. Really good to hear that things seem to be turning around there, not that one month makes a trend. But nonetheless, if you put gas prices aside here, and currency, which folks know are starting to help you here in the first quarter of fiscal '10, are there certain spending categories that you guys are starting to see a little bit of a recovery in first, in terms of how it's driving some of the better year-over-year volume growth comps? (A)We would say at this point, there's no call-out there, and that you have outlined the two bigger drivers that are moving the needle, the removal of FX that was a headwind, and in the first fiscal quarter of 2010, we should start to see that neutral impact that we talked about during the call. And then this same phenomena exists for gasoline prices, sometime in this quarter, potentially in the month of November, we ought to be at the same average price for gas. And we should see that headwind pretty much go to neutral as well.
One comment, Joe, that you made at that end of your remarks that caught my attention was the discussion of investing in merchant acquiring outside the U.S. As I always thought that that was a perfect fit for both the major U.S. networks outside the U.S. So I was hoping you can expand on that a little bit. (A)Well, I think I told you what we're looking at, or thinking about doing. But as it relates to specifics, I'm really - I really don't think I can get into this at this particular point in time. The only thing that I'll add is that when we, assuming that we're looking at acquiring, we're simply looking at places in
the world where doing that will accelerate the distribution of terminals and therefore accelerate our opportunities in those regions.
And if I can ask one follow-up. On the personnel costs, they were up quite a bit. Was that related to the opening of the data center? (A)No. It's - I would say that it was what we said. It was re-organizational - appropriate reorganization accounting, and some one-time incentives, but we'll be back to normal in the first quarter.
I was just wondering if you could talk about how the organizational structure has changed with John Partridge becoming President as well as COO. Does it make any difference? And then just on the acquirer fee, the change in processed transactions was sort of 1.5%, and the sequential increase in the fee was about 20%. Is all that related to the price change? (A)Yeah, let me start with the transaction fee. So the way we would look at it, the transaction fee or our data processing fees for the quarter, year-over-year, were up 33%. And we would put that - we would break that apart in two segments. The first is that we had very strong transaction growth of - in the 9% range for the quarter year-over-year, and then the acquiring fee does have an amplified impact on data processing fees. So think of the balance as pricing actions in combination with strong transaction growth.
So the 100 million sequential increase roughly or over that from Q2 - from Q3 to Q4 is kind of a - Q4 is kind of a run rate, and it should go up as volumes go up then? (A)It directly relates to volumes. There is a mix - no, there really isn't a mix. It directly - it should have a strong correlation to volume, and then of course, we've got to let the pricing actions run their course.
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