Morningstar | Visa's Impressive Growth Continues Unabated
Wide-moat Visa turned in a fine fiscal third quarter, with growth that was modestly ahead of our full-year expectations. The company generated year-over-year top-line revenue growth of 15%. Year-to-date, Visa’s net revenue has grown by 12.4%, almost perfectly in line with our estimate. Unfortunately, not all of this growth fell to the bottom line during the quarter. Visa recorded a $600 million litigation provision that meant operating income actually fell 5% from the previous year. Excluding the litigation provision, Visa’s operating income would have climbed 15%. In addition, adjusted earnings were $1.20, a 39% increase from the previous year. With the exception of the litigation expense, little went wrong for Visa during the quarter. For the quarter, payments volume, cross-border volume, and processed transactions climbed 11%, 10%, and 12%, respectively, from the previous year.  We’ll be maintaining our fair value estimate of $122 per share.In addition to this quarter’s growth, client incentives as a percentage of gross revenue came in at 20.7%, about 40 basis points higher than the previous quarter, but still significantly below management’s expectations for the year. The company now expects that customer incentives will come in at the low end of its stated range of 21.5%-22%. Given that for the first nine months, Visa’s client incentives as a percentage of gross revenue has been only 20.8%, we suspect that Visa will come in below its stated range, perhaps significantly. Though we are expecting higher client incentives in the Visa’s fourth quarter, they would have to be significantly higher to meet management’s full-year expectation. During the call, management attributed the improvement in incentives to contract delays and lower-than-anticipated incentives.
Finally, the company’s international expansion appears to be well on track. Payments volume growth in India increase over 20% during the quarter. Furthermore, during the call, management stated that Visa’s market share in India is now over 50%. Internationally, the only hindrance to Visa’s business has been a stronger U.S. dollar. Specifically, Latin America was hit as currencies fell sharply against the dollar. Though cross-border volume in growth was 10% during the quarter, this is a 1% deceleration from the previous quarter.
Visa is engaged in digital payments. The company facilitates payments between consumers and businesses. The company is focused on its proprietary network, VisaNet, to provide products and services. The company provides a portfolio of business payment solutions, including small business, corporate (travel) cards, purchasing cards, virtual cards/digital credentials, non-card cross-border business-to-business payment options and disbursement accounts, covering various main industry segments around the world. The company also provides several capabilities and services, including fraud prevention and security, processing, loyalty, merchant and digital solutions, consulting and data solutions.
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