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V AT A GLANCE

P/E ► 21.5 AVG EV/EBITDA ► 9.54 AVG Debt to Equity ► 0.431 VERY LOW Current Ratio ► 2.16 AVG Interest Coverage Ratio ► 24.1 VERY HIGH

 

 

 

 

 

 

Visa (NYSE: V) operates the world's largest retail Credit Card Network, in terms of transaction volume and the number of branded credit and debit cards in circulation. Visa does not extend credit to its customers; its member banks such as Capital One Financial (COF), Bank of America (BAC), or Wells Fargo (WFC) extend the credit. As of July 30, 2009 there were more than 1.7 billion Visa branded cards in the global market.^[1] Visa provides the information and resources to complete the transaction between the customer, the merchant and their respective banks, collecting a fee based on the number and dollar value of the transactions that it processes.

As a large player in the credit card industry, Visa is subject to extensive regulation by national governments, especially in the United States. For instance, Visa was forced to pay American Express Company (AXP) $2.25 billion in a settlement over anti-trust infringement in late 2007.^[2] In October 2008, Visa agreed to settle a similar $6.0 billion suit with Discover Financial Services (DFS).^[3] Moreover, American Express also gained the right to provide transaction services to banks that were previously locked into exclusive agreements with Visa and Mastercard. In addition to the Credit Card Reform Bill recently passed, it may be subject to further government regulation. On October 8, 2009, Congress heard testimony regarding interchange fees, which would potentially move forward legislation to make these fees more transparent.^[4]

For the fourth quarter of Visa's fiscal 2009 (ended September 30, 2009) Visa reported a net income of $514 million, a large turnaround from its 2008 net loss of $356 million for the same period.^[5] Visa also announced a share repurchase plan of $1 billion, showing signs that declining credit and debit card use trends are stabling.^[6]

Company Overview

Headquartered in San Francisco, Visa operates the world's largest retail electronic payments network. In particular, Visa provides financial institutions with a platform to process consumer credit cards, debit cards, prepaid cards, and other forms of electronic payment methods.

Visa makes money from card service fees, data processing fees, and international transaction fees. Visa operates a four-party payment system consisting of a card-holder who purchases a good or service from a merchant using one of Visa's cards. The merchant is paid the value of the good, minus the cost of the transaction by the merchant's bank (the acquiring bank). The merchant's bank is then paid back by the card-holder's bank (or the issuing bank), which in turn charges the customer the cost of the good. ^[7]

Visa grew tremendously between 2004; its revenue increased 157% between 2004 and 2008.^[8]. Visa does not actually lend money to its customers, so it is not directly impacted by the credit crunch as holding and lending banks. Instead, it acts as an intermediary between the customer and merchant and their respective banks. This gives Visa some protection against credit default, but the company --which depends on the both the number and value of its transactions-- is still vulnerable to falling consumer spending.

Business and Financial Metrics

While revenue growth has grown each of the past four years, net income has fluctuated.^[8]

In 2008, Visa had operating revenue of $6.26 billion, operating income of $1.23 billion, and net income of $804 million.^[8] Operating revenues increased from its 2007 level of $3.59 billion mainly due to a 17% increase in payment volume and a 13% increase in transactions processed.^[9] Operating expenses declined 20% from $6.31 billion in 2007 to $5.03 billion in 2008.^[8] This decline is largely attributed to litigation provision, or costs associated with a $1.9 billion settlement with American Express Company (AXP) in the fourth quarter of 2007, offset by a subsequent $1.1 billion settlement with Discover Financial Services (DFS) in the fourth quarter of 2008.^[10]

• Note: Visa's fiscal year ends September 30 of each year.

By increasing the number of cardholders, and the number and value of the transactions, Visa increases its revenue. The use of payment cards has risen drastically in the United States, and this has provided Visa with a strong continued growth in volume of transactions. Its total number of transactions rose from 44.0 billion in 2007 to 50.3 billion in 2008 - a 14% increase.^[13][14]

For the third quarter of 2009 (Visa's fiscal year ends September 30 of each year), Visa earned $1.6 billion in revenue, leading to its net income of $733 million despite payments volume falling 5%.^[15] Compared to the previous quarter, net income rose 73%, which was mainly a result of a gain from its initial public offering (IPO) of Visa's international segment.^[1]

Visa's Revenue Breakdown by Fees ^[16]

Business Segments

• Service Fees (41% of Revenue): Service fees make up the largest portion of Visa's revenue and are from fees from customer purchases.^[17]
• Data Processing Fees (28% of Revenue): Visa controls a large data base of information and charges a fee for passing information from a merchants bank to a customers bank. This information transaction includes when the merchant requests approval from the customers bank, transferring the value of the transaction between the banks, fees for using debit services, and other similar data processing.^[18]
• International Transaction Fees (23% of Revenue): International Transaction Fees are fees that are issued when the merchant bank is situated in one country and the customers bank is in another. These fees tend to occur with across the border type transactions, where the customer crosses a border and makes a purchase. These fees are caused by conversion from one currency to another.^[19]
• Other Revenues (8% of Revenue): Other revenues come from extra services customers can use at an extra charge. This includes extended cardholder protection, concierge services, and exclusive services in Visa Europe.^[20]

Key Trends and Forces

Impact of credit card reform bill

On May 22, 2009, President Obama signed into law a wide the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, a wide ranging credit card reform bill set to fully take effect in February 2010.^[21] However, the first stages of the reform take effect as early as August 20, 2009.^[22] Included in this bill are restrictions on interest rate increases, a 45 day notice before changing interest rates, restrictions on fees that can be charged, requirements for more disclosure, and limits on ability of those under the age of 21 to obtain cards, among others.^[23] Banks have warned that the new legislation will increase rates, decrease credit extended, and increase the use of annual fees for cards.^[24] Less credit likely means less transactions, transaction amounts, and thus a negative impact on earnings.

Economic Weakness lowers consumer spending and the volume of transactions

Consumer spending plummeted in the third quarter of 2008 in the sharpest fall in 25 years, possibly since before World War II. The GDP shrank by .5% as economy deals with the economic turmoil.^[25] The shrinking of sales hurt Visa since it depends on both the number and value of transactions carried out using its network. Service fees fell from $792 million in the second quarter to $749 million in the third quarter. Although the number transactions still rose by 13% in the third quarter 2008 as opposed to the third quarter 2007, analyst expects transactions to fall in 2009.^[26][27]

Disappearance of 2 trillion in credit poses threat to Visa

According to Meredit Whitney, an analyst at Oppenheimer and Co. major banks like, Citigroup (C), Bank of America (BAC) and J P Morgan Chase (JPM), may cut up to $2 trillion in credit lines through 2009.^[28]. While this figure may or may not be accurate, reductions in credit lines would have a negative impact on consumer spending, and thus the number and value of the transactions that Visa is able to charge fees on.

Credit Cards replace paper transactions, and are used more frequently and for smaller purchases

The sector is moving away from paper-based approaches to electronic payments. According to a Nilson Report, the global market for card purchase transactions grew at a compound annual growth rate (CAGR) of 14% from 2000 to 2006. The report forecasts the market to grow at a CAGR of 11% from 2006 to 2012. In 2007, credit and debit card payments made up 56% of all purchases.^[29] Many small transactions around $5 are also now done with credit cards. Many stores no longer require a signature for purchases under a certain amount, such as $20 or $30. Customers find it convenient and processors love it because they earn a fee. However, merchants dislike it because they have to pay a fee on each transaction.

Competition

Visa competes against companies in the general purpose payment card industry, as well as against all other forms of payment. As the largest processor of retail payments the world, Visa is the largest by far compared to its rivals. It accounts for 60% of the debit-card transactions in the U.S. market - a four-to-one advantage over rival Mastercard (MA). It is also bigger by total transactions and total volume.

Visa and its competitors in total volume and transaction

• Mastercard (MA): Mastercard has a strong brand loyalty and name recognition through its "Priceless®” marketing campaign. It has also experienced rapid growth as it has pushed to switch from paper to a fully electronic system.^[30] Visa also competes against Mastercard's Maestro - a global online debit card service.^[31] Mastercard has pushed to advertise and replaced Visa as the Rugby World Cup sponsor in 2011.^[32]

• American Express Company (AXP): American Express focuses on being the credit and debit cards for small business and merchants. It has also filed legal suits against Visa and Mastercard for violating anti-trust laws. Visa settled the suit for $2.1B.^[33]

• Discover Financial Services (DFS): Discover is substantially smaller than Visa and competes with it almost exclusively in the US. Visa also competes against Discover's PULSE, a network that increases the compatibility of debit cards and ATMs in the network.^[34]

Notes

1. ↑ ^{1.0 1.1} Visa's Net Jumps 73% Even as Spending Falls. Jay Miller and Kevin Kingsbury. The Wall Street Journal.
2. ↑ CNBC News "Visa to Settle Antitrust Suit For Record $2.25 Billion" 7 Nov 2007
3. ↑ New York Times - Business "Discover, Visa And MasterCard Settle Antitrust Suit" 15 Oct 2008
4. ↑ Laurie Kulikowski Visa, Mastercard Shares in Rally Mode. TheStreet.com
5. ↑ Visa Q4 profit beats estimates, stock up. Juan Lagorio. Reuters.
6. ↑ Visa Net Hints at Turnaround. Aparajita Saha-Bubna. Barrons.
7. ↑ V 10-K 2008 Item 1, "Transaction Processing Services" p.8
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7} V 10-K 2008 Item 6 Pg. 49
9. ↑ V 10-K 2008 Item 7 Pg. 59
10. ↑ V 10-K 2008 Item 7 Pg. 64
11. ↑ V 10-Q 2009 Item 1 Pg. 3
12. ↑ V 10-Q 2009 Item 1 Pg. 3
13. ↑ V 10-K 2007 Item 1, "Industry Overview" p.9
14. ↑ V 10-K 2008 Item 1, "Industry Overview" p.7
15. ↑ Highlights From Visa's Q3 Conference Call. StreetInsider.com
16. ↑ V 10-K 2008 Item 7, "Operating Revenues" p.60
17. ↑ V 10-K 2008, "Service Fee" p.56
18. ↑ V 10-K 2008, "Data Processing Fees" p.57
19. ↑ V 10-K 2008, "International Transaction Fees" p.57
20. ↑ V 10-K 2008, "Other Revenues" p.57
21. ↑ Obama signs sweeping credit card reform bill. John Poirier. Reuters.
22. ↑ Credit card rules change Thursday. MSN Money.
23. ↑ Key provisions of credit card reform bill. MSNBC.
24. ↑ Credit-Card Fees Curbed. Sudeep Reddy. The Wall Street Journal.
25. ↑ MSNBC Business "Economy, consumer spending shrank in Q3" 23 Dec 2008
26. ↑ V 2008 3Q 10-Q "Consolidated Statements of Operations" p.3
27. ↑ V 2008 2Q 10-Q "Consolidated Statements of Operations" p.3
28. ↑ Columbus Dispatch, 2 Trillion in Credit may be cut, December 18, 2008
29. ↑ Credit Cards"Paper to plastic: Checks and cash losing to debit and credit" 3 Oct 2007
30. ↑ 2006 MA 10-k, Item 1, pg. 4
31. ↑ Reuters Business "Mastercard Inc" - Full Description
32. ↑ Bloomberg "MasterCard Becomes 2011 Rugby World Cup Sponsor, Replaces Visa" 9 Feb 2009
33. ↑ "Visa Agrees to Pay Amex $2.1 Billion to Settle Suit," The New York Times
34. ↑ Google Finance "Discover Financial Services" - Summary