Visa’s (NYSE:V) shares slid after the card processing giant reported a 28% decline in net income for the fourth fiscal quarter of 2013. However, after adjusting for the reversal of tax reserves, which occurred due to a revised Revenue Agent Report issued by the IRS in the fourth quarter of 2012, net income for the three months ending September was up 15%. The company’s operations remained strong as payments volume grew 13%, while total processed transactions grew 14% over the prior year.
These metrics are key for Visa, which charges its clients (card issuers) assessment fees as a percentage of the gross dollar volume (GDV) of transactions processed and data processing fees on the basis of the total number of transactions processed for the client. The company also charges cross-border fees for transactions where the issuer or cardholder’s bank and the acquirer or merchant’s bank are based in different countries. Cross-border volume growth was 11% for the three months ending September, on a constant dollar basis.
The incentive rate – the client incentives offered by Visa as a percentage of gross revenues – increased to 18.6%, above the 16% to 17% the company has maintained for the last four years. This can be considered a positive for Visa as it closed 73 major deals this quarter, as opposed to its average of 53. Growing client relationships will allow Visa to further its global dominance. Visa has over 2 billion cards in circulation worldwide, while its competitor, MasterCard (NYSE:MA), has just over a billion.
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Our price estimate of Visa’s stock is $190, in line with the current market price. The company raised its quarterly dividend by 21% to 40 cents per share and returned $1.3 billion to shareholders through share repurchases.
U.S. Growth Falling
Visa is the dominant card processing company in the U.S., accounting for nearly a quarter of the personal consumption expenditures (PCE) in the country.  More than half of the company’s payments volume comes from the U.S. and the company reported 10% growth in the same for the three months ending September. Credit volume increased 11% while debit volume grew 10%, indicating further market adaptation of the Durbin amendment to the Dodd-Frank bill. The act requires banks with more than $10 billion in assets to use separate payment processing networks. This hurt Visa’s debit growth in the first three months of 2013 as U.S. debit volume fell 4%, but the company is now back on the growth track.
A more ominous sign for Visa was the growth decline in the last month of the quarter. The U.S. payment volume growth rate fell from 11% in August to 8% in September and remained around 9% in the first three weeks of October.  We maintain a positive stance on the U.S. growth rate as the economy and the job market continues to improve, but will keep a close eye on consumer sentiment in the coming years.
International Operations Still Strong
Visa maintained a 13% growth rate for global payments volume, consistent with the rate observed for the third fiscal quarter. Nearly 45% of the international payments volume came from Asia, where the company reported a growth rate of 13.5% on a constant currency basis. However, foreign exchange fluctuations affected the company as the reported nominal growth rate was just 8%. Transaction volume from the region increased 14% over the prior year. We believe that emerging markets in the Asian and Latin American regions hold tremendous potential for Visa. Paper-based transactions account for over 60% of the PCE in countries like India, Mexico and Brazil.  Transaction volume will grow as these countries adopt electronic payment technologies. We expect solid international growth driven by developing countries in the coming years.Notes: