Earnings Review: Visa Posts Strong EPS Growth, Poised For A Solid 2016

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Visa (NYSE:V), the U.S.-based payments technology company, reported results for the first quarter of the fiscal year 2016 on Thursday, January 28th. (Fiscal years end with September.)  The company reported a 5.4% year-over-year growth in its revenue, with net income growing by a strong 23.7%, resulting in an earnings per share growth of 27%. [1]  The payments giant left its forecasts for the full fiscal year unchanged. It expects full year revenue growth to be in the region of high single-digits to low double digits, leading to a mid-teens growth rate in earnings per share. [2] Below, we take a closer look at the company’s results.

Strong Performance Across All Segments

Visa generates most of its revenue from its services and data processing segments. The services business grew at 7% this quarter to reach $1.65 billion in revenue. [3] This was driven by a 12% increase in payments volume (on constant currency basis) to $1.3 billion. [3] The company’s data processing revenue grew at 7% to $1.5 billion, driven by an 8% increase in the number of transactions on Visa’s network. [3] The total value of transactions conducted on the network over the quarter  (in constant currency terms) was $19 billion, making Visa’s average cut on each transaction close to 8 cents. [3] While most of Visa’s revenue comes from its business in the United States, it has a strong presence in international markets as well. The company’s international transaction revenues business grew by 6% to $1 billion over the quarter. [3] Visa’s client incentives grew to 18.1% of revenues to $788 million over the quarter. [3]

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Focus On Growth Incentives

Visa’s growth in the future is likely to come from the following three drivers:

1) New Partnerships: Visa has partnership agreements in place with five of its six top clients till 2020. This should ensure stable growth over the period. Additionally, the company acquired two new clients in Costco and USAA in 2015. These partnerships came at the expense of Visa’s competitors: Costco had been a long term partner with American Express, while USAA ended a long term partnership with Master Card. Since the payments solutions market is fairly standardized in terms of product offerings, client relationships are the most important revenue growth driver.

2) China Opportunity: The Chinese economy has been dependent on manufacturing and real estate in the recent years but that trend is changing as the central bank tries to guide the economy towards consumption. Electronic payments will be a major contributor in that shift. However, Chinese Union Pay holds a major monopoly in the processing and clearance services of credit and debit card payments in the China market. Consumption is expected to grow from 36% of China’s GDP to 50% by 2030, so there is considerable opportunity for new players to grow their revenues. Visa will begin expanding its China operations in the second half of 2016 when it finally obtains all the regulatory approvals required to conduct operations in the country. Total card transactions in China stand at around $7 trillion, so if Visa can can capture even 1% of that market it can grow its revenue by 1.5% to 2% by 2017.

3) Mobile Commerce: Instead of merely paying through credit cards at point of sale, consumers are now also increasingly shopping online through their mobile phones as well as choosing to pay through their mobile phones at the point of sale. These are trends that will drive the growth of digital payments going forward and it is important for Visa to be competitive in these segments. As far as online sales are concerned, Visa has bought a business called authorize.net, which helps small merchants accept credit cards online. The company also launched Visa Checkout, which allows customers to make payments via any device. Additionally, Visa also has a big investment in the fast growing startup Stripe. For offline payments, Visa has collaborated with Apple Pay. However, competition in this space is intense and Visa’s innovations in this space will determine its growth opportunities to a large extent.

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Notes:
  1. Visa 10-Q, SEC []
  2. Visa’s (V) CEO Charlie Scharf on Q1 2016 Results – Earnings Call Transcript, Seeking Alpha, January 2016 []
  3. Ref: 1 [] [] [] [] [] []