Earnings Preview: Visa Set For A Strong Second Half Of FY16

July 20th, 2016 by Trefis Team
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V: Visa logo
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Visa

Visa (NYSE: V) is set to report its earnings for the third quarter of fiscal 2016 on Thursday, July 21st. The U.S. based payments company reported a 23.7% year-over-year growth in net profits on the back of a 5.4% year-over-year increase in revenue in the second quarter. This growth was broad based and reflected the strength of the company’s various business segments. Payments volume on Visa’s network grew by 12% and the number of transactions grew by 8%, leading to an 8% increase in services revenue and a 7% increase in payments processing revenue.

We expect the same trends to continue this quarter. The company has strong fundamentals, such as its partnership agreements with five of its six biggest volume driving partners, deals that last till 2020. In addition, Visa has been the beneficiary of the fall out between Costco and American Express, and the termination of the contract between United Services Automobiles Association (USAA) and Master Card. Given the standardization of services in the payments business and the similar rates charged from merchants, client relationships are the most important driver of revenue growth and Visa is doing extremely well on this front.

Most of Visa’s revenue comes from the U.S., but it has been increasing its presence internationally. In the previous quarter, the number of transactions on Visa’s network grew by 6% to over $1 billion. Moreover, Visa is now close to gaining all the regulatory approvals required for operating in China, where card transaction volume clocks in at around $7 trillion per year. Gaining even close to 5% market share can increase Visa’s revenues by close to double digits. The opening up of the Chinese market could provide a significant upside to our price estimate for Visa. As a result of this, if transactions per card increase by 5% each year for the rest of our forecast period, there could be a 20% upside to our target price for Visa. In contrast, if the number of transactions decline by 3% each year, there could be a little over 10% downside to our stock price.

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Finally, with more and more of commerce shifting online consumers are completing a higher proportion of their payments over the internet. Visa has been active on this front in the following ways:

  1. It purchased a business called authorize.net, which helps small merchants accept credit cards online.
  2. It has launched Visa Checkout, a service that allows customers to make payments via any device.
  3. It also has a big investment in the fast growing Silicon Valley based startup Stripe.
  4. For offline payments, it has collaborated with Apple Pay.
  5. In February, the company launched Visa Developer Platform, an open platform that provides Visa APIs and software development kits for access to some of Visa’s most popular payment products and services to allow developers to build new applications on top of them.

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Have more questions about Visa? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Visa
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