Key takeaways:
· Visa beat on revenue and earnings. No 2020 guidance. Cutting expenses. Share repurchase plans and dividend remain unchanged.
· Dramatic fall in volumes but slight stabilization emerging: intra-quarter volume trends decelerated w/ early April volumes in the US and cross-border declining >20% and >40%, respectively. However, volumes stabilized/recovered somewhat in late April. More details below.
· Food & Drug category spending saw only increase: >20% of U.S. spending on Visa’s network comes from food and drug stores and that was the only category to post an increase in April, up +20%. Among the hardest hit categories are travel, restaurants, entertainment and fuel.
· Cross-border headwind until travel recovers: Visa warned “the road ahead will likely be challenging for a number of quarters,” though declines in spending on their network did begin to moderate in April. This is partly due to lower cross-border volumes which are more profitable for them. Cross-border volumes are basically a mix of travel and e-commerce. For the quarter, cross border was down 2%. However, 2Q will be worse. Exiting April, overall cross-border volumes were down 44%. Travel is 2/3 of volume and was down -80%. E-commerce is the other 1/3 and was up +25% in April.
· Current environment could be secular growth catalyst: While cross-border will be headwind for the foreseeable future, current environment may be a catalyst to further displacement of cash aided by faster uptake of contactless and higher e-Commerce penetration.
· CFO Vasant Prabhu said… “It is very likely that this crisis could accelerate trends that were already underway, like the shift to e-commerce and the shift to digital forms of payment… it is speeding up tap to pay adoption and driving growth of new flow use cases.”
Additional Highlights:
· Revenue grew ~8% constant currency YoY and EPS was +9% YoY.
· Key metrics: Payments volume was $2.1T, up 5% (credit +1% and debit +9%), cross-border was -2%. Total cards grew 4% to 3.5B cards (1.1B credit and 2.4B debit). Client incentive were up 15%, stepped up due to high renewal activity.
· COVID-19 impact:
o Discussed trends occurring after the quarter ended more than they normally would.
o US payments volume:
§ strong growth in January and February payments, but by the last week of March payment vols were declining 28%.
§ Credit spending harder hit than debit.
§ Through April 28, US payments volumes were down 19%, debit was down 6% and credit was down 31%.
§ Credit was down at least 25% every week in April, and debt was down mid-teens then spiked into positive territory in both week three and week four as the first wave of economic impact payments were distributed.
§ e-commerce volume excluding travel up 18% in April and card present volume down 45%.
§ 20% of volumes = food and drug stores (along with Walmart, Costco and Target) and are the only categories still growing – up approximately 20% in April – essentially all this growth is coming from online spending up over 100% in the last two weeks.
§ 33% of volumes = categories that are declining between 15% to 50% such as retail automotive, healthcare, education and government.
§ 25% of volumes = the hardest hit categories – including travel, fuel, restaurants and entertainment all declining over 50% in April. The travel decline affects all sub-sectors and is the deepest at around 80%. Within restaurants quick service restaurants are holding up better.
§ Categories showing more resiliency include home improvement within retail and medical equipment within healthcare. Gaming is up over 200%. As economic impact payments have been distributed, they’ve seen significant increases in home improvement, automotive, healthcare and some retail goods and services categories.
o International payments volume:
§ Major markets in Europe and Canada have trends similar to the US
§ India with a rigorous and sudden lock down has experienced one of the fastest and deepest declines.
§ Hong Kong dropped in early February, along with the rest of China and appears to be recovering in April.
o Cross-border:
§ Volume declines exiting March of 44%. Volume remains down 43% through April 28.
§ The majority of the cross-border spend decline is travel related (2/3), and was down 80% in April. E-commerce is the rest of volume and is growing faster than pre-crisis levels.
· Nothing has changed w/ their major growth initiatives: consumer payments, new flows and value-added services.
· Contactless penetration: Seeing increasing penetration of tap to pay. This should help drive displacement of cash for lower ticket purchases.
· Partnerships: Several announcements around new and renewed partnerships –Truist (6th largest issuer in the US), Barclays (UK), Groupe BPCE (France), Comdirect (Germany). Entered into an agreement for B2B virtual cards with ICBC, the largest bank in China. Visa is the global co-brand leader, and extended that this quarter w/ Accor.
· Digital wallets: As payment industry evolves, Visa continues to partner to stay at the center like with Tencent in China, Paytm in India, M-Pesa in sub-Saharan Africa and Lydia in France. They now have relationships with wallet providers that give them the potential to embed Visa credentials in 2 billion wallets.
· Cost cutting: pulling back on discretionary spending, especially related to personnel, travel, professional services and marketing. Expectation for expenses to be flat in 2H. They’ve pledged to their 20k employees no Covid related layoffs in Calendar 2020.
· Balance sheet:
o Ended the quarter with $13 billion of cash.
o At the end of March they raised $4B in fixed-rate senior notes with maturities ranging between 7 and 20 years, and interest rates from 1.9% to 2.7%. The weighted average interest rate was 2.16%. They have a $5 billion revolver, which remains undrawn.
· Capital allocation: YTD FCF of $5B with $5.6B in share repurchase and $1.3B in dividends. Plan to buyback over $9B (so another $3.4B) in stock this fiscal year remains unchanged and their dividend policy remains unchanged.
· Valuation: trading at a 4% FCF yield on 2021….reasonable for a company w/ high moat, powerful brand, vast global acceptance network and LT secular growth – despite near term headwinds.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$V.US
[category earnings]
[tag V]