Visa Q4 Earnings

Key takeaways:

• Beat estimates – Visa reported revenue of $5.1B, above consensus $5B and adjusted EPS of $1.12 vs. $1.09 consensus. Beat driven by solid top-line results and lower than expected client incentives.
• Sequential volume improvement – Payments volume, cross-border volume and processed transactions growth all improved through the quarter and were at varying stages of recovery.
• Cross-border headwind – higher yield cross-border volumes, despite some improvement, continue to be the biggest headwind driven by lower travel demand as a result of Covid travel restrictions.
• No specific guidance given Covid related uncertainty. They expect revenue to decline in the first half and rebound significantly in the second, with the highest growth in the fourth quarter.

Additional Highlights:

• Q4 net revenues were $5.1 billion (-17%), primarily driven by YoY declines in prior quarter payments volume and current quarter cross-border volume, partially offset by growth in processed transactions. If they had recognized service revenues on current quarter payments volume, net revenues would have decreased ~11%. This is b/c quarterly service revenue is based on the prior quarter payments volume – so the impact of such a drastic drop lags in impact to that portion of their revenue. Payments volume for the September quarter increased 4% YoY.
• From Q3 to Q4, payments volume improved 14 points, process transactions improved 16 points, and cross-border volume ex-Europe improved over 5 points.
• Global payments volume increased 4%, improving from a 10% drop in Q3.
• U.S. payments volume increased 8% on a 7% decline in credit, offset by a 24% increase in debit. The debit business has been the major beneficiary of the accelerated shift to e-commerce and the shift away from cash even for in-person transactions. In the US, debit is growing at twice the rate it was pre-COVID.
• Visa total credit payment volume declined 9.3% in constant currency. Credit was hit hard by the pandemic, declining 20% globally in Q3. However, credit has been recovering fast, exiting September, down only 5%.
• Total cross-border volume declined 29% (better than the 37% decrease in 3Q). Cross-border volume excluding transactions w/in Europe declined 41% in Q4 (an improvement from the 47% drop in 3Q). This recovery was driven by a few corridors, where travel is now relatively friction-less, like travel from the US to Mexico and the Caribbean. Travel from and to the Persian Gulf States and travel to Turkey. The sharp recovery in these corridors provide some early indicators for how cross-border travel may recover as borders open.
• Through the pandemic, card-present spending has improved steadily as the economy reopened from a 44% decrease in April to a 4% drop in September. 
• Contactless penetration grew to 43% of all face-to-face transactions around the world (or 65% excluding the US).

• They renewed about 25% of their payments volume in fiscal 2020 with key clients and secured several new wins, over 50% of Visa volume has now been renewed over the last two years. Key client wins/partnerships keep Visa at the center of the payment infrastructure w/ the evolving fintech payment landscape. For example, global fintech Revolut, chose them late last year to be their lead issuing partner. In 12 months, Revolut has issued nearly 7 million Visa credentials in over 34 markets. Also, in the US, they’ve secured the Venmo credit card which has started to rollout unlocking new ways for Venmo and its community of more than 60 million users to shop and split purchases. They also signed multiple deals w/ digital wallets including Yandex in Russia, Wing in Cambodia and PAYCO in Korea.

• Recovery trend across 3 major spend categories in the US (each group accounts for ~1/3 of their volume).
1. Includes categories such as food and drug stores, home improvement and retail goods. These categories have consistently grown above the pre-COVID growth rates in the high teens or even higher every week since mid-April. Through Q4, growth remained strong and stable.
2. Includes categories such as automotive, retail services, department and apparel stores, which dropped between 10% to 50% in April and have recovered to growth by the end of June. In Q4, these categories steadily improved and are generally back to pre-COVID growth rates. 
3. Includes categories that are the hardest hit by this pandemic, travel, entertainment, fuel and restaurants. These categories declined over 50% in April, improved 20 to 45 points through Q3, and at least another 10 points with steady improvement every month. Travel is still declining over 40% in September, with the largest improvement so far in car rentals and travel services. Fuel is also still negative but recovered 20 points since June, driven both by gallons purchased and higher prices. Restaurant spending is almost back to 2019 levels.
   

Acquisitions:

• The DoJ is looking into their Plaid acquisition from an antitrust perspective. No details given.
• They also announced another acquisition, YellowPepper – a software company with a platform that allows clients to connect through a single API based connection – so that processors and governments can add innovative capabilities without having to expend significant technology resources – they can access YellowPepper’s set of APIs to initiate secure, real-time money movement transactions across a variety of payment rails using a simple alley like an email address or a phone number.

While COVID has been a headwind for Visa, particularly in cross border volumes – the long term thesis is intact. Visa is a high moat, duopoly company with extremely high FCF margins (approaching 50%), strong balance sheet and continued runway for secular growth driven by the shift from cash to card-based payments. Trading at >3% FCF yield.