Visa reported a good quarter with revenues of $4.86B and EPS of $1.08, both better than expected (including a benefit from tax reform). Their key business drivers of payments volume, cross-border volume, and processed transactions were supported by a strong global macro environment, including a solid holiday season in the US and growing digital payment penetration. They posted purchase volume growth of 9.7%, with strong performance across all regions. Visa total payment volume was just over $2 trillion (up 12.4% yoy, 9.7% in constant currency). Client incentives have been rising and came in at $1.3B (21.4% of revenue). They gave a solid outlook on the global macro trends they are seeing, especially in Europe.
Thesis intact, highlights from the quarter:
Benefits from tax reform:
Their adj. EPS growth of 26% included a 900 basis point benefit from tax reform. Last quarter they gave initial FY18 guidance of “high single digits” revenue growth and “high end of mid-teens” EPS growth. They maintained their revenue guidance and raised their EPS guidance (mid to high 20% growth) primarily on the lower tax rate. Their tax rate will be down 600bps to 23%, which will add over $800m in earnings and $900m in FCF. As a result, they are increasing their buyback and dividend. In general, they said they plan on prioritizing long-term “sustainable” investments versus one-time actions.
Strong results continue across all regions:
- Asia Pacific +7.5% – improved volumes from Australia and Taiwan.
- Canada+11% – higher gas prices and increased spending in retail and telecom.
- CEMEA +19.3% – driven by the Gulf countries of the Middle East.
- Latin America +14% – particular strength in Argentina.
- US +9.6%
- US credit payment volume was $478bn (up 11.3% yoy) and US debit payment volume of $402bn (up 7.6% yoy). Volume growth driven by increases in consumer credit, holiday spending and accelerating e-commerce growth. Online grew 4X faster than offline.
- Saw particular strength in movies, gaming, fitness, sporting goods, and recreational activities.
- During the holiday season, e-commerce gained share, representing 30% of consumer U.S. holiday volume.
- New co-branded offerings with Starbucks and Uber.
Digital shift is growth driver but will weigh on margins:
- Electronic payments should be a big long term growth driver. Their operating margins have been steadily rising for years, now standing at about 60%, but this trajectory should flatten out as they invest behind digital initiatives like Visa Checkout and Token Service.
Valuation:
- Valuation supported by buybacks and dividends. In Q1, they returned $2.2B to shareholders consisting of $1.7B in repurchases and $460m in dividends. They plan to return over $9B of the $10B in FCF they expect to produce in 2018.
- Given high ROIC and secular growth opportunity, the stock is trading at a reasonable >4% FCF yield. Dividend yield is <1%.
Visa Thesis:
- Visa is the number one credit and debit network worldwide – accounting for about half of all credit and roughly three fourths of all debit card transactions.
- We are still in the earlier innings of the digitization of electronic payments. This is a secular tailwind supporting Visa’s growth as 1.) Electronic payments continue to replace cash 2.) Commerce moves online 3.) Consumer spending grows globally
- Visa’s asset light “toll both” business model is characterized by recurring revenues, high incremental margins, low capital expenditures, and high free cash flow.
- Visa’s recent acquisition of Visa Europe should be a nice tailwind over the next few years as the European market is in the earlier stages of electronic payment adoption and Visa is well positioned to gain market share and improve margins in the region.