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V > SEC Filings for V > Form 10-K on 22-Nov-2013All Recent SEC Filings

Show all filings for VISA INC.

Form 10-K for VISA INC.


22-Nov-2013

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This management's discussion and analysis provides a review of the results of operations, financial condition and liquidity and capital resources of Visa Inc. and its subsidiaries ("Visa," "we," "our" and the "Company") on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this report. Overview
Visa is a global payments technology company that connects consumers, businesses, financial institutions and governments around the world to fast, secure and reliable electronic payments. We provide our financial institution clients with a global payments infrastructure and support services for the delivery of Visa-branded payment products, including credit, debit and prepaid. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. Each of these constituencies has played a key role in the ongoing worldwide migration from paper-based to electronic forms of payment, and we believe that this transformation continues to yield significant growth opportunities, particularly outside the United States. We continue to explore additional opportunities to enhance our competitive position by expanding the scope of payment solutions we provide.
Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during fiscal 2013 reflects the impacts of a slow-moving global economic recovery.
Interchange multidistrict litigation. On October 19, 2012, Visa, MasterCard, various U.S. financial institution defendants and the class plaintiffs signed a settlement agreement to resolve the class plaintiffs' claims in the interchange multidistrict litigation. The court entered the preliminary approval order of the settlement agreement on November 27, 2012. On December 10, 2012, Visa paid approximately $4.0 billion from the litigation escrow account into a settlement fund established pursuant to the definitive class settlement agreement. Certain merchants in the proposed settlement classes, however, have objected to the settlement and a number of merchants have filed opt-out claims. Until the settlement agreement is finally approved by the court and any appeals are finally adjudicated, no assurance can be provided that Visa will be able to resolve the class plaintiffs' claims as contemplated by the settlement agreement. We also signed a settlement agreement to resolve the claims brought by a group of individual merchants which were consolidated with the interchange multidistrict litigation for coordination of pre-trial proceedings. Pursuant to the settlement agreement, we paid $350 million from the litigation escrow account to the individual merchants on October 29, 2012, and on November 6, 2012, the court entered an order dismissing the individual merchants' claims with prejudice. See Note 3-Retrospective Responsibility Plan and Note 20-Legal Matters to our consolidated financial statements.
Reduction in as-converted shares. During fiscal 2013, we repurchased 33 million shares of our class A common stock using $5.4 billion of cash on hand. In July 2013, our board of directors authorized a $1.5 billion share repurchase program to be in effect through July 2014. As of September 30, 2013, the July program had remaining authorized funds of $251 million. All share repurchase programs authorized prior to July 2013 have been completed. In October 2013, our board of directors authorized an additional $5.0 billion share repurchase program. Adjusted financial results. Our financial results for fiscal 2012 and 2011 reflect the impact of several significant items that we believe are not indicative of our financial performance in the prior or future years, as they either are non-recurring, have no cash impact or are related to amounts covered by the retrospective responsibility plan. As such, we believe the presentation of adjusted financial results excluding the following amounts provides a clearer understanding of our operating performance for the periods presented.
Reversal of tax reserves. During fiscal 2012, we reversed all previously recorded tax reserves and accrued interest associated with uncertainties related to the deductibility of covered litigation expense recorded in fiscal 2007 through fiscal 2011. This increased our net income for fiscal 2012 by $326 million.

Litigation provision. During fiscal 2012, we recorded a litigation provision of $4.1 billion and related tax benefits associated with the interchange multidistrict litigation, which is covered by the retrospective responsibility plan. See Note 3-Retrospective Responsibility Plan and Note 20-Legal Matters to our consolidated financial statements.


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Deferred tax adjustment. During fiscal 2012, our reported financial results benefited from a one-time, non-cash adjustment of $208 million related to the remeasurement of our net deferred tax liabilities attributable to changes in the California state apportionment rules.

Revaluation of Visa Europe put option. During fiscal 2011, we recorded a decrease of $122 million in the fair value of the Visa Europe put option, which resulted in the recognition of non-cash, non-operating income in our financial results. This amount is not subject to income tax and therefore had no impact on our reported income tax provision.

The following tables present our adjusted financial results for the years ended September 30, 2012 and 2011. There were no comparable adjustments recorded during fiscal 2013.

                                                                       Fiscal 2013
                                                                                  Net Income
(in millions, except for percentages   Operating                                Attributable to     Diluted Earnings
and per share data)                     Expenses       Operating Margin(1)         Visa Inc.          Per Share(2)
As reported                          $      4,539                61 %         $           4,980     $          7.59
Diluted weighted-average shares
outstanding
(as reported)                                                                                                   656


                                                                                 Fiscal 2012
(in millions, except for percentages                                                 Net Income Attributable        Diluted Earnings Per
and per share data)                   Operating Expenses      Operating Margin(1)         to Visa Inc.                    Share(2)
As reported                          $           8,282                  21 %         $          2,144               $         3.16
Reversal of tax reserves                             -                   -                       (326 )                      (0.48 )
Litigation provision                            (4,098 )                39 %                    2,593        (3  )            3.82
Impact of deferred tax adjustment                    -                   -                       (208 )                      (0.31 )
Adjusted                             $           4,184                  60 %         $          4,203               $         6.20
Diluted weighted-average shares
outstanding
(as reported)                                                                                                                  678


                                                                           Fiscal 2011
(in millions, except for percentages   Operating                              Net Income Attributable   Diluted Earnings Per
and per share data)                     Expenses       Operating Margin(1)         to Visa Inc.               Share(2)
As reported                          $      3,732                59 %         $          3,650          $         5.16
Revaluation of Visa Europe put
option                                          -                 -                       (122 )                 (0.17 )
Adjusted                             $      3,732                59 %         $          3,528          $         4.99
Diluted weighted-average shares
outstanding
(as reported)                                                                                                      707

(1) Operating margin is calculated as operating income divided by total operating revenues.

(2) Figures in the table may not recalculate exactly due to rounding. Diluted earnings per share figures are calculated based on whole numbers, not the rounded numbers presented.

(3) The litigation provision adjustment to net income attributable to Visa Inc. is shown net of tax. The tax impact is determined by applying applicable federal and state tax rates to the litigation provision.

Nominal payments volume and transaction counts. Payments volume is the primary driver for our service revenues, and the number of processed transactions is the primary driver for our data processing revenues. Compared to the prior year, overall payments volume grew in all categories worldwide except U.S. consumer debit, which has been negatively impacted by the Dodd-Frank Act beginning April 1, 2012. The number of processed transactions continues to increase at a healthy rate, reflecting the continuing worldwide shift to electronic currency.


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The following tables present nominal payments volume.(1)

                                   United States                               International                                 Visa Inc.
                       12 months       12 months                   12 months       12 months                   12 months       12 months
                         ended           ended                       ended           ended                       ended           ended
                       June 30,        June 30,          %         June 30,        June 30,          %         June 30,        June 30,          %
                       2013 (2)        2012 (2)       Change       2013 (2)        2012 (2)       Change       2013 (2)        2012 (2)       Change
                                                                     (in billions, except percentages)
Nominal Payments
Volume
Consumer credit      $       789     $       710        11 %     $     1,498     $     1,375         9 %     $     2,287     $     2,085        10 %
Consumer debit(3)          1,046           1,045         - %             392             329        19 %           1,438           1,375         5 %
Commercial and
other(3)                     331             311         7 %             140             130         8 %             472             440         7 %
Total Nominal
Payments Volume      $     2,166     $     2,066         5 %     $     2,030     $     1,834        11 %     $     4,197     $     3,900         8 %
Cash volume                  446             437         2 %           2,083           1,920         8 %           2,529           2,357         7 %
Total Nominal
Volume(4)            $     2,612     $     2,503         4 %     $     4,114     $     3,754        10 %     $     6,726     $     6,257         7 %



                                   United States                               International                                 Visa Inc.
                       12 months       12 months                   12 months       12 months                   12 months       12 months
                         ended           ended                       ended           ended                       ended           ended
                       June 30,        June 30,          %         June 30,        June 30,          %         June 30,        June 30,          %
                       2012 (2)        2011 (2)       Change       2012 (2)        2011 (2)       Change       2012 (2)        2011 (2)       Change
                                                                     (in billions, except percentages)
Nominal Payments
Volume
Consumer credit      $       710     $       641        11 %     $     1,375     $     1,191        15 %     $     2,085     $     1,832        14 %
Consumer debit(3)          1,045           1,038         1 %             329             265        25 %           1,375           1,303         6 %
Commercial and
other(3)                     311             282        10 %             130             116        12 %             440             398        11 %
Total Nominal
Payments Volume      $     2,066     $     1,962         5 %     $     1,834     $     1,571        17 %     $     3,900     $     3,533        10 %
Cash volume                  437             402         9 %           1,920           1,704        13 %           2,357           2,106        12 %
Total Nominal
Volume(4)            $     2,503     $     2,363         6 %     $     3,754     $     3,276        15 %     $     6,257     $     5,639        11 %

(1) Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented.

(2) Service revenues in a given quarter are assessed based on payments volume in the prior quarter. Therefore, service revenues reported for the twelve months ended September 30, 2013, 2012 and 2011, were based on payments volume reported by our financial institution clients for the twelve months ended June 30, 2013, 2012 and 2011, respectively.

(3) Includes prepaid volume.

(4) Total nominal volume is the sum of total nominal payments volume and cash volume. Total nominal payments volume is the total monetary value of transactions for goods and services that are purchased on Visa-branded cards and payment products. Cash volume generally consists of cash access transactions, balance access transactions, balance transfers and convenience checks. Total nominal volume is provided by our financial institution clients, subject to review by Visa. From time to time, previously submitted volume information may be updated. Prior period updates are not material.

The table below provides the number of transactions processed by our VisaNet system, and billable transactions processed by CyberSource's network during the fiscal periods presented.(1)


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                                                                       2013 vs. 2012     2012 vs. 2011
                                       2013       2012       2011      % Change (1)      % Change (1)
                                                     (in millions, except percentages)
Visa processed transactions(2)       58,472     53,324     50,922            10 %               5 %
CyberSource billable transactions(3)  6,533      5,182      4,137            26 %              25 %

(1) Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented.

(2) Represents transactions involving Visa, Visa Electron, Interlink and PLUS cards processed on Visa's networks.

(3) Transactions include, but are not limited to, authorization, settlement payment network connectivity, fraud management, payment security management, tax services and delivery address verification.

Results of Operations
Operating Revenues
Our operating revenues are primarily generated from payments volume on Visa-branded cards and payment products for purchased goods and services, as well as the number of transactions processed on our network. We do not earn revenues from, or bear credit risk with respect to, interest or fees paid by account holders on Visa-branded cards or payment products. Our issuing clients have the responsibility for issuing cards and other payment products, and determining the interest rates and fees paid by account holders. We generally do not earn revenues from the fees that merchants are charged for acceptance by the acquirers, including the merchant discount rate. Our acquiring clients are generally responsible for soliciting merchants, and establishing and earning these fees.
The following sets forth the components of our operating revenues:
Service revenues consist mainly of revenues earned for providing financial institution clients with support services for the delivery of Visa-branded payment products and solutions. Current quarter service revenues are primarily assessed using a calculation of current pricing applied to the prior quarter's payments volume. Service revenues also include assessments designed to support ongoing acceptance and volume growth initiatives, which are recognized in the same period the related volume is transacted.
Data processing revenues are earned for authorization, clearing, settlement, network access and other maintenance and support services that facilitate transaction and information processing among our financial institution clients globally and with Visa Europe. Data processing revenues are also earned for transactions processed by CyberSource's online payment gateway platform. Data processing revenues are recognized in the same period the related transactions occur or services are rendered.
International transaction revenues are earned for cross-border transaction processing and currency conversion activities. Cross-border transactions arise when the country of origin of the issuer is different from that of the merchant. International transaction revenues are primarily generated by cross-border payments and cash volume.
Other revenues consist mainly of license fees for use of the Visa brand, revenues earned from Visa Europe in connection with the Visa Europe Framework Agreement, fees from account holder services, licensing and certification, and other activities related to our acquired entities. Other revenues also include optional service or product enhancements, such as extended account holder protection and concierge services.
Client incentives consist of long-term contracts with financial institution clients and other business partners for various programs designed to build payments volume, increase Visa-branded card and product acceptance and win merchant routing transactions over our network. These incentives are primarily accounted for as reductions to operating revenues. Operating Expenses
Personnel includes salaries, incentive compensation, share-based compensation, fringe benefits and contractor expense.
Network and processing mainly represents expenses for the operation of our processing network, including maintenance, equipment rental and fees for other data processing services.


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Marketing includes expenses associated with advertising and marketing campaigns, sponsorships and other related promotions of the Visa brand. Professional fees mainly consist of fees for consulting, legal and other professional services.
Depreciation and amortization includes depreciation expense for property and equipment, as well as amortization of purchased and internally developed software. Also included in this amount is amortization of finite-lived intangible assets primarily obtained through acquisitions.
General and administrative mainly consists of travel activities, facilities costs, foreign exchange gains and losses and other corporate expenses in support of our business.
Litigation provision is an estimate of litigation expense and is based on management's understanding of our litigation profile, the specifics of the cases, advice of counsel to the extent appropriate and management's best estimate of incurred loss as of the balance sheet date. Non-operating Income
Non-operating income mainly includes accrued interest and penalties related to reserves for uncertain tax positions; income, gains and losses earned on investments; and the change in the fair value of the Visa Europe put option. Visa Inc. Fiscal 2013, 2012 and 2011
Operating Revenues
The following table sets forth our operating revenues earned in the United States, internationally and from Visa Europe. Revenues earned from Visa Europe are a result of our contractual arrangement with Visa Europe, as governed by the Framework Agreement that provides for trademark and technology licenses and bilateral services. See Note 2-Visa Europe to our consolidated financial statements.

                                Fiscal Year ended
                                  September 30,                   $ Change           % Change(1)
                                                              2013        2012      2013      2012
                                                               vs.        vs.        vs.       vs.
                           2013        2012        2011       2012        2011      2012      2011
                                             (in millions, except percentages)
United States            $  6,379    $  5,720    $ 5,135    $   659     $   585      12 %      11 %
International               5,177       4,478      3,846        699         632      16 %      16 %
Visa Europe                   222         223        207         (1 )        16       - %       7 %
Total Operating Revenues $ 11,778    $ 10,421    $ 9,188    $ 1,357     $ 1,233      13 %      13 %

(1) Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented.

The increase in operating revenues mainly reflects continued growth in our underlying business drivers: nominal payments volume; processed transactions; and cross-border volume. Operating revenue growth also benefited from pricing modifications made on various services. These benefits were partially offset by volume loss and increases to client incentives implemented in the United States during the second half of fiscal 2012 as part of our strategy to mitigate the impacts of the Dodd-Frank Act.
Our operating revenues, primarily service revenues and international transaction revenues, are impacted by the overall strengthening or weakening of the U.S. dollar as payments volume and related revenues denominated in local currencies are converted to U.S. dollars. The effect of exchange rate movements in fiscal 2013, as partially mitigated by our hedging program, resulted in an overall decline of about one percentage point in total operating revenue growth compared to fiscal 2012. While we expect our hedging program to continue to mitigate this risk during fiscal 2014, a general strengthening of the U.S. dollar is expected to reduce total operating revenue growth by about two percentage points for fiscal 2014, net of offsetting hedges. See Note 12-Derivative Financial Instruments to our consolidated financial statements.


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The following table sets forth the components of our total operating revenues.

                                            Fiscal Year ended
                                              September 30,                    $ Change              % Change(1)
                                                                           2013        2012        2013       2012
                                                                            vs.         vs.        vs.         vs.
                                      2013         2012        2011        2012        2011        2012       2011
                                                           (in millions, except percentages)
Service revenues                   $  5,352     $  4,872     $ 4,261     $   480     $   611        10 %        14 %
Data processing revenues              4,642        3,975       3,478         667         497        17 %        14 %
International transaction revenues    3,389        3,025       2,674         364         351        12 %        13 %
Other revenues                          716          704         655          12          49         2 %         7 %
Client incentives                    (2,321 )     (2,155 )    (1,880 )      (166 )      (275 )       8 %        15 %
Total Operating Revenues           $ 11,778     $ 10,421     $ 9,188     $ 1,357     $ 1,233        13 %        13 %

(1) Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented.

Service revenues increased in fiscal 2013 and 2012 primarily due to 8% and 10% growth in nominal payments volume, respectively. The growth in service revenues in fiscal 2012 was greater than the growth in nominal payments volume due to a shift in the mix of our payments volume, primarily in volume related to Interlink, which is a debit product that does not generate any service revenues.

Data processing revenues increased in fiscal 2013 and 2012 due to overall growth in processed transactions of 10% and 5%, respectively, combined with pricing modifications that became effective in the third quarter of fiscal 2012 as part of our strategy to mitigate the negative impacts from the Dodd-Frank Act.

International transaction revenues increased in fiscal 2013 and 2012 primarily reflecting 10% and 11% growth in nominal cross-border volume, respectively.

Other revenues increased in fiscal 2013 and 2012 due to an increase in license fees as a result of payments volume growth.

Client incentives increased in fiscal 2013 and 2012, reflecting incentives incurred on long-term client contracts that were initiated or renewed during fiscal 2013 and 2012, respectively. These included a number of significant long-term merchant and acquirer contracts executed as part of our strategy to mitigate the impacts from the Dodd-Frank Act, as well as issuer contracts executed in fiscal 2013. Additionally, client incentives increased as a result of overall growth in global payments volume. Activity in fiscal 2012 also reflects certain one-time incentives incurred outside the United States. The amount of client incentives we record in future periods will vary based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts. We expect incentives as a percentage of gross revenues to be in the range of 16.5% to 17.5% for the full 2014 fiscal year.


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Operating Expenses
The following table sets forth the components of our total operating expenses.
                                    Fiscal Year ended
                                      September 30,                  $ Change            % Change(1)
                                                                  2013        2012       2013     2012
                                                                  vs.         vs.        vs.       vs.
                                2013       2012       2011        2012        2011       2012     2011
                                                  (in millions, except percentages)
Personnel                     $ 1,932    $ 1,726    $ 1,459    $    206     $   267      12  %     18 %
Marketing                         876        873        870           3           3       -  %      - %
. . .
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