Visa's Q2 Fails To Meet Market Expectations

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May 02, 2015

Even the world’s largest credit card and debit card company Visa Inc. (V, Financial) was affected by the dropping crude prices and strong dollar due to which it posted below expected profits for the current quarter. Shares of the company fell 2% with net income standing at $1.6 billion.

Visa woes

Headquartered in California, the American multinational financial services corporation has long been struggling to strike a balance between its revenue making and crude oil fluctuations and dollar price. The company posted profits though quite below analysts’ expectations. Net income of the company went down to $1.55 billion as compared to $1.60 billion at the same time last year. Earnings were also recorded as flat at 63 cents on per Class A share basis. The company’s cross-border volume growth also remained without any growth at 8% considering difference in currency pricing of issuer country and merchant country.

Management Forecast

Visa has made a forecast of 6 to 8 cents lower earnings per share compared to the analyst forecast of 65 cents per share. The huge difference for even the next quarter has been made taking into account the fluctuations going on in the foreign exchange, which plays an important role in Visa’s functioning. A gain of 22% has been recorded in the last year in dollar index (DXY) as against other major currencies.

Coming to crude prices, around 7% to 8% of Visa’s US transaction volume comes from gas bills which will be hugely affected owing to dropping crude prices. Under such situations, customers usually are able to get more gasoline through cash resulting in fewer transactions for companies like Visa. Another major factor, which is going to affect the next quarter results, is the higher client incentives.

The profits recorded

With operations across countries like Australia, Oceania, Asia-Pacific, North America, Central and South America, the Caribbean, Western Europe, central and Eastern Europe, Africa and Middle-East, the company provides for electronic funds transfers throughout the world making plastic money a popular entity in the market.

Taking the last 12 months into account, Visa’s shares have gained 30% and closed at $66.05 post the second quarter results. Operating revenue of the company went up 7.8% to $3.41 Billion as a result of immense growth in service revenues, data processing and international transaction revenues. There was a growth seen in its international transaction revenue as well of about 10% and contributed as much as 28% to the total revenue of the company equaling to $964 million. There was an increase recorded in other revenues as well including Visa Europe licensing fee, which was $204 million, and client incentives, which stood at $676 million equaling almost 16.5% of gross revenues. The total processed transactions were also up by 11% as compared to last year at $17 Billion representing transactions processed by VisaNet.

Recently, China announced allowing foreign companies to clear domestic bankcard transactions, which is going to benefit companies like Visa and MasterCard (MA, Financial) in a big way. However, Visa for now chose to take it as a long-term plan instead of pursuing it for a short-term profit opportunity.

Going forward

Visa Inc. expects the dollar to continue going strong and impacting further on for the rest of the year. However, the company is hopeful of getting bank revenue growth of double-digit in the fourth quarter of the current fiscal.