After the market closed on Jan. 30, Visa Inc. (V, Financial) reported earnings for its first quarter of fiscal 2020. The results missed analyst estimates by a hair, causing Visa’s stock to slide 3% in after-hours trading.
Earnings per share came in at $1.46 on net income of $3.3 billion, which was in line with analyst estimates and represents an increase of 12% compared to the prior-year quarter. Revenue was $6.05 billion, missing predictions of $6.06 billion and increasing 10% compared to the prior-year quarter.
Visa’s rival Mastercard Inc. (MA, Financial) surpassed analysts' revenue and earnings expectations when it reported its fiscal fourth-quarter 2019 earnings the day before, further adding to negative investor sentiment.
Although Visa’s growth wasn’t as strong as analysts expected, the company still delivered promising results as transaction volumes continue to increase on strong economic conditions and low interest rates. The payments processing and credit services industries in general are extremely lucrative businesses because their per-customer profits grow with both the population and the economy.
As of Jan. 31, Visa has a market cap of $459.45 billion, a price-earnings ratio of 37.67 and a return on capital of 604.61%. Its cash-debt ratio is 0.72, and its debt has decreased slightly in recent years.
Contributors to growth
Overall, the volume of payments increased 8% during the first quarter, while the total amount of money transacted was up 11% compared to the prior-year quarter. Cross-border transactions increased 9%.
Most categories produced revenue growth of around 9%, though one notable exception was data processing, which grew 16% year over year.
Like other credit services providers, Visa continued to see increases in the number of customers using fee-based credit cards over cards without annual fees. Fee-based cards offer more rewards, but only for customers who spend a lot, which reflects the strong consumer confidence levels.
Visa’s client incentives grew 10% year over year, which many analysts consider to be insufficient. “Lower client incentives were more than offset by lower card-service revenues,” wrote Barclays analyst Ramsey El-Assal. Although client incentives are an expense for the company, offering more attractive incentives is essential to luring customers away from competitors.
Strategic changes
Visa is continuing to diversify beyond credit cards through acquisitions of other payment service providers. Moving beyond traditional credit and debit services is essential to gaining ground as customers become more focused on connectivity and digital payment methods.
On Oct. 22, Visa completed its acquisition of ticketing business Rambus, which increases the security and convenience of tokenization. On Jan. 13, it entered a definitive agreement to acquire Plaid, a financial connectivity network.
Looking forward
The company’s earnings report included guidance for full fiscal 2020, including revenue growth in the low double-digits and earnings per share growth in the mid-teens.
In terms of expenses, the company guided for client incentives to hit 22.5% to 23.5% of revenue, with annual operating expense expected to grow in the mid-single digits. It also predicts acquisitions to add 3% to 4% to the company’s expenses and 0.5% to its revenue.
Visa made changes to its non-GAAP accounting methodology as of the recent quarter, stating the following on the earnings report:
“Starting in fiscal 2020, Visa revised its non-GAAP methodology to exclude the impact of equity investment gains and losses, amortization of acquired intangible assets for acquisitions in fiscal year 2019 and forward, and non-recurring acquisition-related costs. Prior-year results were restated to reflect this change.”
This change reflects the company’s expectation that it will see increased volatility in equity markets, as well as increased costs related to acquisitions and similar non-recurring items.
Disclosure: Author owns no shares in any of the stocks mentioned.
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