Visa's Second-Quarter Earnings Suggest a More Confident Consumer

By Markets Fool.com

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If Visa's latest financial performance is any indication, then it's safe to say that higher consumer confidence has encouraged Americans to open their wallets and spend more freely.

After the market closed on Thursday, the world's largest credit and debit card company said it generated $1.6 billion in net income from $3.4 billion in revenue during the three months ended March 31.

"Visa reported another solid quarter of financial results against the continued backdrop of a tepid global economy," said CEO said Charlie Scharf. "While the negative impacts from the strengthening of the U.S. dollar and lower gasoline prices continued to exert pressure on revenue growth, our results and volume trends have remained strong."

Looking at the bottom line alone, Visa's shareholders would be excused for being disappointed. Compared with the same period last year, the payment processing company's earnings declined by $48 million.

But before becoming too melancholy, it's worth keeping three things in mind. First, in the year-ago period, Visa recorded a one-time tax benefit of $201 million. If you exclude that, then the company's earnings increased by $153 million, or 9.1%.

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Second, thanks to Visa's common-stock repurchase program, its earnings per share, which matter most to shareholders, grew by $0.01 to $0.63 per share (adjusted for the company's four-for-one class A common-stock split earlier this year).

Throughout the fiscal second quarter, Visa repurchased 16.2 million shares of common stock at an average price of $64.84 per share. Combined with its buybacks in the first quarter, the company has retired 28.6 million shares in the first half of this year alone.

Finally, even though Visa's earnings admittedly left something to be desired, its net operating revenue increased by 10% compared with last year after adjusting for fluctuations in foreign-exchange rates.

Its success in this regard stems from consistently higher customer activity. Most notably, payment volume grew on a constant-dollar basis by 11% to $1.2 trillion, and service revenues of $1.6 billion increased by 8%.

Offsetting some of this progress, however, were slightly higher expenses. Total operating costs for the quarter were $1.1 billion, a 1% year-over-year increase. According to the company, this was the result of "increased personnel, general and administrative expenses, and additional depreciation from our ongoing investments in technology assets and infrastructure, partially offset by the absence of marketing campaigns related to prior-year events such as the 2014 Sochi Winter Olympics and 2014 FIFA World Cup."

Additionally, the amount of money that Visa rebates to its customers as part of its various rewards cards came in $89 million, or 15%, higher than the second quarter of 2014.

Going forward, Visa expects its revenue to climb by "low double digits" and its full-year earnings per share to grow at the "low-end of the mid-teens range."

For shareholders, in turn, the bigger question will come knocking next year, as Visa is set to take American Express' place as the sole credit card accepted at Costco stores throughout the country.

On one hand, this will be a boon for the company's top line, as Costco co-branded cards account for an estimated 8% of all charges processed on American Express cards worldwide, and roughly 10% of physical American Express cards currently in force.

But on the other hand, Visa had to make costly concessions to consummate the relationship. Recent reports say it will charge Costco a mere 0.4% of each transaction it processes in the membership warehouse's U.S.-based outlets. Until now, its average interchange fee has been 2%, or five times the agreed-upon rate with Costco.

How this all shakes out for Visa remains to be seen, but one thing is certain: Combined with its already dominant position, the Costco deal will markedly further Visa's already impressive share of the payment processing market.

The article Visa's Second-Quarter Earnings Suggest a More Confident Consumer originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends American Express, Costco Wholesale, and Visa. The Motley Fool owns shares of Costco Wholesale and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.