3 Take-Ways From Visa's Q2 Earnings Release

| About: Visa Inc. (V)
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Takeaway 1: core business remains strong in the coming years due to Costco and USAA as well as cross-border volume.

Takeaway 2: Europe is slowly getting there with a new management in place and a focused strategy to drive volume in the near-term.

Takeaway 3: PayPal partnership is great way to position Visa for the digital payment trend that could drive meaningful revenue in the medium-term.

Visa (NYSE:V) reported a really good earnings on Thursday in which revenue of $3.63b was in-line with analyst expectation of $3.64b and earnings per share of $0.69 that was higher than expectation of $0.67. Payment volume for the quarter increased 10% y/y and cross-border volume up 5%, and this is in-line with my prior expectation in my preview note when I suggested that JP Morgan's results were good indicators for Visa (see: Why I Am Bullish On Visa Ahead Of The Earnings). In addition, the $5b share repurchase program continues to show that Visa has one of the best capital return program amongst the Dow peers and I would continue to be positive on this stock.

Three key positives for the quarters are better than expected guidance, updates for Visa Europe and tie-up with PayPal (NASDAQ:PYPL) for digital payment adoption.

Management guides fiscal 2017 and continues to see strong results from the core business. Through July 14, the U.S. payment volume was up 11% while the U.S. credit was up 18% on mostly positive impact from Costco (NASDAQ:COST) and USAA. Cross-border volume should remain strong with current growth up 12% compared with 8% on an apples-to-apples comparison. The timing of Ramadan and improvements in the U.S. and Asia are big factors to this growth. On a transaction basis, volume was up 11% which is quite good in my opinion. On the other hand, debit cards continue to decline due to mostly Interlink, which contributed to a third of the decline, although the decisions by merchants and acquirers making routing decisions dynamically also partially contributed to the decline. I do not see this to be a big issue overtime as Visa expands its core business and overseas operation that can offset this weakness.

The company also updated its forecast on Visa Europe and this was another positive in that the management continues to see low double-digit EPS growth despite a 4% negative foreign currency impact. Management continues to see 7-8% net revenue growth on constant dollar basis even with a 3% foreign currency impact. Going forward, we could see higher visibility after the closing of the transaction and the company has established a solid management in place to ensure that its strategies in Europe are executed.

Finally on PayPal, I think it is a great partnership in that you have the biggest credit card processor and the largest digital mobile wallet company working together to drive digital adoption. On a high level, the partnership allows customers to pay with their Visa cards where PayPal enjoys the economic benefits including Visa incentives for increased volume and grater long-term Visa fee certainty but Visa benefits by having PayPal as part of its Visa Digital Enablement Program and point of sale acceptance. In addition, both parties are benefiting from increased spending volume, lower operational cost and improved security where merchants benefit from superior customer experience that will lead to higher sales. PayPal is a unique company after it was spun out of eBay in that with close to 190m users it stands as one of the largest digital wallet in the world and Visa will benefit from this partnership as mobile payment evolve from plastic cards to digital wallet in the coming years.

So far only Visa and American Express (NYSE:AXP) have reported earnings and relative to Amex it seems that Visa is in a better shape because Amex continues to face tough corporate T&E spend and a cautious consumer base. In addition, Amex has not been responding to the marketing efforts by its competitors and this could likely lead to more market share. Management also indicated that higher investment in the second half is necessary to achieve the targeted 2017 cost saving target. This is essentially front loading expense from 2017 to 2016 and quite frankly I am a bit puzzled by this move because it may only help cost saving in 2017 only to see additional cost creep up in 2018.

In conclusion, Visa reported a decent quarter and I continue to be positive on the name. MasterCard (NYSE:MA) will report in the coming weeks and I will give readers another update. As for Visa, I see Costco and USAA to be near-term drivers while we could see Europe and PayPal becoming more meaningful overtime.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.