Visa (V - Get Report) fell close to 5% as the credit-card processor boosted the up-front cash payment for former subsidiary Visa Europe and cut its revenue forecast due to concerns about a weaker global economy and falling oil prices.
The Foster City, Calif.-based card processor now projects total sales will grow no more than 8%, down from a November prediction of potential double-digit gains. Visa dropped 5% to $76.75 after the close of regular trading in New York. The shares previously climbed 4.3% this year.
"The continued headwinds of the strong U.S. dollar, lower oil prices, and an uneven global economy are driving continued weak cross-border spend, but domestic spend continues at reasonably strong levels consistent with last quarter," CEO Charlie Scharf said in a statement. "The U.S. consumer remains strong, but we see weakness in China, Brazil, and oil based economies."
The change in terms for the Visa Europe deal was based on feedback from the European Commission, which has regulatory authority over corporate transactions in the region. Previously, Visa had agreed to pay as much as 21.2 billion euros, with 11.5 billion in cash and a so-called earn-out premium of 4.7 billion euros based on how well the business performed in the four years after the deal closed.
The new terms, which eliminate the earn-out clause, call for a cash payment of 12.25 billion euros ($13.8 billion) at closing and another 1 billion, plus 4% annual interest, three years afterward. Visa, which will still pay the 5 billion euros in preferred shares included in the original deal, ultimately stands to save as much as 2.95 billion euros under the tentative new terms.
"We think this is a good outcome for both parties," Scharf said on an earnings call.
The Visa Europe deal, announced in November, add 3,000 European issuers, 500 million card accounts, and transaction-processing volumes of $1.5 trillion, the company said in a statement. The deal is expected to close before the end of June, pending antitrust approval from the European Commission.
Visa's adjusted earnings of 68 cents a share for the three months through March were higher than the 67-cent average of analysts' estimates in a Bloomberg survey. Net income rose 7% to $1.6 billion, and operating revenue climbed by 6% to $3.6 billion year-over-year, meeting analysts expectations. Payment volume growth was $1.3 trillion, up 12% from the prior year.
"Since we are not seeing any material improvements in economic trends, we are cautious as we head into the second half of fiscal 2016," Scharf said in a statement.
The company said international growth will be dependent on "the interplay between volume growth in the currency translation drag," while other revenues were down 3% due to "lower license fees generated outside U.S. due to slower payment volume."
Total processed transactions by the online consumer financial transaction processing system VisaNet were $18.5 billion, up 9% over the prior year.
Nomura analyst Bill Carcache anticipated Visa would miss Wall Street's consensus projection due to "lower currency volatility (on a year-over-year basis) on international transaction fees," but sees positives for Visa Europe.
The split of the 16-year relationship between Costco (COST) and American Express (AXP - Get Report) has allowed Visa and global bank Citigroup to begin issuing Costco's new branded cards, leveraging a base of 7 million Costco card users who spent about $76 billion on their AmEx cards last year.
"We think the Costco card shifting to Visa is big; we think bringing in Visa Europe is big" said TheStreet's Jim Cramer, who holds both stocks in his Action Alerts PLUS charitable trust portfolio. "It is best in show right now in the credit cards."
EXCLUSIVE LOOK INSIDE: Want to be alerted before Jim Cramer buys or sells Visa or Costco stock? Learn more now.
"Hopefully, we will see some recoveries in the cross-border business and gas prices helped by a weakening dollar" in fiscal 2017, Scharf said.
The company announced Tuesday it would launch new software to speed up transactions in which card scanners read so-called EMV chips, which regulators have begun requiring to improve security. Such payments typically take significantly longer than merely swiping a card.