Visa Beats Expectations Thanks to Debit Card Strength

Visa's (V) domination of debit cards in the U.S. has helped boost its revenue and earnings during an economic downturn when consumers have been reluctant to spend on non-essential purchases.

Visa posted a 33% increase in net income of $763 million, or $1.02 per share, on revenue of $2 billion in its fiscal first quarter ending December 2009. The company handily beat Wall Street analysts' expectations of 91 cents a share in earnings on revenue of $1.92 billion.

Visa's portfolio has shifted considerably to debit from credit cards in the last two years as the company recognized that debit cards are used more commonly for non-discretionary expenses like groceries or gasoline. Today, 62% of Visa's volume comes from debit-card transactions, compared to 61% in 2008. The number of Visa debit cards increased to 979 million in 2009, from 864 million in 2008, while the number of credit cards dropped to 787 million from 812 million in 2008.

During this economic downturn, the shift has helped Visa outperform its chief rival MasterCard (MA), which has to rely more heavily on consumers buying larger ticket items, for which they would normally use credit cards. In the quarter, Visa saw the total amount of payments from its debit cards grow 19% to $291 billion, while volume from its credit cards grew at a slower pace of 11% to $478 billion.

The contrast between how consumers use debit and credit cards was also apparent in the last three months. CFO Byron Pollitt said consumers use of Visa debit cards increased 15% in November, and soared 19% in December, a level it maintained in January of this year. However, Visa credit-card usage dropped 2% in November, rose 2% in December and was up just 1% in January.

CEO Joseph Saunders recognized the shift in Visa's products as a key reason for its growth and why the company's executives "feel positive about Visa's position in light of a challenging economic picture."

Saunders said that he expects "high levels of consumer debt and to keep a lid on consumer spending growth." However, the company increased its outlook for revenue growth to 11% to 15% for 2010.