This summary is based on the first quarter fiscal 2007 earnings call conducted by American Express Co (AXP: chart) on April 19, 2007.
Key Investors Issues
- Earnings per share were 88 cents compared to 70 cents in the prior year period.
- Quarterly revenue grew to $6.7 billion from $6.1 billion in the previous year.
- Net income totaled $1.1 billion, up 21% from $873 million a year ago.
First Quarter Fiscal 2007 Financial Highlights
American Express made changes to its financial statements this quarter.
While one set of changes deals with the format for presenting some of the items on the P&L, the other deals with reporting segments.
About three weeks ago, the firm issued an 8-K, which revised its income statement to provide more details on interest-related revenues and their associated interest expense. The new format provides gross, rather than net, amounts directly on the face of the income statement. It also shows additional detail on interest-related expense as a component within the new “Revenues net of interest expense” line. The 8-K also moved the provisions for losses and benefits to an expense category separate from overall expenses. These reclassifications affected the presentation of revenues and expenses. They did not, however, have any impact on the previously reported consolidated pre-tax income, income taxes, net income, total assets, total liabilities or total shareholders’ equity. The firm’s financial target of at least 8% revenue growth on average and over time is unchanged. Going forward, the company will measure its performance against the new P&L line item “Revenues net of interest expense”. This will have the effect of making its performance targets a bit more subject to interest rate environment. In periods of rising interest rates, growth in this P&L line will be negatively affected, and in periods of declining interest rates, it will be positively affected. Despite the impact of interest rate fluctuations, the firm remains committed to the 8% target on average and over time.
The firm’s Travelers Cheques and Prepaid Services business, and International Banking businesses, have been moved to the Corporate & Other segment. They had been part of the US Card Services and the International Card segments, respectively. Both the formatting and the segment changes are the result of a periodic SEC financial statement review.
The first quarter results included:
- An $80 million ($50 million after-tax) gain in connection with the initial adoption of a new accounting standard that requires the company to record in its consolidated
Statements of Income changes in the fair market value of its retained interest in securitized cardmember loans (these changes in fair market value were previously
recorded in shareholders'' equity);
- A $63 million ($39 million after-tax) gain related to changes in the company’s U.S. pension plans; and
- A $60 million (pretax and after-tax) reserve established for regulatory and legal exposure at American Express Bank International (a subsidiary of American Express Bank Ltd.).
- Also included in the quarter was $32 million ($21 million after-tax) of reengineering costs related primarily to restructuring initiatives throughout the company.
American Express reported first quarter income from continuing operations of $1.1 billion, up 22% from $876 million a year ago.
Diluted earnings per share from continuing operations were 88 cents, up 26% from 70 cents. Net income for the quarter also totaled $1.1 billion, up 21% from $873 million a year ago, and 87 cents per share, up 26% from 69 cents. The net income for the quarter was a record, exceeding the $1 billion level for the first time since the Ameriprise spin-off in late 2005. Higher revenues, combined with tight controls on discretionary expenses, delivered excellent bottom line results for the quarter.
Consolidated revenues net of interest expense rose 10% to $6.7 billion, up from $6.1 billion a year ago.
The strong revenue growth in the quarter reflects increases in discount revenue, finance revenue and other card-related revenues. These were driven by excellent growth in cardmember spending, loans and cards-in-force. Revenue growth would have been even higher without the revised presentation format, which now includes the impact of increased charge card-related funding costs.
To look at consolidated revenues on a basis more consistent with the firm’s prior reporting methodology, as well as on a managed basis, you would add back the charge in other interest expense and also make the U.S. Card Services GAAP to manage adjustments. This would give you total revenues that are more in line with the level and method that some of you have historically used in your models.
Billed business growth remained strong.
Each of the customer segments and every geographic region contributed to the 15% growth worldwide, or 13% on an FX-adjusted basis.
In US proprietary business, consumer spending grew 12%, small business spending rose 15%; and Corporate Services volumes improved by 11%. In total, U.S. volumes for retail and everyday spend grew 15%. This category represents about 66% of US billings. The travel and entertainment related spending, which accounts for the remainder, rose 9%.
Outside the U.S., proprietary billings grew 7% on a foreign exchange-adjusted basis. This was driven by 4% growth within the consumer and small business activities and 11% growth within Corporate Services. These proprietary card comparisons outside the U.S. were negatively affected by last year’s sale and transfer of the firm’s Brazilian operations in second quarter and Malaysian and Indonesian activities in third quarter to three bank partners. Excluding the impact of sales, the spending on proprietary cards grew a strong 11% outside the U.S. on a foreign exchange adjusted basis.
Within Global Network Services (GNS), billed business rose 59%, driven by continued triple-digit growth within the U.S., as well as robust growth outside of the U.S. Excluding the impact of the businesses transferred, GNS billed business growth was 38%.
