Mastercard Incorporated

Thank you for standing by, and welcome to the MasterCard Q4 and full year 2020 earnings conference call. At this time, all participants are in a listen-only mode. After this week's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. As a reminder, this call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Warren Nishaw. Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Tanya. Good morning, everyone, and thank you for joining us for our fourth quarter 2020 earnings call. We hope you're all safe and sound. With me today are Michael Meebok, our Chief Executive Officer, and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions. You can access our earnings release, supplemental performance data, and the slide deck that accompanied this call in the investor relations section of our website, MasterCard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP, currency-neutral basis unless otherwise noted. But the release and the slide deck include reconciliations of non-GAAP measures to GAAP-reported amounts. Finally, to set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding MasterCard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I'll turn the call over to our Chief Executive Officer, Michael Leibach.

Thank you, Warren, and good morning from New York. It certainly feels like a privilege to be addressing you today for the first time as Mastercard CEO. I believe the foundation established under Ajay's leadership positions does extremely well for the future, and I'm looking forward to leading Mastercard from here on, and of course, counting on your continued support. Now, 2020 presented the world and the economy with unprecedented challenges. Still, the resilience of our business model and the focused execution of our strategy by our dedicated employees allowed us to close out the year on a positive trajectory. Fourth quarter revenue and EPS growth rates versus a year ago are continuing to show sequential improvement. As we look to the future, we will continue to execute on our strategy. With our ability to enable and secure the payment ecosystem through deep partnerships, our differentiated services, and our role as a true multi-rail provider, we're well positioned to capture additional flows and the significant opportunities ahead. These opportunities include certainly the accelerated secular shift to digital payments and the advancement of real-time payments and open banking. Let's take a look at our business from the macro level. Retail spending during the holiday season and fourth quarter overall was relatively steady, with very strong e-commerce sales. According to our spending pulse estimates for Q4, U.S. retail sales were up 4%, ex-auto, ex-gas, while overall Europe retail sales slowed with a decline of 1.9% for the quarter in part due to the recent lockdowns. In Asia, we see some bright spots in markets like Australia, and similarly in Latin America, where retail sales in Brazil rebounded this quarter. Now, we're also heartened to see the availability of effective COVID vaccines. But distributing them at scale will dictate when social distancing measures can be relaxed and borders opened. and that will ultimately drive further recovery. We see fiscal stimulus, such as the most recent package in the United States, as an important interim measure in the near term, and we're working closely with governments to get funds into people's hands quickly and safely. Turning to our business specifically, and the four-phase framework we established for monitoring the COVID environment. Seen markets go through the containment and stabilization phases, And we continue to believe most markets are now in the normalization phase domestically, where spending levels gradually improve, with some markets actually approaching growth. Looking at the trends, volumes continue to modestly improve quarter over quarter, and our switched volume growth rates, excluding travel and entertainment, were similar to what we saw in 2019 pre-pandemic. Speaking of travel, Domestic travel, including spending in categories such as lodging and restaurants, declined slightly in the quarter, reversing some of the improvement we saw in the summer months. Cross-border travel remains limited. In October and November, we saw some improvement in cross-border within the EU, although recent restrictions are causing some slowing over there, as mentioned earlier. Improvement in the cross-border travel outside the EU remains limited. We continue to believe travel will improve, starting with personal travel, as border restrictions ease and as vaccination efforts expand. We believe corporate travel will follow. As we said in the past, progress may not be linear, but we believe there is significant pent-up demand for travel. And we continue to expect to see improvements in the second half of the year. In the meantime, we remain focused on building our already strong position in travel, positioning as well to capitalize on this opportunity when it occurs. So while the pandemic is affecting business drivers in the short term, we have diversified our revenue streams and remain focused on managing our business for the long term. This means focusing on our strategic priorities. One, growing our share of core payments, ensuring the digital experience for our customers, partners, and consumers is safe and seamless, as we help drive the accelerated secular shift. Two, deploying meaningful services that help our partners adapt to the changing environment. And last but not least, providing choice with our multi-rail capabilities. Illustrating all of that, we have quite a number of significant strategic wins this quarter, which I will now share with you. Starting in the UK and Ireland, And building off the success we've had in debit with Santander and First Direct, we're really pleased to expand the long-term relationship we have with NetWest Group on credit. The bank will move its entire debit portfolio to MasterCard across all consumer and business product lines and across multiple brands, including NetWest and Royal Bank of Scotland. This migration of approximately 16 million debit cards will start later this year, and when complete, will contribute to the growing overall debit share in the U.K. from low single digits to approximately a third of the market once all recent wins have migrated to MasterCard. We look forward to innovating together to build enhanced digital experience for NetWest customers across multiple payment rails. Now turning to Germany. We expanded our relationship with Deutsche Bank and will become the exclusive international scheme partner, including both Deutsche and PostBank brands, expanding our market share in debit and credit. As part of the upcoming migration, a total of 10 million consumer and commercial credit and debit cards will be reissued from MasterCard-branded products. Deutsche Bank is already leveraging our services within our existing partnership. We will now extend those to the larger customer base and use our advisors, consulting, and analytics to assist with the conversion. And we look forward to developing new opportunities together in B2B and other payment flows. In the US, we will be the network partner for the CityPlex account on Google Pay, which leverages our tokenization services to provide CityPlex customers with a seamless and more secure payment experience. The CityPlex account will include a digital debit MasterCard that's automatically loaded for use in the Google Pay wallet, with an option to request a physical contactless card, providing customers the choice to pay when, where, and how they want to pay by debit card, smartphone, or online. Building on our FinTech momentum, we have secured additional wins around the globe with new partners like Payoneer and Eldra in the U.S., Hype and Flow in Italy, Trezor in France, and Prex in Peru. Our FinTech customers appreciate our tailored approach, addressing their very specific needs, leveraging our expertise, our tech, and, of course, our global network. Now, we're also excited to announce a new strategic partnership with Walgreens. This multifaceted relationship includes a new credit product to be issued by Synchrony Bank, and prepaid products that enable contactless shopping experiences, all-out first money management, and rewards via the Walgreens app. This partnership will enable Walgreens to leverage a number of MasterCard services, including insights and analytics, loyalty, and point-of-sale financing, including installments. you will also look into future opportunities together, including a digital-first debit card and other tech-driven solutions to innovate the future of healthcare payments. Now, we remain very active in the U.S. co-brand space, where we extended and expanded our 7th Club co-brand with enhanced rewards and digital experiences, as announced yesterday, and extended our Walmart consumer credit and co-brand and payroll card, renewed our GM co-brand, now with Goldman Sachs as the new issue, They expanded our relationship with Bass Pro Shops and Cabela's to include small business. Let's come back to travel. We continue to prepare for the broader return of travel with several new partnerships in this space. First up, building on the travel co-brand momentum we announced last quarter, we will now be the exclusive network for our planned co-brand program in the U.S. with JPMorgan Chase Bank and Air Canada, which we'll launch later this year. In both the UK and Spain, we're innovating with IAG Loyalty, part of the International Airlines Group, on new co-brands and loyalty partnerships that will provide customers more choices to earn Avios points and reward them with exclusive benefits. And on a wholesale travel program from one of the largest global online travel agencies, Booking.com has chosen Mastercard to be their preferred partner for virtual card payments to their suppliers. Let's talk about the changing consumer. As spending patterns change, it is critical to offer online and in-person capabilities, and we have solutions for both. As e-commerce accelerates, with card not present transaction accounting for about 45% of our switched volume in 2020, which is up from 40% in 2019, we have several efforts underway to enable safer and more seamless online purchases. Notably, we continue to scale our merchant tokenization services for card-on-file, a critical use case with a six-fold increase in the number of unique merchants transacting in quarter four versus a year ago. Now, recent surveys tell us that seven in 10 e-commerce consumers have their payment card information saved with at least one merchant type. Cardo Trials Organization is particularly helpful for subscription services like Netflix, marketplaces like Etsy, and ride-hailing services like Didi, who have just signed on this quarter. But we do believe that when restrictions ease, people will return to shopping in person, and hence we're driving secular shifts in store as well. For example, we saw strong acceleration of contactless in 2020 as more than 80 markets grew contactless penetration as a percentage of in-person transactions by at least 10%, which is driven by consumer demand for increased speed and safety, but of course, cleanliness at the point of checkout. This paves the way for new solutions that leverage contactless, such as our recently launched Cloud Tap on Phone, which will allow merchants of any size to quickly and easily accept contactless payments on a range of devices, including mobile phones, further expanding our acceptance reach. This will be particularly important for all those hearted small businesses trying to operate more digitally coming out of the pandemic. Now, with respect to service. Services continue to be in strong demand as we help our customers adapt and succeed in this evolving omnichannel environment we just talked about. In aggregate, our services line represented about a third of our revenues in 2020 and grew at 18% during that period on a currency-neutral basis, providing a critical source of growth and diversification. We will continue to invest in these capabilities across all payments loads to keep the ecosystem secure and to provide key insights to our customers, including publishing monthly trends, leveraging assets such as spending pots. Our recent acquisitions in the services space provide a key source of differentiation and are continuing to gain scale. For instance, Bank of America recently expanded its use of ethical dispute management tools. FinTechs in the U.S. and abroad, including American e-commerce company Rappi, are using the behavioral biometric technology of new data to enhance the authentication process. Signing new customers for risk recon to ensure cyber health across their system. And brands like Chicos are leveraging our end-to-end loyalty platform through Session M. So let's turn our focus on the initiatives that are designed to address a broader set of payment flows with our multi-rail capabilities. They offer the choice and flexibility that consumers, businesses, and governments need and increasingly expect. First, we are pleased to report that we closed the acquisition of Finicity in November, extending our network to provide data transmission capabilities, essentially to fully capitalize on the future of open banking. Finicity continues its leadership in signing direct data access agreements with financial institutions and fintech. Building off existing direct relationships with major banks like Chase, Citi, Bank of America, Capital One, and Wells Fargo, we recently added Chime, Brex, BMO Harris, Charles Schwab, and TD Bank, and we're moving quickly to secure more direct access relationships. Finicity continues to build on its digital assets and credit decisioning solutions, including those launched with four leading mortgage companies and have seen rapid adoption of its lending and payment solutions. In parallel, we continue to expand our open banking capabilities in Europe and intend to leverage Finicity there as well. In the real-time space, we're excited that Payments Canada has selected Mastercard to build and run its new real-time payment systems, clearing, and settlement infrastructure. Our technology and expertise will power a best-in-class real-time payment infrastructure that provides a platform for innovation to enhance Canada's economy. With this win, we're now providing real-time payment infrastructure for 12 of the top 50 GDP countries, extending our global footprint. Relating to these new infrastructure wins, we continue to build out applications that leverage real-time payment rails, like with MasterCard Track Business Payment Service, which is now live with real-time payments and batch ACH in the U.S. alongside our card functionality. We've also extended Track's card payment capabilities worldwide and are continuing to build out our network with a number of bank and non-bank partners that considerably extend our reach on both the buyer and supplier side. This year, we plan to continue expanding the platform into new geographies and add our cross-border payment capabilities. We're also delivering on our multi-rail promise with MasterCard Send, which continues to grow across the globe. For example, we expanded our reseller network by deepening our long-standing relationship with Citi to enable them to offer business-to-consumer disbursements in the U.S. This is one of several new partnerships leveraging MasterCard Send to enable B2C and person-to-person money transfers domestically and internationally. We also partner with TransferGold, enabling customers across 20 European countries to make international money transfers from any card or bank account directly to a MasterCard, debit, or credit card. Now, let's take a look into the future. As you've surely heard, there's a lot going on in the digital currency space with many governments around the world evaluating central bank digital currencies. Whether a country chooses to issue its own CBDC, like the pilots we've seen in countries like Sweden or China, or instead provides a regulatory framework for private stablecoins, or otherwise pursues both public and private options in parallel, we are engaged with central banks from a policy and a solution perspective. We've continued to invest in the space to be ready to co-invade with governments, banks, and fintech partners. For example, the virtual test platform that we launched a short time ago is being received well, and our crypto card programs, including Wirex in the UK and Uphold in the US, enable consumers to spend their crypto balances within our acceptance network. This year, we plan on adding digital currency support directly on our network, enabling our partners to take advantage of our acceptance reach and settlement capabilities. This will give choice. and flexibility consumers and merchants for what currency they want to use or receive. Our level of support will vary based on regulations in a given market. It will continue to be guided by our published principles on security, compliance, and consumer protections, and the value to our stakeholders in determining our involvement in a specific initiative. So there's certainly a lot going on and significant opportunity ahead. With that, let me turn the call over to Sachin. Thanks, Michael. Turning to page three, which shows our financial performance for the quarter on a currency-neutral basis and excluding special items related to certain litigation and tax matters and the impact of gains and losses on the company's equity investments. Net revenue was down 7%, reflecting the impact of the pandemic, and includes a 1 ppt benefit from acquisitions. Operating expenses were flat year over year, or down 3% if you exclude the 3 ppt impact of acquisitions. Operating income was down 12% and net income was down 17%, both of which include a 2 PPP decrease related to acquisitions. EPS was down 16% year-over-year to $1.64, which includes $0.04 of dilution related to our recent acquisitions, partially offset by a $0.03 contribution from share repurchases. During the quarter, we repurchased about $1 billion worth of stock and an additional $356 million through January 26, 2021. So let's turn to page four, where you can see the operational metrics of the fourth quarter. Worldwide gross dollar volume, or GDP, increased by 1% year-over-year on a local currency basis, reflecting the effects of the pandemic. U.S. GDP increased by 4%, with debit growth of 15%, partially offset by a credit decline of 7%. Outside of the U.S., volumes were flat. Cross-border volume was down 29% globally for the quarter. Similar to last quarter, intra-Europe volumes were less impacted than other cross-border volumes. Specifically, intra-Europe volume was down 15% for the quarter, whereas other cross-border volume was down 41%. Turning to page five, switch transactions grew 4% in the fourth quarter globally. We saw positive growth in switch transactions across most regions, aided in part by the continued adoption of contactless. In addition, card growth was 6%. Globally, there are 2.8 billion MasterCard and Maestro-branded cards issued. Now let's turn to page six for highlights on a few of the revenue line items, again described on a currency-neutral basis, unless otherwise noted. The decrease in net revenue of 7% was primarily driven by a decline in cross-border volumes due to the effects of border restrictions and social distancing measures, partially offset by growth in GDP, switch transactions, and continued growth in our services. As previously mentioned, acquisitions contributed approximately 1 ppt to net revenue growth. Looking quickly at the individual revenue line items, domestic assessments were up 1% while worldwide GDP grew 1%. Cross-border volume fees decreased 41%, while cross-border volumes decreased 29%. The 12 ppt difference is primarily due to an adverse cross-border mix, mainly driven by lower yielding intra-Europe cross-border volumes being less impacted than high yielding other cross-border volumes. Transaction processing fees were up 4%, while switch transactions were up 4%, with the unfavorable cross-border mix I just mentioned being offset by strong services growth. Other revenues were up 17%, including a 1 PPP contribution from acquisitions. The remaining growth was primarily driven by our data analytics, consulting, and cyber and intelligence solutions. Finally, rebates and incentives were up 1%. Moving on to page 7, you can see that on a currency-neutral basis and excluding a special charge related to litigation, total operating expenses remain flat. This includes a 3 PPT increase related to acquisitions. Excluding acquisitions, we delivered an expensive decrease of 3 PPT. Turning to page 8, let's discuss the specific metrics for the first three weeks of January. Starting with switch volumes, we continue to believe that most markets are in the normalization phase domestically with some approaching growth. Overall, switch volume growth remains generally consistent with the trends we saw in December. While we have seen stronger growth in the U.S., this has been more than offset by slower growth in markets outside the U.S., primarily Europe. Switch volumes in the United States have been strong in recent weeks, supported in part due to the recent fiscal stimulus. Outside of the U.S., switch volumes in Europe have slowed considerably due to the increased lockdowns in countries like the UK, Germany, and Italy. When you look at how people are spending, we have recently seen a decrease in card-present growth rates due primarily to the effects of the increased lockdowns that began to be put in place in December, while our card-not-present growth rates remain healthy. Trends in switch transactions remain steady and are tracking the trends we are seeing in switch volumes. In terms of cross-border, we have seen a reversal in intra-Europe cross-border in recent weeks relative to the improvement we saw in November and December. Highly yielding other cross-border remains more adversely impacted than intra-Europe cross-border. Turning now to page 9, I'd like to provide some additional color on the cross-border trends across card-present and card-not-present. You can see the trends that we shared through the course of the quarter continue. week-to-week fluctuations in November and December reflect holiday timing differences year-over-year. In total, if you look at the gray line, total cross-border, which showed some improvement in November and December, is now continuing in a relatively similar band to what we saw in October due to the re-implementation of border restrictions. If you look at the orange line, card presence bands reflect continued limited travel in part due to the border restrictions I just mentioned. Card-not-present growth, which is the yellow line on the chart, continues to be resilient and has held up well. The green line represents card-not-present spend excluding online travel-related spend and remains positive as we continue to see strong growth across discretionary and non-discretionary retail categories. Turning now to page 10, I wanted to share our thoughts for the upcoming year. First and foremost, we feel like we are very well positioned to grow with the strategic deals we have laid out over the last several quarters, including those with Bank of America, NatWest, Deutsche Bank, and Santander, to name a few. Further, we have positioned ourselves for the return of travel with travel-oriented portfolios. We have built a strong set of services capabilities which continue to grow at a faster rate than the core, and we will deepen penetration of these services across our customer base while expanding this portfolio. And our material strategy positions us well to address new flows and adapt to the changing payments landscape. In terms of the macro environment, we're enthusiastic about the availability of effective vaccines. However, the rate at which vaccinations will take place is still uncertain. As a result, we will not be providing a forward view on net revenues for 2021 at this time as we believe visibility is dependent upon border opening, the further relaxation of social distancing measures, and improvement in consumer confidence. As we have said, we expect to see progress in these areas in the second half of 2021. Turning to the first quarter, we anticipate that some of the more restrictive measures that have recently been put in place because of rising infections will persist in the near term. If this were to be the case, we would not expect spending levels to improve from what we have seen so far in January. By the way, we do plan on providing periodic updates to the operating metrics during the quarter. In addition, I would offer a few additional points to help you with your modeling. First, we will continue to experience lower cross-border-related yields until broader-scale inter-regional travel recovers. Second, from a growth rate perspective, we expect to start lapping the effects of the pandemic primarily in March. Also, as a reminder, last year was a leap year, and so Q1 2020 has an extra day of volumes and revenues. And finally, we expect rebates and incentives as a percentage of gross revenues to be flat or up slightly sequentially due to new and new deal activity, including some of the recent wins Michael has just discussed. Now let's start to operating expenses. We expect you to carefully manage our priorities in order to preserve our ability to invest in our key long-term growth drivers, namely digital, cybersecurity, data analytics, B2B, and multi-rail solutions. For Q1, we expect operating expense growth to be up mid-single digits versus a year ago on a currency-neutral basis, excluding acquisitions. Of note, this increase reflects the lapping of spending actions taken a year ago as a result of the pandemic, as well as a 3 ppt increase due to the lapping of a favorable hedging gain from a year ago. With respect to acquisitions made in 2020 or later, Finicili closed near the end of last November and we continue to expect the transaction with NETS to close in Q1. Based on this timing, we expect acquisitions to contribute about a half a PPT to revenue in Q1 and 1 to 2 PPT for the year. Similarly, acquisitions will contribute approximately 4 to 5 PPT to operating expenses growth in the first quarter and 7 to 8 PPT for the year. As a reminder, we discreetly disclose the impact of acquisitions for the year in which they close and the subsequent year, after which we do not split them up. Other items to keep in mind, foreign exchange is expected to be about a 2 ppt tailwind to net revenues and a 2 ppt headwind to operating expenses in Q1. On the other income and expense line, we are at an expense run rate of approximately $110 million per quarter, given the prevailing interest rates. This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics. And finally, we expect a tax rate of approximately 18% to 19% for the year based on our current geographic mix of the business. And with that, I will turn the call back over to Warren.