Mastercard Incorporated

ladies and gentlemen thank you for standing by and welcome to the mastercard second quarter 2021 earnings conference call at this time all participants are in a listen-only mode After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Warren Nishaw, Head of Investor Relations. Thank you. You may begin.

Thank you, Crystal, and good morning, everyone, and thank you for joining us for our second quarter 21 earnings call. We hope you're all safe and sound. With me today are Michael Niebach, 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 section. 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 accompany this call in the investor relations section of our website, MasterCard.com. Additionally, the release was furnished with the FCC 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, as 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. With that, I'll now turn the call over to our Chief Executive Officer, Michael Hiebach.

Thank you, Warren. And good morning, everyone. So here are the highlights of the quarter. The strong momentum we started the year with accelerated this quarter, with net revenue up 31% and EPS up 37% versus a year ago, all that on a non-GAF currency neutral basis. On that same basis, quarter two net revenues are now 10% over 2019 levels, even though international travel is in the early stages of recovery, which is showing the strength of our diversified revenue stream. Domestic switch volumes are well above pre-pandemic levels with all regions going at a healthy rate. We're seeing improvements in both domestic and cross-border travel with significant upside potential. Within this context, we're making progress against our strategic objectives and have expanded our relationships with key partners like Citi, JPMorgan Chase, Barclays, Stripe, and Verizon. Let's dive in, looking first at the broader economy. Domestic spending levels continue to show improved in-store sales and strength in e-commerce. According to our quarter two spending pulse report, which is based on all payment types, including cash and checks, U.S. retail sales, ex-auto, ex-gas, were up 14% versus a year ago and up 10% versus 2019, reflecting improved consumer mobility and some residual effects of fiscal stimulus. Spending Pulse also indicated that overall European retail sales in quarter two were up 13% versus a year ago and 6% versus 2019. The vaccine rollout has scaled in the U.S., U.K., and Germany and several other countries, with over 35 countries now reporting that over 50% of their populations are at least partially vaccinated. Broadening this effort is critical, but will, of course, take time. Turning to our business specifically and the four-phase framework we established for managing through the COVID environment. We believe that most markets are in the growth phase domestically, while cross-border spend is now starting to normalize, where border restrictions are being relaxed. Looking at MasterCard, spending trends, switched volumes, continue to improve quarter over quarter, with strength across all products. Debit spend remains elevated, and we are seeing further recovery in credit. Driven in part by the return of travel, and increased discretionary spending. This recovery is led by consumer credit, but it's important to note that commercial credit is also improving and has now reached pre-pandemic levels as well. In terms of how people are spending, they are definitely getting out more, as we're seeing improvement in car credit spending, particularly in the travel, retail, and restaurant categories, while e-commerce continues to be strong. Now turning to cross-borders. Cross-border card not present spending, excluding online travel spend, continues to be very strong. On the travel front itself, it is clear people want to travel, and they do so where and when able to. We've seen this domestically and across borders where there are limited restrictions. For example, we're seeing strength between the U.S. and Latin America, as well as an increase in travel within Europe. Our industry reports there has been a recent increase in bookings for travel between the U.S. and Europe, and the quarantine requirements for entry into Canada are starting to be relaxed, so that's a further opportunity. Overall, we expect more borders to open in the second half of the year, dependent, of course, on infection rates, including the recent variants, and progress on the vaccination front. Against this improving backdrop, we are focusing on our strategic priorities. One, growing our core products supported by our services. Second, driving digital enablement both in-store and online. Third, ensuring the ecosystem is safe and secure. And fourth, providing choice through our multi-rail capabilities. As always, we will do this with an eye towards driving top and bottom line growth over the long term by continuing to manage our expenses carefully. Let's look at them one by one. First off, we're driving growth in our core products and are leveraging our comprehensive services to do so, working with new and existing customers to solve their pain points, both in payments and beyond. We're not positioned to capitalize on the return of travel and remain focused on building on our strengths in this area by expanding relationships with our travel partners. For example, we have renewed our exclusive co-brand with JetBlue Airlines in the U.S. We also entered into a long-term global partnership with Cafe Pacific and Asia Miles, who will migrate their existing co-brand portfolio to MasterCard. In the Middle East, we have expanded our British Airways co-brand, and in Latin America, we are now the preferred brand for LATAM Airlines. It is important to note that our services played a critical role in enabling all these deals, including our data analytics, test and learn, loyalty, consulting, and cybersecurity solutions. Of course, we also continue to drive growth and decor outside of travel. Here are a few examples. We're excited about our partnership with Citi to launch the new Citi Custom Cash MasterCard, offering card members cash back in their top eligible spend category. With JPMorgan Chase, we have extended and deepened our agreement in the commercial space, and we have renewed our master brand relationship with Chase in the U.S. We also continue to partner closely with community banks throughout the U.S., including a flip of First Southern National Bank's debit portfolio to become their exclusive network brand. On the digital front, we're well-positioned to drive the acceleration of the secular shift with our digital capabilities, no matter how consumers want to shop, in-store, online, or both. As consumers return to in-person shopping, adoption of contactless continues to grow. The second quarter, contactless penetration represented 45% of in-person purchase transactions globally, according to our switch transaction. That's up from 37% a year ago. At the same time, e-commerce continues its strong growth, and we are providing consumers choice on how they want to pay online. For example, click-to-pay. which improves the guest checkout experience, is now rolled out in over 10 markets, and we continue to launch with significant new merchants, such as the Canadian Tire Group. On to the Buy Now, Pay Later space in Australia, we're partnering with Citi and Commonwealth Bank of Australia to offer installments to consumers wherever MasterCard is accepted. And whether in-store or online, we are securing and streamlining the consumer experience through our tokenization services. Tokenized transactions across in-store, online, and in apps surpass 1 billion per month throughout the second quarter. We continue to partner with major digital players to expand the reach of our digital capabilities. For example, we just entered a strategic partnership with Stripe. to give businesses more control over how they spend their money by enabling strut users to create, manage, and distribute virtual and physical cards for small business, commercial and consumer, across printed, debit, and prepaid. We've also entered a partnership with Verizon to bring 5G innovation to the global payments industry. Leveraging our services and insights and pairing MasterCard's solution with Verizon's 5G connectivity will allow us to create better experiences from the checkout line to being built, even to how businesses are run. Increased capacity and reduced latency of 5G will enable us to take another step toward making every device a commerce device. Now, onto securing the ecosystem. As more merchants and consumers shift to digital, the importance of keeping the ecosystem safe and secure is paramount. It is creating a strong demand for our cyber solutions. In addition to organic growth, a number of our acquisitions in this space continue to perform well. For example, Ethica has strong deal momentum, including a fraud and dispute management agreement with eBanks, a payment solution provider operating across 15 countries in Latin America. Risk Recon, which monitors and assesses customers' third-party cybersecurity risk, is now scanning millions of companies globally, up from thousands when we acquired them at the end of 2019. And new data is providing biometric fraud prevention tools to Major League Baseball and a new bank, Nickel. And we're happy to advance our digital identity capabilities with the acquisition of Ecata, that has now closed and off to a strong start on the deal front. Last, but certainly not least, let's turn to our initiatives focused on addressing a broader set of payment flows with our multi-rail capabilities. The key here is to provide choice, essentially the right tool for the job. With our multi-rail approach, including our expertise and capabilities in cards, real-time payments, and support for digital currencies, we're able to deploy the right combination of assets to meet our customers' needs. And more than just having this range of capabilities, we're making these solutions work together seamlessly, Let me give you a few examples. In B2B, we're making progress with Mastercard Track, building out our global open-loop network by working with buyer agents and supplier agents, such as banks, software companies, and ERP vendors. On the bank side, we're very excited to have signed Barclaycard Payments, who will use Track to connect their global business customers on both the buyer and the supplier sides of the ecosystem across multiple rails. We've also signed FreshBooks, a premier accounting software platform with customers in over 100 countries. In the bill pay space, we continue to scale the MasterCard bill pay exchange, which leverages our real-time payment capabilities to provide a transformative mobile-first experience to bill payments, with city treasury and trade solutions now connecting into the platform. As MasterCard sends, we continue to penetrate a variety of new payment flows beyond traditional card payments. We've enabled dozens of use cases and hundreds of programs across every region of the world. For example, we're partnering with innovative digital messaging platforms to offer P2P services to consumers. Today, users of WhatsApp in Brazil can transfer money directly in-app, leveraging Mastercard Send. We're also partnering with MoneyGram and Checkout to enable near real-time, cross-border P2P transfers across Europe. And on the BBC front, we continue to support the fast-growing gig economy And I'm partnering with Payfair to enable instant earnings payouts for some of the largest gig platforms in the U.S. Through open banking, MonsterCard is empowering people and businesses across the globe to easily and securely gain access to their financial data to create new opportunities for themselves. In the U.S., our efforts with finicity are running ahead of expectations as we continue to enhance direct API connectivity for banks and fintechs. For example, we're partnering with Jack Henry to enable consumers who bank at more than 400 community financial institutions to use its digital platform to access, use, and benefit from their own financial data. And Navy Federal Credit Union recently signed direct data access agreements with Finicity. Finicity is also leveraging its best-in-class data connections to launch new products and new verticals, such as its Mortgage Verification Service. And finally, in terms of cryptocurrency, we're making it easier for cryptocurrency wallets to connect seamlessly to our network through a pilot with Paxos, Circle, and Evolve Bank & Trust, which simplifies the conversion of crypto into fiat. Separately, we're partnering with ConsenSys, the Ethereum software engineering firm, to accelerate the development of crypto applications and services for our customers. Now, summing all this up, We delivered strong revenue and earnings growth this quarter, benefiting from our revenue diversification efforts. We believe that most markets are in a growth phase domestically, and there's upside potential in cross-border travel. We're winning significant new deals, and we continue to focus on our strategic priorities to drive growth over the long term.