Mastercard Incorporated

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 in your telephone. Please be advised that today's conference 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, Mr. Warren Nisha, Head of Investor Relations. Please go ahead.

Thank you, Jeremiah. Good morning, everyone, and thank you for joining us for our first quarter 2022 earnings call. 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 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. Both the release and the slide deck include reconciliations of non-GAAP measures to GAAP-reported amounts. Finally, set forth in more detail in our earnings release, I'd 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 the 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 now turn the call over to our Chief Executive Officer, Michael Meebach.

Thank you, Warren. Good morning, everyone. Russia's invasion of Ukraine marked a somber start to 2022, as war returned to Europe for the first time in decades. Given these extraordinary circumstances, we decided to suspend our business operations in Russia. We did not take this decision lightly given that Mastercard has operated in Russia for more than 25 years. We are now focused on the orderly suspension of business operations in Russia and supporting the well-being of our employees and their families across the whole region. Even in the context of this challenging geopolitical environment, we're off to a strong start in 2022. We delivered robust revenue and earnings growth with further improvement in our underlying operating metrics, notably in cross-border travel. Quarter one adjusted net revenues were up 27% and adjusted operating income up 40% versus a year ago on a non-GAAP currency-intro basis. On the macroeconomic front, consumer spending remains strong, particularly as economies across the globe continue to reopen and pandemic-related restrictions are lifted. Labor markets are firm, with low unemployment rates and rising wages. Weighing against this healthy backdrop are a number of factors that they're monitoring, including inflationary pressures, supply chain constraints, geopolitical uncertainties, and COVID infection rates. They're monitoring these developments, including the fiscal, monetary, public health care, and other policy responses. Let's look at this from a geographic standpoint. U.S. retail spending remains healthy, aided in part by the buildup of excess savings during the pandemic. According to our quarter one spending pulse report, which is based on all payment types, including cash and check, U.S. retail sales, ex-auto, ex-gas, were up 4.7% versus a year ago. In Europe, spending trends are positive, although the invasion of Ukraine has introduced risks to economic growth looking ahead. Growth in Latin America continues to moderate following a strong rebound in 2021. Asia has generally lacked the recovery of other regions. We're seeing several countries relaxing COVID-related restrictions, while others are facing stronger measures. Asia continues to have significant upside potential. Looking at MasterCard spending trends, we continue to see strong growth. Domestic switched volumes saw strength across a broad range of sectors, including retail, utilities, and professional spend. We also saw strong growth in travel and entertainment, including spending with airlines, travel agencies, lodging, and restaurants. In terms of cross-border, where the growth was particularly strong, the recovery continued this quarter, led by travel. Cross-border travel reached 2019 levels as of March for the first time since the pandemic began. Geographically, the cross-border recovery has been broad-based, with improvement across all regions. Cross-border card not present X-travel continues to be strong. Our strategy is designed to enable and capitalize on these trends, and we execute against our three key strategic priorities. One, expanding in payments. Two, extending our services. And three, embracing new networks. Here's an update on how we're progressing against each of those. First. We're expanding in payments by continuing to grow card payments and leaning into innovation and new payment technologies to capture other prioritized payment flows. We're driving growth in card payments through new consumer, small business, co-brand, and fintech wins. On the consumer and small business fronts, I'm excited to announce an enhanced partnership with Wells Fargo, which includes several new elements. Volkswagen will now issue MasterCard, small business credit cards, and for the first time in almost a decade, consumer proprietary and co-brand credit products. We're also excited to announce that we have deepened our relationship with our longstanding partner, Capital One. In addition to renewing our existing business, we will also be their issuing network for a larger number of new originations across both their consumer and small business products. Further on the small business front, we are expanding our small business portfolio with First National Bank of Omaha. We're also partnering with the bank and Verizon to launch a new Verizon Business MasterCard targeting Verizon small business customers. In total, these partnerships will help us continue growing our U.S. small business market share. Outside the U.S., we're driving commercial card growth through new partnerships with leading B2B tech companies like Clara, We will be flipping Cara's business portfolio in Mexico to MasterCard and are working with them to launch new programs in five additional markets across Latin America. Turning to co-brands, we've made substantial progress to ensure we are well-positioned to capitalize on the return of travel. We have renewed and expanded our exclusive partnership with American Airlines, one of the largest co-brand programs in the United States. American will continue to leverage our capabilities, including Session M, and will participate in our Start Pass program to identify new tech partners who can help drive innovation across the airline. And in the UK, we have launched two new Barclaycard Avios cards with Barclays and International Airline Group loyalty. Outside of travel, we've expanded our relationships with leading retailers, including a new co-brand program with Victoria's Secret and a renewal of our Ulta Beauty co-brand offering, both in partnership with Red Financial. We're also continuing to advance our leadership in the digital and fintech space through new product launches and new partnerships. We're partnering with BCA Digital, the digital banking arm of the largest private bank in Indonesia, to launch a digital-first MasterCard debit product catering to millennials. In Latin America, we signed a regional partnership with global payment processing platform Galileo. The partnership establishes MasterCard as Galileo's preferred partner across several markets in Latin America, and they will work to integrate and distribute several of our products and services to help their fintech customers. In addition to driving new wins, we are leveraging our services capabilities to execute against many of the large portfolio migrations that are in flight. In Europe, our consulting teams are engaging with our partners at Santander, Netwest, and Deutsche Bank to ensure a smooth and timely transition and to identify opportunities to optimize those portfolios. Santander is the bulk of the way through a 9 million card migration and we expect it to be complete by early next year, while Netwest commenced the issuance of MasterCard at the end of last year and plans to migrate their entire 16 million card portfolio by the middle of 2023. Deutsche Bank's 10 million consumer and commercial credit and debit cards will be reissued as MasterCard-branded cards with a credit migration starting quarter four of this year and a debit migration commencing early next year. Similarly, our team in the U.S. is supporting key migrations, including Gap Inc., Merit Bank, and First Interstate Bank. All the migrations are on track, with Gap Inc. scheduled to be completed this summer. We're also expanding in payments by leaning into payments innovation in areas like installments and cryptocurrencies. Here are a few examples. Our OpenLeap MasterCard installments program has been very well received and is progressing according to plan. Remember, MasterCard installment is built into our network, making Buy Now, Pay Later available to millions of consumers and merchants worldwide. We continue to add a wide array of new lender and fintech partners, including Amount, Deserve, I2C, Lithic, and Sutton Bank. In this quarter, we announced several merchant partners who are excited to support MasterCard installments, including Bass Pro Shops and Cabela's, HR & Block, Sexton's Avenue, and Walgreens. US customers will begin offering MasterCard installments to consumers this quarter, and international expansion is planned for later this year. and we continue to build solutions to support the crypto economy with a principled approach focused on three key areas. First, helping consumers easily and safely purchase cryptocurrencies and NFTs. In addition, we are enabling consumers to spend their crypto holdings on card and cashing out their crypto wallets via MasterCard sends. Second, providing identity, cyber, and consulting services for market participants, including engaging with central banks as they design and develop central bank digital currencies. Third, preparing our core network to directly support digital currencies. Making substantial progress in each of these areas, this quarter, the Gemini MasterCard, which offers crypto rewards, went live across the U.S., We also partner with Nexo to launch a new crypto card in Europe, one that uses consumers' digital assets as collateral to back their credit line. We established several other international crypto card partnerships, including Banks in Europe and Abra in Mexico and Bello in Latin America. On the crypto services front, MercadoLibre will be leveraging CycloTrace's AI and cyber capabilities to bring security and trust to their digital wallets in Brazil. Now turning to our second strategic priority, services. As I've noted before, our services support and differentiate our core products and have played a critical role in enabling many of the wins I mentioned. We also continue to extend our services across multiple growth vectors through new payment platform capabilities, new verticals, and new use cases. Here are a few examples. First, earlier this month we completed our acquisition of Dynamic Yield. Now that the transaction is closed, we will combine Dynamic Yield's personalization platform and decision engine with our SessionM loyalty platform and our test and learn experimentation software. The result will be a truly differentiated consumer engagement and loyalty hub for our customers. Second, we announced that we're expanding our consulting services into three new practices dedicated to open banking and open data, crypto and digital currencies, and ESG. We've seen increased customer demand and a growing portfolio of successful engagements in these areas. For example, we're supporting Handelsbanken and Intesa São Paulo, design programs that advance their ESG priorities. We're helping WIREX explore innovations in crypto. And finally, we're expanding the breadth of our customer base and deploying our capabilities to solve for a wider range of use cases. For example, we deployed our test and learn capabilities to help tailored brands optimize retail operations and improve marketing efficiency for their leading menswear brands. And we deployed our ethical capabilities with Santander in Spain to help streamline dispute resolutions and improve the customer experience. Beyond expanding in payments and expanding in services, our third key priority area is embracing new networks. Our current focus is on two areas, open banking and digital identity. Our open banking and multi-rail strategies are converging, enabling us to leverage our unique set of assets to address new flows in verticals, like rent payments. For rent payments, the risk of ACH returns due to insufficient funds is a significant pain point for both renters and landlords. To address this challenge, we're launching a new suite of smart payment decisioning tools. These solutions use Finicity's open banking capabilities to recommend the optimal payment day and payment rail for each transaction based on cost, speed, and risk. The Built Payment Alliance, a collection of more than 2 million rental homes, will be one of the first FinTech partners to launch these capabilities. We plan to expand these solutions across a broad range of bill payment verticals. In addition, we continue to extend our open banking reach with Sinicity and AIA by penetrating new verticals and establishing new partnerships. We continue to enhance our capabilities of the mortgage vertical and are now expanding into the auto lending vertical. We're leading the way in terms of provisioning permission-based income, employment, and asset verification information and we partner with Stripe, who will be using our open banking capabilities for a variety of use cases. We're also extending our open banking reach through data access agreements with partners like Fiserv, which will enable direct API connectivity to thousands of SIs in the United States. In the digital identity space, Ecarta continues its strong performance in 4.1, securing deals with financial services companies, including Moneyline and several leading buy-now-pay-later providers. In addition, we recently joined forces with Microsoft on a collaboration to improve digital transaction approval rates and reduce fraud. The solution enables issuers to optimize authorization decisions using network and merchant-specific authentication data. Combined, open banking and digital identity extend our value before and after the payment transaction and into new digital transactions. These are attractive and growing opportunities and we are uniquely positioned to be successful in both. In summary, our business fundamentals remain strong and we delivered robust revenue and earnings growth again this quarter. We also reflect our disciplined approach to expense management. We're executing against our strategic priorities, notably expanding our share with key issuers. In addition, we've worked hard to expand our travel-oriented portfolios, which positions us well to capitalize on the strong recovery in cross-border travel. And last but not least, we want to reflect on what is most important, the safety and well-being of our employees and the families who have been impacted by the war, our thoughts are with them, and the people of Ukraine. Sachin, over to you.

Thanks, Michael. Turning to page 3, which shows our financial performance for the quarter on a currency-neutral basis, excluding special items, and the impact of gains and losses on our equity investments. Net revenue was up 27%, reflecting the continued execution of our strategy and the ongoing recovery in spending. Acquisitions contributed 2 ppt to this growth. These revenues were above expectation, primarily due to stronger-than-expected cross-border and domestic volumes, favorable cross-border mix, and FX-related revenues. Operating expenses increased 13%, including a 6 PPT increase from acquisitions. Operating income was up 40%, which includes a 1 PPT decrease related to acquisitions. Net income was up 61%, which includes a 20-PPT benefit due to the recognition of a one-time discrete tax benefit related to a U.S. tax regulation published in the current period and a 1-PPT decrease from acquisitions. EPS was up 65% year-over-year to $2.76, which includes a $0.36 contribution from the one-time discrete tax benefit and a $0.05 contribution from carry purchases. During the quarter, we repurchased $2.4 billion worth of stock and an additional $599 million through April 25, 2022. So let's turn to page 4, where you can see the operational metrics for the first quarter. Worldwide gross dollar volume, or GDP, increased by 17% year-over-year on a local currency basis. Of note, data related to sanctioned Russian banks were not reported to us In the U.S., GDP increased by 14% with credit growth of 31% and debit growth of 1%, reflecting the recovery of credit spending on travel and the lapping of stimulus. Outside of the U.S., volume increased 19% with credit growth of 20% and debit growth of 18%. Cross-border volume was up 53% globally for the quarter, with intra-Europe cross-border volumes up 50% and other cross-border volumes up cross-border. For the first time since the onset of the pandemic, cross-border volume was above 2019 levels for all regions and cross-border travel was above 2019 levels for the first time in March. Turning now to page five, switch transactions grew 22% year-over-year in Q1 and were at 150% of 2019 levels. Car-present and car-not-present growth rates remain strong. Card present growth was aided in part by increases in contactless penetration in several regions. With respect to card counts, as a result of the suspension of our business operations in Russia, cards issued by Russian banks are no longer active on our network and are therefore excluded from our card counts this quarter. Accordingly, card growth was lowered at 4% this quarter. If you exclude Russian-issued cards from current and prior years, card growth would have been 9%. Globally, there are 2.9 billion MasterCard and Maestro-branded cards issued. Now, let's turn to page 6 for the highlights on the revenue line items, again described on a currency-neutral basis, excluding special items, unless otherwise noted. The increase in net revenue of 27% was primarily driven by domestic and cross-border transaction and volume growth, as well as growth in services, partially offset by growth in rebates and incentives. Acquisitions contributed approximately 2 ppt to this growth. I'd also like to point out that in the first quarter, the suspension of business operations in Russia had a minimal impact to the overall growth rate of the company as the loss of volume was offset by a one-time benefit of lower rebates and incentives due to the absence of a customer incentive agreement renewal in Russia. Looking quickly at the individual revenue line items, Domestic assessments were up 21%, while worldwide GDP was 17%. The poor PPP difference is primarily due to unreported volumes from Russian-related sanctioned customers and a paper good mix. Cross-border volume fees increased 57%, while cross-border volumes increased 53%, both ahead of expectations. The 4 PPP difference is primarily due to favorable mix as higher yielding ex-intra-Europe cross-border volumes grew faster than intra-Europe cross-border volumes this quarter. Transaction processing fees were up 27% once which transactions grew 22%. The 5 PPP difference is primarily due to favorable cross-border mix and FX-related revenues. Other revenues were up 20%, including a 7 PPT contribution from acquisitions. The remaining growth was driven by our cyber and intelligence and data and services solutions. Finally, rebates and incentives were up 30%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. As a percentage of gross revenues, rebates and incentives were lower than expected, primarily due to the absence of a planned customer incentive agreement renewal in Russia, a higher mix of cross-border revenues, and the timing of new and renewed deals. Moving to page 7, you can see that on a currency-neutral basis, total operating expenses increased 13%, including a 6-PPT impact from acquisitions. Excluding acquisitions, operating expenses grew 7%, primarily due to increased spending on advertising and marketing, higher personnel costs to support the continued investment in our strategic initiatives, and increased data processing costs. Turning to page 8, let's discuss the operating metrics for the first three weeks of April. For your reference, to help you understand the trends in the business ex-Russia, we've included an appendix later in this deck to show all the data points from the schedule if you excluded activity from Russian-issued cards from current and prior periods. Going through the metrics in turn, starting with switch volumes, for the first three weeks of April, we grew 23% year-over-year, down 4 ppt versus Q1, primarily due to the cessation of activities in Russia. If you exclude Russia-related volumes from the current and prior periods, switch volumes grew 27%, down 1 ppt versus Q1. Switched transactions grew 14% year-over-year through the first three weeks of April, down 8 ppt from Q1, again driven primarily by the absence of Russia-related transactions. Of note, Russia has a relatively low average ticket size, which results in a larger relative impact to this metric. If you exclude Russia-related transactions from the current and prior periods, switched transactions grew by 25% year-over-year, up 1 ppt versus Q1. Overall, cross-border volumes through the first three weeks of April grew 60% year-over-year, up 7 ppg versus Q1. Excluding Russia from the current and prior periods, cross-border volumes through the same period grew 65% year-over-year, up 13 ppg versus Q1. Since the end of January, cross-border travel has rebounded quickly as border restrictions continue to be lifted, In the first three weeks of April, cross-border travel was up 179% year-over-year, up 38 PPT versus Q1. Cross-border guard not present excluding travel was up 5% year-over-year in April, a decrease of 8 PPT compared to Q1, reflecting in part the lapping of a strong is now above pre-pandemic levels at 110% of 2019 levels.

Turning to page 9, I want to remain strong as we continue to grow our product and service offerings. As Michael mentioned, consumer spending remains robust, particularly as economic restrictions are lifted.

Having said this, we are monitoring a number of factors, including inflationary pressures, supply chain constraints, geopolitical uncertainties, and COVID infection rates. At this stage, we have not seen any significant impact of these on consumer spending. Cross-border travel is recovering rapidly as border restrictions ease. This is occurring faster than our earlier expectations. We are well positioned to capitalize on this growth with our travel-oriented portfolios. Weighing against these positive trends are the impacts of the war in Ukraine and the suspension of our business operations in Russia. So now taking all of this into account, we continue to expect net revenues for full year 2022 to grow at the high end of a high-teens rate on a currency-neutral basis, excluding acquisitions and special items. So essentially, we are maintaining our growth expectations in the same range, as the strong cross-border travel recovery and strengthened consumer spending help mitigate the loss of sizable revenues in Russia and Ukraine. Acquisitions are forecast to add about 1 ppt to this growth, while foreign exchange is expected to be a headwind of 3 to 4 ppt for the year, primarily due to the strengthening of the US dollar relative to the euro. In terms of operating expenses, we are reducing our forecast for the year to reflect cost savings related to Russia. For the year, we expect operating expenses to grow at a high single-digit rate on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 4 to 5 ppt to this growth, while foreign exchange is expected to be a tailwind With respect to the second quarter, year-over-year net revenue is expected to grow at the high end of a high-teens rate, again on a currency-neutral basis, excluding acquisitions. This reflects, firstly, strong consumer spending, including continued improvement in cross-border travel spending relative to 2019. Secondly, the discontinuation of revenues from Russia and a sequential reduction in revenues related stimulus and the easing of pandemic-related restrictions as vaccination programs roll out. Acquisitions are forecast to add about 1 ppt to this growth, while foreign exchange is expected to be a headwind of approximately 5 to 6 ppt for the quarter. From an operating expense standpoint, we expect Q2 operating expenses to grow at a high single-digit rate versus a year ago on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 4 to 5 PPT to this growth, including the acquisition of Dynamic Yield, which we are pleased to have just closed. Foreign exchange is expected to be a tailwind of approximately 3 to 4 PPT for the quarter. Other items to keep in mind, on the other income and expense line, we are at an expense run rate of approximately $115 million per quarter, given the prevailing interest rates and our recent debt issuance. 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 each of the remaining quarters of the fiscal year based on the current geographic mix of our business. Before closing out, I want to briefly comment on our three-year performance objectives for 2022 to 2024. Clearly, the elimination of Russia-related revenues and the reduction of those from Ukraine create a headwind to achieving these objectives. If this were to continue, it would result in a headwind of approximately 2 ppt to our net revenue table. Having said this, we are off to a strong start in 2022 with the recovery of cross-border travel ahead of expectations, as I previously mentioned. We remain focused on building long-term sustainable growth for the company. And net-net, it is really too early to adjust our three-year performance objectives as we work to offset some or all of these headwinds. And with that, I will turn the call back over to Warren. Thank you, Sachin.

Jamairia, we are now ready for the question-and-answer session.

As a reminder, to ask a question, you will need to press star 1 in your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question will come from the line of Sanjay Sakrani with KBW. Please proceed with your question.

Thanks. Good morning. I've got a question on inflation. I know the data suggests the consumer remains in good shape as we look across trends in the verticals and such. Are you seeing anything that sort of – Is seeing some kind of negative impact on consumer? Talk about that. Thank you.

Sanjay, thanks for your question.

So on the inflation side, as Sachin mentioned earlier, we have not seen... What we're seeing is in terms of the impact on...

vertical mix and so forth. There has been a switch volume that's related to gas price increases. We're seeing some shifts in the airline. That is, again, under inflationary pressure there from ticket prices perspective. So we'll have to see where it goes going forward. Fundamentally, this is the push by consumers into the digital space. They learn these habits. There That will continue, and we'll see where the underlying prices go. In the end, it comes back to what we've been saying all along. There's macro considerations in each country that has to be considered here, what is monetary fiscal policy, and then there is the different verticals, which ones of those are carded, which ones we would see, which ones we wouldn't see, and could there be a crowding out effect of rents or gas prices, particularly in Europe? Yeah, there might be, but that's not something we can tell yet.

Your next question will come from the line of Harshita Wallat with Bernstein. Please proceed with your question.

Hi. Good morning. Michael Sachin, I want to ask about cross-border travel. Very strong recovery here. Is there a scenario where even if, let's say, China and other parts of Asia don't come back meaningfully, you can still kind of get back to this, like, normalized 30 to 40 percent kind of level above 2019, which was the kind of pre-pandemic? because there's so much spent of demand, or does Asia and China need to come back for the next legacy of cross-border recovery? And Sachin, just to follow up for you, can you just talk about the sensitivity of your revenue guidance to macro-consumer spending to get away from here? Thanks.

Thanks, Afita. So, first, on your question on cross-border, you're absolutely right. You know, cross-border travel has actually come back stronger than our expectations, and it continues to be, you know, pent-up demand. And we, in terms of, you know, how we're thinking about our guidance, we've kind of built in that improving recovery and cross-border travel on a going-forward basis as well. So, you know, I just want to kind of get that out there. But to give you a little bit more color, right, on cross-border, So cross-border volumes are above 2019 levels across all regions for the first time. I would tell you that the top 20 destinations, which represented approximately 70% of our total cross-border travel pre-pandemic, and were at 70% of 2019 levels when we discussed this at our investor community meeting, are now at 85% in Q1 of 2022. Specifically on your question around Asia-Pacific, I think it's important to note that Asia-Pacific has been slower to recover. The Asia-Pacific opportunities I see is as follows. Asia-Pacific represented approximately 14% of total inbound cross-border travel volumes pre-pandemic. And we're at 40% of our 2019 levels in Q1. So you can see from this number, right, that there's a fair amount of recovery still remaining to come from Asia Pacific. Obviously, it does matter in terms of how restrictions are lifted in that market. You know, again, the point is, at the end of the day, cross-border fundamentally is still very sound. This is something we've been talking about right through the pandemic, where we felt like when restrictions are eased, the volumes of cross-border will come back. We've seen that happen, and we continue to believe fundamentally that that remains very much in place. On AP in particular, a couple of thoughts on China. One, China, both from an inbound and an outbound standpoint, were not a very significant portion of our cross-border volumes pre-pandemic. In fact, I would argue that the outbound China was slightly higher than the inbound China. So when you think about recovery, you've also got to think about what restrictions are there in terms of people going into countries versus people coming out of countries. And I would tell you, Outbound China has shown better improvement than inbound China for obvious reasons, as we all know, that there have been lockdowns in China and things of that sort. So, you know, as I sit back and I think about this, I think about the fundamentals of cross-border being strong. I think about the potential for pent-up demand to continue to contribute to, you know, improvements in cross-border travel spend. And, again, the whole Asia-Pacific region still remains a fairly large opportunity on a going-forward basis.

Yeah, if I can just build on that, we love cross-border, but while we love the trends, it's a lot of hard work. And over the last two years, the travel industry was hard hit from the outset of the pandemic. We have leaned in. If I recall over the last two years, JetBlue, Cafe Specific, British Airways, LATAM, Aeroplan, Air Canada, you name it, it's a long list of where we have either expanded, renewed, one additional volume. So we're participating in the trend in a very significant way. And we've always said it's going to happen this year, and we're ready for that.

Your next question will come from the line of Raina Kumar with UBS. Please proceed with your questions.

Good morning. Thanks for taking my question. It was really good to see the strong operating margin expansion in the quarter, 460 basis points. Can you discuss some of the underlying drivers outside of the return of cross-border and how sustainable you believe an upper 50% operating margin is going forward?

Yeah, Ray, I'm happy to take that question. So look, I mean, at the end of the day, you know that the business as we have it is a high operating leverage business, right? At the end of the day, incremental dollars of revenue typically flow to the bottom line, just given the nature of how we operate. So certainly cross-border recovery is playing into the recovery in operating margins, but it's not just about cross-border. It's about overall strong consumer consumer spending and cross-border travel recovery, all of which is contributing to the delivery of improved operating margins. Helping that even further is the continued strength in our services and everything we're doing along those paths. So it's everything which we're doing in terms of driving the fundamentals of our business back to the strategic priorities Michael was talking about, which is growing our payments, you know, keeping or leaning in on services, and then continue to invest in the new network space, which is really, really important. So all of those factors are contributing factors to the expanding operating margins that you're seeing come through. The message I'd like to leave you with on this is the following. We continue to run the business for long-term sustainable growth, which means effectively that we're going to continue to invest in a disciplined manner to ensure that we are creating the right opportunities for ourselves to deliver this long-term top-line growth. And while we do that, you know, you should see the impact of that come through in terms of operating margins.

Next question, please.

Your next question will come from the line of Darren Peller with Wolf Research. Please proceed with your question.

Hey, thanks, guys. You know, when we look at the types of opportunities on cross-border that you're seeing right now, you clearly are positioned, as you said before, to take advantage of this upswing in travel. And historically, it's been very high pass-through without rebates incentives having as high of a correlation. So first of all, just to be clear, I mean, should we still expect that to be the case? Or is there anything around the new business, you know, the relationships that, Michael, you mentioned earlier, that would cause that gross yield, I guess we can say, or net yield to be a little bit different going forward on this type of big pickup and resumption in spending on travel? And then, Michael, just more strategically, when we think about that, that industry in terms of cross-border payments, there's been so much change. And even you guys are trying to work through opportunities for more A to A and you know, open banking opportunities across globally. And so does that change the ecosystem at all, or is card-based really how you expect to see cross-border players stay really dominant for payments cross-border over time?

Thanks, Aaron. I'll take the first part, and then Michael will address your second question. I guess the headline is the following, which is we're not seeing anything fundamentally change in terms of the profile of our cross-border revenues. I mean, you know, net-net, you know, things are going to move around depending. on how much cross-border comes from intra-Europe versus, you know, volumes from outside of that intra-Europe corridor because, as you know, intra-Europe is lower yielding and then other cross-border volumes are higher yielding. But fundamentally, I would tell you not much has changed. I will make one point. You talked about rebates and incentives not being there with cross-border. I would say that there's a lower indexation of rebates and incentives to cross-border. There's always been some level of rebates and incentives which have been associated with cross-border, not really as high as what's there in the domestic volume environment. We're not seeing fundamentally much change in that regard.

Right. And strategically, so, Darren, Here's what I'd say is similar lens that we took at Investor Day where we looked at different universes and different use cases. You got the P2M world where a card is well-established domestically but also certainly cross-border. The industry, and we very specifically with our services propositions have found a way to ensure that the risks associated with these cross-border transactions for merchants and for consumers are addressed. So the conversion rates and the approval rates have continuously increased, and there is a lot of value brought. So there isn't much of a problem to be resolved to payments for goods on a cross-border basis. Now, where are we actively looking? It tends to participate in all relevant payment flows. We're saying what other payment volumes happening cross-border that we can contribute to with our technology through our franchise and so forth. And here, you know, the whole space of import-exports, cross-border accounts payable, you know, that's a space where account-to-account solutions make sense for us. The whole, we have specifically called out you at the Investor Day, the focus on remittances. Again, that's a significant opportunity for us. That's all additive and expansive from a target market perspective, from an opportunity perspective. Attractive growing opportunities. We have the technology on the cross-border remittances side, our TransFast acquisition, our buyout on the Homestand side. All of that is coming together. It's 100 country reach. So I think what we're bringing here is the multilateral network idea. into this space that has been historically inefficient. So I look at it as a growth opportunity while we're going to continue to power the comp side of the house.

Next question, please.

Your next question will come from the line of Lisa Ellis with Moffitt & Nathanson. Please proceed with your question.

Terrific. Thank you. I was hoping to shine a spotlight on LATAM, specifically Brazil. Just taking a peek at the supplementals, MasterCard volumes are up 40% to 50% in that region. But Brazil is also a market where you've got a local network like PIX gaining a lot of traction. Can you just use that as an example to talk a bit about how MasterCard coexists in a market like that with one of these domestic networks? And is a player like PIX actually a customer or a potential customer of some of your open banking or fraud or identity services? Thank you.

All right, Lisa, let me take that. So first of all, Brazil has been a market and focus, strategically important market for us for years. We're very well established on with the large banks out there, Itaú and others, to mention. I'm actually seeing the Brazilian country manager right after this call. So it's very much in focus. We're very happy with what's going on there. Overall, it's a market that drives a lot of innovation. Buy now, pay later has been a thing in Brazil forever. Open banking is on the rise. Real-time payments is on the rise. So a lot of movement there. And the P2P... network that's been introduced by the central bank in the Brazil market is another push to further digitization in that market. So the whole digitization in Brazil is really seeing great momentum, and we're leaning right into that. Now, the kind of flows that PIX is going after, you see a lot of P2P flows and some B2B flows. So that's not necessarily anything that we're particularly worried about, but it's also the kind of flows as part of our multi-rail strategy that we like to support ourselves, and we have a whole set of technologies for that. WhatsApp page, just to point one out, which has been first live in Brazil itself, as I said, a market with innovation and a lot of momentum there. So here's our technology powering a social network as an alternative, which is an easy user experience, great adoption, 4.7 million users already on that platform. So I look at it as a market that's a lot to learn from, a market that we invest in, the new additional flows beyond card flows with specific local solutions considering the size of the market.

And I'll just add, Michael, a couple of thoughts on Brazil. One, you know, you asked the question about the strong growth. You know, clearly it's a combination of, you know, the macro environment, but it's also the fact that we've been leaning in pretty heavily with our traditional issuers as well as our fintech partners in that space, which has been part of the reason why we've been seeing some of that growth come through in a decent manner, Lisa. The second point I'd make, going back to Michael's comments around PICs, The market has to be bifurcated in the context of both debit and credit. And on the credit side, we continue to see tremendous growth. PIX, which Michael said is primarily catering to P2P and B2B flows, even if it were to actually proliferate a little bit into, call it the smaller merchants from a P2M standpoint, would primarily be focused around the debit side of the equation. And so credit still remains the mainstay for us in Brazil as it stands.

Your next question will come from the line of Tin Jin Wong with J.P. Morgan. Please proceed with your question.

Thank you very much, Shem. Good morning. I wanted to check in on the call balance of trade and this whole card volume coming in and out from wins and losses migrating. Given the update, I know you mentioned Wells and, of course, the internet West and Deutsche Bank. Are you gaining share when all is said and done? I'm just trying to get a better sense, especially in the short term, with all the migrations in and out, where you stand in the share game. Thanks.

Yeah, thanks, DJ. So everything we kind of talked about and Michael talked about earlier on in this conversation was about our expanding relationships with these issuers. And so with these issuers, we are gaining share. That's kind of the reality of the situation. Again, there are puts and takes in the market, right? So as I think about, you know, the new relationship, well, I shouldn't say new relationship, the expanded relationship we have with Wells, right, And that's an increasing share position with Wells, which is taking place, for example, there. So the bottom line is the following, which is whether it's Wells, Capital One, what we're doing with Santander, NatWest, Deutsche, you name it, you know, the GAAP portfolio, all of these incrementally are helping us drive our volumes. From a holistic market standpoint, again, like I said, there are puts and takes, right? But we're very, very optimistic about how we're seeing business translate for us. And, you know, as we mentioned at the Investor Community Day, we are growing market share across all regions, and the market share growth, which we've seen in 16 of our top 20 markets, which is something we shared with you at the Investor Community Day, is really the data points we've put out so far.

And, Jinjin, I should add, I'm very happy you asked the question. I thought these news were just going to pass by with none of you asking about it, so it's much appreciated.

Your next question will come from the line of David Togut with Evercore ISI. Please proceed with your question.

Thank you very much. Cross-border Cardinal President X travel growth was solid in Q1, but did slow throughout the quarter and into April against known very difficult comparisons.

Can you unpack... the present ex-travel growth by geography, especially in Europe and U.S., and how you see this playing out throughout this year, especially with, you know, the return of the consumer to the, you know, physical point of sale as, you know, vaccination rates go up. In other words, do you see a reacceleration of e-com later this year, or do you think the consumer is going to be more active at kind of physical bricks-and-mortar locations?

Sure, David. So I think you're touching upon a couple of things which are there on that card not present X travel. The reality is as cross-border travel comes back, you do see some give back in terms of cross-border card not present X travel. That's a mouthful. So, the point is, at the end of the day, right, there are a few factors that are taken into consideration when you're thinking about future growth rates for cross-border card, not present next travel. Number one, what's the base of recovery on cross-border travel is going to be? what the prior comps were on cross-border card, not present X travel. Because remember, these growth rates are all influenced by prior comps as well. And what was happening in the COVID environment last year, which might have caused for elevated levels of cross-border card, not present X travel. And number three, you do see fluctuations come in that number through as a result of crypto and crypto volumes, right? And so these three factors are kind of things you've got to take into consideration. The point at an upper level is the following, which is the consumer continues to spend in an omnichannel manner. When they can get out and spend in a physical environment, they do that. When they can't spend in a card-not-present environment, they do that. We are ready to support them in both manners, whether it's, you know, through our omnichannel capabilities that we're offering our merchants. And the strength which we're seeing in card-not-present X travel from a cross-border standpoint is It's something we expect that strength to actually stay going forward as well. There might be for all the reasons I just mentioned, but largely I think consumer behavior has changed in a manner where they're gone more digital and you're going to see some strength come through out there.

Your next question will come from the line of Brian Keane with Deutsche Bank. Please proceed with your question.

Hi, good morning. Just a couple quick clarifications. On the Russia-Ukraine, I heard the two points to net revenue targets to the performance objectives, 22 to 24. Could you help us clarify the revenue and expense impact for the going forward quarters like the second quarter, third and fourth this year? Just trying to quantify that. And then the second question is just what level of cross-border recovery are you assuming in the guidance for 22? Thanks so much. Sure, Brian.

So first, I'll take your question on Russia and what we're assuming. So we have suspended operations in Russia, as a result of which we're not earning any revenues related to Russian initial cards. So as it relates to revenue for the rest of the year, you know we had mentioned that we put out an ap about how um russia represented roughly four percent of our revenues in 2021 and so we've assumed that that four percent doesn't exist in any of the quarters going forward from a net revenue standpoint right Point number two, and again, like I said in my prepared remarks, there's some level of headwind, which we're assuming in Ukraine as well. But the reality is that's a little bit of an uncertainty just because we're not entirely sure as to how the war in Ukraine evolves and what the implications of that are. So we've built in some assumptions, and that's what we've kind of given you in our overall thoughts. From an expense standpoint, the Russia-related expenses represented roughly 2% of our operating expenses. And again, from an OPEX growth standpoint, that's the way we think about it. As I mentioned, we have taken down, when we shared with you our thoughts for full year 2022, we have taken down our OPEX growth rate on an ex-acquisition currency neutral basis to reflect that very impact from a Russia standpoint.

Your next question will come from the line of Ramzi Elisal with Barclays. Please proceed with your question.

Hi, thank you for taking my question this morning. I was wondering if you could give us your latest view on what the kind of longer-term post-pandemic payment mix looks like for MasterCard. This is related to kind of a prior question about how, you know, consumers might have changed their behaviors during the pandemic. Do you see a different longer-term mix of debit versus credit or any, you know, associated impacts to P&Ls or yields or anything that we should consider as we model out for long-term?

Right. Let me start off on that. So, The structural changes that we are seeing, that we've been observing with our regular consumer engagement surveys over the last two years and that have transpired with our customers as well, is less cash and checks, number one. Anything digital, more of, number two. The whole... This whole notion, though, has changed in the consumer's mind. A couple things going on. First is consumers are really ready to move on with the pandemic. They want to go out there. They knock off their bucket list. They want to, you know, pent up demand. So there's a lot increased spending back into services. So it's not a structural change. feature of the years to come, that it's all in goods. It's going to go back to services. It's going to balance out. It's also not going to be only online, as Nachin just said. It's going to balance out across multi-channel, buy in store, pick up, have delivered, do it the other way around, whatever works. I think consumers will go for more choices, and that comes right down to our multi-rail strategy to enable basically all relevant choices that are out there. I think that's the right positioning. That's what we're going to see going forward. In terms of debit and credit, you know, if you kind of get a little more granular over here, there was a period in the early parts of the crisis, people will not want to spend on credit if they can avoid it, more control around their finances. That was a big tailwind for debit. We see travel coming back that's more credit-oriented, particularly because of the rewards around it. You start to see in the crypto space, there's a whole new set of credit propositions. You know, we just talked about the Gemini rewards and crypto rewards on that, the Nexo card. So there's a whole thing going on. I think in the end, it's going to be multiplicity around these different tools.

Your next question will come from the line of Dan Zola for the Mizzou Hope. Please proceed with your question.

Oh, hi. Thank you for taking my question. My question is more specific. If I look at U.S. trend debit versus your competitor, I mean, over the last few quarters, I'm seeing a downward trend in your share of the mix in debit and opposite picture in credit. Is there anything to call out there? Is there an opportunity to improve in debit or – Am I just missing something very fundamental here? Again, just U.S. versus your large competitor.

Yeah. So, Dan, there's nothing fundamentally which is really changing as it relates to our debit business. I'll put that out there in the first place. You know, growth rates obviously are impacted by comps. I think you get that piece. I think you've got to take into consideration that there is one portfolio, which is a debit portfolio, which is rolling off in the U.S., was previously announced uh which is probably impacting that cooperative analysis that you're seeing because obviously we're seeing the detriment of that come through in our debit metrics and that primarily is started in in the recent past and will go on through the course of this year uh and you know the competitors likely actually getting the benefit of that so that's probably the reason you're seeing some some level of divergence your next question will come from the line of andrew jeffrey with truett securities please proceed with your questions

Hi, good morning. I appreciate you taking the question. Michael, I actually have a question on other revenues, value-added services in particular. X acquisition seems that it's de-selling a little bit. Would have, you know, perhaps expect to see that growing faster and certainly approaching the growth in the card business. Can you just comment on kind of puts and takes there and what the long-term trajectory is for value-added services?

Andrew, excellent questions. As you know, we love our services business. It drives growth for us. It's a differentiator. It's a margin increaser. It's all of that. And the key focus is on cyber solutions on one hand and data livings and inside solutions. This comes back to the structural trend, by the way. More data, more digital worlds, more digital world to be kept safe, more insights for all these new people that are having businesses online on the data analytics side. So fundamentally, there are sound trends here. If you just pick up this quarter and you do the unpacking the numbers that you have just laid out, that is simply timing. We are expecting, you know, there's nothing to be said that there's anything changing on the growth rates of our business. So that will continue. Our teams are fully engaged. And, you know, as we look ahead and the guidance that Sachin gave, we assume a strong services growth.

Andrew, I'll just try to add a little bit more color on that just because I think it's important for you as you're thinking about your models going forward to actually factor this in. When we talk about rush share revenues, there are a few things from a rush share revenue standpoint which you might want to take into consideration, one of which relates to the fact that services was well penetrated in the Russia and Ukraine markets and had strong growth. And so as you think about, you know, the model and the impact across the different line items, you're going to see impact related to lost services revenue come through in other revenues in the ensuing quarters. That's kind of point number one. A few other salient pieces on Russia-related revenues as you think about the different line items. Yes, we will lose the volumes in transactions. Russia was a fast-growing market. It had low average ticket size, which I kind of mentioned earlier. There was a high degree of contactless penetration. Again, I think these are important things for you all to kind of keep in mind as you think about comps on a going-forward basis. And the cross-border issuing... out of Russia was mostly high-yielding inter-regional cross-border issuing. It's also a strong remittances and disbursements market. Why am I sharing all of this with you? Because as you think about the various metrics we've shared across all of these aspects, those will get impacted as Russia stops coming into play in future borders.

Your next question will come from the line of George Mihalov with Cowan. Please proceed with your question.

Greg, good morning, and thanks for taking my question, guys.

Sachin, I wanted to ask, you called out currency volatility as obviously being a benefit to first quarter results.

Can you isolate what that benefit was in 1Q? I know it's a volatile time, which is sort of three weeks into the next quarter, but how are you thinking about that looking into 2Q?

Yes, look, George, I called it out because Q1 had unusually high foreign exchange volatility. I mean, the reality is we don't typically talk about this because these numbers kind of go back and forth from a volatility standpoint. But there was, you know, unusually high FX volatility in Q1. You know, the outlook from a going forward standpoint is really hard to say. I mean, this is one of those things where I guess... As Michael jokes with me, Sachin, you wouldn't be doing the job if you knew where volatility was going on a forward basis for foreign exchange. So the point is, at the end of the day, we've taken our best assumptions on a holistic basis for our business to share with you what our thoughts are from a fully hard to predict what the outlook going forward is going to be. You know, unusually high volatility does help us. The other thing to keep in mind is since it's related to cross-border volumes, as cross-border volumes come back, that combined with unusually high volatility has that much more of an impact.

Sir, Maria, I think we have time for one more question.

Okay. Our final question will come from the line of Jason Kupferberg with Bank of America. Please proceed with your question.

Thanks, guys. It's a quick one. So just in terms of your expectation for cross-border travel relative to 2019 levels, last quarter you were expecting to be at 100% by the end of this year. You're already at 110% in April. So what's your updated assumption on that?

Jason, as I mentioned, we're assuming improving trends vis-a-vis compared to 2019 as we go forward. We're not sharing a specific number for what that looks like in the second quarter or the end of the year. We've built in our expectations in terms of the revenue guidance I've shared with you, our thoughts around how that trend takes place. You know, the combination of that plus consumer spending and what the improving trajectory in consumer spending is, it's all factored into the numbers.

Can we get a directional rebates and incentives just for the rest of the year?

So the thing I'll mention to you on rebates and incentives is the following, which is we have a rich pipeline of deals. We continue to execute on that, as you heard from Michael, in terms of some of the wins which we had recently. Obviously, you get the benefit of improving cross-border trends to play through in terms of newer amounts of rebates and incentives, impacting that. And the last point I'll make on rebates and incentives is in Q1, we had this one-time benefit relating to the non-renewal of our Russian customer agreement, which you should not expect the benefit of that to come through on a going forward basis. So net-net, I would tell you that, you know, a lot of this is going to be, you know, dependent on what the timing of deals are, how we put the new and renewed deals into play, and what the recovery of transport is going to be.

Thank you. Thank you. Great. Thanks, Ashan. Michael? All right. So thanks for your questions. Insightful questions, as always. Thank you for the support for the company. Just a thought from me. Here we are. We're thinking that we're going to get out of Omicron, and then a few days later we have an invasion in Europe. So for our teams around the world, it continues to be a never-ending marathon, and I just want to extend the thanks to everybody in the MasterCard team. And with that, we'll see you next quarter. Thank you so much. Bye-bye.

And this concludes today's conference call. Thank you for participating. You may now disconnect.