Mastercard Incorporated

Q2 2022 Earnings Conference Call

7/28/2022

spk15: Good morning and welcome to the MasterCard Inc. Q2 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. Warren Nisha, you may begin your conference.
spk03: Thank you Julie, good morning everyone, and thank you for joining us for our second 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 the slide deck that accompany 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. Both the release and the slide deck include reconciliations of non-GAAP measures to their 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 for 30 days. With that, I will now turn the call over to our Chief Executive Officer, Michael Meebok.
spk11: Thank you, Warren. Good morning, everyone. Starting with the key highlights for the quarter, we delivered strong revenue and earnings growth with further improvement in our underlying operating metrics, notably in cross-border travel. Quarter two adjusted net revenues were up 27 percent and adjusted operating income up 40 percent versus a year ago on a non-GAAP currency neutral basis, excluding special items. On the macroeconomic front, we continue to monitor a number of factors that have both positive and negative influences on economic growth. Inflationary pressures have remained persistent and we're now seeing central banks taking even more aggressive steps to reduce inflation, as we have seen the Fed yesterday. The situation has been compounded by geopolitical tensions and supply chain constraints, which have eased from pandemic peaks but remain in many industries. Despite this, unemployment rates remain low, wages are rising, and consumer savings levels remain high. With this backdrop consumer spending and particularly travel related spending remains strong. Looking at this from a geographic standpoint, US retail spending remains healthy as consumers navigate a high inflation environment. Spending has been aided by strong job creation and the buildup of access savings during the pandemic. According to our MasterCard spending pulse, which is based on all payment types, including cash and check, U.S. retail sales ex-auto, ex-gas were up 6% in the second quarter versus a year ago. In Europe, spending trends are positive, although the risks related to both the supply of natural gas and higher interest rates remain headwinds. Growth in Latin America continues to moderate following a strong rebound in 2021. Asia has generally lagged the recovery of other regions. While COVID-related requirements have been relaxed in several countries, strong restrictions remain in others. Asia continues to have significant upside potential. Looking more specifically at our switched volume trends, domestic volumes continue to show strong growth with notable strength in airline, lodging, and restaurant spend. You've seen some shift in spend towards gas and groceries from discretionary categories like home furnishings in the U.S. Cross-border continues its strong recovery as border restrictions continue to be relaxed. Cross-border travel in quarter two has now reached 118% of 2019 levels. Cross-border card not present X travel continued to hold up well. Notwithstanding the strength in consumer spending, we will continue to watch the environment closely, including fiscal and monetary policy responses to high inflation and their potential impact on spending. Within this environment, we will continue to be nimble in managing our expenses. We have the flexibility to respond quickly across a number of levers, as we showed in 2020. Having said this, we will continue to invest in the business to drive top and bottom line growth over the longer term. We have a well-diversified business model, and we are executing against our three key strategic priorities, expanding in payments, extending our services, and embracing new networks. And here's an update on how we're progressing against each one of those. First, we're expanding in payments by continuing to grow card volume, driving acceptance growth, and leaning into innovation to capture other prioritized payment flows. We're driving growth in card volume with new consumer, small business, co-brand, and travel wins globally. In Canada, we're excited to announce that we secured a new partnership with CIBC that creates an opportunity for material share shift for MasterCard with the bank. We also renewed our relationship with the Royal Bank of Canada, including a range of services that will enable us to grow our proprietary and co-brand volumes with them. In the U.S., We established a new partnership agreement with the U.S. Bank, which extends our current debit, credit, co-brand, and small business credit programs. It includes several new products, including the first large-scale launch of a consumer credit product, a small business credit offering, and the development of Buy Now, Pay Later installment solutions. We're excited to announce that we have completed the conversion of Gap Inc.' 's existing 10 million card members to MasterCard across the Old Navy, Gap, Banana Republic, and Athleta brands. We renewed and expanded our co-brand with Brooks Brothers, issued by Citi, and we have renewed and expanded our co-brand with Barnes & Noble in partnership with Barclays. Outside of North America, we have secured several new wins and renewals, including a number of deals that position us well in Asia Pacific as the region rebounds from the pandemic. In Australia, we've extended our partnership with Bendigo and Adelaide Bank Limited, enabling us to maintain exclusivity with Bendigo and convert several of their regional debit portfolios. We're pleased to announce that National Australia Bank and MasterCard have signed an agreement to retain and grow the MasterCard components of Citigroup Australia's consumer business that was acquired by NAB. This marks the first significant issuing relationship between the two companies in years, and we look forward to partnering to grow these portfolios. In Hong Kong, we partner with Citibank and HKT's loyalty program and digital ventures arm, The Club, to launch the Citi The Club credit card. In India, we're happy to report that the embargo on new issuance has been lifted. Issuers have restarted card issuance and they are eager to expand business with us. An example is Yes Bank, where we signed a consumer credit agreement that will enable us to maintain a majority share and include the commitment to scale our world elite portfolio. We've worked hard to expand our travel-oriented portfolios, which positions us well to capitalize on the strong recovery of travel. For example, in Asia Pacific, we entered into a 10-year commercial card issuance deal with Trip.com, one of the world's largest online travel agencies. In the UAE, we renewed our co-brand portfolio with Marriott. In the U.S., we have renewed our long-standing co-brand relationship with Amtrak. And we've extended our co-brand partnership with Virgin Atlantic in the U.K., a partnership that will leverage our test and learn, innovation labs, and Session M loyalty assets. We're also driving growth in payments by continuing to expand acceptance. MasterCard has now accepted over 90 million merchants' locations worldwide, And we have more than doubled the number of acceptance locations over the last five years. MasterCard has been driving tap-on-phone innovation, enabling billions of active smartphones to become potential acceptance devices, with over 130 deployments across 55 markets. This includes working with Apple to enable acceptance of MasterCard contactless cards and digital payments through their tap-to-pay on iPhone capability. It allows businesses to accept payments directly on their iPhones. MasterCard is further empowering the ecosystem through our cloud commerce capabilities, which enables our channel partners to quickly deliver cost-effective acceptance. It also provides easy access to a range of payment solutions and services, including tap on phone, QR, installments, loyalty, data insights, and more via the MasterCard cloud. In addition, we continue to drive adoption of our click-to-pay online guest checkout capability. Click-to-pay is now enabled in over 20 markets across all regions, and transactions have been growing quarter over quarter. We're expanding in payments through innovations like MasterCard installments. Our open-loop Buy Now, Pay Later program has been very well received. MasterCard's installment is now soon to be live with Saudi National Bank and several new partners adding their support to the program. Examples include Cross River Bank, Evolve Bank & Trust, Jiffity, Live Oak, Mocha Financials, and WebBank in the U.S., as well as HSBC, NetWest, and JP Morgan's payments division in the UK. In addition, Apple recently announced Apple Pay Later, which uses the MasterCard installments program. Finally, we're driving growth in payments by leaning into innovation to capture a prioritized set of new payment flows, including disbursements and remittances, commercial point of sale, B2B accounts payable, and consumer bill pay. This is at the heart of the investments we've been making to develop a range of capabilities that span cards, account-to-account payments, push payments, and blockchain. We're at various stages of scaling our capabilities across these different flows, and we're making steady progress. For example, we're expanding network reach through new cross-border services relationships with partners like Doha Bank and Vodafone in Qatar, and UPT, a leading money transfer operator in Turkey. We're targeting specific use cases and scaling distribution through B2B partnerships with MasterCard Send. A few examples, Caesar Sportsbook will leverage Send for instant payment of online winnings. And PaySafe will integrate MasterCard Send into their payments platform to enhance the payout capabilities offered to their merchant customers in the UK and the EU. Now, turning to services. Our services capabilities have proven to be a tremendous growth driver and differentiator for our business, built on a foundation of investments and experiences built over the years. Looking forward, we continue to see a significant opportunity for services in three primary areas. First, services will continue to enhance the value of payments. Services make payments intelligent, safe, and secure. For example, our identity check payment authentication service is driving double-digit improvements in approval rates. We are working with Postapay in Italy to support the deployment of their issuing portfolio, assist in growing their acquiring business, and enhance their customer engagement approach. And our consulting team in Europe is engaging with ING to help them create a seamless payment experience for their clients. Second, we see the needs of our customers expanding beyond payment. We can leverage our full suite of differentiated services to address these needs. A recent example is Travelodge, which is utilizing our test and learn capabilities to support optimization of new investments in their business. And third, our services can be deployed to support new networks, making our open banking and digital identity propositions even stronger. With these adjacent networks, it's our services that will enable us to establish a differentiated position to scale and win. For example, we recently launched a new biometric checkout program. The program outlines a set of standards from banks, merchants, and tech providers, helping to ensure the security and privacy of personal data when people pay with a smile or with a wave. Now beyond expanding in payments and expanding in services, our third key strategic priority area is embracing new networks. As a reminder, our current focus is on two areas, open banking and digital identity. We're leveraging our Finicity and Aya acquisitions to extend our open banking footprint, grow our customer base, and deliver new solutions. This quarter, we expanded our Engage partner network to include our open banking services with new FinTech partnerships, including Douala, Synctera, I2C, and others. They can now use our open banking capabilities to easily build and implement solutions for their end customers across a range of use cases. from lending to payments to financial management. In addition, we recently launched a global start path open banking program. This program enables us to co-innovate with startup fintechs like DAPI, Financier, MMOB, Mono, and Paywallet, as we support their path to scale. We expanded our open banking product offering as well. We announced Pay by Link in Europe, which allows businesses to send payment requests through invoice, email, SMS, or social media chat. This can expedite the payment of invoices in a cost-efficient way, enabling both parties to better manage cash flows. Online accounting provider Visma Dinero is using pay-by-link to simplify invoice payments for over 75,000 small and medium-sized businesses. And in the digital identity space, Icarta continues its strong performance, signing over 200 new deals and expansions since we acquired the company just over one year ago. This includes many of the leading buy-now and crypto companies. It also includes real-time payment software providers like ACI Worldwide, who's leveraging Icarta's capabilities to help their global merchant network more accurately identify fraudulent transactions. Open banking and digital identity are attractive and growing opportunities, and MasterCard is uniquely positioned to be successful in both. So in summary, our business fundamentals remain strong. We delivered robust revenue and earnings growth again. We're executing against our strategic priorities in payments, services, and new networks. We have fortified our strong position with travel-oriented portfolios to capitalize on the continued recovery in travel. On a macroeconomic front, we continue to monitor a number of factors influencing economic and spending growth. And with all of that, we will continue to manage our expenses carefully. That said, we will also continue to invest in the business to drive top and bottom line growth over the longer term.
spk10: Sachin, over to you. Thanks, Michael. Now turning to page three, 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 one PPT to this growth. Operating expenses increased 12%, including a five PPT increase from acquisitions. Operating income was up 40%, which includes a 1 BBT decrease related to acquisitions. EPS was up 40% year-over-year to $2.56, which includes a 5 cent contribution from share repurchases. During the quarter, we repurchased $2.4 billion worth of stock and an additional $448 million through July 25, 2022. So now let's turn to page 4, where you can see the operational metrics for the second quarter. Worldwide gross dollar volume, or GDV, increased by 14% year-over-year on a local currency basis. On the same basis, if you exclude Russia from the prior period, GDV increased by 19%. In the U.S., GDV increased by 10%, with credit growth of 25%, reflecting the recovery of spending on travel. Debit declined by 2%. Excluding the impact of a roll-off of a customer agreement, debit increased by 1%. Outside of the U.S., volume increased 16%, with credit growth of 19% and debit growth of 13%. Cross-border volume was up 58% globally for the quarter, reflecting continued improvement in travel-related cross-border. Turning to page 5, switch transactions grew 12% year-over-year in Q2. Excluding Russia from the prior year, switch transactions grew 22% year-over-year in Q2. Card-present and card-not-present growth rates remained strong. Card-present growth was aided in part by increases in contactless penetration in all regions when excluding Russia. In addition, card growth was 5% or 9% if we exclude cards issued by Russian banks from the prior year card cut. Globally, there are 3 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 1 ppt to this growth. Looking quickly at the individual revenue line items, domestic assessments were up 13% while worldwide GDP grew 14%. Cross-border volume fees increased 61% while cross-border volumes increased 58%. The 3PPT difference is primarily due to favorable geographic mix. Transaction processing fees were up 22% while switch transactions grew 12%. The 10PPT difference is primarily due to favorable mix FX-related revenues and pricing. Other revenues were up 23%, including a 3PPT contribution from acquisitions. The remaining growth was driven by our cyber and intelligence and data and services solutions. Finally, rebates and incentives were up 23%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. Rebates and incentives as a percentage of gross revenue is higher relative to Q1 2022, primarily due to volumes and related revenues generated from a sizable customer in Russia in Q1 with no related incentive agreement on such volumes. Moving now to page seven, you can see that on a currency neutral basis, total operating expenses increased 12%, including a five PPT impact from acquisitions. Excluding acquisitions, The remaining increase was primarily due to increased spending on personnel to support the continued execution of our strategic initiatives, as well as unfavorable foreign exchange related expenses due to the re-measurement of monetary assets and liabilities. Turning to page eight, let's discuss the operating metrics for the first three weeks of July. For your reference, to help you understand the trends in the business ex-Russia, we have 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 prior periods. As a general comment, our metrics are holding up well in July. Going forward, however, the year-over-year growth metrics will face tougher calms as we begin lapping periods when COVID-related restrictions eased and spending levels started to rebound. Going through the metrics in turn, starting with switch volumes, for the first three weeks of July, we grew switch volumes 18% year-over-year, down 3 ppt versus Q2. Switch transactions grew 10% year-over-year through the first three weeks of July, down 2 ppt from Q2. Overall, cross-border volumes through the first three weeks of July grew 54% year-over-year, down 4 ppt versus Q2. Cross-border travel had another quarter of strong growth as border restrictions continue to be lifted. In the first three weeks of July, cross-border travel was up 89% year-over-year, down 55 PTT versus Q2 due to more difficult year-ago comps, as I just noted. Cross-border travel is now at 126% of 2019 levels, up eight points versus Q2. Cross-border card not present excluding travel was up 16% year-over-year in July. The increase of 9 ppt compared to Q2 reflects a reduced headwind from crypto purchases and the timing of significant e-com promotional activity between the periods. This metric continues to hold up well in relation to 2019 levels. Turning to page 9, I want to share our thoughts on the remainder of 2022. Let me start by saying that we have strong momentum with our customers, we continue to enhance our product and service offerings and that our business fundamentals remain very strong. consumer spending remains robust and cross border travel has improved more quickly than expected as border restrictions ease and consumers increase their spending spending towards travel. And there is more room to grow as those remain either restricted or have yet to recover to historical levels of growth, for instance. Based on our switched volumes, Asia, which represented approximately 14% of cross-border inbound travel in 2019, is only at approximately 60% of 2019 levels in Q2. Similarly, the U.S., U.K., and Canada, which represented approximately 20% of cross-border inbound travel in 2019, is at about 110% of 2019 levels, still well below the historical trajectory. If inbound travel to these three countries had continued to grow at the historical three-year CAGR through 2019, we would have expected to be at approximately 135% of 2019 levels rather than approximately 110%. We are well-positioned to capitalize on this growth with our travel-arranged portfolios. As Michael mentioned, there are a number of macro economic factors that could influence future economic growth employment and beach levels consumer savings levels. persistent and elevated inflation and rising interest rates and geopolitical tensions in particular, we are monitoring each of these, but on balance. expect a modest improvement and cross border travel versus 2019 levels and a generally resilient consumer spending through the remainder of 2022. Taking this all into account, including our well-diversified business model, we are increasing our expectations for net revenue growth for the full year 2022 to a low 20s rate on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecasted to add about 1 ppt to this growth, while foreign exchange is expected to be a headwind of 5 to 6 ppt for the year, primarily due to the strengthening of the US dollar versus the euro. It is worth highlighting that this performance is despite the cessation of our Russia operations in Q1. For the year, we expect operating expenses to grow at the low end of a low double-digit rate on a currency-neutral basis, excluding acquisitions and special items. This reflects continued investment in our people and strategic priorities, as well as impacts from FX-related expenses, primarily due to remeasurement of monetary assets and liabilities. Acquisitions are forecasted to add about four ppt to this growth while foreign exchange is expected to be a tailwind of approximately three to four ppt for the year. We are prepared to quickly adjust our operating expense base as we did in 2020 should circumstances dictate. With respect to the third quarter of 2022, 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 and special items. Sequentially, this reflects continued strong consumer spending, including a modest improvement in cross-border travel spending trends relative to 2019, reduced FX-related revenues as a result of lower anticipated FX volatility, and finally, the lapping of a stronger year-ago quarter as the recovery took hold last year. Acquisitions are forecast to add about 1 ppt to this growth, while foreign exchange is expected to be a headwind of approximately 7 to 8 ppt for the quarter. From an operating expense standpoint, we expect Q3 operating expenses to grow at the high end of a low double digit rate versus a year ago on a currency neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 5 ppt to this growth. Foreign exchange is expected to be a tailwind of approximately 5 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. 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 between 19% and 21% in Q3, which includes a discrete income related to an unfavorable court judgment, the details of which we are still assessing. We expect a tax rate of approximately 19% in Q4. And with that, I will turn the call back over to Warren.
spk03: Thank you, Sachin. Julie, we're now ready for the question and answer session.
spk15: Thank you. As a reminder, if you'd like to ask a question, press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from Arshita Rawat from Bernstein. Please go ahead.
spk14: Hi, good morning. So Michael Sachin, can you comment on the media reports yesterday on the potential bill for introducing the outing choice for credit cards? I know the Durbin Amendment for Debit has market share. How could a credit routing choice be implemented given many alternative networks don't have those capabilities? And then finally, just taking a step back, can you talk about routing decisions for merchants and why they choose MasterCard or might choose MasterCard when they have a choice of alternatives? Thank you.
spk11: Harshita, let me start off with that. So we read the same article. Clearly, it's early stages because we haven't seen the bill yet. So we're all speculating here, I think, what might happen. So we'll engage. We'll try to find out more over the weeks and months to come. But if you just assume for a moment that the article would be complete and this would actually happen, a few things come to mind that are straightforward from our perspective. First of all, we believe in competition. We believe in a level competitive landscape and playing field. And we've invested massive amounts in safety and security. And we focus on providing consumer choice, you know, different ways of pay, credit, debit, whatever it is. So that's been our strategy. So we're going to look at this proposal, a proposed bill through that lens. So that's the starting point for us. Some of the questions that you touched on, some points here. What are practicalities? What are the technical aspects of this? How many providers are ready that have made the same kind of investments to really ensure that the consumer can rely on safety and protection and so forth? Those are open questions. We'll have to see what the regulation actually foresees. You know, overall, the concept of interchange is a balancing factor in the ecosystem. It's one that has served the ecosystem, including the consumers, well in terms of rich propositions and all of that. We'll have to see what becomes out of that. Those are a whole range of questions that we've talked about over years that need to be considered by all stakeholders. And we will spend the time and the effort to ensure that everybody is well informed about the puts and takes around this proposed bill.
spk14: Thank you.
spk15: Next question, please. Okay, next question comes from Sanjay Sakrani from KBW. Please go ahead.
spk04: Thanks. Good morning. Sachin, you talked about what's being baked into your forward view on cross-border as being a modest improvement in cross-border, but you talked also about the long runway you still believe you have in terms of cross-border. Could you just help us think about, you know, what's factored in versus what practically can happen as we look forward? Thanks.
spk10: Sure, Sanjay. So what I shared was that we are, you know, thinking ahead in terms of cross-border travel seeing a modest improvement relative to 2019. And as you can see in our metrics, cross-border travel in Q2 was at 118%, and in the first three weeks of July is at 126%. Without getting too specific as to what exactly we're kind of building in there, the point we've got is the following. We expect a modest improvement in cross-border travel when indexed back to 2019, and it's predicated on certain data points. And the data points are, if you think about what's gone on in Asia Pacific, we've talked about how Asia Pacific, from a cross-border travel standpoint, has been lagging and has historically not come back over the last few years since COVID hit, in the same way, say, as intra-Europe has come back. as to where we stand from an inbound cross-border travel standpoint in Asia Pacific. So there's a lot of room to grow there. We think that that opportunity exists. Markets in Asia Pacific, such as Australia, New Zealand, Singapore, even Japan, they've started to open up and actually have opened up fairly well. The one thing which we have always taken comfort in is that the fundamentals of cross-border travel and of cross-border in total remain very sound. When people have the ability to travel, they have demonstrated their intent to travel. And I think we've got enough data points now over the last 18 months to suggest that when barriers towards travel are lifted, people get on the road again. And so if you think about that and you think about the context of what's going on in Asia and the potential there, we've got opportunity there. But even beyond Asia, there are several other corridors, such as the US, UK, and Canada, which still have not reached their historical growth levels. They're higher than their 2019 index levels from an inbound standpoint, but there's still more room to grow. So we've kind of built all of that in in our thoughts for the rest of the year.
spk11: I'd like to just add to that. Fine travel is such a fascinating topic and certainly very central to our business. There's been this notion around of pent-up demand, like this is going to be a bubble and then it's all going to go back to where it was during the last two years. Why would anybody that now has the chance to see their family and their friends again stop doing that in a year from now? So I think that actually doesn't make any sense. So we believe exactly the point that Sachin just made, if there is a possibility, people will continue to travel the way they have been before COVID. One other thing to add is, you know, one thing is the underlying trends that we have built in and our outlook on the data points that Sachin just talked about, but it's also the strength in our position vis-a-vis that travel trend. You know, all the portfolios, we talked to you about American Airlines, about JetBlue, about Cathay Pacific, You know, everything that we have won in the last two years is going to really come to bear to really make the most of this. Next question, please.
spk15: Your next question comes from Raina Kumar from UBS. Please go ahead.
spk13: Good morning. Thanks for taking my question. During the 08-09 recession, MasterCard generated solid revenue and earnings growth I'm curious to know what you think has changed the most about MasterCard since then that could help you generate positive results through another potential economic downturn, even if you're not seeing it right now.
spk11: Thank you. I think the last word, as you said, is instructive, as we are not seeing it right now. Generally, resilient consumer spending for the time being, and we talked about the modest improvement and cross-border and same spending behaviors until the end of last year. You're taking us really a long time back, in 2008 and 2009. I think the first thing I would say is it's It's a very different scenario the sorry that we're looking at externally I come to the company in a moment Externally is we are not having you know a crisis around unemployment We're having high consumer spending levels So we don't have an asset bubble that looks any anything similar than what we've seen at that time so different starting point I would say it's a somewhat more benign starting point than we had at that time now the company also looks entirely different than it looked in 2008 and 2009. It's a much more diversified business. It's a highly diversified business. I think we were largely consumer credit debit oriented at the time. We have a whole range of card-based spending from push payments into general payments for goods and services, opening up new verticals and so forth. And then there is our progress into new flows. So that gives us resilience on underlying payments. It also, our reach of our business model and how many payment transactions we touch that allow us to build a set of services audit looks entirely different. Our switching ratios at that time were much, much lower than they are today, which has led to a very successful services business, which we have seen in the last two years is actually quite resilient when you go through up and down cycles. And as we continue to build into the future to see whenever we might face a down cycle, I'll be more resilient with other activities around digital identity and open banking and so forth that go into a world of open banking and move even further before or after the payment transaction to give us more resilience. So better earnings quality, higher diversification, And we've been tested. We've been tested over the last two years. I mean, there was a down cycle, and we needed to demonstrate that agility and the speed in managing our expenses, make the right investment decisions. So we feel we're well positioned to navigate whatever is going to come. Hopefully it's positive.
spk15: Your next question comes from Darren Keller from Wolf Research. Please go ahead.
spk05: Thanks, guys. You know, look at the best services you close can pay off. And I think to your point, it underscores that your customer base is still willing to really spend on some of those areas. Can you just talk about what you're seeing in terms of the strength there and what kind of resilience you'd expect those to have in different economic scenarios? And then, Sachin, just one quick one on processing yields. It came in a lot better than ours relative to transaction growth. processing revenue line up. You mentioned price and other variables. Can you just talk about if that's sustainable spread? Thanks, guys.
spk10: Yeah, Darren, I'm happy to take the second question first. I must say you were breaking up on the first part of your question, so we might ask you to just kind of state that again. But on your second part of the question, what you're seeing in transaction processing growth rates relative to the growth in switch transactions is exactly, like I said, the three things kind of going on there, right? There's the favorable mix piece, which I talked about. There's higher FX-related revenues, and then there's some elements of pricing. Look, I mean, the reality is we're operating in an environment in which you've seen a few things happen one is the mix is shifted towards more cross-border and you know we make cross-border fees both in the cross-border volume fees line as well as in switch transactions so sometimes that's kind of an overlooked element but that's an important piece to keep in mind that we do make cross-border fees on the transaction processing line and as the shift has gone towards more cross-border that's helped us number two is you know there's high levels of volatility in the foreign exchange markets. We deliver some very important services when we do switching of transactions and when we do the settlement of those transactions. In the highly volatile FX environment, it's actually worked in our favor. And on pricing, the baseline is the following, which is at the end of the day, we continue to deliver value to the ecosystem. And as we put value out into the ecosystem, we price for that value. And what you're seeing there is exactly that come through, which is we are reflecting that in the nature of pricing. You'll see puts and takes in different quarters in terms of what we may or may not do in terms of pricing, depending on what we believe is the value we're delivering, as well as what the market's appetite to accept that is. And that's what you're seeing come through there. Okay, that's helpful. Could you repeat the first question?
spk05: Yeah, that's much better. Yeah, thanks. I was just trying to figure out the value-added services, the new flows, all the areas that are driving other revenues obviously are continuing to trend very well, and I mean, if you could just revisit, what do you think are the top two or three drivers there, and what kind of sustainability and different macro scenarios you'd expect for that? It looks like the investments you made there are clearly paying off. I think we're just wondering on the cyclicality of it. Thanks again, guys.
spk11: All right, good. So what we're seeing here is, first of all, in the backdrop, let's just pick up on the structural changes, again, that we have seen over the last two years. clearly driven by social distancing measures, a significant push into more digital engagements by consumers, they were sitting at home, so all that. So it's a more digital world. So here, services that help make a more digital world safer and more easily understood. That's really the general thrust of what is what's driving the growth and the interest from our customers across established customer sets as well as new ones. Earlier I talked about travel watchers, people who come to us and say, hey, I want to use all of that data to get a better understanding of my business. So taking it one by one, safety, security, anything in the fraud space and the authentication space has been a joy for us. You go further into cyber risk assessments, our small businesses safe those many small businesses that have opened up in a more digital fashion now over the last two years and you go all the way into digital identity because in a more digital world people find they have more passwords and nobody wants really wants that so digital identity is now a solution that's really taking hold um so that's that whole space and you saw some actually doesn't stop at current types of payments. The last thing I should add is our acquisition of CypherTrace and how we're going into the crypto space, making that safer, as that is certainly something that captures consumers' interests. One space. The second piece is what do you do with all of that data, retail and commerce, travel logic. I'll give you one example. Many other customers are trying to understand how to run their business better using the payments data that is thrown off, and we help them with that. Our dynamic yield acquisition is is one of them where we help customers, retail and commerce customers, engage their end customers in a more targeted fashion. I imagine a landing page that now has personalized offers. In our case, always with strong consent from consumers and a focus on data privacy. So those are the two headlines. We do various other things and services from consulting into processing-related activities and so forth, but that's center of the plate.
spk10: And, Darren, I'll just add, as it relates to how we see the other revenue line item and services in particular to what, you know, Maizu was talking about, look, we see really good demand from the customers and we see good growth potential there. The reality is we are doing deeper penetration of those services with our existing customer base. We're expanding the set of services we've got across our customer base. And on the third element, we're actually taking those same services and moving across to the new network side of things as well. And Michael alluded to one part of that when he was talking about what we're doing in cipher trace, but more broadly even in open banking, for example. So the potential is there, and we do expect that, you know, given the suite of services we've got, there's good growth potential going forward.
spk15: Your next question comes from Lisa Ellis from Moffitt Nathanson. Please go ahead.
spk12: All right. Good morning. Thanks, guys. Good stuff here. I wanted to ask a question about some of the news related recently to the CFPB, the Consumer Financial Protection Bureau, looking into standalone service providers both in the P2P space, so meaning the fraud issues we've seen in Zelle and other private P2P services, and then also on the BNPL side, looking at the standalone providers there with the marketing and kind of risk management that they're doing. Can you just comment on how MasterCard is kind of positioned relative to the areas they're looking into? Is this an opportunity for MasterCard to perhaps play a larger role with MasterCard Send in P2P and with MasterCard installments in BNPL? Thank you.
spk11: Thank you, Lisa. So let me start off on that. You know, where the Consumer Protection Agency here in the U.S. and some other markets are going is really to ensure that there is the right kind of protections for consumers. That goes all the way from responsible lending to safety, security, and so forth. You know, We follow that, but if I look just in-house and see what we're doing, if I look at our data principles, what we have done around the MasterCard installment programs to ensure that the participating lenders go through a vetting process and follow responsible lending rules that we have set as part of our franchise, we feel well positioned. I feel we are a good industry custodian to ensure that these responsible practices are being held around. Now, is that also an opportunity for us in all of this? Absolutely. We have learned to partner with P2P systems in many countries around the world, with safety and security solutions, the services I actually just talked about, where we say, hey, you know, you have a fraud issue, we get it. Here's a set of answers that we have for you to partner. And in other markets, we compete head-on because we simply believe we have the better solution and players not necessarily always want to partner with us. So it's a bit of a mix, give and take, but it's an interesting and dynamic field that we are very focused on.
spk15: Your next question comes from Tin Jin Wong from J.T. Morgan. Please go ahead.
spk07: Hey, thank you so much. Thanks for going through all of this. I'm just curious how deal activity is going. Are the known conversions that you have proceeding in a timely way? I don't know if there's been any change given some of the macro uncertainty there. And then also, Sachin, would you mind just rehashing the FX Neutral OpEx numbers again? Are you changing your underlying investment strategy or inflation assumptions given what we've learned around the macro? Thank you.
spk11: So, Jim, let me start off with deal activity. The momentum that we have seen over the last, you know, two years throughout the pandemic, where we meet in with our customers and say, hey, you know, what do you need? These are tough times. I think we set ourselves up as a trusted partner and helped to shape that deal pipeline that we currently see, which is very strong. Deal pipeline is strong across all regions. We gave you a few examples today from, you know, we haven't talked much about Canada lately, so these are strong wins. This is excellent. Some of the very significant wins we talked about over a year ago in Europe, when you think about NetWest, Deutsche Bank, the multi-regional deal that we have with Santander, They are progressing according to plan. The conversions are going on. I mentioned very specifically back to the United States, the gap conversion is actually done on those 10 million cards. So overall, we talked to you at the Investor Day in November last year that we see share growth across all of our carded products, and we continue to feel very good about that. So momentum is competitive out there, of course, but I think the mix of what we have in various payment solutions as well as services sets us apart. We've also re-looked at how we deploy our sales resources across the company with all the acquisitions that we have so that we can do the best possible work for our customers. So overall, strong momentum that I think will continue.
spk10: And engine on your question as it relates to you know the outlook for the full year 2022 on our banks. So on a currency neutral rate basis, excluding acquisitions, we are. guiding along the following lines, which is on OpEx that we expect to come in on a full year basis at the low end of the low double digits range. And just to remind you, while we're talking about OpEx, on the revenue side also, we have changed our full year guide and our revenue, again, on a non-GAAP growth basis, currency neutral excluding acquisitions, is now at... the low 20s rate, which is higher than what we had shared with you previously.
spk15: Your next question comes from David Tilghout from Evercar. Please go ahead.
spk16: Thank you. Good morning. Among your largest geographic regions, Europe continues to generate the greatest payment volume outperformance versus our model. You underscored a number of geopolitical and economic risks for Europe going forward, especially as we head into the winter. Can you talk through MasterCard's growth algorithm, what that might look like in a significant economic slowdown in Europe? Historically, you've been a big share gainer there, particularly against the national payment networks. You've got the secular shift working in your favor. But if you could just kind of talk through your thought process, that would be much appreciated.
spk11: All right, let me start, and then Sachin can chime in. So, David, the matter of fact is Europe is not homogenous. That's the first thing I would say. When you look at where we are on the arc of the secular shift, it's very different. So there's lots of opportunity across the board from further digitization. The opportunity to go beyond P2M and sets of flows is wide open in Europe. The push of the European authorities to digitize beyond just in-store payments and online payments is significantly there. We're well positioned with our tools in Europe, which is pushing on open banking, which is pushing on account-to-account, which is pushing bill pay solutions. We have all of that in a hop. So we feel that there is significant opportunity. And as I said before, there is uncertainty on the European macroeconomic front. But on the other hand, macroeconomic, GDP, overall economy, and our basket are two different things, and we'll have to kind of see how that will play out. Can't really predict that. I'm from there, so I have a sense, but I'm not in the business of predictions.
spk15: Your next question comes from from Barclays. Please go ahead.
spk00: Hi, thanks so much for taking my question. I had wanted to ask about some of the longer term drivers of rebates and incentives. It seems like today or not seems like today rebates and incentives as a percentage of gross revenues are, you know, several hundred basis points higher than they were in 2019. I guess the question is, is the mix and the mix related drivers of that increase are very clear. But as we move forward over the next couple of years, And your mix normalizes. Should we see downward pressure on rebates and incentives as a percentage of gross revenues? Or is this something where this new baseline is sort of here to stay? And if that's the case, maybe give us some reasons why.
spk10: Sure. So, Randy, I'll take that one. So, look, I mean, I think you're right. well aware about the fact that rebates and incentives are influenced by a number of factors, right? Some of which you alluded to, which is what's going on from a volume growth rate, what's going on from a mixed standpoint, how the pipeline of new and renewed deals are looking, and you take all of that into consideration. But the reality is, if you just think about where we are from a mixed standpoint, particularly on cross-border between where we were pre-pandemic and where we are today, we've still not gone back to the historical mixed levels from a cross-border to domestic volume standpoint. as that reverts back to the mean and when i say the mean means closer to what the pre-pandemic levels were you would expect to see some benefit of that come through in rebates and incentives versus gross as a percentage of gross you would see that come through but the reality is there are the countervailing factors which are also taking place right which is a function of what the pipeline of deals looks like what the timing around that is but the basic premise is correct which is as more cross-border happens you're going to see a benefit come through in rebates and incentives as a percentage of gross
spk00: Got it. Thank you so much. Appreciate it.
spk15: Your next question comes from Brian from Deutsche Bank. Please go ahead.
spk02: Hi, guys. Good morning. I just wanted to ask a clarification, Sachin, on the OPEX, the non-gap growth, currency neutral X acquisitions. That went up from high single digits originally. I think it was last quarter that you got into that for the year to low. end of low double digits. So, you know, I guess why the increase in op-eds, and is it just taking the opportunity to invest more due to the strength of the top line, but any color maybe on where some of those investments might be going with the additional expense?
spk10: Thanks. Sure, Ryan. So a couple of things which are going – you're right. We had previously guided to high single digits and now are guiding to low end of low double digits on this non-GAAP metric on OPEX. A couple of things going on. One is we have taken foreign exchange-related losses on the remeasurement of our assets and liabilities during the first two quarters, order of magnitude about $70 million. And you'll see all of this in our – which we kind of publicly put out there. So that's certainly impacting it. And then the couple of other things which to me are more critical, which is we continue to invest in the long term growth of our business that which includes investing in our people in a. In a hot talent market, we want to make sure we've got the best people. We want to be there in terms of having those best people help us execute on what we've laid out as our strategic priorities, which is what we're doing right here. We've always kind of followed the philosophy of let's keep an eye on the top line and then kind of pulse as to what we want to do from an expense and investment standpoint, and that's the philosophy we're following. We'll continue to follow that philosophy going forward. Thank you.
spk15: Your next question comes from Dave Koning from Baird. Please go ahead.
spk09: Yeah. Hey, guys. Thanks so much. And I guess my question is on cross-border yields. One thing that was interesting this quarter, intra-Europe cross-border grew faster than non-intra-Europe for the first time in a long time, and yield was up regardless. So it seems like, you know, the last few quarters, mix helped a lot, but now there seems like another driver on top. I guess, is that right? Maybe what's that other driver? And should we get faster growth and not enter Europe kind of in coming quarters?
spk10: Sure, David. So you're right in terms of what the makeshift between inter and intra was this quarter versus last quarter. I think there are a few things to keep in mind. There's the makeshift between inter and intra, but there's also within the world of inter, what are the corridors which are coming back versus the corridors which have not come back, right? And as you've started to see more of the higher-yielding corridors come back, that's actually helping us and providing us the tailwind we're talking about right here. So, for example, you've got markets like inbound into the U.S. As that starts to come back, you start to see the benefit of that come through. Markets like Asia, inbound into Asia, you start to see the benefit of that come through. Yeah.
spk09: Great. Thank you.
spk15: Your next question comes from Jason Kupferberg from Bank of America. Please go ahead.
spk06: Good morning, guys. Wanted to get your perspective on just the relative health of the lower income consumer versus higher income. And then if you can just make some remarks about how we should think about rebates and incentives for Q3 and Q4. Thank you.
spk10: Sure, Jason. So on your first question, here's what we're seeing actually. Overall, the consumer and consumer spending patterns are very healthy. You know, and again, you've got to parse this data out between what we see in the U.S. versus what we see in the rest of the world, right? And different people have different definitions on what is lower income versus what is the affluent. But let's just start kind of with that as the frame. In the U.S., what you are seeing is good strength across both, but a declining trend in terms of the growth rates on the lower income side of things. Affluent spend continues to be very healthy and carries on in a very nice way. Outside of the U.S., we're not seeing much in the nature of a shift between how the affluent category is spending versus what the lower income category is spending. So the benefits of what we've got in MasterCard by being a diversified business and being diversified from a geographical standpoint, is actually helping us very nicely because independent of what happens in one market versus the other, the value of what we got across the globe comes through in terms of spend levels here. And then your second question was around rebates and incentives. Look, I just talked about things which influence rebates and incentives, so I won't kind of belabor that point. What I'll share with you is the following, that we expect that rebates and incentives as a percentage of growth will be roughly similar in Q3 to what we saw in Q2.
spk06: Thank you.
spk15: Your next question comes from Bob Napoli from William Blair. Please go ahead.
spk01: Thank you, and good morning. I just wanted to follow up on a lot of your comments on the open banking, digital ID, and your investments there. Can you maybe give some color on what you feel like the revenue, Tam, is for those businesses and what type of – where you see the most opportunity, what kind of the growth trajectory is of those businesses?
spk11: Right. So, you know, open banking, let me start off more generally speaking. So clearly a global trend, one that's to stay. It's happening in Brazil. It's happening in Australia. It certainly was there in the United States and Europe. You know, the way we approach it is, first of all, have a relevant position in connectivity and then building out a bunch of use cases. And the use cases, that's, you know, what gets really to the heart of your question. You see very different types of kind of revenue models, value exchange models. First of all, in connectivity itself, you have per API call kind of logic. If you go into financial management solutions, you know, it depends on who's our customer here. Let's say it's a FinTech. That could, again, be by API. But you could start to see as you go into lending, you know, mortgage verification, asset verification kind of use cases. Those are kind of that's the broad range of currently what we're seeing. No established model at this point in time. I mean, we're investing heavily in Finicity because we feel there is a tremendous opportunity. This is going to help to pull so many new consumers into the ecosystem on the financial inclusion side, on the SME side, and so forth. So hard to answer very specifically right now where we are, but those are those kind of different kind of models, and it's going to be multi-geography, and it's going to be here around to stay.
spk10: And I'll just add to that. A couple of thoughts. One, I think defining any sort of TAM in open banking at this point in time will just be an incorrect. We'll be looking for precision where it doesn't exist because use cases are still to develop. So I think what we see is tremendous potential with what open banking does by providing us access to an alternative network. It's a data network which comes with its own sets of use cases. The second point I'll bring out is Regardless of whether it's open banking or digital ID or all of our services, we think about that in the context of the revenues they generate for MasterCard, the company. But it's really important to remember that all of this is one big circular wheel. Our open banking assets power our payments. Our services power our payments. So there is the collateral advantage which comes through by virtue in being in all of these spaces which trickles down to all parts of our business.
spk11: Thank you.
spk10: All right.
spk11: Appreciate it. Thank you so much for that last question. Exciting space. We're going to close the call now. We're at the top of the hour. Appreciate your time this morning. Do want to thank our 24,000 colleagues around the world, and I want to thank all of you who've joined us today for your continued support for MasterCard. Talk to you in a quarter. Thank you so much.
spk15: This concludes today's conference call. You may now disconnect.
Disclaimer

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Q2MA 2022

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