Mastercard Incorporated

Q3 2022 Earnings Conference Call

10/27/2022

spk13: Good morning. My name is Audra, and I will be your conference operator today. At this time, I'd like to welcome everyone to the MasterCard Incorporated Q3 2022 Earnings Conference Call. Today's conference is being recorded. 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 would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Please only press star 1 once to queue up for a question, as pressing star 1 multiple times may affect your position in the queue. At this time, I'll turn the conference over to Warren Nisha, Head of Investor Relations. Please go ahead.
spk15: Thank you, Audra. Good morning, everyone, and thank you for joining us for our third quarter 2022 earnings call. With me today are Michael Meebach, our Chief Executive Officer, and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then that the queue will open for questions. You can access our earnings release, supplemental performance data, and the slide deck that accompanied this call in the investor relations section of our website, MasterCard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non-GAAP, currency-neutral basis, unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to GAAP-reported amounts. Finally, as set forth in more detail in our earnings release, I would like to remind everyone that today's call will include forward-looking statements regarding MasterCard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I'll now turn the call over to Michael.
spk19: Thank you, Warren. Good morning, everyone. Let's get right into it. So, the headline is that consumer spending remains resilient and cross-border travel continues to recover. With this backdrop, we delivered strong revenue and earnings growth through the focused execution of our strategy. Third quarter net revenues were up 23 percent and adjusted operating income up 27 percent, both versus a year ago on a non-GAAP currency neutral basis, excluding special items. Now, the macroeconomic and geopolitical environment remains uncertain. Inflationary pressures have remained elevated, and central banks are continuing to take aggressive steps to bring inflation in line. Tensions remain high with the war in Ukraine and the supply of natural gas to Europe is a concern. Despite all of this, unemployment rates remain low, wages are rising, consumer savings levels remain elevated, and credit is readily accessible. In this setting, overall consumer spending has remained resilient, although we are seeing some shifts in what consumers are buying. Looking at our switched volume trends, domestic volumes remain steady, showing growth relative to 2019 levels, relatively consistent to the second quarter of 2022. The trend towards spending on experiences continues. We saw notable strength in airline, lodging, and restaurant spend, with a shift away from categories like home furnishings and appliances. The current mix between retail, T&E, and other categories of spend is now broadly similar to pre-pandemic levels. Cross-border. Cross-border continues to recover as border restrictions are progressively relaxed. Cross-border travel in the third quarter has reached 124% of 2019 levels. Relative to 2019 levels, most regions are up sequentially, including a notable improvement in Asia. Cross-border cards not present, ex-travel continued to hold up well. Notwithstanding the continued strength in consumer spending, we will continue to watch the environment closely, including fiscal, monetary, and other policy actions taking in response to events. This will inform our actions as it always has. Should the market outlook weaken, we are prepared to act quickly to modulate our expenses. As we demonstrated during the pandemic, we have the flexibility to respond quickly across a number of levers and will do so while maintaining focus on our three key strategic priorities. The focus on these areas that will create new opportunities for growth that starts by solidifying our positions and payments, complemented by our differentiated services lines and our expansion into adjacent activities like open banking and digital identity. Moving on to some examples of how we are progressing against each of these. First, we are expanding in payments by enabling digital transformation with our customers, including volume growth, expanding acceptance, and capturing new payment flows. There are now over 3 billion MasterCard in circulation, supported in part by programs such as our Digital First initiative. A Digital First solution starts with the ability for a consumer to acquire and then use a new card digitally in near real time. It's helping customers create a best-in-class digital experience, leading to increased approval rates on average by two percentage points, reduced fraud on average by four basis points, and increased spend per active account on average by 10%. To date, we have launched over 200 digital-first customers around the globe, from Santander in Mexico, Chase in the UK, Citibank, ING in Spain, and NewBank in Brazil are amongst the latest customers to partner with Mastercard to deliver an end-to-end digital first customer journey. Also, we're driving growth and volume with new and renewed wins across a broad set of partners. In the U.S., we recently extended our exclusive deal with KeyBank for debit, credit, commercial, and small business, as well as deepened our relationship on services. This quarter, in partnership with Chase, we will launch a new co-run program with DoorDash. This deal further expands our presence in the digital food delivery space. We also went live with the Uber ProCard, an enhanced loyalty and payments experience that will help drivers in Korea save on gas, fees, and other expenses. In Europe, we have seen momentum in Italy with Crédit Agricole, securing an expanded deal that includes a credit and prepaid flip, as well as securing the current MasterCard portfolio. And in Latin America, we have renewed our exclusivity agreement with Mercado Libre and secured incremental credit share with Banco Scotiabank Copatria. Overall, another great quarter with notable wins. Let's shift to one area that is sometimes underappreciated. That is how we are enabling growth in payments by giving people and businesses more places to use their MasterCard. We have added more acceptance locations in the last five years than the previous 50, and we are now accepted at more than 90 million merchant locations. The preference for contactless payments that grew over the last two years continues. More than half of the in-person switch purchase transactions are now tapped, up from approximately one-third pre-pandemic. And this trend will be bolstered by the adoption of new technologies, such as tap-on phones. Further, our technology and global reach enable growth and acceptance, while helping our partners drive their digital strategy. For example, we have signed with McDonald's to use our gateway capabilities, enabling them to easily offer more solutions to new markets beginning in Middle East and Africa. Finally, we're driving growth in payments by leaning into innovation to capture a prioritized set of new payment flows. We continue to make progress in going after flows in the disbursements and remittances space by expanding into new use cases and geographies. For example, in the U.S. gig economy, we signed a new global agreement with Airbnb to facilitate host payouts using MasterCard Send and select markets. We have also expanded with gaming payouts, launching our Gaming Fast Payout program. To address account-to-account cross-border domestic payments, we have signed a deal with Pagero, a leading global B2B network and solutions provider that provides accounts table automation to some of the world's largest corporate brands. We're also growing commercial point-of-sale transactions by targeting small business, corporate T&E, purchasing, and fleet flows. In the U.S., we announced our exclusive co-brand partnership with First National Bank of Omaha to issue the Howell Small Business Card, This product offers small business owners industry-leading access to tools, benefits, and services with a focus on equitable access to credit. Very important. We also continue to target B2B accounts' payable flows by expanding access and reach, leveraging our virtual card capabilities. We signed a deal with Maketa to enable our next-generation virtual card solution, Instant Pay. This solution intelligently and automatically sends instant payments to suppliers. We have also signed an agreement with SAP Talia to integrate our virtual card solutions into Talia and SAP solutions, enabling their customers to facilitate virtual card payments. We're also well-positioned to capitalize on the return of travel with our MasterCard wholesale travel program. In Bahrain, we signed a deal with Infinius for their online travel agency and travel management company volumes. And in Europe, we signed a deal with the fintech Swile who are going after B2B travel flows in Europe and Latin America. As you can see, we continue to make steady progress in addressing our prioritized set of new payment flows. Now turning to services, where we delivered another quarter of strong revenue growth. Our services deliver a diversified revenue stream for Mastercard beyond payments. We accomplished this by adding new service capabilities as well as extending existing service offerings into new and existing customers. There continues to be a tremendous growth opportunity in this space. First up, we're excited about Dynamic Yield's unique personalization platform, which offers a great example of how we're adding new service capabilities. Since complementing the acquisition earlier this year, we have added dozens of new retail and commerce customers. A great example is C&R, a German fashion store. I always share... German examples that I can, they have more than 1,400 stores in Europe, and we have deployed our content personalization capabilities to additional markets. In addition, we are expanding our capabilities to financial institutions. Now, beyond adding new services, there's an opportunity to grow by extending existing offerings into new and existing customers. In the third quarter, we signed an agreement with Sky Italia, part of Sky Group, one of Europe's leading media and entertainment companies to enrich and commercialize a new service to support small businesses. Embers, a technology provider to insurance companies, is implementing our card-linked services for their micro-savings programs with Generali Insurance in Switzerland. And in Spain, we have grown our relationship with CaixaBank with one of our largest European Africa deals. The deal enables them to provide a more efficient chargeback flow for all their card portfolios. Beyond expanding in payments and extending in services, our third key priority area is embracing new networks. As a reminder, our current focus is on two areas, open banking and digital identity. This quarter, I'll touch on open banking. While open banking is early in the game, it is a tremendous opportunity. We are engaged with a broad set of financial institutions and fintechs who are increasingly interested in a wide range of use cases. And what's unique and interesting here is that we are the partner that brings what is needed to scale and instill confidence in this space. Things like responsible data practices, consumer protections, and deep compliance. All on top of our robust technical capabilities, broad connectivity, and extensive applications. So just to give you a flavor in the U.S., Quicken, a leading provider of financial management solutions, has selected MasterCard as provider of consumer permission data, for its popular Simplify budgeting platform. We're also working with Fidelity about their innovation in student loan repayment for organizations that want to help their employees improve their financial wellness. And then there's Jack Henry, which will enable community and regional financial institutions to be at the center of their account holders' financial lives. They will do this providing the ability to securely see all of their financial accounts. Within and outside the primary financial institution in a single view, this will help enable consumers and businesses to make more informed financial decisions. This is just the beginning, much more to come in open banking. Before wrapping up, I'd like to share an example of how we are incorporating our capabilities across all three strategic pillars. Our strategy to engage in the crypto economy leverages assets across payments, services, and new networks. a combination that yields a truly differentiated value proposition. Here, we're deploying our payment capabilities to enable consumers to spend their crypto holdings on card and cash out their crypto wallets via MasterCard Send. This quarter, we partner with Evonex, who will become our first partner in Australia to issue crypto-funded cards. We're enabling off-ramp solutions with MasterCard Send and recently added five new players in North America and Europe, including Binance, supported by Checkout.com, In all instances, we do not handle crypto, but rather take delivery of fiat currency. Our services and new networks capabilities are providing identity, cyber, and consulting services for market participants. CryptoSecure is an innovative solution designed to bring additional security and trust to this digital ecosystem by helping car issuers address regulatory risks. We also recognize the interest people continue to have in buying and holding crypto through trusted resources like their banks. So, last week, we announced CryptoSource, which is designed to give our financial institutions partners access to a comprehensive suite of buy, hold, and sell services for select cryptoassets. This will be augmented with our proven identity, cyber, security, and advisory services. To support these upcoming pilot programs, Mastercard is expanding its partnership with Paxos Trust Company to leverage their crypto asset trading and custody services. As you can see, our crypto strategy is bringing together best-in-class capabilities at scale, all built on our core principles of providing strong consumer protections, safety, and security. In summary, we delivered another strong quarter of revenue and earnings growth, aided by a resilient consumer and a continued recovery in cross-border travel. We continue executing against our three strategic priorities. We have strong momentum with our customers, offering a diverse set of innovative solutions. We will continue to manage our expenses carefully within this macroeconomic environment and our well-diversified and flexible business model positions as well for the future.
spk16: Sachin, over to you. Thanks, Michael. 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 23%, supported by resilient consumer spending and the continued recovery of cross-border travel relative to 2019 levels. Acquisitions contributed one PPT to this growth. Operating expenses increased 17%, including a 3 PPT increase from acquisitions. Operating income was up 27%, which includes a 1 PPT decrease related to acquisitions. EPS was up 22% year-over-year to $2.68, which includes a $0.06 contribution from share repurchases. During the quarter, we repurchased $1.6 billion worth of stock and an additional $505 million through October 24, 2022. So let's turn to page four, where you can see the operational metrics for the third quarter. Worldwide gross dollar volume, or GDV, increased by 11% year-over-year on a local currency basis. On the same basis, if you exclude Russia from the prior period, GDV increased by 18%. In the U.S., GDV increased by 10%, with credit growth of 20%, reflecting in part the recovery of spending on travel. Debit increased 2%. Excluding the impact of the roll-off of a previously discussed customer agreement, debit increased approximately 5%. Outside of the U.S., volume increased 12%, with credit growth of 15% and debit growth of 9%. Cross-border volume was up 44% globally for the quarter, reflecting continued improvement in travel-related cross-border spending. Turning to page 5, switch transactions grew 9% year-over-year in Q3. Excluding Russia from the prior year, switch transactions grew 19% year-over-year in Q3. 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. Contactless now represents 54% of all in-person switch purchase transactions. In addition, card growth was 5% or 10% if we exclude cards issued by Russian banks from the prior year card count. Globally, there are 3 billion MasterCard and Maestro-granted cards issued. Now, let's turn to page six for highlights on the revenue line items, again, described on a currency-neutral basis, unless otherwise noted. The increase in net revenue of 23% 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 one PPT to this growth. Looking quickly at the individual revenue line items. Domestic assessments were up 9% while worldwide GDD grew 11%. The difference is primarily driven by mix. Cross-border volume fees increased 57% while cross-border volumes increased 44%. The 13 ppt 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 22%, while switch transactions grew 9%. The 13 PPT difference is primarily due to favorable mix, FX-related revenues, and pricing. Other revenues were up 22%, including a 2 PPT contribution from acquisitions. The remaining growth was driven primarily by our cyber and intelligence and data and services solutions. Finally, rebates and incentives were up 26%, reflecting the strong growth in volumes and transactions and new and renewed deal activity. Moving on to page 7, you can see that on a non-GAAP currency neutral basis, total adjusted operating expenses increased 17%, including a 3PPT impact from acquisitions. Excluding acquisitions, the remaining increase was primarily due to higher personnel costs to support the continued execution of our strategic initiatives. Turning now to page 8, let's discuss the operating metrics for the first three weeks of October. For your reference, to help you understand the trends in the business ex-Russia where we suspended operations in March 2022, 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 October. As expected, the year-over-year growth metrics faced tougher calms as we began lapping periods in 2021 when COVID-related restrictions eased and spending levels started to rebound. However, it is important to note that all metrics continue to hold up well relative to 2019 levels. Going through the metrics in turn, starting with switched volumes, for the first three weeks of October, we grew 17% year-over-year, down 1 ppt versus Q3. Switch transactions grew 9% year-over-year through the first three weeks of October, consistent with Q3. As a reminder, Russia has a relatively low average ticket size, which results in a larger relative impact to this metric. Overall, cross-border volumes through the first three weeks of October grew 36% year-over-year, down 8 ppt versus Q3. Cross-border travel had another quarter of strong growth as border restrictions continued to be lifted. In the first three weeks of October, cross-border travel was up 62% year-over-year, down 11 ppt versus Q3 due to more difficult year-ago comps, as I just noted. Cross-border travel is now at 125% of 2019 levels, up 1 ppt from Q3 levels. Cross-border card not present, excluding travel, was up 12% year-over-year in October, which includes the impact of significant e-commerce promotional activities and is down 1 ppt from Q3. This metric continues to hold up well in relation to 2019-11. Turning to page 9, I wanted to share our thoughts on Q4. Let me begin by saying that the execution of our strategic priorities is translating into expanded and deeper customer relationships and the broader adoption of our multi-rail solutions and differentiated services. Consumer spending remains resilient in the face of macroeconomic headwinds and cross-border travel continues to recover as border restrictions ease and consumers shift their spending back towards travel. Just to update you on some metrics we are tracking. asia which represented approximately 14 percent of cross-border inbound travel pre-pandemic in 2019 is at approximately 76 percent of 2019 levels in q3 up from about 60 percent in q2 we continue to believe there is more room to grow as several travel corridors particularly in asia still remain restricted and airline industry capacity continues to build back up We remain well positioned to capitalize on this growth with our travel-oriented portfolios and service offerings, including access to an extensive airport lounge network and concierge services, and our global MasterCard travel rewards program, which allows issuers and merchants to connect to provide consumers with unique benefits through a simple digital experience. As we have laid out, there are a number of factors that could influence future economic growth. These include elevated inflation and rising interest rates and geopolitical tensions balanced against low unemployment, rising wages, and high savings levels in particular. We are monitoring each of these. As Michael just said, we are prepared to act quickly to adjust our expenses to reflect any meaningful change to top line growth. With respect to the fourth quarter, We expect year-over-year net revenue to grow at the high end of a mid-teens rate on a currency-neutral basis, excluding acquisitions. This is consistent with prior expectations and sequentially reflects, one, generally resilient consumer spending relative to 2019 levels, two, stable to slightly improved cross-border travel growth relative to 2019 levels, with some continued improvement into Asia and some moderation within Europe, three higher rebates and incentives as a percent of gross revenues due to elevated deal activity consistent with seasonal norms and finally the lapping of a strong year ago quarter as border restrictions were lifted in the us uk and canada during q4 2021 acquisitions are forecasted to add about one ppt to this growth while foreign exchange is expected a headwind of approximately six to seven ppt for the quarter As a reminder, the euro has depreciated significantly year-over-year and is the primary driver of this headwind. From a sensitivity standpoint, based on the current mix of the business, the annual impact to net revenue of a one-cent change in the value of the euro relative to the U.S. dollar is approximately $55 million. From an operating expense standpoint, we expect Q4 operating expenses to grow at 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 3 ppt to this growth. Foreign exchange is expected to be a tailwind of approximately 4 to 5 ppt for the quarter. Other items to keep in mind are the other income and expense line. We are at an expense run rate of approximately $100 million per quarter, given the prevailing interest rates. This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics. And finally, we expect a tax rate of approximately 19% in Q4, based on the current geographic mix of our business. And with that, I'll turn the call back over to Warren.
spk15: Thanks, Sachin. Audra, we're now ready for the Q&A session.
spk13: Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. Please only press star one once to queue up for a question as pressing star one multiple times may affect your position in the queue. We'll pause just a moment to compile the Q&A roster. We'll take our first question from Sanjay Sakrani at KBW.
spk12: Thanks. Good morning. Sachin, I was just wondering if you could just parse out a little bit of the fourth quarter net revenue expectations. It was a little bit lower than we were thinking. I'm just curious, is it incentives kind of spiking up in the fourth quarter or is it just the gross number? Any color there would be helpful. Thanks.
spk16: Sure. First, I'm just going to kick it off by saying the fourth quarter thoughts that I just shared with you are very consistent with what we had shared in our implied fourth quarter numbers when we gave you our full year guidance at the last earnings call. So very consistent in terms of what we're sharing with you in terms of fourth quarter. But just a few things I want to emphasize as to what our key assumptions going into the fourth quarter are. One is we continue to believe that there will be a resilient consumer and spending from the consumer relative to 2019 levels will be generally resilient. Number two, we are expecting stable to slightly improved cross-border travel roads relative to 2019 levels. You know, in terms of rebates and incentives to your question, you know, as a percentage of gross revenues, we expect them to be higher in the fourth quarter. This is very consistent with our seasonal norms, so nothing unusual as far as I'm concerned there. And then also, you know, again, if you look at it on a sequential basis back to comparing fourth quarter to third quarter, there is the lapping effect, which I kind of talked about. So really, I mean, the summary of what I guess I'm sharing with you is our fourth quarter thoughts are very consistent to what we had actually shared with you previously.
spk13: We'll move next to Lisa Ellis at Moffitt Nathanson SVV.
spk02: Terrific. Good morning, guys. Thanks for taking my question. I want a question about business resilience, I guess, looking forward in the face of a potential economic downturn. I'm just thinking about the fact that over the last several years, MasterCard increased the diversification in the business significantly with more debit, more fast ACH, more services, et cetera, more B2B. How do you think about where you are now in terms of resilience of the business if we do at some point see a slowdown in the consumer side of spending? Thank you.
spk19: Good morning, Lisa. Thank you for your question. So let me kick off on that one. You implied the answer in your question, actually. It is the nature of our continued diversification. I mean, just to remind everybody on why are we diversifying. it is to give us a diversified revenue stream, but it's also to differentiate our payments. And all of that plays hand in hand with better services. We're going to see more payment volumes come out with better services. It's easier to get into some of the new payment flows. For example, our safety security solutions are well sought after in the P2P space where there's, you know, fraud issues all over the place. So all that I think is a good starting point for us. If I just look back over the last two years, where we certainly had a slowdown on the payment side in the macroeconomic overall, and services carried today very significantly for us. So we're just going to continue to push harder there. And then new flows, and I gave you a whole range of examples earlier on how we are building out the new flows. And if you just, you know, just put some light onto commercial POS. So here is, this is existing tools that we have. We don't need to build a lot for it. It's a space that we haven't penetrated significantly in the past, and we're ready and we're going in. This is a $14 trillion opportunity that we're going after, which is payments diversification going on in addition to services diversification. Earlier on, the stats on acceptance, just more places where people can spend. In the end, then your people will spend, even in a downturn. It doesn't actually matter for us what they spend on, but they spend on a MasterCard, we give them more opportunities to do so. So diversification is the name of the game.
spk11: Thank you. We'll move next to Darren Peller at Wolf Research.
spk00: Hey guys, thanks. You know, your model is clearly still showing benefits of inflation and we could just kind of remind us again, the sensitivity in the areas you see in the basis points driven inflation impact, but also whether or not there's any pricing changes you guys are interested in employing on the, on the non-basis point side, whether it's transactions or it's services, probably more importantly, uh, just given what we've seen or if you've done so already, um, And then maybe just on a side note on that, on the other side would be the expense management and the willingness, just how willing you are on, for example, marketing to flex there if necessary. Thanks, guys.
spk16: Yeah, Darren, I'll take that question. I guess to your point around inflation, you know, look, I mean, persistent inflation for long periods of time, which causes for a shift in share of wallet away from carded categories into non-carded categories would be the one area I would actually flag. you know our business model but putting that issue aside the reality is you're very correct about the fact that you know we charge our basis points and cents per transaction our basis points are a nominal value of spend and that reflects the impact of inflation in there so the reality is you know as we said in the past modest inflation and inflation in carded categories we're generally you know we kind of our business model accounts for that because depending on if it's carded it doesn't matter like michael said whether it's uh it's happening in travel or it's happening in in food and in clothing you know those are carded categories and you kind of get the benefit of that come through Look, I mean, as it relates to your question on expenses, we've always remained disciplined on expenses. The thing which we always keep in mind is a few things. One, we want to make sure that we're investing in the long-term growth of our business along the three strategic priorities which Michael talked about. We will continue to do that. That being said, as we demonstrated during the COVID environment, we do have the opportunity to flex our expenses whether it's around marketing whether it's around professional fees whether it's around you know t e it all is a function of making sure we're keeping an eye on the top line keeping an eye on the bottom line while we're actually delivering what we need to do from a from an expensive standpoint and we'll continue to do that going forward you know the reality is we keep a close eye on to what are the things which are in demand from our customers what is it that the consumer wants and we are pulsing our expenses in that regard. An example would be, as you remember in COVID, when travel was out of favor, we started to pull back on A&M related to travel. It just didn't make sense for us to be doing at that point in time. So we'll remain flexible on that. And then there are initiatives which we've got, which are longer term initiatives, which will pay off over many, many years in the future, where we have the opportunity to actually pulse the base at which we're incurring expenses on those in the event we start to see a little bit of a slowdown in terms of top line. You asked the question on pricing. Our philosophy around pricing is very consistent as it's always been. We price for the value we deliver, and our assumption from a pricing standpoint, whether it's pricing in basis points or cents per transaction, is very tightly correlated to the value we're delivering to our customers and to the end consumers and to our merchant partners. So all of that's very consistent at the end of the day. We assume minimal net pricing, net of rebates, and incentives from a pricing standpoint.
spk19: I just want to add one point here, and that is looking back at the last two and a half years now, back to the second quarter of 2020 when revenue was severely impacted by a truly unprecedented event out there. To the power of the levers that we have, the range of levers that we have to modulate our expenses, hiring, AMM, professional fees, T&E, your market appetite and all of that, it just showed that we did not have to make any compromises when it comes to driving our strategic priorities. We pulled through on new flows. We pulled through on services expansions and so forth. The model is wide and flexible. That helps us a lot. And as I look forward, there's optimism in how we're going to navigate that.
spk08: Thanks, guys.
spk11: We'll take our next question from Harshita Lalat at Bernstein.
spk10: Good morning. Michael Sachin, can you talk about online debit routing in the U.S.? The Fed very recently put out clarification of rules. If I recall correctly, last time you ended up gaining market share, but Durban was implemented. So how does it impact MasterCard with online debit routing now? Thank you. Right. Hey, Rashida.
spk19: Thanks for the question. There's always something in debit routing going on. So here we have the clarification of the rule by the Fed. And, you know, it takes all the way back to a decade ago when there was this requirement to have two networks on every debit card. And basically what the Fed here clarified is that this is applying to whether it's a debit transaction that's made online or in store. So pretty simple, pretty straightforward implementation by mid of 2023. So we have some time, but we will be ready and we'll be implementing. I think really what that does is we will just continue to compete with all the assets that we have in debit. I'm not really sure what this will do to the market, but we will certainly be there leveraging our technology to win more debit in the United States.
spk16: And, Rashida, I'll just add one additional comment to what Michael just said, which is, as you know, we've been investing pretty heavily in our services capabilities, some of which relate to cyber intelligence. And, you know, in an environment where our partners, whether it's the merchants or the issuers, need more of our services to better manage their product capabilities, in the online environment, we stand ready to do that as well.
spk11: Thanks very much.
spk13: We'll take our next question from Tianjin Wang at JPMorgan.
spk01: Hey, thank you. Good morning. You mentioned nothing unusual on rebates and incentives, but I just wanted to ask, as I sometimes always do with deal activity versus 90 days ago, any change there? Is your appetite to drive program growth versus maybe more discipline growth on their side? Are there changes in timing of deals and implementation, things of that nature? Thanks. Sure, Tingen.
spk16: I can take that. Tingen, I think you know that we've been active in the marketplace. We've been winning share globally, and that's just part of the strategy of what we want to do, which is on a disciplined, profitable basis, we want to win share and deliver more in the nature of services on that share to optimize and grow our overall net worth. I'll start with that as kind of the headline, but on your specific question on Q4 on rebates and incentives, nothing unusual. It's a rich pipeline. We continue to be active in the marketplace. We're not seeing any changed kind of behavior or patterns as it relates to how our issuing partners are in the marketplace, and we just remain active, and that's really the essence of what we're seeing there. Great.
spk08: Thanks for the update.
spk11: Next, we'll move to Ashwin Srivakar at Citi.
spk20: Thank you. Hi, Michael. Hi, Sachin. If I can ask about cross-border, now that we've seen some normalization in travel, if you could kind of talk about how much more travel improvement there is yet to come in your view and the mix of cross border now that some of the normalization has happened as we look to travel versus non-travel.
spk16: Sure, Ashwin, I can take that question. So first, I kind of mentioned that we said in the last earnings call, we saw opportunity in terms of further recovery in travel. We saw some of that come through in our Q3 numbers. We still believe there's potential from a cross-border travel recovery standpoint, in particular in Asia Pacific. I shared a metric about how Asia Pacific inbound cross-border travel and approximately 76% in Q3 of 2019 levels. So that just goes to show there's some more room to grow there. I mean, there are several markets in Asia Pacific which still remain to be open. Also, you know, airlines are bringing more capacity back on. As you know from our personal experiences, you know, getting seats on planes is hard and it's expensive. And so the reality is all of that should be helpful in terms of the potential for cross-border travel recovery. The other point, which I think you alluded to, Ashwin, is as it relates to the mix. And the mix is also important because the mix of cross-border has not reverted back to historical mixes. So said differently, if you remember, as we were going through COVID, we first saw recovery take place in intra-Europe. And you know intra-Europe is generally lower yielding. We've recently been seeing a stronger growth pattern in ex-intra-Europe cross-border. And so the reality is, you know, that makes us nod back to the pre-pandemic levels at this point in time.
spk19: And just, you know, just one thing to add. It isn't exactly your question, but, you know, that whole space has been in focus for us pre-pandemic, during the pandemic, and now. And, you know, while airlines were struggling, you know, with really no flights taking off. We were a strong partner, and it showed in how the engagement with airlines and travel-oriented portfolios work now. So we stand well positioned to benefit from the trend that Sachin just talked about on the services side as well as on the payments and the co-brand side. So exciting space.
spk08: I think our bets are paying off. Thank you.
spk11: We'll go next to Raina Kumar at UBS.
spk09: Good morning. Thanks for taking my question. You continue to see very strong growth in Latin America, 29% GDP growth in the quarter. Can you discuss some of the key drivers of that growth and how sustainable you think it could be going into 4Q and into 2023? Thank you.
spk19: Freda, let me start off on that. Latin America, fascinating region for us, highly diverse from a super well-developed Brazil to markets at the other end of the spectrum, high travel markets with the Caribbean, so Mexico. So you have all of that in the mix. It's really interesting when you peel the onion of it and you look at some of these markets and you compare them. Two of the largest markets, for example, Brazil and Mexico, If you look at the digital penetration in Mexico compared to Brazil, there's so much more potential to go. So there's upside in digitization. There's other issues that, you know, require some of our solutions. The region has experienced some fraud issues, generally in payments, so our, you know, safety and security solutions are in great demand and a great driver for growth for us in the region while the underlying digitalization continues. So you put those trends together, it's all fairly attractive. And then, you know, I talked to you about our engagement in the crypto economy. You know, if there's one place in the world where crypto is really in focus, it's in that part of the world. Historic pain through high inflation and so forth, people were thinking crypto might be an answer.
spk16: lot of innovation in the space so across all payments services and new uh payment flows and innovation um this is a region that has is showing full momentum for us yeah right i'll just bring to life one of the points which michael talked about in terms of increased trends towards digitalization um you know as it relates to our performance in latin america and q3 and going forward uh you know the reality has been we've been very focused on the conversion of Maestro to Debit MasterCard. And this has been part of what we as a company have been doing for a very long time. You're seeing the fruits of that come through. Because as you know, as you go down the path of converting Maestro to Debit MasterCard, whether it's a companion digital Debit MasterCard or it's an actual conversion of the card, It now becomes enabled for online transactions back to the digital trend, which Michael's talking about. So it's all about us trying to enable those cards, and we've been seeing good migration stateless from Maestro to Debit Mastercard.
spk11: We'll go next to Jason Kupferberg at Bank of America.
spk17: Thanks, guys. Good morning. I want to see if you can unpack a little bit what you're seeing in terms of consumer spending across different parts of Europe. And then Sachin, I wanted to see if you could make just a quick comment around what you guys are envisioning the potential FX headwind to revenue in 2023, just based on current rates. Thanks. Sure.
spk16: So, Jason, I'll give you, you know, just on your person, then I'll get into the FX question, which you're talking about. In terms of Europe, we continue to see good MasterCard performance in Europe. Remember, in terms of what you're seeing in our metrics, you're seeing not only what the underlying economies are doing, but also the impact of our share growth, which has been taking place in Europe. So it's kind of the amalgamation of all of that which is coming through. In terms of regional patterns, I would tell you that we're not necessarily seeing any meaningful change in terms of Trends across the continent in terms of how the spending patterns are taking place You know the consumer generally back to our comment earlier on consumer being resilient and strengthen consumer. That's certainly the case now As you think about, you know, different markets, you know, in markets like the UK, we're seeing stronger growth. A large part of that is being driven by the fact that we've had recent share wins in the UK. And then there are share wins we've spoken about in the past in continental Europe, which are still to come to effect, right? So, for example, we had talked about our win with Deutsche Bank in Germany. That's still to come to effect. So anyway, there's a mix of all of that, which is kind of taking place at this point in time. On your question around FX, I shared with you in my prepared remarks what the annual impact on that revenue of a one cent change in the value of the euro would be relative to the US dollar, which is about. Fifty five million dollars on an annual basis. We wanted to put that out there. So you had to have a sense on, you know. what what the potential headwind or tailwind could be depending on what happens with fx rates the hard part is predicting fx rates and so given the current mix of our business um you know that's the sensitivity of john's share with you as it relates to how you should think about what the impact could be for 2023. and we'll go next to tim chiodo at credit suisse
spk05: Great. Thank you for taking the question. I want to dig in a little bit on MasterCard Send relative to Visa Direct. I was wondering if you could call out for us and investors any of the different maybe strategic focus areas, if there are any pricing differences, or if there are any mechanical differences, or maybe use cases where you seem to be getting traction relative to Visa Direct. That would be extremely helpful.
spk19: All right. Let me take that. So, All the Visa-related stuff, you should ask them, obviously. So I'm not going to do a direct comparison here, but I can tell you how we are thinking about it. So first of all, you know, just earlier on, I talked a lot about the crypto space. To just give you one example, here is an interesting new technology and a growing ecosystem. And what's the way to get out of your crypto wallet balances is you turn it into fiat and you use MasterCard send. We were right on this from the first day and we have all the partnerships that do exactly that. Then you go around and basically there is new flows, there's geographies, there's use cases. So those are the dimensions on how we are looking at this. We're very systematic about it. This has to have ubiquity. We're looking at all regions from a coverage perspective. We're looking at the key use cases. We're very selective on use cases because here you could get lost in a thousand flowers bloom. The examples I gave to you on partnering with large global firms like Airbnb, that is the approach where you're going to say you partner with somebody that is in all the regions and covers a use case that just matters to people out there. So that's essentially the approach on MasterCard Send. It has a domestic angle to it. It has a cross-border angle to it. It grows at significant rates. We're very happy with it across all of these aspects that I just said. So one thing to add, earlier we were talking about the numbers ex-Russia. So Russia was a huge success on Send from day one. That's in fact where a lot of our learnings came from. And We exited Russia, as you know, in March this year. So that is skewing the numbers a little bit, but the learnings are not going away. We're putting that into a whole set of other markets and to the question around Europe, particularly in Europe, we see some of those learnings translate in other parts of Eastern European countries and so forth.
spk16: And just to add to what Michael said, particularly on the remittances side, we've seen very good traction take place in terms of cross-border remittances and the capabilities we've got there and the capabilities we're building there. Our global reach out there is holding us in really good stead as it relates to how we are able to tap our partners to generate more and more volume down that path. So it's a bright spot in terms of the broader remittances piece as well.
spk05: Excellent. Thank you for all that context on MasterCard's end.
spk13: We'll go next to Andrew Jeffrey at Truist Securities.
spk06: Hi, good morning. Thank you for taking the question. Michael, I wonder if you could give us an update on your processing efforts globally, maybe with an emphasis in Europe, whether you're taking share and winning business in processing and how you think that can affect over time both the net revenue yield and maybe the profitability of the business too.
spk19: Right. So, Andrew, thanks for that question. You know, so starting with Europe, but then, you know, we could extend this conversation looking at the Middle East or at Asia. So we have processing assets in those parts of the world. And just to illustrate how this matters, there is obviously a whole new set of players that are entering the payment space who are whose prime raison d'être isn't really the process. They want to have a great financial app. So they're looking downstream for a whole set of solutions that complete what they do, make it relatively easy out of one hand, and that's what we provide. And, you know, this is really the explanation for some of our progress on the fintech side or the neobank side. Those guys, where we have those partnerships, 70% win rate, I'd like to add here, is really, to a large extent, coming down to our processing capabilities, which are state-of-the-art, modern, FinTech-oriented processing capabilities. So it's been a joy for us to watch. In some parts of the world, we do partnerships. In some parts of the world, we are doing partnerships, for example, with Network International, parts of Africa and so forth. So it's a combination of our own assets where we feel there is scale and differentiation and sometimes is through partners. So overall, there's a good play here in processing. It's one of the services that we have in our portfolio.
spk16: I'll just add some color as it relates to beyond the processing piece on our efforts around switching and the proportion of our total MasterCard branded transactions, which, as you know, we've been pushing hard to actually get more switching share. And the reality is that is working very nicely. We are seeing growth in our proportion of switch transactions, which now stands at greater than 60% of total transactions worldwide. And that's super important particularly particularly where we're seeing improvements and uh progress is in latin america uh and in asia pacific uh both of which had been generally low index markets from a switch transaction share standpoint in the past so lots of good effort going on there and we're seeing good progress come through thank you very much sure our next question comes from brian keen at deutsche bank
spk03: Hi, good morning. I just wanted to go through the yield improvements again. It sounds like it's a lot of mix and some pricing in there. How do we think about the yield going forward into the fourth quarter and into next year? Is there some comps get a little tougher as we get into next year for these yields? Thanks. Sure.
spk16: So, Brian, what you're seeing in the nature of yield improvement quarter over quarter, this is net revenue yield divided by GDV, you can attribute a large part of that to just mix. As you know, our inter-cross-border has come back pretty nicely, and as that has come back nicely, that is higher yielding, and that gives us the benefit and the deal when you're seeing on a sequential basis. I will point out that as it relates to Q4, you should expect that the yield will decline some, which is very consistent with what you see every year. That is just the nature of how the business works, just because Q3 happens to be a large cross-border quarter, and you tend to see the benefit of that come through. In Q4, you start to see some of that slowdown. Now, you asked a question about 2023. I would tell you, you know, we as a business remain very focused on driving and maximizing our net revenue yield. And there's multiple factors which are going to influence that, some of which is the mix of cross-border domestic, certainly, but also things around just like we just talked about, how we're increasing our proportion of switch transactions. The more the switching we do, the greater the yield gets, and that's what we're focused on. how we talked about the shift from Maestro to Debit Mastercard. Again, lots of focus around that, and so we're very focused on driving that. All of which, when you overlay all the services we've been bringing to the market, you get the benefit of that coming through as well. So generally speaking, as I look forward, I kind of feel like, you know, our focus as a business from a driving yield standpoint continues, and I don't see anything necessarily which is going to change dramatically going into 2023 from a yield trajectory standpoint.
spk19: You know, and Sachin just kind of explained the strategy again. That's what we're trying. We're trying to be in the payment transaction at profitable levels, but then use our services to continue to improve the overall revenue yield. And that is that combination that makes us look at the future very optimistically. So I don't really see anything changing here. These are the tools that we have, and we're using them effectively.
spk03: Great. Thank you both.
spk13: Next, we'll move to Ramsey Ellis at Barclays.
spk04: Hi, thank you for taking my question. I had one on rebates and incentives and more specifically, kind of how the mix of those rebates and incentives have changed over the past several years. I guess the underlying question is, are you having to incentivize an expanding number of value chain players, fintechs, merchants to kind of support consistent growth? How has that mix evolved over time and how do you expect it to evolve in the future?
spk16: Yeah, so in terms of rebates incentives, the mix in terms of how we're actually incentivizing to generate incremental revenue has not changed. You know, we've historically been... more focused and we have actually delivered higher levels of rebates and incentives to our issuing partners that continues to be the case as to where we are actually uh expending most of our rebates and incentives dollars um and that really hasn't changed and as it relates to the mix between rebates and incentives for domestic volumes versus cross-border i'd say that mix also hasn't really changed as you know cross-border has generally been um indexed lower from a rebates and incentive standpoint and that continues very much to be the pattern right now as well ramsey
spk04: Okay, so pretty stable environment is what it sounds like. All right, appreciate it. Thank you.
spk13: We'll move next to David Togut at Evercore ISI.
spk08: David, are you there?
spk11: And, sir, you may have your line on mute. We're not hearing you.
spk08: Maybe we go to the next, please, and then we'll see if we can get back on.
spk13: Yes, we'll move next to Bob Napoli at William Blair.
spk18: Hi, thank you, and good morning. Just would like an update on your B2B, your thoughts around the B2B payments markets and the opportunities there. I know you called out a commercial POS of $14 trillion. What inning are we in? Any thoughts on the changes of that market, the growth of that market? Thank you.
spk19: Right. Yeah, so I'm really not into baseball analogies, so that's why earlier I was talking about the first half of the game, but to your question very specifically, B2B, huge opportunity from a volume perspective. We called it out and we cut it down into very distinct types of flows at our investor day at the end of last year to focus on B2B accounts payable on one hand, but there's other B2B flows which we're very active in. For example, through all the illustrations I gave you earlier on virtual card use cases. So virtual card is the current and most immediate answer to go after B2B flows. There's the commercial POS piece somewhere, which is kind of an in-between space between B2B and small business. But that's a huge space with a lot of cash and checks. So you build it up over those into the accounts payable piece. range vision that we have on accounts payable is really the MasterCard track business payment service piece where we say, over time, we're building a two-sided network here. That continues to grow, but that takes time. But we have large players around the table, HSBC, JP, and so forth. So that's a good initiative for us. But for now, we are very active on virtual cards to solve the issues of buyers and suppliers in the space. We have not moved away from this by any stretch of the imagination. This is a huge opportunity, and we're going to go after it.
spk15: Thank you. Audra, I think we have time for one last question.
spk13: We'll take that question from Jamie Friedman at Susquehanna Financial Group.
spk14: Hi. Sachin, transaction processing fees increased 15%, but switch transactions increased 9%. I know you called out in your prepared remarks mixed changes. I was just wondering if you could elaborate on that. Thank you.
spk16: Sure. So there are a few things going on right there where our transaction processing fees are growing faster than the underlying driver, one of which is the mixed exchange. And really remember, when we make cross-border revenues, we make cross-border revenues on a basis point basis, as well as on a cents per transaction. And the component which is on basis point sits in cross-border volume fees, and then some component of cross-border related cents per transaction that sits in terms of the number of transactions which we process, which is in transaction processing fees, which is where the mixed effect comes through, because as you've seen, inter-cross-border grow at a rapid pace, that's contributing to that delta between what we're seeing in the revenue line and what we're seeing in the driver, because cross-border is high-yielding than is domestic. There are a couple of other factors which cause for that differential as well. I talked about F-accelerated revenues and some level of pricing. Those are the two other contributors which go into that chain.
spk03: Thank you.
spk19: All right, let me bring the call to a close. First of all, thanks for your questions. And to all of our investors, thank you for your support. This morning I sent a note to all colleagues here at MasterCard thanking them for a strong quarter because they are the ones who make all of this happen. So a shout out to them as always. And with that, we'll talk to you in the next quarter. Thank you very much. Thank you.
spk13: This concludes today's conference call. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Q3MA 2022

-

-