Mastercard Incorporated

Q1 2023 Earnings Conference Call

4/27/2023

spk08: Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the MasterCard Inc. Q1 2023 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 would like to ask a question during this time, simply press star followed by 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. If you would like to withdraw your question, press star one again. Mr. Warren Neesha, head of investor relations, you may begin your conference.
spk05: Thank you, Audra. Good morning, everyone, and thank you for joining us for our first quarter 2023 earnings call. With me today are Michael Meebok, our chief executive officer, Sachin Mehra, our chief financial officer, and Devin Kaur, our incoming head of investor relations and my successor. 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 or 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.
spk14: Thank you, Warren. Good morning, everybody. Another quarter, let's jump right in. The headline is that in quarter one, consumer spending has remained remarkably resilient, and that despite continued economic uncertainty. We kicked off the year with strong revenue and earnings growth. Quarter one adjusted net revenues were up 15%, and adjusted operating income was up 17%, both versus a year ago, as always, on a non-GAAP currency-neutral basis, excluding special items. Focusing on the macro for a moment, let's take stock of the positive and negative factors we have been monitoring. First, the labor market in aggregate remains strong, while savings remain above historical levels, and consumers continue to access credit, which all are key drivers of consumer spending. Second, central banks continue to combat elevated inflation levels with higher interest rates. Although we are seeing signs of inflation cooling, additional stresses on the banking sector have emerged. We will continue to monitor how banks respond to these evolving conditions. And finally, economic growth around the globe continues to vary by country and sector. The reopening of China is a positive catalyst. However, the impact of monetary and fiscal tightening in many countries will likely be with us for some time. So overall, many moving pieces, but even so, consumer spending levels have remained resilient, while the mix of spending has continued to rebalance towards experiences. Looking at our switched volume trends, domestic volume growth has remained relatively stable with some recent moderation in the U.S., in part due to lower tax refunds. Cross-border travel in quarter one reached 148% of 2019 levels with all regions above 2019 levels. This includes notable improvement in Asia. Cross-border card not present X travel continues to hold up well. We will continue to watch the environment closely. And as we have demonstrated in the past, we are prepared to adjust investment levels appropriately while maintaining focus on our key strategic priorities. And as a reminder, these three priorities are expanding in payments, extending our services, and embracing new networks. Now I've been on the road for much of the quarter, meeting with customers, partners, government leaders, and of course our teams. These conversations reinforce the energy we have for our collaborative approach and show the importance that many place on digital payments and driving much of today's economic activity. And it's with that in mind that I'll share some examples of how we are progressing against our three strategic priorities. First, we're expanding in payments by winning deals across a diverse set of customers, innovating in and growing acceptance, and expanding solutions to address new payment flows. We see our partnership evening with a diverse set of co-brand partners, financial institutions, and fast-growing fintechs around the world. This quarter, we had a significant win with Costco Wholesale in Taiwan, the largest co-brand portfolio in the market. The deal is a competitive flip that ensures exclusive co-brand issuance and exclusive acceptance of MasterCard co-brand cards in stores, effective in August this year. We also announced our exclusive partnership with Wells Fargo and Choice Hotels to launch their new credit card program in the United States. In the Middle East, we inked a renewal with National Bank of Egypt, the largest issuer in the country. And on the fintech front, we renewed our deal with N26, one of the largest neobanks in Europe, for Mastercard to be the exclusive provider for issuing and processing services. And in Latin America, we expanded our relationship with Wallah, one of the fastest growing fintechs in the region, to be the exclusive network on prepaid, debit, and credit. So we are continuing on our trajectory, delivering another solid quarter of new and renewed wins, an important element of our growth algorithm. Beyond new wins, we are driving growth and payments through the development of innovative solutions, like our installment offerings. In Australia, we're scaling our solutions with some of the largest banks in the market, including Commonwealth Bank of Australia, National Australia Bank, and Westpac. Providing the way to pay is central to what we do. So too is making sure people and businesses can use those payment tools when and where they want. Along those lines, we are continuing to drive growth in acceptance, expanding connectivity and trust across all forms of card payments. Our acceptance footprint has now surpassed 100 million locations, effectively doubling over the past five years. And that's just the start. Our innovative contactless cloud commerce and click-to-pay solutions give more merchants the ability to accept electronic payments with simple technology connectivity. To us, that's an opportunity to bring more physical and digital transactions onto our network. Over 100 markets have now reached at least 50% contactless penetration, double the number three years ago. Contactless drives higher consumer engagement and helps accelerate the secular shift to digital payments by accessing lower ticket size purchases that have historically been cash-based. In quarter one, our tokenization capability was selected as part of a mobile payments launch in South Korea, enabling a significant number of private label cards for Contactless, and thereby giving us the opportunity to deliver services on those transactions. We continue to see momentum in tap on phone with programs across more than 70 markets globally. We continue to scale, including with Stripe, who announced in quarter one that they have enabled tap to pay on Android in multiple markets. In addition to helping our partners bring tap on phone to market, our cloud commerce acceptance technology is now live in Europe. Our cloud commerce capabilities make it easier and quicker for businesses of all sizes to accept payments on virtually any device. And Click2Pay is now live in nearly 30 markets globally, including key markets such as Australia, Brazil, UK, and US. We are partnering with payment service providers like Nexi in Italy to further expand our presence. This is all complemented by our work with partners to grow acceptance by integrating the payment experience where their customers are. You see that in the social commerce space with WhatsApp in Brazil, enabling consumers to make purchases directly from small businesses right within a chat. Further, we remain focused on expanding our set of new payment capabilities to capture a prioritized set of new payment flows. I'll highlight a couple of areas we are targeting, starting with commercial. We've had a strong growth in the space with volumes across our commercial credit and debit products in quarter one up 21% versus the prior year, on a local currency basis. We see substantial opportunity growing commercial, particularly with our virtual card and small business solutions. With virtual cards, where we are the market leader, one of our initiatives is to integrate our solutions with leading B2B technology platforms. This quarter, we signed a partnership agreement with Coupa to enhance their Coupa Pay solution, which embeds virtual cards to address accounts payable flows. On a small business front, today only a small fraction of payments are captured on card. We are enhancing the value proposition through programs like Easy Savings, which offers automatic merchant-funded rebates to nearly 40 million enrolled cardholders in over 80 countries. And we are growing by establishing new issuance deals through partners like Galileo in the United States. The MasterCard will be the preferred brand for small business and commercial programs. Beyond commercial, disbursement and remittances flows represent a significant opportunity for growth through geographic expansion, new distribution partners, and an expanding set of use cases. In terms of new markets, our gaming use case is now live in Canada and Peru, and we have added cross-border origination to the UAE and Uzbekistan. By connecting with MFS Africa, a leading digital payment company, we have enabled mobile payouts across 10 markets in Africa. We are working with distribution partners like Checkout.com to increase reach to even more customers in Asia and the United States. And we're enabling our cross-border services solutions to small and mid-sized banks through cross-border services express. With this simple-to-use digital first solution, participating financial institutions can offer their customers the ability to send money or pay vendors across the globe quickly and securely. In terms of expanding use cases, we have enabled cash-in at POS in Europe and the UK, facilitating underbanked customers to safely load cash into their accounts from a non-bank location, which can also help drive follow-on card spend. So as you can see, we continue to make broad-based progress in addressing our prioritized set of new payment flows. Turning now to services. We love services. where we are focused on growth and resiliency through scaling our existing solutions and adding new capabilities. As merchants and consumers shift to digital, our comprehensive set of cybersecurity solutions becomes even more critical. For instance, Risk Recon helps an enterprise identify their own cybersecurity vulnerabilities as well as for their ecosystem partners. With our acquisition of Baffin Bay Networks this quarter, we now have a solution to help these customers act on this information. Specifically, Baffin Bay's AI-enabled cloud-based threat protection helps to stop cyberattacks related to malware, ransomware, and EDOS attacks. The acquisition also complements our other cyber offerings, including our simulation and assessment tools, as well as our cybersecurity consulting practice. You all are familiar with our comprehensive set of data analytics, marketing, and loyalty assets. These are about helping our partners make smarter decisions to drive better outcomes. For example, Agoda, one of the world's fastest growing online travel platforms in Asia, is leveraging our economic insights to inform their strategic planning. Mediamarkt Saturn, the largest electronics retailer in Europe, is utilizing our test and learn capabilities to support the assessment and optimization of new business initiatives. We also continue to make progress signing deals with retail and commerce partners, like Hyundai Motors Europe and Puma. to utilize our recently acquired personalization platform, Dynamic Yield. We continue to look for ways to combine all these assets to deliver valuable end-to-end solutions. We just announced Element, a suite of applications which brings insights from Mastercard's data analytics to enrich Dynamic Yield's personalization experience. Our third key priority area, is embracing new networks, where we are making progress in the areas of open banking and digital identity. In open banking, we continue to work with a broad set of banks and fintechs who are interested in its potential across a wide range of use cases. In addition to the pay-by-bank solution with J.P. Morgan that we announced last quarter, we are working with payment risk and identification company GIACT, member of the London Exchange Group, to embed a secure account verification solution. Also, Saxo Bank will use our open banking technology for account opening and top-ups in Europe. Further, we're developing capabilities on top of our open banking platform. We have advanced analytics partnering with fintech innovators like Upswot, NAV, Enigma, and GenEquity to expand access to capital with better data for making lending decisions. This is another great example of how our technology supports small business. Moving next to digital identity, We continue to see strong adoption of our intelligent identity solutions powered by machine learning. This quarter, we secured a key partnership with Southwest to embed our intelligent identity solutions from ACATA to reduce fraud and friction in digital interactions. Still early stages with open banking and digital identity, but we are making progress scaling our technology to new markets and use cases with notable partners. So with that, I will wrap it up, and in summary, we delivered another strong quarter of revenue and earnings growth, reflecting a resilient consumer and the continued recovery of cross-border travel. We will continue to watch the environment closely and are prepared to act as circumstances dictate. We see significant opportunity ahead, having now surpassed 100 million acceptance locations worldwide. And our focus strategy, diversified and resilient business model, and strong relationships around the globe position us well through economic cycles. Sachin, over to you.
spk12: 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 15%, reflecting resilient consumer spending and the continued recovery of cross-border travel. Operating expenses increased 12%, including a 2 PPT increase from acquisitions. Operating income was up 17%, which includes a 1 PPT decrease related to acquisitions. Net income was up 2%, which includes a 1 PPT decrease related to acquisitions. EPS was up 4% year-over-year to $2.80, which includes a $0.07 contribution from share repurchases. Of note, the respective growth rates of net income and EPS were negatively impacted by a low tax rate in 2022 as a result of sizable discrete tax benefits last year. During the quarter, we repurchased $2.9 billion worth of stock and an additional $602 million through April 24, 2023. So now let's turn to page four, where you can see the operational metrics for the first quarter. Worldwide gross dollar volume, or GDV, increased by 15% year-over-year on a local currency basis. On the same basis, if you exclude Russia from the prior period, GDV increased by 16%. In the U.S., GDV increased by 9%, with credit growth of 15%, reflecting in part the recovery of spending on travel. Debit increased 3%. Excluding the impact of the roll-off of a previously discussed customer agreement, debit increased approximately 6%. Outside of the U.S., volume increased 18%, with credit growth of 17% and debit growth of 19%. Cross-border volume was up 35% globally for the quarter on a local currency basis, reflecting continued improvement in travel-related cross-border spending. Turning to page 5, switch transactions grew 12% year-over-year in Q1. Excluding Russia from the prior year, switch transactions grew 20% year-over-year in Q1. Both card-present and card-not-present growth rates remain strong. Card-present growth was aided in part by increases in contactless penetration, as contactless now represents over 58% of all in-person switched purchase transactions. In addition, card growth was 9%. globally there are 3.2 billion mastercard and maestro branded cards issued turning to slide six for a look into our net revenues for the first quarter which were above our expectations as a reminder we recently revised our disaggregated revenue disclosure net revenues are now broken down into two new categories payment network and value-added services and solutions now getting into the numbers described on a currency neutral basis Payment network net revenue increased 10%, which would have been 1 PPT higher if we excluded the Russia-related special item, which benefited Q1 2022. The growth in payment network was primarily driven by domestic and cross-border transaction and volume growth and also includes growth in rebates and incentives. Value-added services and solutions net revenue increased 21%, including a 1 PPT benefit from acquisitions. The growth was primarily driven by the continued strong growth of our cyber and intelligence solutions, driven by underlying driver growth, higher demand for our fraud solutions, as well as the scaling of our identity and authentication solutions. And we saw healthy demand for our data analytics, consulting and marketing services, as well as our loyalty solutions. Now, let's turn to page 7, starting with key metrics related to payment network, again described on a currency-neutral basis, unless otherwise noted. Looking quickly at each key metric, domestic assessments were up 9% while worldwide GDP grew 15%. The difference is primarily driven by mix and the underreporting of volumes from sanctioned customers in Russia last year, which accounted for approximately 2 ppt of the variance. Cross-border assessments increased 39% while cross-border volumes increased 35%. The 4-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 assessments were up 14% while switch transactions grew 12%. The 2-PPT difference is primarily due to FX-related revenues. Other network assessments related to licensing, implementation, and other franchise fees were $212 million this quarter. It's important to note that these other network assessments may fluctuate from period to period. Moving now to page 8, you can see that on a non-GAAP currency-neutral basis, excluding special items, total adjusted operating expenses increased 12%, including a 2 PPP 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. Operating expenses were higher than expected in part due to personnel costs to support higher than expected revenue, as well as unfavorable foreign exchange related expenses due to the re-measurement of monetary assets and liabilities. Turning to page nine, let's discuss the operating metrics for the first three weeks of April. As a general comment, our metrics are holding up well in April. As expected, the year-over-year growth rates are being impacted by two opposing factors. One, more difficult comps as we began lapping the effects of Omicron, and two, the lapping of the drag created by the suspension of our operations in Russia in March of last year. To aid in your understanding of the underlying spending trends and eliminate some of the noise induced by the lapping effects, we have also included the Metrics Index 2019 levels on the slide. Let's discuss each of the metrics in turn. Starting with switched volumes, through the first three weeks of April, we grew 17% year-over-year, down 1 ppt versus Q1. This reflects more difficult comps and some modest slowing in the U.S. due to lower tax refunds. They started in March and continued into April. This is partially offset by a 3 PPT benefit from the lapping of Russia. Switch transactions grew 18% year-over-year through the first three weeks of April, up 6 PPT versus Q1. This includes an 8 PPT benefit from the lapping of the suspension of operations in Russia. As a reminder, Russia had a relatively low average ticket size, which results in a larger relative impact to this metric. In terms of cross-border, volumes grew 29% on a year-over-year basis, down 6 ppt from Q1. This reflects the continued recovery in cross-border travel, as well as the positive impact of lapping the suspension of our Russian operations, but is more than offset by a tougher year-ago calm as travel surged after the passage of Omicron last year. Cross-border volume is indexing at 171% of 2019 levels in April, up from 168% in Q1. To further assist your understanding of the trends in the business ex-Russia, where we suspended operations in March 2022, we have included an appendix to show all data points from the schedule if you exclude an activity from Russian-issued cards from current and prior periods. Turning to page 10, I wanted to share our thoughts on the remainder of the year. Let me start by saying that our business fundamentals remain strong and our diversified business model and our momentum with our customers position us well for the opportunities ahead. Consumer spending overall remains healthy, albeit with some recent moderation in domestic spending in the U.S., in part due to lower tax refunds this year. At the same time, as Michael noted, the recovery in cross-border travel continues, with inbound travel to all regions now well above 2019 levels. Within Asia, in Q1, China outbound cross-border travel increased to approximately 65% of Q1 2019 levels, while inbound reached 45% on the same basis. As a reminder, China made up 2% of outbound and 1% of inbound cross-border travel in 2019. We remain well-positioned to capitalize on this growth with our travel-oriented portfolios and related service offerings. While we are monitoring a number of macro and geopolitical factors, our base case scenario assumes consumer spending remains resilient and cross-border travel continues to recover. For the year, our outlook has improved modestly, reflecting our stronger-than-expected performance in Q1. We expect net revenue growth for the full year 2023 to be at a low teens rate on a currency-neutral basis, excluding acquisitions and special items. This growth rate would be higher by approximately 1.5 PPT if you exclude Russia-related revenues from 2022. Warranty exchange is expected to be a tailwind of 1 PPT for the year, and we expect minimal impact from acquisitions. Our expectations for operating expense for the year are unchanged, with growth expected to be at the high end of a high single-digit rate on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 1 ppt to this growth, while foreign exchange is expected to have a minimal impact for the year. Again, we are prepared to proactively adjust our operating expenses if we see meaningful changes to top-line growth. With respect to the second quarter, year-over-year net revenue is expected to grow at the high end of a low double-digit rate, again, on a currency-neutral basis, excluding acquisitions and special items. Coming off of a strong Q1, this sequentially reflects a tougher year-ago comp, lower anticipated FX volatility, partially offset by lapping the suspension of operations in Russia. Foreign exchange and acquisitions are not expected to have much of an impact for the quarter. From an operating expense standpoint, we expect Q2 growth to be at the high end of a low double-digit rate versus a year ago on a currency-neutral basis, excluding acquisitions and special items. This includes costs of approximately two PPT associated with the wind down of our efforts related to the P27 project, given their decision to withdraw their license application in the Nordics. Acquisitions are forecast to add approximately zero to one PPT to this growth, while foreign exchange is expected to be a tailwind of approximately zero to one PPT. Other items to keep in mind. First, on the other income and expense line, we forecast an expense of approximately $100 million for Q2, given the prevailing interest rates and debt levels, which includes a sequential increase due to our recent debt issuance. This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics. Second, we expect a non-GAAP tax rate of between 18.5% and 19%, for both Q2 and the full year based on the current geographic mix of our business. Before I turn the call back over to Warren to begin the Q&A session, I wanted to express my deep gratitude to Warren for the thought leadership, dedication, and friendship he has demonstrated over his last six plus years at MasterCard. As previously announced, Warren will be handing over the head of IR role to Devon Core effective May 1 and will be with us through year end in an advisory capacity. Thank you, Warren. And over to you for the Q&A session.
spk05: Thank you, Sachin. I have to say it's been a distinct pleasure. With that, let's turn it over to questions. Audra, we're ready to go.
spk08: 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.
spk10: will take our first question from lisa ellis at moffett nathanson hey good morning uh thanks for taking my question and warren you will be missed of course um i just had a question about uh fed now coming in july of course vocalink you know has been involved in the clearinghouses rtp network can you just kind of give your perspective on how you expect the rollout of FedNow to affect MasterCard's business in the U.S., you know, positively or, you know, potential, you know, pressures. Thank you.
spk14: Good morning, Lisa. Thanks for your question. And thank you for missing one. So on FedNow, important development, of course, we've been watching closely. As you know, for years we've been involved in real-time payments. So, you know, it's been our learning over the years that it's really critical that, you know, there's a proposition for merchants, there's a proposition for consumers for really for these systems to grow. On the merchant side, criticality is reach. And for the consumers, it's got to be a proposition that's an easy experience and it's got consumer protection in it. So those are all aspects that the card systems have demonstrated over years and we'll have to see where these P2P systems go with that. Fundamentally, we appreciate competition. It makes us a better company as we try to make our proposition even better. Now, you know, on FedNow, very specifically here, a technical go-live is different from being available for consumers and merchants, as I've just discussed, and we have to see where that goes and what the features will be. What is the user experience? What are any kind of protections that would be in there for consumers and so forth? We will continue to seek ways to partner with B2B systems, and the same applies here in the United States. For the flows that this might target, which are currently flows on account-to-account, you will recall the announcement that we've made in the last quarter with Chase on pay-by-account. So those are alternative solutions that would be in the market to capture some of these new flows. So opportunity threat, we'll have to see how it plays out. I think we're well-positioned.
spk10: Thank you.
spk08: We'll go next to Tianjin Wang at J.P. Morgan.
spk01: Hey, thanks. Yeah. And my thanks to Warren as well. I forgot that May 1st crept up on us. I won't ask a macro question because, Michael, I think you asked for more questions last quarter. So I'll ask you one on generative AI, if that's all right. And given you guys have Yeah, so I know you have a data analytics and consulting business within your VAS, and so just curious, how are you thinking about generative AI? I know ChatGPT gets a lot of attention, so your thoughts on impact on VAS, maybe on the broader business as well.
spk14: All right. Thank you, Chin-Chin. This is certainly a topic that got a lot of attention, particularly since the latest model of ChatGPT was out there, Bart gets attention every day. There's a whole set of headlines. You know, for us, we've been using AI for the better part of the last decade, so it's embedded in a whole range of our products. Just now, I talked in my prepared remarks about Baffin Bay Networks, which you will all be surprised is actually not in Canada, but in Sweden, the company. They're using AI-enabled thread protection solutions. So you'll find it embedded in a whole range of our products, including generative AI. So we have used generative AI technology, particularly in creating datasets that allow us to compare and find threats in the cybersecurity space. You will find AI in our personalization products. So there's a whole range of things that set us apart. We use this as foundational technology. And internally, you can see, increasingly so, that generative AI might be a good solution for us when it comes to customer service propositions and so forth. So we're actively engaged on that. Fundamentally, though, I think we all have to be aware that the application of AI needs to be done in a principled way. We approach data privacy in a principled way, we approach crypto space in a principled way, and the same thing applies here. So trustworthy AI is clearly the focus. We've encouraged our employees to experiment with the technology, but we set very clear guardrails. Don't do it in production. But it's something that we cannot afford to ignore. We will not. We will lean in, but make sure that we are a trusted party when it comes to scaling it up.
spk08: We'll go next to Darren Peller at Wolf Research.
spk07: Hey, thanks, guys. You know, maybe you could just give a quick update on business activity. Obviously, incentives and rebates, it's not reported the same way, but I know we have a pickup in the year. And so going back 15 and 16, 2015 and 16, when you had a big incentives, rebates year, it tended to be followed by an acceleration in volume and revenue growth in the years after. So maybe just give us a sense of, you know, what's driving the increase this year? What's, you know, what kind of activity levels you're seeing now? And if we can expect a similar follow through in the years to come. Right.
spk14: Then let me start on that. We see very encouraging activity. In fact, it was tough to make choices here what not to tell you in the 15-minute overview that I gave you. So solid activity in deal wins. And you recall some of the bigger deals that we have announced in 2021 and 2022, which are, you know, behind some of the share gains that we're seeing, particularly if you look at the Europe numbers. So that is, you know, having some impact on how the RNI plays out, but I'll defer to Sachin to say a little bit more, but overall the activity is very healthy.
spk12: Yeah, Darren, good morning. Look, it's like Michael said, right? I mean, we compete every day in the market. We are being successful in what we're doing in terms of winning new business and retaining existing business. That's very much the mantra and the playbook we've adopted as a company. That's a very important part of the growth algorithm, which we have laid out for ourselves to drive growth for us because at the end of the day, we believe very firmly that being in the flow is important because you get the benefit of PCE, you get the benefit of secular shift, but you also get to deliver additional services by being in the flow. And so really what we are trying to do is we're trying to win profitable, market share, and at the same time drive an accretion in our overall net revenue yield, which is really about taking it together in the composite because payments and services and our new networks are very tightly integrated together. One relies on the other, and we have to look at this from an overall net revenue yield basis. And so that's really what's going on. To your specific question about rebates and incentives, Look, I mean, we've always kind of shared with you rebates and incentives and be sharing with you what the rebates and incentives on our payment network are even now. The reality is, as and when deals come up, we will compete for them. We will do that in a smart manner. For Q2, I can tell you that rebates and incentives as a percentage of total payment network assessments, it will be roughly similar to what we had in Q1. So based on everything we can see from a line of sight standpoint in terms of deals and activity and so on and so forth, that's what I can share with you at this point in time.
spk08: We'll go next to Raina Kumar at UBS.
spk09: Good morning. Congratulations, Warren and Devin. I want to ask about Europe. You saw 31% volume gain in the quarter. That's outstanding. Can you talk a little bit about some of the market dynamics you're seeing in that region and whether your growth is more reflective of market share gains or just strength in the overall shift to electronic payments?
spk14: Raina, I think I almost partially answered your question just now. So, deal activity is strong, but to the second half of your question there, Now, through the last three years, you saw some European markets, some large European markets that have been historically less digitized and more cash focused to really catch up. The stats I gave earlier on contactless penetration, that includes a good number of European markets jumping ahead in the rankings. Strong secular shift, that's an opportunity. You start to see some of the payment service providers driving more acceptance into more parts of the economy. And that's also reflected in some of the acceptance growth that we talked about, 100 million, a good chunk of that is coming from Europe. So it's a mix of the share wins that we have seen very specifically in the UK and the secular shift. So we feel very well positioned in Europe.
spk08: And we'll move next to Brian King at Deutsche Bank.
spk06: Hi, good morning. Just wanted to ask about cross-border volume. I know it was up at 29% for the month of April or through April 21st. Just thinking about how that might grow throughout the year. Is that the right number to think about for our models? And just thinking about the Asia recovery, what's left there. Obviously, we talked about China and just thinking about that business as we progress through the year.
spk12: sure brian um look here's what i tell you i'd say the things to keep in mind when you're putting your model together and this will be no surprise to you is we did see a um opening up of economies last year coming out of covid and uh as we mentioned in q1 we were um in the face of omicron you started to see that recovery kind of um take place after omicron passed and so what you should expect is there are going to be lapping related um issues which will be a headwind to year-over-year growth rate on all metrics. and then cross-border as well. Now, offsetting that to some extent would be the recovery from Asia-Pacific, which is something we saw happen towards the tail end of last year coming into this year. So there are puts and takes. I'm not going to give you a specific forecast as to what that growth rate should look like from our model assumption standpoint, but I think there are these important puts and takes which you've got to kind of keep into consideration as you think about cross-border. The most important thing, I think, is that the value prop we deliver through our cross-border proposition is still fundamentally very sound. This is really, really important. As you remember, over the last two or three years, it was being questioned as to whether cross-border was something which was going to remain challenged over the long term. The reality is it has come back. It has come back strong. We have positioned ourselves really well through the pandemic period to be winning good portfolios, to be able to ride the wave back up, and you're seeing the results of that come through with some really strong cross-border performance in Q1. with 35 percent year-over-year growth and so so the reality is that cross-border proposition remains good just as a matter of reference if you look at our cross-border volumes for q1 at 168 of 2019 um and you can do this math as well the reality is that reflects approximately a 14 percent uh compound annual growth rate uh over the window from the period prior to the pandemic to where we are in q1 and so you know you've you've pretty much got caught up for lost time as part of that process if you go back to what the historical rates from cross-border were so i kind of wanted to share that with you in terms of how we see cross-border going forward
spk08: We'll move next to Sanjay Sakrani at KBW.
spk11: Thanks. Good morning. I know you're not changing your views on the macro for the rest of the year, but you're monitoring the situation. Maybe you could just give us a little bit more color if we parse underneath the covers, just what gives you the confidence things are stable despite the slowing in March and April, and then sort of the forward look on just spending trends in cross-border. Thanks.
spk12: yeah hey um look i mean at the end of the day um what what we see is is what you see from a consumer strength standpoint and you know uh we we have our best estimates as to what we kind of think that looks like on a go-forward basis uh like michael said there are positive and negative factors you know the health of the consumer remains strong backed by record low unemployment rates and that gives us a level of confidence on the flip side you've got you know the the headwinds which come along with higher interest rates more recently the banking crisis which which we're all going through, and we have no idea as to what the implications of the banking crisis are going to look like on a go-forward basis. So our views in terms of the strength of the consumer remain pretty much unchanged. There are puts and takes by region based on the fact that, you know, at this point in time, there's no real evidence to see that, you know, the consumer is not showing good strength from a spend standpoint. They're in good shape. The year-over-year growth rates, like I mentioned earlier, are going to change. You're going to see the lapping effect of that come through because of the recovery last year. That's got less to do with what spend levels this year are as compared to anything else. And, you know, it's on the base of that that we have, you know, modestly increased our full year guide on a currency neutral basis excluding acquisitions to reflect the fact that we had a stronger Q1 And we feel like overall from a consumer health standpoint, our assumptions are, you know, relatively unchanged between what it was one quarter ago towards where we are right now.
spk14: One thing to add here, you know, I'm just looking at my phone here, can you imagine, in a conference call, but it was the reporting of the quarter one GDP numbers. look into that, the consumer does stand out positively. So the resilience even in that number is reflected. I think the point that I mentioned earlier on the impact of stresses on the banking sector, that's another one that we did talk about. And here, if you think about what does this mean in terms of potentially Additional regulation, what it means in terms of credit appetite for banks and so forth, those are all not near-term effects that we can judge at this point in time. So some of the outlook that we're taking here is a near-term outlook for the year, and we'll have to see how things develop over time. Again, flexibility and agility is critical, and so we feel ready for all of that.
spk08: We'll move next to Harshita Rawat at Bernstein.
spk00: Hi, good morning. I have a question on your value-added services. Can you unpack the competitor set for these different services, cyber intelligence, data services, other, and kind of highlight MasterCard's opportunity to increase penetration of these services within your existing client base and also continue to get new clients? And just as a follow-up, Sachin, if you can also remind us of the profitability of value-added services versus your experience in natural businesses, that would be great. Thank you.
spk14: Good. Harshita, let me start on this. So first on the competitive landscape. As Sachin was saying earlier, our services strategy is closely tied in with our payment strategy, so we're not your average service competitor, as in a cybersecurity company that competes with a bunch of other cybersecurity companies. We are somewhere in the middle between both, and being in the flow gives us additional data points that make this a fairly unique competitive landscape for us. which is why we like the combination of both. But, you know, very specifically on cybersecurity, you have a whole set of specialty players. Baffin Bay was a specialty player, and yet we're dealing in threat protection, as we were ourselves with RISC-RECORN before. It's just a slightly different angle of that. So we are very aware of the wide competitive landscape here, But our position, I think, sets us apart. Now, there's other potential competitors closer to the payment space, so looking at services as well. So we're trying to keep our services set differentiated and ahead of the curve. It's the same thing for data and services. Yet again, a lot of data and SaaS companies that are building their businesses, But on the other hand, we have a captive set of customers today, and we have a captive set of transactions of these customers that these companies want to understand. And where do they come to an integrated provider that helps them with both? So that's, again, a unique position for us to look at. I think dynamic yield and how we're combining that with our data set, as I referred to in my earlier remarks, I think is an excellent example of that. So that's The competitive landscape that we're looking at, it's a fast-moving one, so we will continue to have that in focus.
spk12: Rashid, I'll just add a couple of thoughts to what Michael said, and I'll get to your question around how the financials play out for... for what we do on the services side. So a couple of things. One, just even adding to what Michael said, structurally, if you think about how the world is going more digital, and as the world goes more digital, there is going to be likely increasing fraud-related issues which come in an increasingly digital world. There are structural tailwinds which we feel good about. And so long as we can continue to grow our portfolio to ride those structural tailwinds is another piece which helps us think that there is good runway on services. The second piece which Michael said which was around data and the power of data is one of the ingredients which makes us successful across both CNI and DNS. But then there are others, which is, do we have the technology? Do you have the AI capabilities? And can you seamlessly deliver this to your customers so that there isn't big implementation challenges? All of which, when you think about our network play, allow us to do that in a very efficient manner, which is what's been helping us drive the kind of growth we've seen. On your question on the financials, I will tell you that, I mean, there's a range of what I would call incremental costs, which come depending on the nature of the service we deliver. So things which are more, I would say, attached to the payment network, such as some of our cyber and intelligence solutions, some of our data solutions, they tend to come with lower incremental cost. There are others, such as our consulting capabilities, such as our marketing services capabilities, they come with a little bit higher in the nature of incremental cost. And so the overall mix is really important because they all kind of hang together. It's important for us to provide those consulting services and marketing services in order to be able to be a full service provider to our customers. And that's only speaking about services. Now, when you take that and you kind of tie that back to how it helps us win market share and payments that's the other piece which is super important as part of this because the economics need to be thought about in the composite as opposed to each one of these services individually we'll go next to david toga at evercore isi thank you good morning last summer london heathrow airport put some uh severe capacity limits on airlines
spk02: Those limits came off a while back, but I'm curious whether you're getting any indication on advanced cross-border summer travel as things opened up a bit more at Heathrow, and how can we think about the impact on cross-border revenue for the rest of this year?
spk12: Sure, David. Here's what I'd say. I'd say, you know, you hear what we hear as it relates to what the airline's plans are from a capacity release standpoint. And the reality is I think everybody's trying to kind of find that right balance between bringing on more capacity and what the implications for the price procedures as part of that process. And so we feel generally good about the prospects of travel. I mean, you know, the reality is there's a trend from the consumer towards more spending on experiences. Experience tends to be travel and entertainment-related stuff. And so generally speaking, that trend is going in the right direction. As more capacity comes on, which we expect will happen, right, you will tend to see the benefit of that come through in our cross-border travel metrics. Again, I will remind you, strong value prop, year-over-year lapping issues, which are there from a year-over-year growth rate standpoint. And then the third piece is, you know, we have the potential for recovery in Asia Pacific. And I want to kind of bring that whole thing into the picture beyond the capacity question you asked.
spk14: So hard to predict, hard to predict, but fact is capacity isn't fully backed. So that's one important aspect when we gave you the outlook later on.
spk02: Understood. And just as a quick follow-up on Europe, just your updated thoughts on the rollout of ACH payments in Europe under open banking would be appreciated.
spk14: Right, David. So let me take a look at that. Conversations in Europe have been going on for years on ACH payments. ACH Systems, as you know, when the UK was part of the EU, you know, I don't even know if it's Europe right now or not, but we invested in Vocalink. So we have an account-to-account system in Europe for a long time. We're having some stakes in other P2P systems on the continent and so forth. The most recent development here is the announcement around the European Payment Initiative, which is yet another effort in account to account. Europe is the land of domestic systems and domestic payment solutions. It's a very versatile, competitive landscape, and there is more coming. We have found ways to partner. We have found ways to compete. In the case of EPI, we are partnering with the owner banks to push our solutions. At the same time, we'll have to see where EPI goes, and then we stand ready to engage one way or another, depending on their willingness. As you can see, Europe has been a source of share growth for us and revenue growth, so we know how to play this environment.
spk15: Understood. Thank you.
spk08: We'll go next to Ramsey Elisal at Barclays.
spk04: Hi, thanks for taking my question, and best of luck to Warren in his future endeavors. My question is for Sachin. I wanted to ask, you called out tax refunds a couple times as weighing on US volumes sort of more recently. Should we think about that as normalizing into Q2? Does it flip to more of a tailwind? And then I guess secondarily, how do you see the spread, which is pretty wide between US and worldwide metrics, trending this year? X Russia, will it stay pretty wide? Will it tighten as maybe tax refunds normalize? How are you looking at it?
spk12: Yeah, look, I mean, the data we look at for what we're seeing from a tax refund standpoint is what we see on the IRS website, right? And so you can take that for what it's worth because that's the insight we've kind of garnered. What we've seen is that the tax refunds tend to happen mostly in this window around, you know, call it March and going into April. So we view this impact of the lower tax refund to be relatively transitory. And I say that only because as the year progresses, if there were lower tax refunds, the implications of that would be minimal just because the vast majority of the refunds happen around the period we're talking about right now. So that's why we use them as being transitory. The other thing to keep in mind is, on account of some of the natural disasters which have taken place, there are some states in the U.S. which have, where from a federal tax standpoint, they've been given more latitude in terms of what the tax filing date is. And so that's the other thing to keep in mind in terms of what the potential might be for a catch-up on some of these lower tax refunds. Again, very hard to predict, but I want to kind of bring those two pieces out there. On your second question on U.S. versus rest of world trends, at the highest level, I tell you, I feel pretty good about what we are seeing on our overall operating metrics. I mean, these are pretty compelling operating metrics from a growth rate standpoint. You've got 15% credit growth taking place in the U.S. It's being driven in a large part by just consumers desire to get back to experiences our portfolios our co-branded portfolios our travel portfolios are performing uh very well and again if you kind of were to think about the go forward you know the reality comes back to the the broader questions we were talking about how do we feel about drivers from a domestic expense standpoint and the cross-border spend standpoint all of that will manifest itself in terms of what u.s volumes look like going forward on the rest of the world side you know then obviously we've got some really good metrics there as well both across debit and credit and you know you're seeing the impact of um some of our market share wins in those metrics as the year progresses you're going to start to see the impact of that market share on some of the players start to tail off just because you'll be reaching the lapping stage on that so you need to keep that in mind that should help you kind of model out as to how the gap between the us and the rest of the world plays out um as we progress through the year
spk04: super helpful. Thanks. Sure.
spk08: We'll go next to Andrew Jeffrey at Truist Securities.
spk03: Hi. Good morning. Appreciate you taking the question. Michael, I'd like to ask you about the India opportunity and specifically the potential inclusion or inclusion of MasterCard credit products in UPI. I just wonder if you could frame that up. So much talk about rest of world growth and cash-based economies and especially those in which perhaps account-funded wallets have moved to the fore. Can you just dimensionalize or give us an update on your India positioning?
spk14: Right. So India is a hugely important market for us. We have a large number of our employees based in India serving the Indian market as well as other markets in Asia. You know, deep engagements with customers there. It's interesting when you look at the market from where it has gone, Under the lead of India's government, they've built a tremendous digital economy. So the India tech stack has really opened up the digital economy at a much, much different scale than before, and we like that. That gives an opportunity for us to engage with our customers to many more Indian citizens. So we generally see that opportunity. It's also true, though, that today everyday solution around debit and credit matter, and You know, we have now, we're back to pre-embargo growth on the issuing side with our customers in India. So that is looking very, very positive. We're back in the market there. So we're playing both of that. It's a market where we'll see more innovation coming from us of the folks that are based there. So there isn't a financial inclusion opportunity. There's an everyday opportunity in credit and debit. And, you know, this is not the most populous country in the world, so it's going to be the theater of the future, and we're excited to be involved there. You know, where is all the engagement going within your tech stack? What does it mean for our will cards, and how will cards be linked into UPI and so forth? The details have yet to be seen, but we're active in those conversations. And, you know, in the end, when we have an opportunity to partner, then we will try to do that.
spk03: We look forward to tracking that. Thanks. Andrew, we have time for one more call.
spk08: And we'll take that from Jason Kupferberg at Bank of America.
spk13: Hey, thanks, guys. Maybe just building on that last question a little bit, you just talked about India to some extent, but which emerging geographies are you most excited about over, say, the next five years or so, just in terms of the general cash-to-card opportunity? Right, Jason.
spk14: So here the opportunity, I wouldn't really point to a particular geography. I think generally the set of countries that have a lower digitization rate is a tremendous opportunity for us. We have learned how to drive digitization. Just look at Latin America. You take a country like Mexico, tremendous opportunity in terms of driving digitization up. And part of that we have seen in Brazil. So you can start to make those comparisons and you add that up across the world. That is a tremendous opportunity. In terms of large-scale country opportunities, we just talked about India. And certainly not in the category of emerging markets, but China is a market that we are very engaged on today in the cross-border business, and you do know that we have a license application out there to participate in the domestic market, and we stand ready to invest for and with the Chinese consumers and businesses, so we'll see where that one goes. Great. Thank you, Michael. Any final comments? I do have final comments. I've made it a habit to thank the 30,000 people at MasterCard for what they all do, and I shall do that again for this quarter. I thought it was a good quarter, and it is reflected of their work. But I do want to thank you as well, Warren. So it's been a fun three years for me and previously with Ajay. So thank you for everything that you did. I know we all talk about you. I do want to talk about Devin as well. So if you could picture us here in this room, here's Devin, and we're looking forward, Sachin and I, to work with you. And I do want to say, Warren, you have built a tremendous set of relationships with the folks on the call. And I look to those folks on the call, first of all, thanking you guys for your support, but also to give Devin the same kind of support that you have in the past. With that, thank you very much and speak to you one quarter from now. Thank you.
spk08: That does conclude today's conference. Again, thank you for your participation. You may now disconnect.
Disclaimer

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Q1MA 2023

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