Mastercard Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 13 speakers on the call.

Operator

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. Q2 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. As pressing star 1 multiple times may affect your position in the queue. Thank you. Mr. Devin Kaur, Head of Investor Relations, you may begin your conference.

Speaker 1

Thank you, Audra. Good morning, everyone, and thank you for joining us for our Q1 2023 earnings call. With me today are Michael Miebach, our Chief Executive Officer and Sachin Mehra, our Chief Financial Officer. Following comments from Michael Anshakian, the operator will announce your opportunity to get into the queue for the Q and A session. It is only then that the queue will open for questions.

Speaker 1

You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning. Our comments today regarding our financial results will be on a non GAAP Currency neutral basis unless otherwise noted. Both the release and the slide deck include reconciliations of non GAAP measures to GAAP reported amounts. Finally, as set forth in more detail in our earnings release, I'd like to remind everyone that today's call will include forward looking statements regarding Mastercard's future performance.

Speaker 1

Actual performance could differ materially from these forward looking statements. Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I will now turn the call over to our Chief Executive Officer, Michael Miebach.

Speaker 2

Thank you, Devane. Good morning, everyone. So starting with the big picture. Our momentum continued into the 2nd quarter with net revenue up 15% and operating income up 16%, both versus a year ago on a non GAAP Once again demonstrating the strong fundamentals of our business. Consumer spending has remained resilient with spend on experiences and travel Remaining a focus.

Speaker 2

On the macroeconomic front, we continue to monitor a number of factors. First, the overall labor market remains strong, including wage growth and consumers continue to be supported by credit and savings. These are key factors of consumer spending. 2nd, the efforts of central banks to curb inflation are showing signs of progress. Despite this, inflation remains elevated and we are in a period of tight monetary policy across many countries.

Speaker 2

Economic growth will continue to vary country by country and sector by sector. Looking at our switched volume trends. Domestic volume growth remains healthy. We continue to see strength in T and E with some recent moderation in both inflation and spend in select international markets. Cross border travel continues to show strength Reaching 154 percent of 2019 levels in the Q2.

Speaker 2

We remain well positioned to capitalize on this trend with our travel oriented Our initiatives in areas like loyalty and marketing. Cross border card not present ex travel continues to hold up well. We're monitoring the environment closely and are ready to adjust investment levels as appropriate, while maintaining focus on our key strategic priorities. As a reminder, these priorities are: 1, expanding in payments 2, extending our services and 3, embracing new networks. 1st, we're expanding in payments by continuing to win deals with a diverse set of customers, powering growth and acceptance, Capturing a prioritized set of new payment flows and exploring new ways to ensure payment choice by leveraging multiple alternatives, including Cardrails, ACH, Blockchain and Open Banking.

Speaker 2

Back to the top of this list, we are winning deals across the globe through a combination of our innovative products, differentiated services and our solution selling approach. I'll share a few examples from each region. Let's start in Europe, where we announced a significant win with UniCredit across all card products. We expanded our partnership and put in place a first of its kind single card Multi market strategy spanning 13 banks, 12 markets and 20,000,000 cards. UniCredit selected Mastercard due to our innovative In Germany, the previously announced conversion of approximately €10,000,000 of Deutsche Bank's credit and debit cards to Mastercard has now started.

Speaker 2

These wins build on our prior success in the U. K, where there are now 16,000,000 NetWest Debit Mastercards Live in market. When combined with the Santander and First Direct migrations, approximately 27,000,000 debit cards have now shifted to Mastercard across These three portfolios in the U. K. Turning to North America, Mastercard will partner with Fiserv's money network for all U.

Speaker 2

S. State and federal government benefit and wage disbursement debit programs. Up north, Coast Capital Canada's largest Federal Credit Union will be converting their consumer and small business portfolios to Mastercard. The partnership highlights our shared commitment to local communities with issuance through Calabria Financial Services. In addition, we have a new agreement with Tim Hortons, The largest quick service restaurant brand in Canada.

Speaker 2

Tim Hortons will launch a new Mastercard credit card and will be using a broad set of Mastercard's digital analytics and Fraud Services and Technologies. Our relationship with Santander in Latin America continues to grow. In Mexico, we established a long term exclusive deal with OpenBank, their new digital bank. We also renewed the Fiesta Rewards co brand credit card, Santander's key offering within their consumer portfolio. In Brazil, we will be Santander's exclusive partner across their commercial portfolio.

Speaker 2

And we've expanded our partnership with fast growing Secreti, one of Brazil's largest credit unions. In Asia Pacific, we've extended our relationship with Standard Chartered Bank, which will enable us to grow our consumer credit presence across key markets in the region. We've also expanded our partnership with HSBC through the launch of the TravelOne card in Singapore, Malaysia and Vietnam. TravelOne will provide instant in app rewards redemption powered by the Mastercard Rewards system. With all of these cards, people do need a place to use them.

Speaker 2

We continue to power growth and acceptance by establishing new partnerships and scaling This quarter, we announced partnerships with both Alipay and WeChat Pay to enable international travelers to easily link Any Mastercard credit or debit card to Alipay and WeChat Pay digital wallets. The partnership allows visitors to make payments with Travelers shop and pay in more places in a simple way, it's like paying like a local. And this will be valuable as inbound cross border travel to China improves from approximately 50% of 2019 levels in the Q2. In the online environment, we are Scaling our click to pay capability to enhance the guest checkout experience. Click to pay transactions grew over 70% year over year in the 2nd quarter Enter Technology is now live in 30 markets.

Speaker 2

In the quarter, we added Chile, Bahrain and Slovakia. And NetWest Group We are making tangible progress in this area. In commercial point of sale, we've extended our partnership with Brex to support the international expansion of their commercial We expanded our relationship with MyPOS, continuing to drive new merchant acceptance across more than 30 European markets, while also migrating their small business debit portfolio to Mastercard. And we've established an exclusive partnership with In B2B accounts payable, we remain the market leaders in virtual card. We continue to drive growth by tapping into new use cases.

Speaker 2

For example, we established an exclusive partnership with Easy Transfer in Greater China. This competitive flip leverages our virtual card capabilities to We're also making it easy for buyers and suppliers to integrate virtual cards into the Building on our prior announcements with SAP and Coupa, we've recently partnered with GEP to integrate our virtual card technology into their payables platform. And on the supplier side, we launched Mastercard Receivables Manager With Billtrust, the solution streamlines the processing of virtual card transactions with suppliers and automates the integration of reconciliation data into accounts receivable systems. This is a great solution and it builds on partnerships with companies like Boost Payment Solutions who have been working closely with Mastercard to And finally in new flows, We continue to deploy our disbursement and remittances capabilities in new ways and across new geographies. In the U.

Speaker 2

S, We partner with top sports gaming processor, Interchex, who will make Mastercard Send available to gaming operators for payouts. CareenPay, one of the largest digital wallets in UAE will use Send to pop up their wallets using Mastercard. And on the cross border front, we've partnered with Al Fardan Exchange in Qatar to facilitate remittance services and support cross border travel. Our work in real time ACH continues to support these new flows. Our historical approach has been to expand our infrastructure reach into new markets.

Speaker 2

Going forward, we will be focusing on delivering and scaling in the markets we already are serving, while building applications and services in these key locations In line with our overall strategic and financial objectives. In the blockchain, we're introducing the Mastercard Multi Token Network, MTN. MTN is a set of foundational capabilities designed to make transactions within digital asset and blockchain ecosystems All secure, scalable and interoperable. We believe in the potential of blockchain technologies. However, regulated money such as bank deposits CVDCs need to be part of the solution and they should interoperate the traditional systems.

Speaker 2

We can help with that. MTN is the natural evolution of the work we have already done in this space. The initial sandbox will kick off in the UK this summer. Now turning to services. Our services inform decision making of our customers.

Speaker 2

They help them create stronger connections and greater loyalty. Payments and services reinforce each other, multiplying our impact and the value we deliver to all our partners. Our services helped drive many of the wins I mentioned earlier. Still here are a few additional examples. We recently launched our consumer fraud risk solution, which leverages our latest AI capabilities and the unique network view of real time payments I just mentioned to help banks predict and prevent payment scams.

Speaker 2

AI is a foundational technology used across Lloyds Bank, Halifax, Bank of Scotland, Netwest, Monzo and TSB to stop scam payments before funds leave a victim's account. TSB, one of the first banks to adopt the solution, indicated that it has already dramatically increased its fraud detection since deploying the capability. We This quarter, we extended our broad based partnership with Expedia Group. Together, we will combine Mastercard's loyalty solution with Expedia's extensive travel supply enable Mastercard cardholders to book travel using loyalty points. We also partnered with Thomas Cook in India to issue prepaid cards for international travel.

Speaker 2

The proposition includes cardholder access to over 450 cross border travel offers to Mastercard Travel Rewards. And earlier this month, I met with our partners at Deutsche Bank and Lufthansa in Frankfurt. We resigned our long standing partnerships with Lufthansa Group for its Mars and More loyalty program and welcome Deutsche Bank as the new In this enhanced relationship, you'll see a combination of our loyalty solutions, personalization capabilities and digital user experiences help The partnership take off to the next level using airline speak. We're also leveraging our personalization and test and learn capabilities to help our partners across the ecosystem enhance the customer experience and improve acquisition and conversion rates. For example, we combined Dynamic Yield's personalization capabilities with our marketing services to drive digital customer acquisition for Echo Bank in Nigeria.

Speaker 2

In addition, HP Inc. Has partnered with us to deploy personalized back content for their consumers across Canada and Europe. And on the merchant side, we are working with 711 in Australia using our test and learn capabilities to support the rollout of new store concepts Our 3rd strategic priority area is embracing new networks with a focus on Open Banking and Digital Identity. We continue to make progress in Open Banking and established a series of new and expanded collaborations this quarter, including ones with Freddie Mac, Algoin based out of France and DAPI in the UAE. These entities will leverage our smart and consumer permission data to drive increased financial inclusion and make digital interactions simpler and safer.

Speaker 2

Turning to digital identity. We're driving adoption across several new verticals, including travel, ticketing, retail and financial institutions. Travel provider FlightHub is using our identity solutions to help travelers book their new next adventure. Sports teams across the U. S, Including the New Jersey Devils used these solutions to enable fans to buy tickets while reducing fraud and ticketing platforms.

Speaker 2

Major League Baseball used our new Detect technology to ensure that all star votes were authentic for this year's all star game. In retail, we partnered with IKEA Black and Latinx communities are using our capabilities to authenticate consumers in real time, making financial empowerment a reality for more people. So in summary, we delivered another strong quarter of revenue and earnings growth supported by resilient consumer spending, particularly in travel and experiences. Our strong deal momentum continues with new wins and expanded relationships powered by our services across a range of partners including UniCredit, Fiserv, Tim Hortons, Brex and many more. Our differentiated capabilities, diversified business model and focused strategy positions us well to capitalize on the Sachin, over to you.

Speaker 3

Thanks, Michael. So turning to Page 3, which shows our financial performance for the quarter on a currency neutral basis, excluding special items and the impact of gains and losses on our equity investments. Net revenue was up 15%, reflecting resilient consumer spending and the continued recovery of cross border travel as well as the continued growth in our value added services and solutions. Operating expenses increased 13%, including a minimal impact from acquisitions. And operating income was up 16%, including a minimal impact from acquisitions.

Speaker 3

Net income and EPS increased 11% 14 respectively, both reflecting a sizable discrete tax expense this quarter related to foreign tax legislation enacted in Brazil. EPS of $2.89 includes a $0.22 reduction due to the discrete tax expense I just mentioned and an $0.08 contribution from share repurchases. During the quarter, we repurchased $2,400,000,000 worth of stock and an additional $497,000,000 through July 24, 2023. So let's turn to Page 4, where you can see the operational metrics for the 2nd quarter. Worldwide gross dollar volume or GDV increased by 12% year over year on a local currency basis.

Speaker 3

In the U. S, GDV increased by 6% with credit growth of 8% and debit growth of 3%. Outside of the U. S, volume increased 16% with credit growth of 14% and debit growth of 17%. Of note, we have now completed the NatWest debit migration in the UK.

Speaker 3

Overall, cross border volume increased 24% globally for the quarter on a local currency basis, reflecting continued improvement in travel related cross border spending. While this is sequentially lower versus Q1, this is due to tougher comps as we opened up post Omicron last year. When you look at the trend versus 2019, you see continued strength. For example, cross border travel is at 154% of 2019 levels in Q2, which is up 6 ppt from the prior quarter. On the same basis, cross border card not present excluding travel It used to hold up well in relation to 2019 levels, up 2 ppt from the prior quarter to 2 10%.

Speaker 3

Turning to Page 5, switch transactions grew 17% year over year in Q2. 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 60% of all in person switched purchase transactions. In addition, card growth was 8%. Globally, there are $3,200,000,000 Mastercard and Maestro branded cards issued.

Speaker 3

Turning to Slide 6 for a look into our net revenues for the Q2, which came in above our expectations. As a reminder, earlier this year, we revised our disaggregated revenue disclosure. Net revenues are now broken down into 2 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 14%, primarily driven by domestic and cross border And volume growth and also includes growth in rebates and incentives.

Speaker 3

Payment Network net revenue was higher than anticipated primarily due to higher revenues related to FX Volatility and the timing of planned deal activity. Value Added Services and Solutions net revenue increased 16%, primarily due to the continued healthy growth of our cyber and intelligence solutions driven by our underlying driver growth and the demand for our fraud and security solutions and strong demand for consulting and marketing services, which was partially offset by other solutions. Now let's turn to Page 7 to discuss key metrics related to the payment network, again described on a currency neutral basis unless otherwise noted. Looking quickly at each key metric. Domestic assessments were up 11%, while worldwide GDV grew 12%.

Speaker 3

The difference is primarily driven by mix. Cross border assessments increased 29%, while cross border volumes increased 24%. The 5 ppt difference is primarily due to favorable mix as higher yielding ex intraura cross border volumes Grew faster than intra or cross border volumes this quarter. Transaction processing assessments were up 16%, while switch transactions grew 17%. The 1 ppt difference is primarily due to lower revenues related to FX volatility versus the prior year.

Speaker 3

Other network assessments related to licensing, implementation and other franchise fees were $270,000,000 this quarter. As a reminder, these other network assessments may fluctuate from period to period. Moving on to Page 8, You can see that on a non GAAP currency neutral basis, excluding special items, total adjusted operating expenses increased 13%, primarily due to increased spending on personnel to support the continued execution of our strategic initiatives. Now turning to Page 9, Let me first comment on the operating metrics trends in the Q2. Versus 2019, overall spending has remained resilient.

Speaker 3

When viewed year over year on a sequential basis, we are seeing some moderation in both inflation and spend in select international markets as well as more difficult comps. As it relates to the 1st 3 weeks of July, our metrics are holding up well, generally in line with Q2 when indexed to 2019. Just for your information, we have included all the data points 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 continue to remain strong As overall consumer spending remains healthy and we continue to deepen our relationships with partners across the globe. Domestic spending patterns have broadly normalized post pandemic.

Speaker 3

Cross border travel continues to grow at a healthy pace, now above 150% of 2019 levels. While the travel recovery has progressed well in most regions, there remain pockets of opportunity, notably into and out of China. We remain well positioned to capitalize on this continued growth with our travel oriented portfolios and related service offerings. Cross border card not present ex travel continues to hold up well. While we are monitoring a number of macro and geopolitical factors, Our base case scenario for the year continues to assume consumer spending remains resilient, buoyed by strong labor market and reflects current spending dynamics and the ongoing recovery of cross border travel.

Speaker 3

For the year, our outlook is broadly unchanged. We expect net revenue growth for the full year 2023 to remain in the low teens range on a currency neutral basis excluding acquisitions and special items. As a reminder, this growth rate would have been approximately 1.5 ppt higher if you exclude Russia related revenues from 2022. Foreign exchange is expected to be a tailwind of 1 ppt for the year and we expect a minimal impact from acquisitions. Our expectations for operating expense for the year are also 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.

Speaker 3

Acquisitions are forecasted to add about 1 ppt to this growth and foreign exchange is expected to be a headwind of approximately 0 to 1 ppt for the year. As Michael mentioned, we are prepared to proactively adjust our operating expenses if we see meaningful changes to top line growth. With respect to the Q3, year over year net revenue is expected to grow at a low double digit rate, again on a currency neutral basis, Coming off a strong Q2, this sequentially reflects a lower anticipated contribution to growth Foreign exchange is expected to be a tailwind of approximately 3 ppt And acquisitions are not expected to have much of an impact for the quarter. From an operating expense standpoint, we expect Q3 growth to be Acquisitions are forecast to add approximately 0 to 1 ppt to this growth and foreign exchange is expected to be a headwind of approximately 1 to 2 ppt. Other items to keep in mind.

Speaker 3

1st, on the other income and expense line, we forecast an expense of approximately $90,000,000 for Q3. This excludes gains and losses on our equity investments, which are excluded from our non GAAP metrics. 2nd, we expect a non GAAP tax rate of between 18% 19% for Q3 and Q4 based on the current geographic mix of our business and the recent U. S. Tax guidance that allows for more tax credits to be claimed related to 20222023.

Speaker 3

And with that, I will turn the call back over to Devin.

Speaker 1

Thank you, Sachin. Audra, we are now ready to begin the question and answer session.

Operator

We'll take our first question from Tien Tsin Huang at JPMorgan.

Speaker 4

Hi, good morning. Good to talk to you guys. Just wanted to ask on the unit credit win there. That was a nice one just outside the top ten, it looks like in Europe. So You mentioned a multi market strategy is what they're going after and I heard sustainability also as a reason for the win.

Speaker 4

I'm just curious Thinking about this as a case study, is this a new trend? Why are they employing the strategy now in the wake of a lot of the macro uncertainty, open banking and There's a lot of talk about pan European schemes and whatnot. So I'm just wanted to study this a little bit and if there's any comments on timing and pricing as well. Thanks.

Speaker 2

Hi, Tianjin. Thanks for the question. So this is a fantastic win. We're excited about that. As I laid out, it's very unique.

Speaker 2

This is a pan European bank, so cutting across 13 banks in 12 markets. It's a wide strategy. Therefore, it's single card, multi market and it cuts across a lot of our digital So I think the breadth of our offering on the Digital First site, as well as our services are a key aspect of us winning this particular The sustainability part, we see this across all range of customers who are all looking at climate as the question of the century To solve what can be done, the consumption question in the context of payments, there's so many angles to it. Our price is kind of positioned on Tree planting and so forth plays into that. So that is particularly important to Oonecredid.

Speaker 2

So here again, we had a meeting of the minds. In the end, it comes down to as part of the migration and you've alluded to this in your question, do we stand ready to serve their needs from day 1 as the migration We have proven this with Deutsche Bank. We have proven it with NetWest and so forth. So this is something that is not new to us. So we're excited to see this unfold Yes, over the near future.

Speaker 4

That's great. Thank you, Michael.

Operator

We'll go next to Harshita Rawat at Bernstein.

Speaker 5

Good morning. Thank you for taking my question. Michael, I want to ask about FedNow, which is now finally launched. I know you've commented on this before in very early days and You've talked from any sort of ubiquity or potential retail payments use cases. But you've had also a lot of experience working alongside real time payments raised, So how are you thinking about FedNow and the risk

Speaker 2

What FedNow is doing, they are now going live. So this is clearly a milestone, a good opportunity to look at this topic again. Yes, our view on this really hasn't changed. So in the end, it comes down to what problem you're trying to solve. What are merchants looking for?

Speaker 2

Merchants are looking So scale matters. What are consumers looking for? Consumers are looking for safe ways to pay in a predictable fashion, ubiquity Available. So those are all factors that haven't changed with this launch. We built that acceptance.

Speaker 2

We have a brand, the 2 interlocking circles that represent trust. So that addresses a lot of what merchants and And we strengthened the position the proposition over years, contactless, tap on phone, buy now, pay later, Mastercard installments, click to pay and so forth. So that's good. The Mastercard debit proposition is strong, and we keep evolving that. So it's well understood.

Speaker 2

Now FedNow is launching. So as we look at that, we will obviously continue to compete And offer our services to our banking and issuing partners. At the same time, in our experience to your question, we have stayed close to these Students in various other countries in the end ending up partnering with most of them. So here we'll have to see where it goes. Live, going live doesn't mean that it is broadly available yet.

Speaker 2

It is early days as you said. It doesn't have features. It doesn't have a consumer platform as such. You can't access it through your mobile banking app. All of that is what our solution today provides.

Speaker 2

So I have to see where it goes. Head on competition by the mindset of partnership where and where it makes sense for us and where this goes. It is important to say that we do have solutions for these systems. If you look at the Chase pay by bank solution that we put into the market, so That's exactly leveraging these kind of flows that would run across these systems, generally P2P focused. Some non card penetration verticals run across these particular systems.

Speaker 2

So we see that as an opportunity and Chase by Bank One of those ways to going after that, we've done similar kind of solutions in the UK and Europe and so forth. So more to come, we'll stay very close At this point in time, I think we have the better solution in the market.

Speaker 5

Very helpful. Thanks.

Operator

We'll go next to Sanjay Sakhrani at KBW.

Speaker 6

Thanks. Good morning. I had a question on the Fed routing rules on debit. I guess the card not present transactions went through in July. I'm just curious sort of how you see the opportunity there.

Speaker 6

It would seem like you're in a good position to take some share.

Speaker 2

Right. So The clarification came, 2 networks available as of 1st July. So we put that in place and we said we would and we're ready to do that. It's still early days. We have to see where that goes.

Speaker 2

But as you rightly said, Sanjay, we stand ready to compete. And that is certainly we will look for

Operator

Next, we'll go to Lisa Ellis at MoffettNathanson.

Speaker 7

Hi, good morning. Thanks for taking my question. Michael, in the prepared remarks, you Highlighted that with Mastercard's real time ACH strategy, you're sort of in a phase of transitioning from building out infrastructure to Focusing more on building applications and services. Just kind of taking a step back, it's always been a big differentiator for Mastercard that you Own infrastructure and fast ACH with VocaLink and Net Corporate Services. Can you just kind of comment a bit on the movie over the last 6 or 7 years?

Speaker 7

Like How has that helped differentiate Mastercard in terms of being able to capture account to account network payments, new

Speaker 2

Thanks, Lisa. So real time payments, when the rise of real time payments started 2016, 2017 and so forth and we invested into VocaLink. It was clear at the time that we wanted to be in This trend from day 1. That was the 1st season of the movie, so to say, to stick with your analogy. Where we are today, we build out a enviable and unique position in real time payments, having a footprint in 13 of the top 50 GDP countries where we run and partially operate real time payment infrastructure.

Speaker 2

Yes, our strategy was we will be in the markets that matter and we don't want to be in the markets that don't matter. So we feel we've reached that point And now it's really to drive up scale and use that infrastructure position. The business in itself of running these systems in these markets is Attractive enough. As we pointed out, we're going to focus on building out a set of applications and services on top of that. You recall from the prepared remarks where I talked about the scam, the anti scam solution in the U.

Speaker 2

K. With these 9 That's a fantastic example of how our expertise in these markets has positioned us to rally 9 banks around the table to come up with a market wide Now not everything that we will do will be market wide solutions that will be individual customer solutions, but we feel we have Muscle in this space is not going to go away. All these government payment systems out there, more and more real time payment Solutions will come up and I think we will be in demand. And because we've done it for a long time, we'll have a seat at the table.

Operator

Thank you. We'll move next to Darrin Peller at Wolfe Research.

Speaker 6

Hey, thanks guys. Can we touch on value added services for a moment? I mean, it's been a good tailwind for some time. I think it grew just about a point below transactions this time around. And you mentioned Strength in cyber and some other categories offset by that were offsetting others.

Speaker 6

So I'd be curious to get a little more detail as to what Were the strengths and weaknesses of value added services now including the other? And then more importantly, just how much room do you think you have across those Different categories to keep that growth alive and cross sell well into your meaningful payments business.

Speaker 2

Right. So let me start and then Sachin can add a bit around the various dynamics around growth rates and so forth. So as I said in prepared remarks, payments and services complement each other. The strategy is a combination Both and then we extend that into new networks. So that's the starting point.

Speaker 2

We remain convinced that that is a key reason That all those wins, I just talked about earlier are happening. So essential to our strategy, Our services in aggregate continue to grow faster than the core. So we continue to diversify our revenue base. We like that. We want to continue to do that.

Speaker 2

There's a whole range of service to choose from. We could do lots of things. We have pruned our strategy when it comes to processing We didn't feel that was such a differentiator. But we felt that cybersecurity in a world that is rapidly digitizing is just Going to drive the biggest demand and we're seeing that coming through in the numbers when I look into our C and I business, which grow at a very healthy clip. If you think about our D and S and data analytics business, here, we keep on building out the value chain.

Speaker 2

A vertically integrated value chain. We have test and learn. We have loyalty and you go all the way into Personalization that is before, after, during the transaction helping our customers run a better business. I don't see an end to the demand. In fact, that is key to our segment diversification strategy.

Speaker 2

So running at a healthy clip, I don't see any moderation here. This We'll continue to grow and you should see us continue to build out across the key aspects of services And Cybersecurity and Data Analytics Insights. So we love this business, and we'll continue to nourish it.

Speaker 3

Hey, Darren, it's Sachin. Good morning. A couple of additional thoughts. So Michael kind of covered off the strength we continue to see in our Valuance Services and Solutions, and that's indeed the case. But you got to remember that growth rates move around quarter to quarter On this area, and so we should all focus on the longer term trends out here.

Speaker 3

As it relates specifically to Q2, When you look at growth rates for value added services and solutions in Q2 of 16%, I assume you're looking at the sequential trend out there. One point to keep in mind is that there was a one ppt drop in Q2 on account of acquisitions. So Q1 had the impact of acquisitions. Q2 doesn't I bet because it's in a lapped that acquisition period. So that's one piece.

Speaker 3

And then specifically in my comments, I talked about that the strength in Cyber and Intelligence as well as in some of our data and services capabilities was offset by other solutions. And it's really all about what the growth rate So when we talk about other solutions, think about it in the context of things like real time ACH, which tend to grow at a lower pace there. So historically, what we had spoken about was just services. Now we are talking about value added services and solutions. When we think about services In historical context, in Q2, that services growth rate was more like 18%.

Speaker 3

So just sort of a reference point for you on that.

Speaker 6

Understood. Very helpful. Thanks.

Operator

We'll move next to Timothy Chiodo at Credit Suisse.

Speaker 6

Great. Thank you for taking the question. I want to dig in a little bit on another business that is important to your both your volume and your revenue growth algorithm over the medium term, which will be Mastercard Send. You touched a little bit on some of the cross border use cases. I believe many of the initial use cases were much more domestic, but it's evolving over time.

Speaker 6

Maybe you could just dig in a little bit more to some of the cross border use cases that are really gaining traction.

Speaker 2

Right. So Timothy, let me start off with that. So our Sand business domestic and cross border together that's we look at it. There's a big chunk in there, which is cross border disbursement remittances, as you rightly said. The way that we go after that is by adding new geographies.

Speaker 2

I gave you 3 markets that we've added this year, Chile, Bahrain and Slovakia. So there is tremendous reach, unparalleled reach in what we have in our cross border proposition, 100 countries around the world. Then there's new ways to go after it, and that is the use cases. So earlier when I was talking about gaming payouts, some of that is domestic, of that is international. The whole workers' remittances piece, Al Fardan and Qatar, those are important corridors.

Speaker 2

We very Specifically go after these corridors Middle East into South Asia and so forth. So it's pretty methodical. But there's another way that which I haven't talked about on how to accelerate this business and this is how we make it easier for customers to onboard with us. So Cross Border Service Express, which is kind of prepackaged solution around cross border payments is another way for us to accelerate this business. So new geographies, new use cases, corridor specific, great methodology.

Speaker 2

I think we have the right kind of assets here Across our HomeSense integration, across our Transfast acquisition, the Mastercard propriety system and our card reach. So all in, this is growing at a very healthy pace, and we like that business a lot. We are experts in cross border, as you know, on the card side, and we're Building that out here over here in cost remittances and disbursements.

Speaker 6

Excellent. Thank you for taking the question.

Operator

We'll go to our next question from Reina Kumar at UBS.

Speaker 8

Good morning, Michael and Sachin. Thanks for taking my question. Both of you in the past have discussed how B2B remains a large opportunity for Mastercard. Can you talk about what trends you're seeing in B2B payments in this macro environment? How you're progressing against capturing the TAM?

Speaker 8

And if you're seeing any slowdown in corporate spending as companies potentially tighten their budgets.

Speaker 2

Thank you, Rayna. I'm noticing there's a lot of questions Coming from me means that there isn't a lot of questions in the numbers, which is fantastic. And I love to talk about B2B. Let me take the lens, Rayna, that's a little bit broader here on commercial overall. So I feel like I'm repeating myself here, but we're choosing priorities because they are growing at a healthy clip.

Speaker 2

So is the story for commercial growing at a healthy clip. So this is we're seeing quarter over quarter year on quarter to year growth above the consumer side. There's Strength in our international markets business, and we've sustained elevated levels of growth when we compare this back 2019 all the noise of COVID out of it. We have 2 main focuses in this area. 1 is commercial point of sale and the 1 is our B2B accounts payable business, commercial point of sale.

Speaker 2

Now this is a tremendous total market The This is about penetrating with the tools that we have today, targeting SMEs and corporate T and E purchasing fleet, all of that With our existing capabilities that we have, plus our complementary solutions like smart data and easy savings and so forth. So A lot of cash and checks out there, a lot of opportunity with cards that we have today. So we leverage that. We built out a separate vertical in the company. We're focusing hard and we're seeing the growth rewarding us for that.

Speaker 2

On the B2B side, this is accounts payable, trusted relationships, this is invoice payments and so forth. This is an even larger TAM With a lot of clear pain points, companies are looking to automate these processes, digitize these processes, get rid of the paper and virtual cards It's a solution that works tremendously well. We, as I called it out earlier, we are the leaders in virtual cards, but the solution isn't perfect. So we invest a lot of energy through our product teams to make it better and better. What I was saying earlier on receivable manager, this is a way to automate the acceptance of virtual card payments, Build it into the accounts receivable system, automate it through get the benefits of virtual cards without some of the manual processes that we have to go through over the So this is a real breakthrough.

Speaker 2

This business is going to be hugely important for us going forward. We called it out in November 2021 at our strategy day, it's one of our biggest growth opportunities. We feel we're ahead in the market and we're seeing the healthy growth And that will be remaining a focus for us.

Operator

We'll go next to Ashwin Shirvaikar at Citi.

Speaker 9

Hey, good quarter guys. Michael, Since you said Sachin is not getting enough questions, maybe I'll ask a numbers question. Yes. I wanted to figure out sort of the cadence of operating expense, 3Q versus 4Q, it sort of looks like you're kind of exiting the year A little bit higher than the 3Q levels in terms of growth. So What's causing that as well as I know your cadence Of spending tends to be longer term in nature, but are there product or service call outs in terms of the types of investments That you're making that's most pertinent now.

Speaker 3

Hey, Ashwin. Good morning. So look, what we shared with you is our It's around what we think operating expenses look like in the Q3, right? And I've given you what the full year numbers or what our expectations for the full year numbers So I think you can kind of back into what our operating expense growth rate is going to be or is expected to be in the Q4. There's nothing unusual going on from an OpEx standpoint in Q4.

Speaker 3

Honestly, I would tell you, if you look at it on a year over year basis growth rates, When you back into those numbers, you'll see there's nothing really unusual going on there. Broadly speaking on OpEx, Here's what I would say. We continue to remain focused on driving our operating expenses in what matters. It's the strategic priorities. It's making sure we're channeling our capital in the appropriate manner to drive growth both in the short, medium and long term, and that's what we'll continue to do.

Speaker 3

As you know, we are a people business to a large extent because a lot of what we do from a tech development standpoint is around people. A lot of what we do from a sales standpoint is around people. So that's what we invest in. So when you see growth rates in terms of operating expenses, I tend to call out personnel as one of the line items essentially for that reason alone, which is The growth comes from people and people are the ones who actually bring the assets that are there for which allow us to deliver that revenue. But really nothing unusual going on from an OpEx standpoint As we exit the year.

Speaker 9

Okay, great. Thank

Speaker 10

you. Yes. So we keep top

Speaker 2

and bottom line growth in mind, but there is The tremendous opportunity ahead of us right now. So we are using this tailwind that we're currently seeing to continue to invest. You see the list of wins, the growth momentum in B2B, the growth momentum in services. This is the time to continue to nourish

Operator

We'll go next to Dan Dolev at Mizuho.

Speaker 11

Hey, guys. Thank you so much for taking my question. I appreciate it. Just a quick question on the guidance. Like obviously results were very strong.

Speaker 11

You exceeded your 2nd quarter guidance on revenue. Like what was the thought process of not boosting the guidance for the year? Thank you.

Speaker 3

So Dan, a couple of thoughts here. One, again, remember, we share guidance in terms of ranges, and that's what We've shared out here as well, right? And when you think about ranges, that's what they are in essence. Point number 2 is some of the beat Which we had in Q2, as I mentioned in my prepared remarks, was driven by what we call timing of deal activity. We still expect to be active in the markets.

Speaker 3

We still expect to vigorously compete in these markets. And so I kind of Intentionally mentioned that as timing only because we do expect that as the year progresses, we will continue to be active in the market. So I think you should take that into consideration as well. And then my only other comment I'd make is in Q1, we had modestly increased our thoughts relative to what we had shared right at the start of the year. So When you bring all of that together, right, that's kind of our thinking behind what we shared from a full year guidance standpoint.

Speaker 11

Got it. Thank you so much.

Speaker 4

Sure.

Operator

We'll go next to Bob Napoli at William Blair.

Speaker 10

Thank you and good morning. On Open Banking, Mastercard has been pretty aggressive in investing in Open Banking, but I'd just like some additional thoughts and maybe on How that's progressing and then how Open Banking maybe fits into other strategies like embedded in finance and banking as a service?

Speaker 2

All right. So, Open Banking, as you know, we specifically Call that out as one of 2 opportunities in new networks. The trend is here to stay. That's pretty clear. This whole notion of Yes, people get to use their data footprint to avail better financial services.

Speaker 2

There's a lot more regulation coming around that. PSD 3 in Europe is coming out. So this train is has left the station. That's good. We're on it.

Speaker 2

The way we look at it is We have to move beyond connectivity. We had a good start. We are well connected here in the U. S. Through our Finicity asset and in Europe through our IR assets.

Speaker 2

And we're very busy now building use cases on top of that and this is where we think the future is going. Initial demand of ethnicity was very Clearly, in lending oriented use cases and asset verification use cases, that feels that is where the demand is today to Sachin's earlier point, where do We invest where we see the demand in the near term event. So that is where we're optimizing. But you're already starting to As we're going beyond these lending use cases, with our solutions like our Chase by Pay by Bank solution here in the U. S.

Speaker 2

This is using a payment success indicator, which is using open banking data to To tell Abila this is a good time when there is balance on an account lease now bill, that is what the payment success indicator does. That is powered by Mastercard's Open Banking Technology. So near term use case is clear. That's working connectivity. We're well positioned with our 2 assets and we're very busy building out use And obviously, we're excited to see PayPay Bank with Chase launch in the Q3 as we said to you.

Speaker 10

Thank you.

Operator

We'll take our next question from David Togut with Evercore ISI.

Speaker 12

Thank you. Good morning. Cross border volume growth remains very strong, but on Slide 9, clearly there's a So my question is for the second half, What growth rate in cross border volume is embedded in your guidance? And then if you could go

Speaker 2

a little bit under the hood, what do

Speaker 12

you see in cross border travel volumes? You may be a little more texture on what you're seeing by country in Europe. You gave, kind of overall data and some thoughts on China.

Speaker 6

Sure, David. So a couple

Speaker 3

of thoughts first. Let's start at the highest level, which is the value prop of cross border travel still remains incredibly strong. So we've got a strong value prop. We have a strong presence in the market. As you'll remember, as we were going through COVID, when everybody had stopped traveling, We've used that as an opportunity to continue to bolster our position in cross border and that's paying dividends right now.

Speaker 3

The fact that we were building portfolios and Winning portfolios at that point in time is helping us actually drive strong growth in cross border, broadly speaking, but also in travel. Now specifically to your question around trends, I think you're looking at year over year growth rates when you are looking at what the cross border travel trajectory is month over month declines you were talking about. I'd encourage you to look at the right hand side of Slide 9, which talks about the numbers indexed 2019. And there you could see actually there's an accelerating trend in cross border travel. So said differently, you can see that in Q1, our cross border travel as a percentage of 2019 was 148%.

Speaker 3

In Q2, that was 154%. In the 1st 3 weeks of July, that's 157%. The reason that's important is because The year over year growth rates are getting impacted by tougher comps from last year. And I think that's important to actually keep in mind. In terms of Regional color.

Speaker 3

I would say that regions are performing well. Look, I mean, the beauty of what we've got at Mastercard is a diversified business model. It's diversified across multiple dimensions, Across payments and services, across products, across channels of sale, across regions. And the fact that we've got This presence, strong presence across various regions helps us in the cross border side as well. And really what we're seeing is Good sustained growth in cross border, both on travel as well as non travel across the globe.

Speaker 3

We're seeing accelerating trends in Asia Pacific, Which we had very much expected and spoken about. That's what you're seeing coming through in the nature of the numbers here. We still think there are pockets of opportunity on a going forward basis, in particular, Going into China and coming out of China, just as a reference point, Michael talked about how cross border travel Inbound into China stood at approximately 50% of 2019 levels in Q2. That just goes to show what the opportunity remaining there is. Conversely, cross border travel outbound from China was approximately 70% in Q2.

Speaker 3

And so that both those numbers will give you an indication of where the opportunities lie on a going forward basis. And as we continue to do what we're doing in terms of Winning more portfolios, enriching our proposition, layering services such as our loyalty programs, that just helps position us well on a going forward basis. So that's the kind of color I'd like to share with you on this. Broadly speaking, I think we're in a very good place as it relates to cross border.

Speaker 2

One thing to Add here, that is the current imbalance in the market between demand and supply. So there's still an unlock There as in airline capacity, airport capacity and all of that will unlock. So the combination of the underlying desire to travel, How that trend is coming through, our position, strong position in the travel industry with our portfolios Expedia and Lufthansa just to add to here. And this unlock of capacity over time will be a very good mix. This is an exciting space.

Speaker 2

People just want to be out there.

Operator

We'll go next to Dan Perlin at RBC.

Speaker 6

Thanks. Good morning. I just wanted to maybe dig a little deeper on the commentary around this moderation in inflation and spending Sachin that you called out. Particularly, what can you tell us about kind of the downdraft in average tickets during the current quarter? And then Maybe more specifically, are you seeing any discernible signs or indications of trade downs from the consumer that would be high corollaries to Slightly weaker consumer spending as opposed to this resiliency that it sounds like you guys are continuing to talk about.

Speaker 6

Thank you.

Speaker 3

Sure, Dan. So a couple of thoughts. I mean, it's no surprise, I think you guys are all seeing that inflation, while still remaining at High levels have started to moderate, right? So you're seeing that come through in terms of the nature of spend, right? We're a nominal value business.

Speaker 3

And at the end of the day, right, inflation Inflation quarter over quarter will have an impact. So that was important to actually call out. And then I also talked about how there's a moderation in select The reality is when you look at markets and this is not broad based, right? There are select markets where let's take a market like the UK. At the end of the day, Rising interest rates and high inflation levels ultimately will put a squeeze People's ability to spend.

Speaker 3

That doesn't mean that the consumer isn't necessarily resilient. The consumer remains resilient on a more holistic basis. But At the margin, right, what you start to see is, as say for example mortgages get reset, when mortgages get reset, they're getting reset at higher interest rates. What it's doing is it's squeezing The wallet or share of wallet, which would be available for other discretionary categories of spend. So you're going to see a little bit of that trend come through, which is what we were kind of calling out.

Speaker 3

But all of that's factored into our thinking as we think about the rest of the year and in my full year guidance. So that's really, in essence, What we were kind of thinking about. So again, I'll summarize it by saying there's recent reductions in inflation, there's a little bit of moderation in select So markets, and really we haven't seen this as being broad based. We haven't seen this as something which is causing concerns for us. It's very much in line with what we've been thinking about from a guidance standpoint.

Speaker 3

And I'll remind you that at the end of the day, cross border continues to be strong, back to the question David just asked. So kind of bring that all together, right? We feel good about what the strength of the consumer is.

Speaker 1

Excellent. I think we have time for one more question.

Operator

And we'll take that question from Bryan Keane at Deutsche Bank.

Speaker 6

Hi, guys. Good morning. Thanks for fitting me in. Sachin, just want to ask about FX volatility and how it impacts the model. I know cross border assessment revenue growth was Above volume.

Speaker 6

So it had a positive yield. I think in your peers one of your peers' reports, it was actually negative and they called out the lack of FX Volatility. So just trying to understand how it impacts Mastercard's model?

Speaker 3

Okay. So first, When we talk about FX volatility, you see that in our numbers in transaction processing assessments, not in cross border assessments. It is tied to the activity of Auth Clear and Settle, which is why it sits in transaction processing assessments. And what I called out was the higher growth rate in cross border assessments relative to volume was driven by What we call favorable mix, which is the fact that our inter volumes, which is everything ex intra Europe, right, are growing at a faster pace than intra Europe, Inter volumes tend to be high yielding as compared to intra and that's the reason you had that positive kind of Gap between where revenues were on cross border assessments and where volumes were. And again, the volatility comment I made was tied to transaction processing assessments, which is where it sits.

Speaker 1

Thank you. Michael, any closing comments?

Speaker 2

All right. Thanks, Devin. The first thing I want to say, you should all know that Warren sits in the other room and is listening to us. So this is the first time solo So moved by Devin and we're delighted to with this next chapter now. As always, I want to make a comment about all the people at Mastercard who make this happen, the 30,000 of us.

Speaker 2

I sent them a note earlier today with the results This is the value that you guys deliver every day. So I just wanted to share that with you. And with that, thank you for your support, your questions today, and we'll talk to

Speaker 3

you soon. Take care. Bye bye. Thanks everyone.

Operator

And this concludes today's conference call. Again, thank you for your participation. You may now disconnect.

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Earnings Conference Call
Mastercard Q2 2023
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