Mastercard Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 27, 2022

There are 17 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the 4th Quarter 2021 and Full Year Mastercard Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Session.

Operator

Please be advised that today's conference is being recorded. I mass. I would now like to hand the conference over to your speaker today, Mr. Warren Kneeshaw, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, Jeremiah. Good morning, everyone, and thank you for joining us for our Q4 2021 earnings call. With me today are Michael Miebach, our Chief Executive Officer and Sachin Mehra, our Chief Financial Officer. Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q and A session. It is only then that we see we'll open for questions.

Speaker 1

You can access our earnings release, supplemental performance data and the slide deck that accompany this call 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 report 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 of 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 mass market 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, Mike Niebuhr.

Speaker 2

Thank Thank you, Warren. Good morning, everyone from New York. I'm starting off with the key highlights for the quarter. We delivered strong revenue and earnings growth mass we saw further improvement in our underlying operating metrics. Quarter flow net revenues were up 28% and EPS up 46% versus a year ago on a non GAAP currency neutral basis.

Speaker 2

On the same basis, quarter 4 net revenues are 19% above pre COVID levels mass market in 2019. So with that, let's take a look at the macroeconomic front. The outlook remains positive despite the recent supply chain constrained geopolitical uncertainties and inflationary pressures. Although there has been a recent surge in COVID cases, there are signs that these may be peaking. Mass In the U.

Speaker 2

S, economic growth remained solid with low unemployment and healthy consumer confidence. Mass. According to our quarter 4 spending pulse report, which is always based on all payment types, including cash and check, best retail sales ex auto, ex gas were up 6.4% versus a year ago and up 10.9% versus 2019. In Europe, mass. GP growth has been strong, although recently impacted by mobility restrictions.

Speaker 2

The impact of the Omicron variant reduces, we mass. We expect the economic growth to pick up in the coming quarters, in large part, thanks to considerable pent up demand from the past year. Spending cost shows that overall European retail sales in quarter 4 were up 3.3% versus a year ago and up 1.3% versus 2019. In Asia Pacific, vaccination rates continue to improve and we expect the economic recovery to pick up pace as both governments and businesses ramp up investment. The travel recovery in Asia Pacific has lagged that of the rest of the world and has significant growth potential.

Speaker 2

The growth in Latin America is expected to moderate a bit following the rebound in 2021. As it relates to COVID Specifically, there are early signs that the Omicron surge will be relatively short lived. The reality is that the tools we have to deal with the pandemic are more advanced than ever. 60% of the world's population is now at least partially vaccinated. Effective therapeutics are becoming available and governments are using more targeted measures to limit the spread.

Speaker 2

More borders have opened and have stayed open despite the recent variant. Although we've always said the path forward will not be linear, There are signs we are moving toward the endemic phase of the disease. Looking at Mastercard spending trends, switch volume growth continued to improve quarter over mass market. Both consumer credit and debit continue to grow well. Turning to cross border.

Speaker 2

The recovery has continued with overall quarter 4 cross border levels now higher than those in 2019. Cross border travel continued to show improvement relative to quarter 3 levels, quarter, aided by border openings in the U. S, U. K. And Canada.

Speaker 2

While Omicron has had some recent impact on cross border travel, we continue to believe that cross border travel will return to 2019 levels by the end of this year. Plus, border card not present spending ex travel continued to hold up well in the quarter. Overall, the spending trends are moving in the right direction with some near term travel related headwinds as a result of the variability. Now turning to our business highlights. As I outlined in our Investment Community Meeting in November, we remained focused on our Grow, Diversify, Build strategy and our 3 strategic priorities, which are expanding in payments, extending our services, and embracing new networks.

Speaker 2

Here's an update on how we're progressing against each of those priorities. First, we're expanding in payments, a growing person to merchant payments, Gailing across other payment flows and leaning into innovation in new payment technologies. In aggregate, these targeted flows represent $115,000,000,000,000 in opportunity. First off, we're driving growth in personal marketing payments through new wins across the globe. In the U.

Speaker 2

S, I'm excited to announce that we're partnering with Chase and Instacart, the leading online grocery platform in North America on a new Instacart Mastercard co brand program. This partnership marks an additional co brand win with Chase quickly following the recent launch of the Chase Aeroplan World Elite Mastercard. In addition, with First Interstate Bank's planned acquisition of Great Western Bank, we will flip Great Western's consumer debit, credit and commercial portfolios to Mastercard. And I'm happy to note that the consumer credit portfolio of Marix Bank, over 3,000,000 customers will transition to Mastercard beginning in the Q2. Maritime plans to leverage several Mastercard solutions, including our fraud prevention, consulting, open banking and loyalty services.

Speaker 2

Over in the Netherlands, we've renewed our partnership with Raubank, which includes the migration of 8,000,000 Maestro cards Debit Mastercard. We signed an exclusive deal with Westpac in Australia for the new banking as a service platform. This platform will allow new players to leverage Westpac's banking capabilities. Afterpay, the first partner on the platform, will connect debit Mastercards to Money by Afterpay app. And in the U.

Speaker 2

K, the NetWest debit migration is progressing to plan as in the early stages of consumer rollout. We're We're also expanding in payments by capturing new payment flows, including commercial, B2B accounts payable, bill pay and cross order remittances. For example, in the commercial space, we've expanded our relationship with Bank of America, where we'll be the lead brand for new commercial card issuance. We've also renewed and expanded our relationship with WEX, including the chosen as their strategic partner and adding open loop functionality to the millions of closed loop feed cards. For the medium term stable, we continue to scale Mastercard track as WEX, BMO, BOK Financial, Nelio and Deluxe will connect to the platform.

Speaker 2

We also launched the launch we also announced the launch of Mastercard Fast Track Instant Pay, which uses machine learning to analyze and initiate automatic virtual card payments, streamlining processes for buyers and improving cash flow mass market for suppliers. And we're driving new B2B acceptance through a global partnership with Boost Payment Solutions with an initial focus on mass expanding the use of commercial card in 7 key markets. We're addressing new payment flows in consumer and bill payments as well. We recently announced the acquisition of ARCUS to help deliver bill based solutions and other real time payment applications in Latin America. ARKUS enables digital payments for the majority of household bills in Mexico and its connections with banks, fintechs and digital wallet providers across the region.

Speaker 2

And finally, we continue to capture new flows in cross border remittances. This quarter, we established a partnership with Travelex in Brazil, We'll use Mastercard's cross border services to send P2P transfers to the U. S. And Europe. Domestic disbursements in the U.

Speaker 2

S, we partnered with FinTech Processor TABA Pay to make Mastercard 10 easily available to FinTechs and merchants across multiple use cases. Now shifting gears, we're also expanding in payments by leaning into payment innovation in areas like installments, contactless acceptance and cryptocurrencies. Here are a few examples. Our open loop Mastercard installments program that we announced last mass market share this week. Watch this space.

Speaker 2

Now we're making great progress in expanding contactless acceptance mass by turning the world's billions of active smartphones into potential acceptance devices, enabling people to buy and sell whenever, wherever they want. We now have 100 deployments of tap on foam and over 50 deployments. The penetration increased transaction to 1 in 2 of our in person switch transactions globally this quarter. This is up from approximately 1 in 3 prior financial inclusion and consumer convenience is substantial. We're mass NFTs.

Speaker 2

I'll walk with consensus will make it easier for software developers to increase the scale, efficiency and speed of transactions on Ethereum and permission blockchains. And our CDC SandBox test platform, which we launched in 2020, continues to gain traction. We're helping central banks, financial institutions and fintechs simulate the issuance and distribution of the CBDC Along with the integration of CBDBs with our card network, our real time payment modules and native blockchain wallets. Now shifting to services. Our services support and differentiate our core products and have played a critical role in aiding many of the wins I just mentioned.

Speaker 2

We grew services revenue at 25% in 2021 on a currency neutral basis. We We'll continue to extend our service capabilities to enhance the value of payments. We've been further accelerating our growth by expanding into new areas and new use cases, particularly through our data and services and cyber intelligence propositions. Again, a few examples for you. In December, we announced an agreement to acquire Dynamic Yield from McDonald's.

Speaker 2

Dynamic Yield uses enhanced AI. So this is our customized product recommendations, offers and content to consumers. Their customer set includes over 400 global brands ranging from financial services companies like Synchrony to retailers like Lensend. McDonald's is a great example of a company who's using all 3 of these platforms today with plans to further scale and integrate Dynamic Yield's capabilities In addition, our Ethoca platform continues to experience strong traction in preventing unnecessary chargebacks, a real pain point. We added new customers in every region in 2021 for Ethoca.

Speaker 2

Recently, we launched Ethoca Consumer Clarity, U. K. And several European markets including OTP Bank, Central Cooperative Bank and Payvox Bank. Now beyond expanding in payments and extending in services, our 3rd strategic priority area is embracing new networks. Specifically, we are leveraging our expertise in payments to build out new networks with the current focus on Open Banking and Digital Identity.

Speaker 2

On the open banking front, we have closed the acquisition of IR in November, which brings strong API connectivity to over 2,700 banks across Europe. In the key open banking regions, upon which we're building solutions to solve for a wide range of use cases. One example is in the mortgage verification space, Affinicity has signed deals with several new partners including loan people. And in the digital identity space, we're helping our customers with fast, frictionless identity verification services. Ekata has performed strongly over the last quarter, expanding through strategic partnerships with companies such as Zip and Equifax as well as growing its global footprint with leading fraud providers Tongdong and AirClick in Asia Pacific.

Speaker 2

Combined, Open Banking and Digital Identity extend our value before and after the payment transaction. These are large attractive and growing opportunities We are uniquely positioned to be a leader in both. So in summary, if you look at strong revenue and earnings growth this quarter, macroeconomic outlook remains positive with a few areas of monitoring and we're executing against our 3 strategic priorities, mass spending in payments, extending our services and embracing new networks and all that with substantial progress on the product and deal front this quarter. Now I'll turn it over to

Speaker 3

you and the numbers. Thanks, Michael. So turning to Page 3, which shows our financial performance for the quarter mass market on a currency neutral basis excluding special items and the impact of gains and losses on our equity investments. Net revenue was up 28%, reflecting continued execution of our strategy and the ongoing recovery in spending. Acquisitions contributed to this growth.

Speaker 3

Operating expenses increased 19%, including a 7 ppt increase from acquisitions. Operating income was up 37%, which includes a 1 ppt decrease related to acquisitions. Net income was up 44%, which includes no impact from acquisitions mass market. The impact of actuators on operating income was offset by a one time acquisition related tax benefit. EPS was up 46% year over year to $2.35 which includes a $0.04 contribution from share repurchases.

Speaker 3

Market. During the quarter, we repurchased $1,300,000,000 worth of stock and an additional $528,000,000 through January 24, 2022. So let's turn to Page 4, where you can see the operational metrics for the Q4. Worldwide gross dollar volume or GDV increase by 23% year over year on a local currency basis. We are seeing continued strength in debit and credit.

Speaker 3

Mass. U. S. GDV increased by 23% with debit growth of 15% and credit growth of 34%. Outside of the U.

Speaker 3

S, volume increased 23% with debit growth of 25% and credit growth of 20%. To put this in perspective and a percentage of 2019 levels, GVD is at 125%, up 4 points quarter over quarter with credit at 116%, up 5 points sequentially and debit at 134%, quarter, up 3 points sequentially. Cross border volume was up 53% Qb for the quarter with intra Europe cross border volumes up 45% and other cross border volumes up 63%, reflecting continued improvement in travel related cross border as several borders opened during the Q4. In the Q4, cross border volume was 109% of 2019 levels with intra Europe at 122% and other cross border volume at 98% of 2019 levels. Turning to Page 5, switch transactions grew 27% year over year in Q4 and were at 132% of 2019 levels.

Speaker 3

Card present growth continued to improve, while card not present growth rates remained strong. Card present growth was aided in part by increases in contactless penetration In addition, card growth was 9%. Globally, there are $3,000,000,000 Mastercard and Maestro branded cards issued. Now let's turn to Page 6 for highlights on a few of the revenue line items, again described on a currency neutral basis unless otherwise noted. The increase in net revenue of 28% was primarily driven by domestic and cross border transaction and volume growth as well as strong growth in services, partially offset by higher retits and incentives.

Speaker 3

As previously mentioned, acquisitions contributed approximately 3 PPTs to net revenue growth. Looking quickly at the individual revenue line items, domestic assessments were up 24%, while worldwide GDV grew 33%. Cross border volume fees increased 61%, while cross border volumes increased 53%. The ACV difference is primarily due to favorable mix as higher yielding ex intra Europe cross border volumes grew faster than intra Europe cross border volumes this quarter. Transaction processing fees were up 28%, generally in line with switch transaction growth of 27%.

Speaker 3

Other revenues were up 30%, including a 9 ppt contribution from acquisitions. The remaining growth was mostly delivered expectations, reflecting the strong growth in volumes and transactions and new undertone deal activity. Moving on to Page 7, You can see that on a currency neutral basis, total operating expenses increased 19%, including a 7 ppt impact from acquisitions. Excluding acquisitions, operating expenses grew 12%, primarily due to increased spending on advertising and marketing, higher personnel costs to support the continued investment in our strategic initiatives and increased data processing costs. Turning now to Page 8, let's discuss the specific metrics for the 1st 3 weeks of January.

Speaker 2

1st, as a point of process,

Speaker 3

volume and transaction metrics both on a year over year and as a percentage of 2019 basis. However, quarter. It's important to note that as we turn the calendar and move into 2022, the index versus 2019 metric now looks like 3 years and therefore includes a compounding improvement relative to the 2021 index metric. This compounding impact must be taken into consideration mass market. The sequential trend from Q4 to January.

Speaker 3

So at the highest level, Omicron has had a minimal impact on overall volumes and transactions that has caused some moderation on cross border travel. Going through the metrics in turn, volume. Starting with switch volumes, through the 1st 3 weeks of January, we are now at 149% of 2019 levels, up 13 points versus Q4. This increase is primarily driven by the compounding effect I just referred to. After adjusting for this compounding effect, Switch volumes are tracking similarly to what we saw in Q4.

Speaker 3

The underlying trends in switch transactions adjusted for the compounding effect are generally tracking the trends we are seeing in switch volumes. In terms of cross border volume growth, as I mentioned earlier, spending levels as a percentage of 2019 in Q4 are now above pre pandemic levels. The omicron variant, which hit partway through December impacted the strong cross border travel momentum we saw in November. That impact has carried over into January. This has been partially offset by an increase in cross border guard not present ex travel.

Speaker 3

Overall, cross border volume through the 1st 3 weeks of January is now at 116 percent of 2019 levels, up 7 points versus Q4. In this case, the compounding effect This is partially offset by the impact of the omicron virus on transport travel in January. Turning to Page 9, I want to share our thoughts on the upcoming year. While there is some uncertainty related to Omicron and potential future variants, Our overall expectations for 2022 are positive. The macroeconomic outlook is for continued growth and domestic spending levels are Massage Passes.

Speaker 3

As Michael just noted, the tools available to deal with the pandemic have improved with time and although the path forward may not be linear, mass. We are moving towards the endemic phase of this disease. Many countries have relaxed their border restrictions And we continue to expect cross border travel to recover to 2019 levels by the end of 2022. Our recent new wins, travel oriented portfolios and diversified set of services position us extremely well to capitalize on these trends. Turning to our expectations for the full year 2022, our base case scenario is for net revenues to grow at the high end of a high teens rate on a currency neutral basis excluding acquisitions.

Speaker 3

Acquisitions are forecasted to add about 1 ppt to this goal, While foreign exchange is expected to be a headwind of 1 to 2 ppt for the year, primarily due to the strengthening of the U. S. Dollar relative to the euro. In terms of operating expenses, we continue to carefully manage our spending as we invest in our payments, services and new network priorities to drive short and long term growth. For the year, we expect operating expenses to grow at the low end of a low double digit rate on a currency neutral basis, Mass.

Speaker 3

Excluding acquisitions and special items. Acquisitions are forecast to add about 4 to 5 ppt to this growth, quarter. While foreign exchange is expected to be a tailwind of approximately 1 ppt for the year. Building now to the Q1, year over year net revenue growth is expected to be at the high end of a high teens rate, again on a currency neutral basis excluding acquisitions. This reflects some sequential improvement in cross border travel spending trends within the quarter relative to 2019 as the impact of Omicron starts to recede as the quarter progresses.

Speaker 3

Acquisitions are forecast to add about 2 ppt to this growth, quarter. While foreign exchange is expected to be a headwind of 2% to 3% PTT for the quarter. From an operating expense standpoint, quarter. We expect Q1 operating expense growth to be at the high end of high single digits rate versus a year ago on a currency neutral basis excluding acquisitions and special items. Acquisitions are forecast to add about 6 ppt to this growth, while foreign exchange is expected to be a tailwind of approximately 1 ppt for the quarter.

Speaker 3

As a reminder, we discretely disclose the impact of acquisitions for the year end which tick those and the subsequent year after which time we do not split them out. For instance, Finicity, which closed in November of 2020, is now folded into the base. We are pleased to have closed The acquisitions of both IR and August in November and anticipate closing the pending acquisition of Dynamic Year in the first half of twenty twenty two.

Speaker 2

Other items, Satik and Mike.

Speaker 3

On the other income and expense line, we are at an expense run rate of approximately $115,000,000 quarter given the prevailing interest rates and debt levels. This excludes gains and losses on our equity investments, which are excluded from our non GAAP metrics. And finally, we expect a tax rate of approximately 17% to 18% for the year based on the current geographic mix of our business. With that as a backdrop and turning now to Slide 10, I would like to update you on our 3 year performance objectives for the 2022 to 2024 period that we first introduced in November at our Investment Community Meeting. The bottom line is that there is no change, quarter.

Speaker 3

Although our jumping off point for earnings is slightly higher due to our Q4 2021 over performance. As a reminder, These objectives are on a currency neutral basis, exclude special items, gains and losses on equity investments and acquisitions closed after 2021. Using 2021 as our base, over the 2022 to 2024 period, we expect to deliver a net revenue compound annual growth rate in the high teens. This assumes an annual target market volume growth rate of 10% to 11%, cross border travel returning to 2019 levels by the end of 2022 mass and growing our services revenues at a 20% plus caper. From an operating margin perspective, we will continue to operate with the philosophy of Minimum Annual Operating Margin of 50%.

Speaker 3

Having said this, I would like to emphasize that we continue to believe that it is important for us to invest for the long term growth, while mass market. While delivering positive operating leverage and we couldn't be aggressive with this philosophy in mind. And finally, we expect to deliver an EPS CAGR in the low-20s range on a currency neutral basis excluding the impact of special items, gains and losses on equity investments and future acquisitions. And with that, I will turn the call back over to Warren.

Speaker 1

Thank you, Sachin. Jumeirah, we're now ready for the question and answer session.

Operator

Mass. Your first question will come from Reina Kumar with UBS. Good morning. Thanks for taking

Speaker 4

my questions. So with cross border spending now above pre pandemic levels, are you dissipating any pent up demand in travel spend in your financial guidance, particularly as we get to the travel month in the summer?

Speaker 2

Hi, Reina. This is Michael. Let me kick this off. So as I said in my remarks earlier, we do mass. We've seen pent up demand in the last year and the year before and it continues.

Speaker 2

People will want to travel and get out whenever they can and it has been proven again and again. So there is an assumption there and we've been pretty vocal about that that we Do continue to believe that cross border travel will return to pre pandemic levels by the end of the year. Sachin? Yes. I think Michael, you

Speaker 3

pretty much covered it. So Randall,

Speaker 2

The only thing I'd just add is, we just need to go back to 2021 where

Speaker 3

we saw that when people had the ability to travel, they expressed their intent to travel. And We do believe that the impact of Omicron is going to be short lived. And as borders start to relax a little bit more and people get a little bit more comfortable around this, People will get out there and express their demand for travel back to what Michael was just saying.

Speaker 2

In fact, I'm heading to Europe tonight. So there you go.

Operator

Great. Thank you. Your next question will come from Harshita Robert with Bernstein.

Speaker 5

Good morning. Thank you for taking my question. Michael, I want to ask about Fed now. It looks like it will be in line with

Speaker 4

the U. S. In 2023.

Speaker 5

Domestic RTP system in many countries is used for payments other than consumer to business, but any of examples like the ones in India with UPI that's used for retail payments. How do you see that playing out with FedNow? And how can you participate in terms of services enablement for that. Thank you.

Speaker 2

Right. Thank you, Ashita. So FedNow, we'll have to see when it actually comes live. But broadly speaking, if we go with our experience in other countries, we believe there is in real time payments like the real alternative alternative payment solutions. There's demand by government, there's demand by businesses and consumers.

Speaker 2

The MASS-twenty-twenty-two standard allows to carry more data. So there's also some reasons why this might make sense. To your question on how mass participation looks like. When we just bought VocaLink in 2016, I promise I won't take you back 5 years now, but that There is some use cases where cars are just simply an excellent answer today. It's an ecosystem drives huge value.

Speaker 2

And There is yes, there might be alternatives, but we continue to invest in that and focus on that. At the same time, there's a whole range of use cases where real time payments calendar account makes a lot more sense than basic ACH or cash and that's a displacement opportunity that we certainly want to engage in I think where our participation and our differentiation comes in is we have tools across of the whole gambit of payment solutions. That's our multi rail strategy. We have advanced this quite significantly the last couple of years to true multi rail solutions. It's not like that we have one and the other in parallel.

Speaker 2

It's one single solution. If you look at Mastercard Track, that's exactly what it is. You can say any which way through any which way you like through Mastercard Track, but the payment optimization, the security, the pricing, the predictability, the Mastercard Good It's all the same across all of these options. So, I see it as a fundamental opportunity to participate in new flows rather than anything else.

Speaker 5

Thank you.

Operator

Your next question will come from Darren Peller with Wolfe Research.

Speaker 6

Thanks guys. Michael, when we think about the parts of your business that are outperforming, partly because of the pandemic, Partly given where we are, just in the acceleration on spending on electronic payments. Can you just walk through that in terms of what kind of sustainability you see to the parts of the business that have Sustainable upside now, in other words, debit volumes now probably bigger than you would have otherwise thought it would be. Services is another piece that's probably higher Otherwise could have been. Are those sustainable?

Speaker 6

And then maybe remind us of the parts of the business besides just cross border that can catch up mass as we see the recovery again. Thanks guys.

Speaker 2

All right. Thanks, Darren. So I'll start that off and then maybe Sachin can kick in. So 1st of all, the secular shift has gotten a real push out of COVID. I mean, we had to spend online.

Speaker 2

And When I look at that, I think that is a fundamental structural trend, more online commerce, more online banking, more online everything. And what has really come out over the last 2 years that this is a lasting trend. So every bit of consumer research that we do, market research that we do, people will say, I learned to like it, so I'm going to continue to do that. So I think that is an accelerated growth opportunity. And it's a big assumption in our 3 year long term guidance that we gave that we continue to believe that the race towards a more digital economy will be a positive driver for us.

Speaker 2

So sustainable growth driver, You see it come through in how we build out acceptance, 19% acceptance growth. We continue to find pockets and opportunities and flows and You pointed to services. Now services, in a world that is more digital, it shows of more data. In the C and I services, our security service solutions, we Basically, we can't run fast enough. That has been outperforming.

Speaker 2

I gave you the growth rate for 2021 and services at 25%. That's for sure an elevated growth rate and we continue to see that very, very positive. On data and analytics, more data, more people will We want to do something with the data. A merchant will understand now that they have more more merchants are entering into the digital space, How do they find customers in an easy way? How do they retain customers?

Speaker 2

That's where Dynamic Yield comes in, a perfect tool to really make more of that. And then all of that data in the end will fuel the world of open banking, which is part of our whole new network strategy is essential and of course the need for digital identity solutions. So all of that is sustainable. The catch up opportunity back to your question is Sure. Travel, it is travel domestic travel has been leading, leisure travel has been leading, cross border travel and corporate travel Over different curves over time, there's significant catch up opportunity for us.

Speaker 2

So I think those are the headlines.

Operator

Your next question will come from Lisa Ellis with MoffettNathanson.

Speaker 4

Hey, good morning, guys. I was hoping to ask about net yields. Just looking back mass pre pandemic Mastercard's net yields were steadily increasing about half a basis point or basis point a year, but then over the last 2 years have dropped first in 2020, then again somewhat over in 2021. Can you just help parse for us a bit how much of the pressure on yields recently is due to cross border travel weakness versus perhaps competitive pressure or something like that and kind of what gives you And I guess looking out into 2022, are you now expecting yields to move back the other direction? Thank you.

Speaker 3

Sure, Lisa. I'll take that question. So look, I think the short answer to your question is the vast majority of what you've seen in terms of net yields has been driven by the changing mix of the business over the pandemic, primarily cross border volumes coming down and the impact of that. As you know, cross border volumes and revenues are less indexed from a relays and incentive standpoint. So you have the impact of that playing through.

Speaker 3

I I would say fundamentally, we've always operated in the competitive environment. We see no real change in the level of competition relative to what we've seen over the past few years. So candidly, I would tell you our assumption going into our planning cycles and going 2022 as well as over our 3 year performance objectives has been one of the impact of having minimal net pricing, which is net of rebates We still continue to see that to be the case. That was very much the case a couple of years ago as well. So the point really is a lot of what you're

Speaker 2

seeing on the net revenue yield

Speaker 3

is being driven by the changing mix primarily cross border. Services continues to do really well and has been accretive to our yield in the past and we expect that given the opportunity in services That will be the case going forward as well.

Speaker 4

Terrific. Thank you.

Operator

Your next question will come from Sanjay Sakhrani with KBW.

Speaker 7

Thanks. Good morning. I have another follow-up question on the cross border. I guess when we think about Omicron, I know there's been a small impact, but I'm just curious if there's any learnings from it. Do you feel like the resiliency of the consumer And obviously the tools that we have put us in a better position than what where we were maybe when you guys provided your expectations, understanding your expectations haven't changed.

Speaker 7

And then I'm just curious as we've seen the U. S. Inbound travel improve, were there any learnings from that? Thanks.

Speaker 2

All right, Sanjay. I'll kick that off. So clearly, there have been learnings and there have been learnings across the whole industry. You may have followed some of the airlines during the early season. This whole thought about that the Time period between a surge, a case surge and how bookings are coming back is narrowing.

Speaker 2

So the first learning is that consumers just become more adaptable. I said that earlier, it's not just consumers, it's actually businesses, consumers and governments. Now governments have also learned and governments have learned in terms of how broad based social distancing measures and quarantine rules and the likes are. And those are much more targeted these days. As I said, more borders stayed open.

Speaker 2

When the U. S. Opened in November, surges were going on in Europe and there are no entry hurdles at this point. I said I'm traveling to Europe. There's no hurdle at all.

Speaker 2

It's just pretty easy to get back. So, I think the combination of vaccination rates going up, learnings in governments and so forth makes Much more benign mix to deal with whatever might be coming there. So that is a significant assumption that we took as we look rest of the year. You also see that more routes are being opened, more people Want to get out whenever they can. So there's a desire and there's their ability to go out, I think, together make the kind of right package for us

Speaker 3

that gets us pretty positive. And Sanjay, I'll just add to what Michael I think you'll read our November Investment Committee inbound cross border travel corridors represented mass of 2019 levels. This is the data we shared with you at the ICM. Well, just as an update, which Michael talked about U. S, U.

Speaker 3

K, Canada And the same metric, which is the U. S, UK and Canada in Q4 is now at 70% of 2019 level. So that's just an expression of our confidence about how when people can travel, they will travel.

Speaker 2

And I just want to add one more point. So these are some I shared some of the macro learnings. Sachin just talked about the upside potential. Now taking both of that, what we have learned from our customers that are active in the travel space is that everybody is of the same opinion and hence leaning into the travel sector Winning more co brands, engaging consumers so that they book with our partners versus somebody else, All that is going on. You see the whole range of wins.

Speaker 2

The JetBlue renewal was one of the more recent one, the Aeroplan launch with Chase, IAG last year, etcetera, etcetera. So there's a lot of learnings by the travel industry Co Brand Programs worthwhile, which we like a lot.

Speaker 3

That's perfect. I have my fingers crossed. Thanks.

Speaker 2

Yes. Very good.

Operator

Your next question will come from Tien Tsin Huang with JPMorgan.

Speaker 8

Thank you. Good morning, Michael and Sachin. I wanted to ask about just well, it sounds like your macro view hasn't changed too much from what you guys talked About ICM aside from some of the near term travel headwinds, but just want to check your 1Q outlook here for high teens revenue growth when it looks like your January trends Growing above that, nicely above that. Any callouts there? Or is that just conservatism?

Speaker 2

So, look, I mean, Tien Tsin, here's what I I think in

Speaker 3

what I shared with you in terms of our Q1, the headwind which is coming in from the strengthening U. S. Dollar, which I kind of talked about what our estimate around that is. So that would be one kind of color. But other than that, all we're kind of expressing is where we're seeing mass.

Speaker 3

So really nothing else going on there. I will emphasize one more time, what you're seeing in terms of the 1st 3 weeks of January index package 2019 has got a compounding effect and that you have to take into consideration when you're checking when you're looking at the sequential trends, which is why I was giving that additional color Around what the impact of Omicron was adjusted for the compounding effect on switch volume, switch transactions and cross border.

Speaker 8

Understood. Thank you.

Operator

Your next question will come from David Togut with Evercore ISI.

Speaker 9

Thank you. Good morning. What are your expectations this year for the pace of account to account payments rollout in Europe under Open Banking? And how do you see this affecting Credit and debit card growth in Europe. And as a follow-up, would appreciate your perspective on Amazon's very public negotiation with Visa mass over credit card acceptance at Amazon UK and whether this reflects more payment options, for example, to account or is this a one off negotiation between 2 corporates?

Speaker 2

All right. Let me David, I'll end with that. So account to account in Europe, when you look over the mass years in Europe. It's been relatively slow placed in terms of consumer adoption and rollout. We have invested, we're heavily invested across that with IR on the Open Banking side of account to account, mass with VocaLink.

Speaker 2

So we're deep in the space. We like generally like what we see in terms of direction. Take off. I think it's I would call it paced. So

Speaker 3

that's the

Speaker 2

first thing I would say. Initiatives like EPI, you look at that and say their initial focus is actually on the card side and they're thinking out account to account in the longer run that reflects the same that I So continued significant opportunity for cards in Europe, but we see the long term growth opportunity in account to account. And We've kind of covered our basis there. And with our open banking investments and our initial use cases there, particularly in the UK, I think we can be pretty optimistic about that. Our partnership with Tesco and Lloyd's is looking very positive.

Speaker 2

So your question around Amazon, that's fundamentally a question for Visa, I would say. And for Amazon, we have Seeing these kind of negotiations in the public domain now and then over the years relatively short list and were resolved. This particular news did not involve us at all. We have a strong and longstanding relationship with Amazon and we agree mass That consumer choice matters. That's why we have a multi rail strategy and we're going to continue to work with Amazon delivering a whole differentiated set of products.

Speaker 2

So nothing particularly to worry about from our perspective.

Speaker 3

Thank you.

Operator

Your next question will come from Bryan Keane with Deutsche Bank.

Speaker 10

Hi, guys. Good morning. Just two quick ones for Sachin. Just looking at switch volume on the January month to date in the U. S.

Speaker 10

At 15%, that's down a little bit from where it was running before. I don't know if that's just a anniversarying of some of the comps. I know The 3 year percentage still increased to 139%, but just thinking about on a year over year basis that 15% anything to call out And then secondly on rebates and incentives, any guidance you can give us for fiscal year 2022 as a growth rate or as a percentage of revenue? Thanks.

Speaker 3

Sure, Brian. On the first point, you're referring to the 15% year over year growth in the 1st few weeks of January and you're looking at the sequential trends there. Well, that is a tougher comp issue. And this goes back to the impact of the economic stimulus, which was enabling better spending back In the comparable period last year and that's what you're seeing happen there. So that's kind of the answer to that first part of the question.

Speaker 3

On your second point, look, I The whole rebates and incentives thing, I need to just emphasize one more time. Look, I know people are focused on the competitive environment. Mass. Trust us, we too are because we operate in that competitive environment and we want to make sure that we compete effectively with our products, capabilities, services, whatever the case might be. We have not seen a meaningful shift in the competitive environment relative to what we've been used to operating in So that's kind of just to level set where we are.

Speaker 3

But specifically to your question on previous incentives, it's dependent on the timing of deals and how the volume and mix plays out through the year. In Q1, we expect previous incentives as a percentage of growth to be similar to Q4. That's kind of the extent and all of this is contemplated in what I've shared with you on Our full year thoughts as well as on Q1.

Speaker 10

Got it. Thanks so much.

Speaker 2

Sure.

Operator

Your next question will come from Ramsey El Assal with Barclays.

Speaker 10

Hi and thanks for taking my question this morning. I wanted to ask about supply chain pressure and whether you're seeing any changes and with that pressure abating and how much of that might be contemplated in your full year guidance? And separately, I just was wondering If you could help us contextualize your exposure to Russia and what we should expect there if sanctions in fact tighten due to political unrest in Ukraine potential.

Speaker 2

All right. Yes, Ramsey, let me start with the supply chain and touch on Russia quickly. Supply chain pressures are clearly there. You're looking at chip shortages. There are also all sorts of things affecting the supply chain.

Speaker 2

We continue to believe that these are rather short lived as the supply chain actually balances out. So that's the first thing I would say. So there's not a huge assumption in our outlook around that. What we've also seen is, particularly through the holiday season, pretty holiday pretty significant holiday spending, positive season, And people spend what they can spend on. So if you can't buy something, they buy something else.

Speaker 2

So we've seen shifts in categories. So from that perspective, again, the pent up demand is an important aspect here. On Russia, very, very early to tell How this is going to play out is certainly was one of the points that I referred to earlier, geopolitical uncertainties that we have to keep in focus. We have seen sanctions applied mass in previous years, and we basically managed through that. We'll have to see what it is.

Speaker 2

Russia is a substantial and important and strategically important market for us. We'll have to see how that plays out. All right.

Speaker 10

Thanks so much.

Speaker 2

Thanks.

Operator

Your next question will come from Dan Dolev with Mizuho.

Speaker 11

Hey, good morning. Thanks for taking my question. There was a question before on overall yields. I want to ask about domestic assessment Specifically, if I look at Q4, I think you're running at about 13.1 basis points. Historically, the number was higher, Closer to 14.

Speaker 11

Is there anything to call out on that front? Thank you very much.

Speaker 3

Dan, look, I mean, on domestic assessment, I think what you've I mean, what we've seen is that typically in Q4, we see the yield of domestic assessments to TV actually drop off a little bit. That's just what we have historically seen. There's a bunch of moving parts which are going on in that and really nothing unusual to call out out there. Mass. The trajectory of what we've seen historically still holds true on a going forward basis.

Speaker 11

Got it. Thank you so much.

Operator

Your next question will come from mashi Orenbuch with Credit Suisse.

Speaker 12

Great, thanks. And You did discuss the account to account side of things a little bit. And I'm just but I'm just wondering given how often this comes up in discussions with investors. We've seen some issues that some of the domestic players have had from a regulatory standpoint. Any thoughts about how that could affect kind of the evolution of that product advantages perhaps that being part of Mastercard might be for Tink and Aya and other kind of thoughts about just the growth of that both in Europe and the U.

Speaker 12

S? Thanks.

Speaker 2

Right. Moshe, excellent question. We see there is clearly an interest of regulators in new forms of payment. Regulators are always keen on security, on data protection and consumer protection that is always in focus. We have most recently seen this with an interest in buy now, okay, later.

Speaker 2

U. K. Regulator is doing a consultation. Various regulators have shown interest to regulate the space. In account to account, you should expect something similar.

Speaker 2

We do know that from VocaLink and Pay by account in the U. K, That is very much in focus. And I think it differentiates an established player like us to basically come in. We have very clear data principles. We have we don't sell data to anybody.

Speaker 2

We believe in the consumer strong consumer consent, the likes and the likes and all of that is codified in the Mastercard franchise. So a company that goes beyond just being a fintech and providing a connection and getting money from A to B, but doing it In an organized fashion with very clear rules that people sign up that partner with us, I think there's going to be a differentiator. And I'll just add

Speaker 3

to what Michael I think you're going to remember that when we talked about what we were doing in the open banking space, we were very deliberate about how we went about our activities there, particularly as it relates to How we got data from the banks and that was all through APIs has been our philosophy. And the idea being You got to do it in the right way. You cannot do screen scraping. You should be doing it through APIs, not only because it's the right thing to do from a safety and security standpoint, But also the data elements you can actually get by virtue of doing it in that manner, help you create a much more sustainable long term product, Which you can offer. So very much part and parcel of what the philosophy has been from the get go in this space for us.

Speaker 12

Great. Thank you, Michael.

Speaker 3

Thank you.

Operator

Your next question will come from Dave Koning with Baird.

Speaker 13

Yes. Hey, guys. Thank you. And I noticed U. S.

Speaker 13

Average ticket size in Q4, I think it was only 2%, the prior three quarters up 6% to 7%. So you would think with inflation it would be accelerating not decelerating. Is that just consumers Returning to card present, maybe lower transaction sizes or just splitting transactions? And what's the impact? That seems positive to you, right?

Speaker 3

Yes. Dave, again, I want to make sure I got the question, but what we've observed if you look at our trends for how Switch volume and switch transactions are trending. You'll see effectively that the improvement quarter over quarter in switch volumes from 131 1% of 2019 to 136 percent of 2019 is a 5 point improvement compared to switch transactions, which have improved from 131 to 132. That should signal to you that there is a higher ticket size, which is happening, which you would expect because as people get out and travel more, They do so that's higher ticket in general. They do it on credit products, which are higher ticket size as also there is As e commerce happens, that happens to be higher.

Speaker 3

So you've seen that come through in the delta on a sequential basis.

Speaker 13

Yes. And I was referring more towards it. It looked like it's Decelerating in the U. S, which seems positive. It seems good to have splitting transactions possibly happening is what it just seems like or different pipes, Amal.

Speaker 3

Yes. No, I wouldn't see anything materially different in our U. S. Trends than what I just shared globally in terms of what we're seeing from marketplace standpoint.

Speaker 2

All right. Thank you.

Operator

Your next question will come from Andrew Jeffrey with Truist Securities.

Speaker 6

Hi, good morning everybody. One of the more discussed topics in the market generally today is inflation. I wonder if you could just touch on, if we do see persistent embedded global inflation, whether or not that's positive for your business from a volume and or yield standpoint?

Speaker 2

Brian, Andrew. So definitely a significantly discussed topic, all sorts of views on it. So here's our take. First of all, where it happens. We generally distinguish to look at it.

Speaker 2

1st at the macro level, what What's the policymakers response? We heard the U. S. Policymakers talk about this yesterday. Then there's broader impacts that go beyond our immediate business, wage growth.

Speaker 2

How does all of this in the end affect the consumer's ability to So there's a lot of macro things to consider. On the micro side, basically it's not homogeneous. So inflation is affecting our business in different way than it would be the overall CPI. So if you have inflation expecting rent, while it's generally not running The impact that inflation has, it could be negative on consumers, on businesses and so forth. There is an impact on GDV, if it's moderate inflation that Jet would be showing in our numbers.

Speaker 6

Okay. I assume that's been taken into account your guidance.

Speaker 14

Right.

Speaker 2

Appreciate it. Thanks.

Speaker 3

Thank you.

Operator

Your next question will come from Jamie Friedman with Susquehanna.

Speaker 15

Hi. Thank you for taking my question. I just wanted to ask about the difference between other revenue and services revenue. I know services did great, up 28%, 25% for the year, 28% for the quarter. But other actually grew a little bit faster.

Speaker 15

So, Sachin, maybe if you could remind us What the Nuance difference is? I know one's a subset of the other.

Speaker 3

Yes. So in other revenue, we have a bunch of our services revenue But there's other stuff going on in that as well. So you've got, for example, some of our VocaLink revenue sits The Nets acquisition would sit in there. Some of the and so if you're looking at the other revenue growth rate of 30%, remember 9 points of that growth came from acquisitions, Which is just basically a lapping effect of the fact that we didn't have those acquisitions last year at this time and we do at this point in time. So on services, services continues to grow very nicely.

Speaker 3

A large part of that sits in other revenue. Some of it sits in transaction processing. The growth you're seeing in other revenue is being is a combination of strong services growth Plus some of the acquisitions which you're seeing come through in that growth rate there.

Speaker 2

Mass.

Speaker 3

Sure.

Operator

Your next question will come from George Mihalos with Cowen.

Speaker 14

Great. Thanks for taking my questions guys. Just very quickly, Sachin, I'm curious as you look through the weekly trends year to date here through January, are you A lot of variability meaning are you seeing sort of a bigger pickup as we go through the month? And then somewhat related to that, if you could talk a little bit about what you're seeing in the

Speaker 3

rest of the world. Sorry, what we're seeing in the rest of the world did you say? Rest of the world

Speaker 14

versus U. S. I mean, it looks like if I look at your volumes mass for credit at least, the worldwide volume is now starting to accelerate a little bit and pick up. So I'm just wondering Starting to see that really

Speaker 3

come into the numbers over the last couple of weeks. Yes. Okay. So I got you, Christian. So look, I mean, in terms of weekly trends, they bounce around, right?

Speaker 3

I mean, there's so much which goes on in the nature of weekly trends. It varies depending on the month in question. I'm not seeing anything which is highly unusual in terms of What we're sharing with you on our 1st 3 weeks of January in terms of weekly trends. But there is volatility week over week and you would expect that to be the case. And sometimes it's a comp issue as well.

Speaker 3

So you got to remember that you've got to kind of go back to what you're comparing the comp to and to see if there's differences in growth rates, which is emanating from that. When we look at spend levels, that's kind of generally the case. As it relates to rest of the world versus the U. S, look, the U. S.

Speaker 3

On a growth rate basis has a tougher This year in the 1st 3 weeks of January, just by virtue of the fact that we had a whole bunch come in from the economic stimulus last year. Conversely, in the rest of the world, particularly in Europe, right, when you really think about what's going on there, There was a lockdown in Europe, which took place last year in January. So you have an easier comp on Europe from a growth rate standpoint. So you have to factor those in when you're looking at the growth rates there.

Speaker 1

I think we have time for just one final question.

Operator

And we'll take our final question from Jason Kupferberg with Bank of America.

Speaker 16

Thanks guys. Just wanted to ask a question about how we should think about quarterly cadence here of net revenue growth. You told us about Q1, it sounds like omicron and FX and rebates are somewhat of a headwind there. Your year over year comp obviously is much harder in the second quarter than the first quarter, but arguably you won't really have omicron headwind at that point. So just wanted to try and get things calibrated from a modeling standpoint, at least through the first half of the year directionally as we work towards the full year target.

Speaker 3

Yes, Jason. So here's what I'd say, obviously, we've given you some thoughts Q1 and for the full year at this point to get you started. We'll talk a little bit more about other quarters as the year progresses. But just stepping back a bit, as we said in our remarks, We expect that cross border travel recovery will resume as the surge passes and that will reach the cross border travel back to the 2019 levels by the end of 2022. Look, we continue to be very active on the deal front and So that needs to be taken into account.

Speaker 3

But overall, here's what I would say is that the pace of cross border travel recovery will be a key determinant as to how that cadence mass and more to come as we go through the year. I'll share a little bit more about what we think about ensuing quarters. But right now, that's the extent of what I'm going to share with

Speaker 1

Great. Thanks, Sachin. Michael, any final comments?

Speaker 2

Yes. I was hoping the last question would be for me. Anyway, so thank you for all your questions. As you see, we're optimistic with the outlook. We reaffirmed our 3 year guidance that we gave you in November.

Speaker 2

I don't think there's any need to repeat anything we said. I'd just like to thank you for your support. And as usual, a call out for people that make all this happen. Thank you and speak to you next quarter.

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Earnings Conference Call
Mastercard Q4 2021
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