Mastercard Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2022

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the First Quarter 2022 Mastercard Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Warren Kneeshaw, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Jirmairita. Good morning, everyone, and thank you for joining us for our Q1 2022 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 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,

Speaker 2

the release was furnished with

Speaker 1

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 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. Actual performance could differ materially from these forward looking statements.

Speaker 1

Information about the factors that could affect future performance are summarized at the end of the earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I'll now turn the call over to our Chief Executive Officer, Mike Miebach.

Speaker 2

Thank you, Warren. Good morning, everyone. Russia's invasion of Ukraine marked a somber start to 2022 The war returned to Europe for the first time in decades. Given these extraordinary circumstances, we decided to suspend our business operations in Russia. We did not take this decision lightly given that Mastercard has operated in Russia for more than 25 years.

Speaker 2

We are now focused on the orderly of business operations in Russia and supporting the well-being of our employees and their families across

Speaker 3

the whole

Speaker 2

region. Even in the context of this challenging geopolitical environment, we're off to a strong start in 2022. We delivered robust revenue and earnings growth with further improvement in our underlying operating metrics, notably in cross border travel. Quarter 1 adjusted net revenues were up 27% and adjusted operating income up 40% versus a year ago on a non GAAP currency neutral basis. On the macroeconomic front, consumer spending remains strong, particularly as economies across the globe continue to reopen and pandemic related restrictions are lifted.

Speaker 2

Labor markets are firm with low unemployment rates and rising wages. Weighing against this healthy backdrop are a number of factors that bear monitoring, including inflationary pressures, supply chain constraints, geopolitical uncertainties and COVID infection rates. We're monitoring these developments, including the Cisco, Monetary, Public Health Care and other policy responses. Let's look at this from a geographic standpoint. U.

Speaker 2

S. Retail spending remains healthy aided in part by the buildup of excess savings during the pandemic. According to our quarter 1 spending pulse report, which is based on all payment types, including cash and check, U. S. Retail sales, ex auto, ex gas, were up 4.7% versus a year ago.

Speaker 2

In Europe, spending trends are positive, although the invasion of Ukraine has introduced risks to economic growth looking ahead. Growth in Latin America continues to moderate following a strong rebound in 2021. Asia has generally lacked the recovery of other regions. Several countries relaxing COVID related restrictions, while others are facing stronger measures. Asia continues to have significant upside potential.

Speaker 2

Looking at Mastercard spending trends. We continue to see strong growth. Domestic switched volumes of strength across a broad range of including retail, utilities and professional spend. We also saw strong growth in travel and entertainment, including spending with airlines, Travel Agencies, Lodging and Restaurants. In terms of cross border, where the growth was particularly strong, the recovery continued this quarter, led by travel.

Speaker 2

Cross border travel reached 2019 levels as of March for the first time since the pandemic began. Geographically, the cross border recovery has been broad based with improvement across all regions. Cross border card not present ex travel continues to be strong. Our strategy is designed to enable and capitalize on these trends and execute against our 3 key strategic priorities: 1, 2, extending our services and 3, embracing new networks. Here's an update on how we're progressing against each of those.

Speaker 2

First, we're expanding in payments by continuing to grow card payments and leading into innovation and new payment technologies to catch up other prioritized payment We're driving growth in card payments through new consumer, small business, co brand and FinTech wins. On the consumer and small business front, I'm excited to announce an enhanced partnership with Wells Fargo, which includes several new elements. Wells Fargo now issued Mastercard Small Business Credit Cards and for the first time in almost a decade, consumer proprietary and cobrand credit products. We're also excited to announce that we have deepened our relationship with our long standing partner, Capital One. In addition to renewing our existing business, we will also be there issuing network for a larger number of new originations across both their consumer and small business products.

Speaker 2

Further on the small business front, we are expanding our small business portfolio with First National Bank of Omaha. We're also partnering with and Verizon to launch a new Verizon Business Mastercard targeting Verizon Small Business customers. In total, these partnerships will help us continue growing our U. S. Small business market share.

Speaker 2

Outside the U. S, we're driving commercial card growth through new partnerships with leading B2B tech companies like Clara. We will be flipping Clara's business portfolio in Mexico to Mastercard and are working with them to launch We have renewed and expanded our exclusive partnership with American Airlines, 1 of the largest co brand programs in the United States. American will continue to leverage our capabilities, including Session M, and will participate in our Start Pass with Barclays and International Airline Group loyalty. Outside of travel, we've expanded our relationships with leading retailers, including a new co brand program with Victoria's Secret and a renewal of our Ulta Beauty co brand offering, both in partnership with RED Financial.

Speaker 2

We're also continuing to advance our leadership in the digital and fintech space through new product launches and new We're partnering with BCA Digital, the digital banking arm of the largest private bank in Indonesia, to launch a digital first Mastercard debit product catering to millennials. In Latin America, we signed a regional partnership with global payments processing platform, Galileo. The partnership establishes to execute against many of the large portfolio migrations that are in flight. In Europe, our consulting teams are engaging with our partners at Santander, NetWest and Deutsche Bank to ensure a smooth and timely transition and to identify opportunities to optimize those portfolios. Santander is the bulk of the way through a 9,000,000 card migration and we expect it to be complete by early next year.

Speaker 2

Our Net West commenced the issuance of Mastercard at the end of last year and plans to migrate their entire €16,000,000 card portfolio by the middle of 2023. Deutsche Bank's €10,000,000 consumer and commercial credit and debit cards will be reissued as Mastercard branded cards with a credit migration starting Q4 of this year and a debit migration commencing early next year. Similarly, our team in the U. S. Is supporting key migrations, including Gap Inc, Merrick Bank and All the migrations are on track with Gap Inc.

Speaker 2

Scheduled to be completed this summer. We're also expanding in payments by leaning into payments innovation in areas like installments and cryptocurrencies. Here are a few examples. Our open fleet Mastercard Installments program has been very well received and is progressing according to plan. Remember, Mastercard installment is built into our network, making Buy Now, Pay Later available to millions of consumers and merchants worldwide.

Speaker 2

We continue to add a wide array of new lender and fintech partners, including Amount, Reserve, I2C, Lithic and Southern Bank. In this quarter, we announced several merchant partners who are excited to support Mastercard installments, including Bass Pro Shops and Cabela's, HR and Block, Saks Fifth Avenue and Walgreens. Those customers will begin offering Mastercard installments to consumers this quarter, and international expansion is planned for later And we continue to build solutions to support the crypto economy with a principled approach focused on 3 key areas. 1st, Helping consumers easily and safely purchase cryptocurrencies and NFTs, in addition, we are enabling consumers to and their crypto holdings on card and cashing out their crypto wallets via Mastercard Send 2nd, Providing identity, cyber and consulting services for market participants, including engaging with central banks as they design and develop central bank digital currencies. 3rd, preparing our core network to directly support digital currencies.

Speaker 2

We're making substantial progress in each of these areas. This quarter, the Gemini Mastercard, which offers crypto rewards, went live across the U. S. We also partnered with Nexo to launch a new including banks in Europe and Opera, Investo and Bello in Latin America. On the crypto services front, MercadoLibre will be leveraging CipherTrace's AI and cyber capabilities to bring security and trust to their digital wallet in Brazil.

Speaker 2

Now turning to our 2nd strategic priority, services. As I've noted before, our services support and differentiate our core products and have played a critical enabling many of the wins I mentioned. We also continue to extend our services across multiple growth vectors Earlier this month, we completed our acquisition of Dynamic Yield. Now that the transaction is closed, we will combine Dynamic Yield's personalization platform and decision engine with our Session and loyalty platform and our test and learn experimentation software. The result will be a truly differentiated consumer engagement and loyalty hub for our customers.

Speaker 2

2nd, we announced that we're expanding our consulting services into 3 new practices dedicated to Open Banking and data, crypto and digital currencies and ESG. We've seen increased customer demand and a growing portfolio of successful engagements in these areas. For example, we are supporting Handelsbanken and Intesa Sanpaolo design programs that advance their ESG priorities, helping Wirex explore innovations in crypto. And finally, we're expanding the breadth of our customer base and deploying our capabilities to solve for a wider range of use cases. For example, we deployed our test and learn capabilities to help tailored brands optimize retail operations and improve marketing efficiency for their leading menswear brands.

Speaker 2

We deployed our FantaCare capabilities with Santander in Spain to help streamline dispute resolutions and prove the customer experience. Beyond expanding in payments and extending in services, our 3rd key priority area is embracing new networks. Our current focus is on 2 areas, Open Banking and Digital Identity. Our Open Banking and multi rail strategies are converging, enabling us to leverage our unique set of assets to address new flows in verticals like rent payments. For rent payments, the risk of ACH returns due to insufficient funds is a significant pain point for both renters and landlords.

Speaker 2

The Built Payment Alliance, a collection of more than 2,000,000 rental homes, will be one of the first fintech partners to launch these We plan to expand these solutions across a broad range of bill payment verticals.

Speaker 3

In addition,

Speaker 2

we continue to extend our Open Banking reach with Zenicity and IR by penetrating new verticals and establishing new partnerships. We continue to enhance our capabilities at the mortgage vertical and are now expanding into the auto lending vertical. We're leading the way in terms of provisioning permission based income, employment and asset verification information. And we which will enable direct API connectivity to thousands of FIs in the United States. In the digital identity space, Acarta continued its strong performance in quarter 1, securing deals with financial services companies, including MoneyLion and several leading buy now pay later providers.

Speaker 2

In addition, we recently joined forces with Microsoft on a collaboration to improve extend our value before and after the payment transaction and into new digital transactions. These are attractive and growing opportunities, and we are uniquely position to be successful in both. In summary, our business fundamentals remain strong and we delivered robust revenue and earnings growth again This quarter, which also reflects our disciplined approach to expense management. We're executing against our strategic priorities, notably expanding our With key issuers. In addition, we've worked hard to expand our travel oriented portfolios, which positions us well to capitalize on the strong recovery in cross and Travel.

Speaker 2

And last but not least, we want to reflect on what is most important: the safety and well-being of our employees and the families who have impacted by the war. Our thoughts are with them and the people of Ukraine. Sachin, over to you.

Speaker 3

Thanks, Michael. 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 27%, reflecting the continued execution of our strategy and the ongoing recovery in spending. Acquisitions contributed 2 PPT to this group. These revenues were above expectation, primarily due to stronger than expected Cross border and domestic volumes, favorable cross border mix and FX related revenues.

Speaker 3

Operating expenses increased 13%, including a 6 ppt increase from acquisitions. Operating income was up 40%, which includes a 1 ppt decrease related to acquisitions. Net income was up 61%, which includes a 20 ppt benefit due to the recognition of a onetime discrete tax benefit related to a U. S. Tax regulation published in the current period and a 1 ppt decrease from acquisitions.

Speaker 3

EPS was up 65% year over year to $2.76 which includes a $0.36 contribution from the one time discrete tax benefit and a $0.05 contribution from share repurchases. During the quarter, we repurchased $2,400,000,000 worth of stock and an additional 599,000,000 through April 25, 2022. So let's turn to Page 4, where you can see the operational metrics for the Q1. Worldwide gross dollar volume or GDP increased by 17% year over year on a local currency basis. Of note, Data related to sanctioned Russian banks was not reported to us and hence such amounts are not included in Q1 2022.

Speaker 3

In the U. S, GDV increased by 14% with credit growth of 31% and debit growth of 1%, reflecting the recovery of credit spending on travel and the lapping of stimulus. Outside of the U. S, volume increased 19% with credit growth of 20% and debit growth of 18%. Cross border volume was up 53% globally for the quarter With intra euro cross border volumes up 50% and other cross border volumes up 56%, reflecting continued improvement in travel related cross border.

Speaker 3

For the first time since the onset of the pandemic, cross border volume was above 2019 levels for all regions and cross border travel was above 2019 levels for the first time in March. Turning now to Page 5, Switched transactions grew Grew 22% year over year in Q1 and were at 150% of 2019 levels. Card Present and Card Not Present growth rates remain strong. Card Present growth was aided in part by increases in contactless penetration in several regions. With respect to card counts, as a result of the suspension of our business operations in Russia, cards issued by Russian banks are no longer active on our network and are therefore excluded from our card counts this quarter.

Speaker 3

Accordingly, card growth was lower at 4% this quarter. If you exclude Russian issued cards from current and prior years, card growth would have been 9%. Globally, there are 2,900,000,000 Mastercard and Maestro branded cards issued. Now let's turn to Page 6 for the highlights on the revenue line items, again described on The increase in net revenue of 27% was primarily driven by domestic and cross border transaction and volume growth as well as growth in services, partially offset by growth in rebates and incentives. Acquisitions contributed approximately 2 ppt to this growth.

Speaker 3

I'd also like to point out that in the Q1, the suspension of business operations in Russia had a minimal impact to the overall growth rate of the company as the loss of volume was offset by a one time benefit of lower rebates and incentives due to the absence of a customer incentive agreement renewal in Russia. Looking quickly at the individual revenue line items. Domestic assessments were up 21%, while worldwide GDV grew 17%. The poor PBT difference is primarily due to unreported volumes from Russian related sanctioned customers and a favorable mix. Cross quarter volume fees increased 57%, while cross quarter volumes increased 53%, both ahead of expectations.

Speaker 3

The full PPD 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 27%, while switch transactions grew 22%. The 5 ppt difference is primarily due to favorable cross for the mix and FX related revenues. Other revenues were up 20%, including a 7 ppt contribution from acquisitions. The remaining growth was driven by our Cyber Intelligence and Data and Services solutions.

Speaker 3

Finally, rebates and incentives were up 30%, reflecting the Strong growth in volumes and transactions and new and renewed deal activity. As a percentage of gross revenues, rebates and incentives were lower than expected, primarily Due to the absence of a planned customer incentive agreement renewal in Russia, a higher mix of cross border revenues and the timing of new and renewed deals. Moving to Page 7, you can see that on a currency neutral basis, total operating expenses increased 13%, including a 6 ppt impact from acquisitions. Excluding acquisitions, operating expenses grew 7%, 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 to Page 8, let's discuss the operating metrics for the 1st 3 weeks of April.

Speaker 3

For your reference, to help you understand the trends in the business ex Russia, we We've included an appendix later in this deck to show all the data points from the schedule if excluded activity from Russian issued cards from current and prior periods. Going through the metrics in turn, starting with Switch volumes for the 1st 3 weeks of April, We grew 23% year over year, down 4 ppt versus Q1, primarily due to the cessation of activities in Russia. If you exclude Russia related volumes from the current and prior periods, Switch volumes grew 27%, down 1 ppt versus Q1. Switch transactions grew 14% year over year through the 1st 3 weeks of April, down 8 ppt from Q1, again driven primarily by the absence of Russia related transactions. Of note, Russia has a relatively low average ticket size, which results in a larger relative impact to this metric.

Speaker 3

If you exclude Russia related transactions from the current and prior periods, Switch transactions grew by 25% year over year, up 1 ppt versus Q1. Overall, cross border volumes through the 1st 3 weeks of April grew 60% year over year, up 7 ppt versus Q1. Excluding Russia from the current and prior periods, cross border volumes through the same period grew 65% year over year, up 13 ppg versus Q1. Since the end of January, cross border travel has rebounded quickly as border restrictions continue to be lifted and we distance ourselves from Omicron. In the 1st 3 weeks of April, cross border travel was up 179% year over year, up 38 ppt versus Q1.

Speaker 3

Crosswater's car not present, excluding travel, was up 5% year over year in April, The decrease of ACBT compared to Q1, reflecting in part the ramping of a strong comparable period year ago. One point to emphasize is cross border travel is now above pre pandemic levels at 110% of 20 19's levels. Turning to Page 9, I want to share our thoughts on the remainder of 2022. Let me start by saying that our business fundamentals remain strong as we continue to grow pandemic related restrictions are lifted. Having said this, we are monitoring a number of factors, including inflationary pressures, supply chain constraints, geopolitical uncertainties and COVID infection rates.

Speaker 3

At this stage, we have not seen any significant impact on these and consumer spending. Cross border travel is recovering rapidly as border restrictions ease. This is occurring faster than our earlier expectations. We are well positioned to capitalize on this growth with our travel oriented portfolios. Weighing against these positive trends are the impacts of the war in Ukraine and the suspension of our business operations in Russia.

Speaker 3

So now taking all of this into account, we continue to expect net revenues for Full year 2022 to grow at the high end of a high teens rate on a currency neutral basis, excluding acquisitions and special items. So essentially, we are maintaining our growth expectations in the same range as the strong cross border travel recovery and strengthened consumer spending help mitigate the loss of sizable revenues in Russia and Ukraine. Acquisitions are forecasted to add about 1 ppt to this growth, Well, foreign exchange is expected to be a headwind of 3 to 4 ppt for the year, primarily due to the strengthening of the U. S. Dollar relative to the euro.

Speaker 3

In terms of operating expenses, we are reducing our forecast for the year to reflect cost savings related to Russia. For the year, we expect operating expenses to grow at a high single digit rate on a currency neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 4 to 5 ppt to this growth, while foreign exchange is expected to be a tailwind approximately 2 to 3 tpt for the year. With respect to the 2nd quarter, year over year net revenue is expected to grow at the high end of a high teens rate, again on a currency neutral basis, excluding acquisitions. This reflects, firstly, strong consumer spending, including continued improvement in cross border travel spending relative to 2019 secondly, the discontinuation of recent revenues from Russia and a sequential reduction in revenues related to Ukraine and finally, The lapping of a strong year ago quarter that was aided by fiscal stimulus and the easing of pandemic related restrictions as vaccination programs rolled out.

Speaker 3

Acquisitions are forecast to add about 1 ppt to this growth, while foreign exchange is expected to be a headwind of approximately 5 ppt to 6 ppt for the quarter. From an operating expense standpoint, we expect Q2 operating expenses to grow at a high single digit rate versus a year ago on a currency neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 4 to 5 ppt to this growth, including the acquisition of Dynamic Yield, which we are pleased to have just closed. Foreign exchange is expected to be a tailwind of approximately 3 to 4 ppt for the quarter. Other items to keep in mind.

Speaker 3

On the other income and expense line, we are at an expense run rate of approximately $115,000,000 per quarter given the prevailing interest rates and our recent debt issuance. 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 18% to 19% for each of the remaining quarters of the fiscal year based on the current geographic mix of our business. Before closing out, I want to briefly comment on our 3 year performance objectives for 2022 to 2024. Clearly, the elimination of Russia related revenues and the reduction of those from Ukraine create a headwind to achieving these objectives.

Speaker 3

If this were to continue, it would result in a headwind of approximately 2 ppt to our net revenue cable. Having said this, we are off to a strong start in 2022 with the recovery of cross border travel ahead of expectations as I previously mentioned. We remain focused on building long term sustainable growth for the company. And net net, it is really too early to adjust our 3 year performance objectives as we work to offset some or all of these headwinds. And with that, I will turn the call back over to Warren.

Speaker 1

Thank you, Sachin. Jaimarya, we are now ready for the question and answer session.

Operator

Your first question will come from the line of Sanjay Sakhrani with KBW. Please

Speaker 1

I've got a question on inflation. I know The data suggests the consumer remains in good shape. As we look across trends in the verticals as such, are you seeing anything that sort of You're seeing some kind of negative impact on consumer spending patterns as a result of inflation? I know we heard some comments on e commerce. Maybe you could talk about that.

Speaker 2

Sanjay, thanks for your question. So on the inflation side, as Sachin mentioned earlier, we have not Anything yet in terms of changing consumer spending behaviors, but what we're seeing is in terms of the impact on Vertical mix and so forth, there has been a 1% increase in our switch volume that's related to gas price increases. We're seeing some shifts in the airline. That is again under an inflationary pressure there from ticket prices perspective. So we'll have to see where it goes going forward.

Speaker 2

Fundamentally, where I stand on this is the push by consumers into the digital space. They learn these habits. They're online. All that will continue, and we'll see where the underlying prices go. And the end comes back to what we've been saying all along.

Speaker 2

There's macro considerations in each country that has to be considered here, what is monetary fiscal policy and then there is the Micro aspects of the different verticals, which ones of those are carded, which ones we would see, which ones we wouldn't see. And could there be a crowding out effect of Rents or gas prices, particularly in Europe, yes, that might be, but that's not something we can tell yet. Thank you.

Operator

Your next question will come from the line of Harshita Rawat with Bernstein. Please proceed with your question.

Speaker 4

Hi, good morning. Michael Sachin, I want to ask about gross budget travel, very strong recovery here. Is there a scenario where even if let's say China The growth of Asia don't come back meaningfully. You can still kind of get back to this like normalized 30% to 40% kind of levels above 2019, which The pandemic, because there's so much pent up demand or does Asia and China need to come back to the next legacy of the further recovery? And Sachin, just a follow-up for you.

Speaker 4

Can you just talk about the sensitivity of your revenue guidance, should macro consumer spending deteriorate from Thanks.

Speaker 3

Thanks, Safita. So first, on your question on cross border, you're absolutely right. Cross border travel has actually come back stronger than our expectations, and They continues to be pent up demand. And we in terms of how we're thinking about our guidance, we've kind of built in That improving recovery in cross border travel on a going forward basis as well. So I just want to kind of get that out there.

Speaker 3

But to give you a little bit more color, right, On cross border. So cross border volumes are above 2019 levels across all regions for the first time. I would tell you that The top 20 destinations, which represented approximately 70% of our total cross border travel pre pandemic And we're at 70% of 2019 levels when we discussed this at our Investor Community Meeting, are now at 85% in Q1 of 2022. Specifically on your question around Asia Pacific, I think it's important to note that Asia Pacific has been slower to The Asia Pacific opportunity as I see it is as follows. Asia Pacific represented approximately 14% of total inbound cross border travel volumes pre pandemic and were at 40% of our 2019 levels in Q1.

Speaker 3

So as you can see from this number, right, that there is a fair amount of recovery still remaining to come from Asia Pacific. Obviously, it does In terms of how restrictions are lifted in that market, again, the point is at the end of the day, cross border fundamentally is still very sound. This is We continue to believe fundamentally that, that remains very much in place. On EP, in particular, a couple of thoughts on China. 1, The both China, both from an inbound and an outbound standpoint, were not a very significant portion of our cross border volumes Pre pandemic.

Speaker 3

In fact, I would argue that the outbound China was slightly higher than the inbound China. So when you think about You've also got to think about what restrictions are there in terms of people going into countries versus people coming out of countries. And I would tell you, Outbound China has shown better improvement than inbound China for obvious reasons, as we all know, that there have been lockdowns in China, That's all. So net net, as I sit back and I think about this, I think about the fundamentals of cross border being strong. I think about The potential for pent up demand continue to contribute to improvements in cross border travel spend.

Speaker 3

And again, the Polynesia Pacific region still remains a fairly large opportunity in a going forward basis.

Speaker 2

Yes, if I can just build on that. We love cross border, but While we love the trends, it's a lot of hard work. And over the last 2 years, I mean, the travel industry was Hard hit from the outset of the pandemic. We have leaned in. And if I recall over the last 2 years, JetBlue, British Airways, LATAM, Aeroplan, Air Canada, you name it, it's a long list of where we have either And renewed, one additional volume.

Speaker 2

So we're participating in the trend in a very significant way. And we've always said it's going to happen this year and we're ready for that.

Operator

Your next question will come from the line of Rayna Kumar with UBS. Please proceed with your question.

Speaker 5

Good morning. Thanks for taking my question. It was really good to see the strong operating margin expansion in the quarter, 460 basis points. Can you discuss some of the underlying drivers outside of the return across border and how sustainable you believe an upper 50% operating margin is going forward?

Speaker 3

Yes. Henry, happy to take that question. So I mean, at the end of the day, you know that the business as we have it is a high operating leverage business, right? At the end of the day, Incremental dollars of revenue typically flow to the bottom line, just given the nature of how we operate. So certainly, cross border recovery is playing into the recovery in operating margins, but it's not just about cross border.

Speaker 3

It's about overall strong consumer spending And cross border travel recovery, all of which is contributing to the delivery of improved operating margins. Helping that even There is a quick new trend in our services and everything we're doing along those paths. So it's everything which we are doing in terms of driving the fundamentals of our business back Strategic priorities Michael was talking about, which is growing our payments, keeping our leaning in on services and then continue to invest in the new network space, which is really, really important. So all of those factors are contributing factors to the expanding operating margins that you're seeing come through. The message I'd like to leave you with on this is the following.

Speaker 3

We continue to run the business for long term sustainable growth, which means effectively that we're going to continue to invest in a disciplined manner to ensure that we are creating the right opportunities for ourselves to deliver this long term top line growth. And while we do that, You should see the impact of that come through in terms of operating margins.

Speaker 1

Next question please.

Operator

Your next question will come from the line of Darrin Peller with Wolfe Research. Please proceed with your question.

Speaker 1

Hey, thanks guys.

Speaker 6

When we look at the types of opportunities on cross border that you're seeing right now, you clearly are positioned, as you said For to take advantage of this upswing in travel. And historically, it's been very high pass through without rebate incentives, I I have a correlation.

Speaker 3

So first of all, just to be clear,

Speaker 6

I mean, should we still expect that to be the case? Or is there anything around the new business you've written the relationships that Michael you mentioned earlier that would cause that growth yield, I guess, we can say or net yield to be a little bit different going forward on this type Big pickup in resumption in spending on travel. And then Michael, just more strategically, when we think about that, that industry in terms of cross border payments, there's been so much change. And even you guys are trying to work through opportunities for more A2A and open banking opportunities across globally. And so has that changed the ecosystem at all?

Speaker 6

Or Card based really how you expect to see cross border play stay really dominant for payments cross border over time?

Speaker 1

Thanks, Aaron. I'll take the first part

Speaker 3

and then Michael will address your second question. I guess the headline is the following, which is we're not seeing anything fundamentally change in terms of the profile Our cross border revenues. I mean, net net, things are going to move around depending on how much cross border comes from intra Europe versus Volumes from outside of that intra Europe corridor, because as you know intra Europe is lower yielding and then other cross border volumes are High yielding, like fundamentally, I would tell you not much has changed. I will make one point. You talked about rebates and incentives not being there with cross border.

Speaker 3

I would say that There's a lower indexation of rebates and incentives to cross border. There's always been some level of rebates and incentives which have been associated with cross border, not nearly as high guess what's there in the domestic volume environment, but we're not seeing fundamentally much change in that regard.

Speaker 2

Right. And strategically, so Darren, Here's what I'd say is, similar lens that we took at Investor Day where we looked at different universes and different use cases. You got the P2M world Where card is well established domestically, but also certainly cross border, the industry and we very specifically with our services For merchants and for consumers are addressed, so the conversion rates and the approval rates have continuously increased and there's a lot of value brought. There isn't much of a problem to be resolved to payments for goods on a cross border basis. Now where we're actively looking, In our intent to participate in all relevant payment flows, we're saying what other payment volumes We can contribute to with our technology through our franchise and so forth.

Speaker 2

And here, the whole space of import exports, Cross border accounts payable, that's a space where account to account solutions make sense for us. The whole we have specifically called out for you at the Investor Today, the focus on remittances, again, that's a significant opportunity for us. That's all additive and expansive From a target market perspective, from an opportunity perspective, attractive growing opportunity. We have the technology on the cross border remittances side, our Transfast Our buyout on the HomeSense side, all of that is coming together. It's a 100 country reach.

Speaker 2

So I think what we're bringing here is the multilateral network idea into this space that has been historically inefficient. So I look at it as a growth opportunity, while we're going to continue to power the comp side of the house.

Speaker 1

Next question please.

Operator

Your next question will come from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.

Speaker 5

Terrific. Thank you. I was hoping to shine a spotlight on LatAm, specifically Brazil. Just taking a peek at the supplementals, Mastercard volumes are up 40% to 50% in that region. But Brazil is also a market where you've got a local network like PIX gaining a lot of traction.

Speaker 5

Can you just use that as an example to talk a bit about how Mastercard coexists in a market like that with one of these domestic networks? And is a player like PIX a customer or a potential customer of some of your open banking or fraud or identity services? Thank you.

Speaker 2

All right, Lisa, let me take that. So first of all, Brazil has been a market in focus, strategically important market For us, for years, we're very well established on with the large banks out there, Itau and others to mention. So I'm actually seeing the Brazilian country manager right after this call. So it's very much in focus. We're very happy with what's going on there.

Speaker 2

Overall, it's a market that drives a lot of innovation. Buy now, pay later has been a thing in Brazil forever. Open banking is on the rise. Real time payments is on the rise. So a lot of movement there.

Speaker 2

And the P2P network that's been introduced by the Central Bank in the Brazil market is another push to further digitization market. So the whole digitization in Brazil is Really seeing great momentum and we're leaning right into that. Now the kind of flows that PIX is going after, you see a lot of P2P flows and some B2B flows. So that's not necessarily anything that we're particularly worried about, but it's also the kind of flows as part of our multi rail strategy that we like to support ourselves, and we have a whole set of technologies for that. WhatsApp page, just to point one out, which is The first slide in Brazil itself, as I said, a market with innovation and a lot of momentum there.

Speaker 2

So Here's our technology powering a social network as an alternative, which is an easy user experience, great adoption, 4,700,000 users So I look at it as a market that's a lot to learn from, a market that we invest in And Webby Chart Pass for the new additional flows beyond card flows, very specific local solutions considering the size of the

Speaker 3

And I'll just add Michael, couple of thoughts on Brazil. One, you asked the question about the strong growth. Clearly, It's a combination of the macro environment, but it's also the fact that we've been leaning in pretty heavily with our Traditional issuers as well as our fintech partners in that space, which has been part of the reason why we've been seeing some of that growth come through in a decent manner, Lisa. Second point I'd make, tying back to Michael's comments around PIKs. The market has to be bifurcated in the context about debit and credit.

Speaker 3

And on the credit side, we continue to see tremendous growth. PIX, which Michael said, is primarily catering to P2P and Even if it were to actually proliferate a little bit into, call it, the smaller merchants from a P2M standpoint, we're primarily

Operator

Your next question will come from the line of Tien Tsin Huang with JPMorgan. Please proceed with your question.

Speaker 7

Thank you very much and good morning. I wanted to check-in on the call it balance of trade and this whole card volume coming in and out When the loss is migrating, given the update, I know you mentioned Wells and of course, they ended their NatWest and Deutsche Bank. Are you Gaining share when all is said and done? I'm just trying to get a better sense, especially in the short term with all the migrations in and out, where you stand in the share gain? Thanks.

Speaker 3

Yes. Thanks, Tijin. So everything we kind of talked about and Michael talked about earlier on in this conversation was about are expanding relationships with these issuers. And so with these issuers, we are gaining share. That's kind of the reality of the situation.

Speaker 3

Again, there are puts and takes in the market, right? So as I think about the new relationship, but I shouldn't say new relationship, expanded relationship we have with Wells, right, that's an increasing share position with Wells, which is taking place, for example, there. So the bottom line is the Whether it's Wells, Capital One, what we're doing with Santander, NatWest, Deutsche, you name it, the GAAP portfolio, all of these incrementally are helping us drive our volumes. From a holistic market standpoint, again, like I said, there are puts and takes, right? But we're very, very optimistic about how we're seeing business translate for us.

Speaker 3

And as we mentioned at the Investor Community Day, We are growing market share across all regions and the market share growth, which we've seen in 16 of our top 20 markets, which

Speaker 2

I thought these news were just going to pass by with none of you asking about it, so it's much appreciated.

Operator

Your next question will come from the line of David Togut with Evercore ISI. Please proceed with your question.

Speaker 8

Thank you very much. Cross border card not present ex travel growth was solid in Q1, but did slow throughout the quarter and into April against known very difficult comparisons. Can you unpack class order card not present ex travel growth by geography, especially in Europe and U. S. And How you see this playing out throughout this year, especially with the return of the consumer to the physical point of sale as vaccination rates In other words, do you see a reacceleration of e com later this year or do you think the consumer is going to be more active at kind of physical bricks and

Speaker 3

Sure, David. So I think you're touching upon a couple of things which are there on that Card Not Present X Travel. The reality is as cross border travel comes back, you do see some give back in terms of From what is Card Not Travel, Card Not Present X Travel, that's a mouthful. So the point is at the end of the day, right, there are a few factors you got to take into consideration when you're thinking about future growth rates for cross border card, not PresentX Travel. Number 1, What's the pace of recovery on cross border travel is going to be?

Speaker 3

Number 2, what's the prior year comps were on cross Cross border card, not present ex travel. Because remember, these growth rates are all influenced by prior comps as well. And what was happening in the COVID mean last year, which might have caused for elevated levels of cross border thought, not present ex travel. And number 3, You do see fluctuations come in that number through as a result of crypto and crypto volumes, right? And so these three factors are kind of things you got to take into consideration.

Speaker 3

The point at an upper level is the following, which is the consumer continues to spend in an omnichannel manner. When they can't get out and spend in environment, they do that. When they can't spend any card in our present environment, they do that. We are ready to support them in both manners, Whether it's through our omni channel capabilities that we're offering our merchants and the strength which we're seeing in card not present ex travel from a cross border standpoint, It's something we expect that strength to actually stay going forward as well. There might be puts and takes for all the reasons I just mentioned, but largely I think consumer behavior has changed in a manner where they've gone more digital and you're going to see some strength come throughout there.

Operator

Your next question will come from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.

Speaker 8

Hi, good morning. Just a couple of quick clarifications. On the On the Russia Ukraine, I heard that 2 points to net revenue targets to the performance objectives 22% to 24%. Could you help us clarify the revenue and expense impact for the going forward quarters like the Q2, 3rd 4th this year? Just trying to quantify that.

Speaker 8

And then the second question is just what level of cross border recovery are you assuming in the guidance for 2022? Thanks so much.

Speaker 3

Sure, Brian. So first, I'll take your question on Russia and what we're assuming. So we have Operations in Russia as a result of which we're not earning any revenues related to our initial cost. So as it relates to revenue for the rest of the year, We had mentioned that we put out an 8 key about how Russia represented roughly 4% of our revenues in 2021. And so we've Assume that that 4% doesn't exist in any of the quarters going forward from a net revenue standpoint, right?

Speaker 3

Point number 2, and again, like I said in my prepared remarks, there's some level of A headwind which we're assuming in Ukraine as well, but the reality is that's a little bit of an uncertainty just because we're not entirely sure as to how The war in Ukraine evolves and what the implications of that are. So we've built in some assumptions and that's what we've kind of given you in our overall thoughts. From an expense standpoint, The Russia related expenses represented roughly 2% of our operating expenses. And again, from an OpEx growth standpoint, That's the way we think about it. As I mentioned, we have taken down when we shared with you our thoughts for full year 2022, We have taken down our OpEx growth rate on an ex acquisition currency neutral basis to reflect that very impact from a Russia standpoint.

Operator

Your next question will comes from the line of Ramsey El Assal with Barclays. Please proceed with your question.

Speaker 6

Hi, thank you for taking my questions this morning. I was wondering if you could give us your I have a prior question

Speaker 8

about how

Speaker 6

consumers might have changed their behaviors during the pandemic. Do you see a different longer term mix of debit

Speaker 2

Right. Ramsey, let me start off on that. So the structural changes that we are seeing, that we've been observing with our Regular consumer engagement surveys over the last 2 years and that have transpired with our customers as well is Less cash and checks, number 1. Anything digital, more off, number 2. The whole This whole notion though has changed in the consumer's mind.

Speaker 2

A couple of things going on. First is consumers are really ready to move on with the pandemic. They want to go out there, they knock off their bucket list, they want to Hands up demand. So there's a lot increased spending back into services. So it's not a structural feature of The years to come that it's all in goods.

Speaker 2

It's going to go back to services. It's going to balance out. It's also not going to be only online as Sachin just said. It's going to balance out across multi Channel, buy in store, pick up, have delivered, do it the other way around, whatever works. I think consumers will go for more choices, and that comes right down to our multi rail You enable basically all relevant choices that are out there.

Speaker 2

I think that's the right positioning. That's what we're going to see going forward. In terms of debit and credit, if you kind of get a little more granular over here, there was a period in the early parts of the crisis, people will not want to Coming back, that's more credit oriented, particularly because of the rewards around it. You start to see in the crypto space, There's a whole new set of credit propositions. We just talked about the Gemini rewards and crypto rewards on that, the Nexo card.

Speaker 2

So there's a whole thing going on. I think in the end, it's going to be multiplicity around these different tools.

Operator

Your next

Speaker 7

My question is more specific. If I look at U. S. Trends, debit versus your competitor, I mean, Over the last few quarters, I'm seeing a downward trend in your share of the mix in debit Credit, is there anything to call out there? Is there opportunity to improve in debit or are we am I just Very fundamental here.

Speaker 7

Again, just U. S. Versus your large competitor.

Speaker 3

Yes. So Dan, There's nothing fundamentally which is really changing as it relates to our debit business. I put that out there in the first place. Growth rates obviously are impacted by comps. I think you get that piece.

Speaker 3

I think you've got to take into consideration that there is a one portfolio, which is a debit portfolio, which is rolling off in the U. S, Which was previously announced, which is probably impacting that corporate of analysis that you're seeing because obviously we're seeing the detriment of that comes through in our debit metrics and that Primarily started in the recent past and will go on through the course of this year. And the competitors are likely actually getting the benefit of that. So that's Probably the reason you're seeing some level of divergence.

Operator

Your next question will come from the line of Andrew Jeffrey with Truett Securities, please proceed with your question.

Speaker 8

Hi, good morning. I appreciate you taking the question. Michael, I actually have a question on other revenues, value added services in particular. Ex acquisition seems that It's de selling a little bit. Would have perhaps expect to see that growing faster And certainly approaching the growth in the card business.

Speaker 8

Can you just comment on kind of puts and takes there and what the long term trajectory is for value added services?

Speaker 2

Andrew, excellent questions. As you know, we love our services business. It It drives growth for us. It's a differentiator. It's a margin increase, so it's all of that.

Speaker 2

And the key focus It's Cyber Solutions on one hand and Data Living and Insight Solutions. This comes back to the structural trend by the way. More data, more digital worlds, more digital worlds to be kept safe, more insights for all these new people that are Having businesses online on the data analytics side, so fundamentally there are sound trends here. If you just pick up this quarter and you do the Unpacking the numbers that you have just laid out, that is simply timing. We are expecting our There's nothing to be said that there's anything changing on the growth rates of our business.

Speaker 2

So that will continue. Our teams are fully engaged. And as we look And the guidance that Sachin gave, we assume a strong services growth.

Speaker 3

And I'll just add some little bit more On that, just because I think it's important for you as you're thinking about your models going forward to actually factor this in. When we talk about Russia revenues, there are a few things From a Russia revenue standpoint, which you might want to take into consideration, one of which relates to the fact that services was well penetrated in the Russia Ukraine markets and had strong growth. And so as you think about the model and the impact across the different line items, you're going to see impact related to loss this is revenue come through in other revenues in the ensuing quarters. That's kind of point number 1. A few other salient pieces on Russia related revenues as you think about Yes, we will lose the volumes and transactions.

Speaker 3

Russia was a fast growing market. It has low average ticket size, which I kind of mentioned earlier. There's a high degree of contactless penetration. Again, I think these are important things for you all to kind of keep in mind you think about comps on a going forward basis and the cross border issuing out of Russia was mostly higher yielding interregional cross border issuing. It's also a strong remittances and disbursements market.

Speaker 3

Why am I sharing all of this with you? Because as you think about the various metrics we've shared across all of these aspects, those will get impacted as Russia stops coming into play in future quarters.

Operator

Your next question will come from the line of George Mihalos with Cowen. Please proceed with your question.

Speaker 8

Great. Good morning and thanks for taking my question guys.

Speaker 6

Sachin, I wanted to ask, you called out currency volatility as obviously being a benefit to Q1 results, can you isolate what that benefit was in 1Q? I know it's still a volatile time, which is sort of 3 weeks into the next quarter, But how are you thinking about that looking into 2Q?

Speaker 3

Yes. This is George. I called it out because Q1 had unusually high foreign exchange Volatility. I mean the reality is we don't typically talk about this because these numbers tend to go back and forth from a volatility standpoint, but there was unusually high FX volatility in Q1. The outlook from a going forward standpoint is really hard to say.

Speaker 3

I mean, this is one of those things where I guess, As Michael joked with me, Sachin, you wouldn't be doing the job if you knew where volatility was going on a forward basis for foreign exchange. So The point is, at the end of the day, we've taken our best assumptions on a holistic basis for our business to share with you what our thoughts are from a full year and a Q2 Basis on net revenue. Very hard to predict what the outlook going forward is going to be. Unusually high volatility does help us. The other thing to keep in mind is Since it's related to cross border volumes, as cross border volumes come back, that combined with unusually high volatility has that much more of an impact.

Speaker 1

Jeremiah, I think we have time for one more question.

Operator

Okay. Our final question will come from the line of Jason Kupferberg with Bank of America. Please proceed with your question.

Speaker 6

Thanks, guys. It's a quick one. So just in terms of your expectation for cross border travel relative to 2019 levels, last Quarter, you were expecting to be at 100% by the end of this year. You're already at 110% in April. So what's your updated assumption on that?

Speaker 3

Jason, as I mentioned, we're assuming improving trends vis a vis compared to 2019 as we go forward. We're not sharing a specific number for what that looks like in the Q2 or the end of the year. We've built in our expectations in terms of the revenue guidance I've shared with you, Our thoughts around how that trend takes place. The combination of that plus consumer spending and what the improving trajectory in consumer spending as it's all factored into the numbers.

Speaker 6

Can we get a directional rebate on incentives just for the rest of the year?

Speaker 2

So the thing I'll mention

Speaker 3

to you, Enrique's incentives, is the following, which is We have a rich pipeline of deals. We continue to execute on that, as you heard from Michael, in terms of some of the wins which we had recently. Obviously, you get the benefit of improving cross border trends to play through in terms of lower amounts of rebates and incentives Impacting that. And the last point I'll make on rebates and incentive is, in Q1, we had this one time benefit relating to the non renewal of our Russian customer agreement, Which you should not expect the benefit of that to come through on a going forward basis. So net net, I would tell you that a lot of this is going to be depending on what the timing of deals are, how we put those new and new deals into play and what the recovery across the board is going to be.

Speaker 6

Thank you.

Speaker 1

Great. Thanks, Sachin. Michael?

Speaker 2

All right. So thanks for your questions. Insightful questions as always. Thank you for Paul for the company. Just a thought from me.

Speaker 2

Here we are, we're thinking that we're going to get out of Omicron and then a few later we have an invasion in Europe. So for our teams, it's Around the world, it continues to be a never ending marathon. And I just want to extend the thanks to everybody in the Mastercard team. And with that, We'll see you next quarter. Thank you so much.

Speaker 2

Bye bye.

Operator

This concludes today's conference call. Thank you for participating. You may

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Earnings Conference Call
Mastercard Q1 2022
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