Mastercard Incorporated, Q1 2024 Earnings Call, May 01, 2024 - NYSE:MA

NYSE:MA

Devin Corr, the Executive Vice President of Investor Relations at Mastercard, made the following statements during the Q1 2024 Earnings Call:

1. Opening Remarks:

   • Thanked the operator and welcomed everyone to the Mastercard Incorporated Q1 2024 Earnings Conference Call.
   • Introduced Michael Miebach, the Chief Executive Officer, and Sachin Mehra, the Chief Financial Officer, who were also present on the call.

2. Conference Call Logistics:

   • Provided instructions for the Q&A session, noting that the queue would open after comments from Michael and Sachin.
   • Mentioned that the earnings release, supplemental performance data, and slide deck accompanying the call were available in the Investor Relations section of Mastercard's website, mastercard.com.
   • Noted that the release was furnished with the SEC earlier that morning.

3. Financial Reporting Basis:

   • Clarified that the comments regarding financial results would be on a non-GAAP currency-neutral basis unless otherwise noted.
   • Stated that both the release and the slide deck included reconciliations of non-GAAP measures to GAAP reported amounts.

4. Forward-Looking Statements Disclaimer:

   • Reminded listeners that the call would include forward-looking statements about Mastercard's future performance and that actual performance could differ materially from these statements.
   • Advised that information about factors that could affect future performance was summarized at the end of the earnings release and in recent SEC filings.

5. Replay Availability:

   • Noted that a replay of the call would be posted on the company's website for 30 days.

6. Introduction of CEO:

   • Turned the call over to Michael Miebach, the Chief Executive Officer.

7. Closing Remarks:

   • Thanked the operator and announced the opening of the line for Q&A.

   • Concluded the call by thanking participants and noting the significance of Labor Day, expressing gratitude to Mastercard's 33,000 employees and shareholders for their support.

Michael Miebach, CEO, President, and Director of Mastercard Incorporated, provided the following information and insights during the Q1 2024 Earnings Call:

1. Quarter 1 Performance:

   • Mastercard delivered strong revenue and earnings growth in Q1 2024.
   • Net revenues were up 11%, and adjusted net income increased by 16% on a non-GAAP currency-neutral basis.
   • These results were driven by healthy consumer spending and strong cross-border volume growth of 18% year-over-year on a local currency basis.

2. Full-Year 2024 Outlook Reiteration:

   • Mastercard is reiterating its full-year 2024 outlook for both net revenue and operating expense on a currency-neutral basis, excluding acquisitions and special items.

3. Macroeconomic Environment:

   • Strong labor markets and solid wage growth support healthy consumer spending globally.
   • Inflation is moderating, with a path toward normalization of monetary policy in most countries, though persistent inflation in the U.S. could delay rate cuts.
   • Geopolitical uncertainty remains in several countries.

4. Strategic Priorities:

   • Mastercard is focused on three strategic priorities: consumer payments, new flows, and services and new networks.
   • The recent realignment of the organizational structure will help the company execute on these priorities faster and deliver more value to partners and customers.

5. Payments Growth Algorithm:

   • The growth algorithm includes being in the flow to capture natural economic growth, accelerating the shift to electronic payments, further penetrating new flows, growing market share, and optimizing customer portfolios.
   • Mastercard is confident in the long-term secular opportunity for the shift to digital payments for person-to-merchant transactions.
   • The acceptance footprint is a key competitive advantage, and the company continues to expand its reach globally while enhancing the user experience for digital transactions through its technologies.

6. Contactless Technology:

   • Contactless technology has been instrumental in displacing cash, representing more than 2 of every 3 in-person switched purchase transactions.
   • Tap on Phone capabilities are a cost-effective way for merchants of all sizes to accept digital card payments, and Mastercard is live in over 100 markets.
   • In Brazil, the number of active devices using Tap on Phone is over 1.5 million.

7. Tokens and Security:

   • Tokens deliver an elevated level of security and improve the performance of a client's portfolio while supporting new ways to pay.
   • Tokenized transactions grew over 50% year-over-year, with approximately 1 in 4 transactions on the Mastercard network tokenized today.

8. Vertical Penetration:

   • Mastercard is focused on verticals traditionally underpenetrated by cards, such as housing and healthcare, to address the needs of providers and consumers.
   • Examples include enabling digital rent payments and partnering with healthcare providers to grow acceptance in key markets.

9. Switching Penetration:

   • Mastercard now switches approximately 2/3 of its total transactions worldwide, up from approximately 55% in 2018.
   • Actions in markets like Japan, Mexico, Colombia, and Chile have increased switching penetration.

10. Issuer and Co-Brand Partnerships:

    • Mastercard is winning new deals and retaining key business in every region, including agreements with Banco Bradesco, Fiserv Money Network, Citigroup, Target, and the TJX companies.
    • The company signed a 10-year exclusive partnership with First Abu Dhabi Bank and a new exclusive co-brand agreement with Global Hotel Alliance across the EMEA region.

11. New Flows Pillar:

    • Mastercard continues to execute its strategy to further penetrate the addressable market in targeted areas like commercial payments, disbursements, and remittances.
    • The company is securing key partnerships, including traditional banks, travel, and ERP providers.

12. Services and New Networks:

    • Services and new networks are a crucial component of Mastercard's growth algorithm, driven by best-in-class fraud capabilities, data analytics, consulting, marketing, loyalty, identity, and open banking assets.
    • The company is driving growth by increasing penetration with existing customers, extending services across new customers and new payment flows, and deploying new solutions.

13. U.S. Merchant Class Action Settlement:

    • Mastercard expressed relief over the agreement reached with the merchant community regarding the U.S. merchant rules class action.
    • The settlement involves a mild reduction of interchange rates and provides more clarity and simplification around surcharging and discounting rules while retaining the Honor All Cards rule.
    • Mastercard does not expect a dramatic impact on the business from the interchange changes.

14. Geographic and Vertical Opportunities:

    • There is a significant secular opportunity for the shift to digital payments, both in developed and developing economies.
    • Mastercard is focused on capturing opportunities in verticals like healthcare, rent, and public transport.

15. Organizational Structure Changes:

    • The recent changes in the organizational structure aim to align with the company's strategic priorities and move faster to deliver more value to customers.
    • The changes involve focusing on core payments, new payment flows, and an integrated set of services offerings, along with a central role for generative AI.

16. Competitive Landscape:

    • Europe remains a significant growth opportunity for Mastercard, with a focus on debit conversion and strong wins in markets like the UK and the continent.
    • Mastercard competes effectively in Europe by partnering with local players and leveraging its strong propositions on credit and debit.

17. Travel Trends:

    • Travel and cross-border spending remain strong, with particular resilience in non-travel-related cross-border spending.
    • Mastercard sees opportunities for further recovery in travel, especially in corridors like inbound and outbound travel to and from China.

18. U.S. Debit Trends:

    • Mastercard is seeing some impact from routing mandates under Regulation II but considers it not material.
    • The company focuses on fighting for the back of card positions by highlighting the net economic benefits of its propositions, including its safety and security solutions.

19. Marketing and Branding:

    • Mastercard emphasizes the importance of investing in marketing and branding, considering its status as a fast-moving consumer brand.
    • The company curates a set of sponsorship assets and adjusts marketing spend according to the timing of these assets.

20. Closing Remarks:

    • Michael thanked the 33,000 employees at Mastercard for their contributions and expressed gratitude to shareholders for their continued support.

Sachin Mehra, the Chief Financial Officer of Mastercard, provided detailed commentary on the company’s financial performance and outlook during the Q1 2024 earnings call. Below is a summary of his statements:

Financial Performance Overview

• Q1 2024 Key Financial Metrics:

  • Net revenue was up 11%.
  • Operating expenses increased 9%, including a minimal impact from acquisitions.
  • Operating income was up 12%, including a minimal impact from acquisitions.
  • Net income and EPS increased 16% and 19%, respectively.
  • EPS was $3.31, which includes a $0.07 contribution from share repurchases.

• Key Drivers of Revenue Growth:

  • Worldwide gross dollar volume (GDV) increased by 10% year-over-year.
  • Cross-border volume increased 18% globally.
  • Switched transactions grew 13% year-over-year.

• Payment Network and Services Revenue Growth:

  • Payment network net revenue increased 8%, driven by domestic and cross-border transaction and volume growth.
  • Value-added services and solutions net revenue increased 15%, driven by strong growth in underlying drivers and continued demand for consulting and marketing services, loyalty solutions, and fraud and security capabilities.

Operating Expense Growth

• Operating Expenses:
  • Total adjusted operating expenses increased 9% on a non-GAAP currency-neutral basis, excluding special items.
  • Growth was primarily due to increased spending to support strategic initiatives and an increase in indirect taxes.

Outlook

• Full Year 2024:

  • Net revenue expected to grow at the high end of a low double-digit range on a currency-neutral basis, excluding acquisitions.
  • Operating expenses expected to grow at the low end of a low double-digit range on a currency-neutral basis, excluding acquisitions.
  • Foreign exchange expected to be a headwind of 1 to 2 ppt for the year.

• Q2 2024:

  • Year-over-year net revenue growth expected to be at the low double-digit range on a currency-neutral basis, excluding acquisitions.
  • Operating expense growth expected to be at the low end of a low double-digit range versus a year ago, on a currency-neutral basis, excluding acquisitions.
  • Foreign exchange expected to be a headwind of approximately 2 ppt for the quarter.

Other Income and Expenses

• Q2 2024:
  • Expected expense of approximately $85 million.
  • Assumes prevailing interest rates and debt levels continue and excludes gains and losses on equity investments.
  • Non-GAAP tax rate expected to be approximately 17% for both Q2 and on a full year basis.

Q&A Session

• Rebates and Incentives:

  • Rebates and incentives were in line with expectations and what was shared in the previous earnings call.
  • For Q2, rebates and incentives as a percentage of payment network assessments expected to be roughly similar to slightly down from Q1.

• Travel Trends:

  • Cross-border travel growth rates are healthy and comparable to pre-COVID days when adjusted for Easter timing and comp impact.
  • Asia has room for further recovery, especially inbound and outbound travel to/from China, which was at approximately 80% of pre-COVID levels in Q1.

• Value-Added Services Growth:

  • Overall outlook and demand for value-added services and solutions are strong.
  • Growth rates expected to be higher in each of the remaining quarters compared to Q1.
  • Safety and security solutions and consulting and marketing services are the lion's share of value-added services and solutions.

• Other Solutions Growth:

  • Continued focus on growing other solutions, primarily real-time infrastructure assets and bill payment assets.
  • Growth rates for other solutions are inherently slower compared to safety and security solutions and consulting and marketing services.

• Advertising and Marketing Spend:

  • Lower A&M spend in Q1 due to the timing of sponsorships and activations.
  • More A&M spend expected as the year progresses.
  • There is an element of marketing given in terms of rebates and incentives to drive portfolio spend.

Sachin Mehra provided detailed insights into the financial performance, strategic outlook, and specific areas of focus for Mastercard, highlighting the company’s strong position and positive outlook.