Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Thank you, and good morning, everybody. My name is Bob Napoli. I'm the analyst at William Blair that covers the fintech space. For a complete list of disclosures, please go to williamblair.com. We're very excited again to have with us Sachin Mehra. He was with us live in Chicago last year, virtually this year. Sachin is the CFO at Mastercard. He's been the CFO for about a year and he joined Mastercard in 2010. Sachin, welcome. Everybody, welcome to the 40th Annual William Blair Growth Stock Conference.

We are in somewhat of unprecedented times, more than somewhat, with the global pandemic, now civil unrest here in the United States. What's your view on this environment? And what are the key priorities for Mastercard today?

First of all, thank you, Bob, for having me here. It's always a pleasure to be back. And good morning, good afternoon, good evening to everybody who's joining in. I really appreciate the opportunity to be here. You're indeed right, Bob. I mean it is indeed very unusual times and challenging times, as we all know. And you kind of asked the question around the pandemic. And really, as we kind of sit back and we think about this, we believe this to be a public health crisis. And the speed and shape of any sort of recovery in such an environment, in our opinion, is a function of 3-policy initiatives: one being the public health policy; two being monetary policy; and the third being the fiscal stimulus, which we're seeing not only in the U.S. but across the globe. As you can well imagine, right, I mean it's really important that all 3 get tackled in order for things to come back to what I would call the normal. You're certainly seeing a lot of action around that stuff. Across the globe, different governments have been very active in terms of how they're responding from a public health policy standpoint, but also from a fiscal stimulus and monetary policy perspective. The way we at Mastercard are thinking about this is we're kind of going through what we call the COVID-19 crisis by managing through 4 phases, and the 4 phases we've spoken about publicly so I won't belabor those, but I'll just mention them briefly. Those being of containment, stabilization, normalization and growth. And we think this framework is important because what it does do is it kind of tees up where we believe we are from a holistic standpoint across various assets, those being of what are we seeing from a broader restriction standpoint, what are we seeing from a social distancing standpoint, what are we seeing from the opening and closing of essential and nonessential businesses standpoint, and last but not the least, the impact on spend levels. And we can go into more detail as to how we've defined these, but I think those are well understood. The one point I'll make is that we expect that different drivers, different sectors and different geographies will be in different phases at any given point in time. And they likely will move back and forth between phases depending on how things may play out from a public health standpoint. Look, I mean you asked the question as to what are the important initiatives which we at Mastercard are focused on in light of the crisis. And I would tell you, we are focused on several areas: first and foremost, being our employees; then obviously, our customers, governments and then the broader society at large. From an employee standpoint, Mastercard has done a bunch of things to make sure that we have high levels of engagement in this environment from our employees. It's -- you're very familiar with the fact that we believe that the decency quotient is something we care deeply about at Mastercard. And in light of the fact that all of us as human beings are going through what we are, it's really important that we step up and do the right thing for all of these stakeholders. From an employee standpoint, some examples of things we have done are: We've provided 10 days of paid leave for our employees for taking care of sick and elderly people, which -- who are impacted by the COVID-19 crisis; we've committed to no COVID-related layoffs in 2020. In addition to that, there are several other initiatives which are underway from an employee standpoint, one amongst them being free testing for COVID for U.S.-based employees. So there are several things which are going on. We believe this is important. We're just doing the right thing to make sure our employees are well taken care of. Moving on to the customer side. I will tell you, I've seen a tremendously high level of engagement with our customers, and that's a 2-sided equation. So it ties back a little bit to high engagement with employees leads to high engagement with customers, and we're seeing that. We're seeing that even through remote environments where our employees and our teams are very actively engaged with our customers, working with them in different ways to try and understand how best we can help them, leveraging the assets that Mastercard has got. And the assets range from not only our core card rails, but extending to our services assets, extending to our multi-rail assets. There are several things which are currently underway in terms of how we engage it. The most important thing is dialogue, communication and understanding the needs of the customer. And we are actually leveraging a lot of our data and analytics capabilities, our fraud management capabilities because those are very topical for our customers. As you can imagine, if this is impacting spend levels at Mastercard, it's certainly impacting -- it's coming through in the nature of lower volumes for our customers. What we're working with them is to help them provide real-time insights to them on how these spend levels are playing out and what are the actions that they can take in order to actually address this and get on the front foot. In some instances, on -- in terms of things which are already happening, and in other instances, getting them ready to catch the right inflection point when things start to turn around. And so if you think about everything we've invested in over the past decade from a services standpoint, that's holding us in very good stead. As it relates to the governments, super active engagement. I personally have been somewhat very pleased, actually, I would tell you, about the ability of Mastercard to leverage its assets to provide governments with real-time insights on what they need to be thinking about in terms of driving -- how their fiscal stimulus, for example, can be most impactful. And we're doing that. We're doing that actively on one side. But in addition to that, as they're rolling out the fiscal stimulus, leveraging Mastercard's card rails, for example, in the U.S., our Direct Express program, as a way to get money into the hands of consumers as they need to roll it out in a super-efficient manner. And then I'll extend that to the multi-rail piece. Look, in the U.K., 90% of all payroll is made over our Vocalink rails. And most of state benefit payments in the U.K. are already taking place through our real-time payment rails. So we're just extending the utilization of those rails to enable disbursements in markets like the U.K.. And I've just given the U.S. and the U.K. as examples. We're doing this across the globe, as you can imagine. This is happening in Argentina. It's happening in Chile. It's happening in Israel. I'm just naming a few. But active engagement with the government, they're seeing the real value which Mastercard can bring, both in the nature of insights as well as in the nature of helping them get the monies out in the hands of the people. Very important. And the team is going to remain engaged on that. And then broadly speaking, we're doing our part to help with the recovery efforts, and that's at multiple levels. One, you're aware about the investment we made along with the Gates Foundation and the Wellcome Trust into Therapeutics Accelerator. That's something which we deem to be incredibly important. It's the right thing to do, and that's something we're proud of. In addition to that, we made a $250 million commitment towards supporting small businesses globally. And this is a combination of our -- it's multi support, plus our various assets, including our services assets. It's our insight capabilities. It's various products, which we've got. So we're out there trying to engage and make sure we stimulate -- doing our part to stimulate the small business community, which has been impacted by this to the largest part. So look, I mean lots of action taking place, lots of good stuff happening. Unusual times for sure, and we'll see where it goes.

Thank you, and appreciate that. You -- Mastercard put out some numbers last night, which we appreciate. And Mastercard's been putting out some weekly trend updates every several weeks. Can you give a little color on the trends on those numbers that you got last night and the trends that you're seeing? And what do you expect to see over the next several months or quarters?

Okay. Sure, Bob. You're right. We did put out our operating metrics at night. And so you can see from the operating metrics, based on what you're seeing out there, we continue to believe that we are seeing the transition from what we call the stabilization phase into the normalization phase across most markets domestically. And you can see that in the metrics, right? So let's just piece that apart in terms of what the metrics are showing. You'll see from a switch volume standpoint, relative to the last operating metrics update which we did where we showed you numbers as of the week of May 7, there's roughly a 4.4 ppt improvement in switch volumes which have taken place. Let me give you a little bit of color as to how and where we're seeing this and why we're seeing what we're seeing. We believe that this improvement is being driven by the stimulus packages which I talked about, both in the U.S. as well as across the globe, but also the relaxation of social distancing measures and the opening up of economies which are starting to come -- see come through. There has been a more -- there's been better growth in the card-present side of the business. Card-not-present continues to grow nicely. But card-present, which was impacted as people were sitting at home in the past and now started to step out, that's starting to see some level of some traction come through in these numbers. You're also seeing a pickup in discretionary spend in various categories, including in home improvements, gas, restaurants, in domestic travel. So you're starting to see early signs of recovery come through in terms of what we call going from stabilization to normalization. We feel like we're squarely in normalization at this point in time. Look, I mean from a geographical standpoint, you can see in the metrics we have put out there. The U.S. certainly has shown some level of improvement over the May 7 versus May 28 metrics, which we're seeing. But also several other markets across the globe. In fact, some markets like Italy, Poland and Australia are in growth mode. So back to my point earlier, while at the top of the house, we feel like we're seeing the transition from stabilization to normalization, there are markets and geographies such as the Italys, the Polands and the Australias who are actually seeing growth. So those are positive signs. You would expect that to be the case if things continue to open up. Switch transactions seen about a 5 point improve between May 7 and May 28. The reasons are about the same as what I just described from a switch volume standpoint. And then the last but not the least is cross-border. And you can see in cross-border, it's pretty static between the May 7 metric and the May 28 metric. And candidly, that's largely impacted by travel. And until travel starts to really come back, right, that's going to be one which we have to closely watch on that. When I say travel, I don't mean domestic travel. We're starting to see domestic travel come back, but in the nature of cross-border travel there. Now on cross-border, important to realize that we've given you this breakdown which is how we're seeing card-present growth take place, how we're seeing card-not-present growth take place and then card-not-present ex travel. Card-not-present ex online travel continues to show solid growth. You can see that in the metrics we've put out. And we're seeing a modest improvement in card-present -- sorry, in the online card-not-present component of cross-border. And that's being driven by, again, people starting to make a little bit more in the nature of bookings coming through in the nature of online travel, but very modest amounts of growth. At the top of the house, the numbers are fairly even between May 7 and May 28, so I wouldn't make too much of what we're seeing there at this point in time. One more point of note that I'll flag, Bob, is from a foreign exchange standpoint, we had at the time of the first quarter earnings call shared with you that we expect to see a 1 ppt headwind on our revenues in Q2 and a 1 ppt tailwind on our operating expenses on account of foreign exchange. Given where we've seen foreign exchange play out so far and -- as our current estimate that, that will be a 2 ppt headwind on net revenues and a 2 ppt tailwind on operating expenses. So I thought I'd share that as well.

Okay. Structurally, how do you feel this environment will affect the payments industry on one hand? I mean obviously, there's a lot more e-commerce, omni-channel. Can I get your thoughts on the payments market? And then as it affects how Mastercard operates their business. So you have a lot more people working from home, although the expense savings, I guess, that -- and just to remind our clients on the line, if you do have a question, you can -- there should be a place on your Zoom to input that. And we'll see if we can get it answered.

Yes. So Bob, structurally, I would tell you that what we're seeing right now is an acceleration of a trend which was already underway. And that acceleration of the trend is the acceleration of the secular shift we've been talking about for many, many years. We've all seen how there's been this movement which is taking place from cash to electronic form of payment. And we're just starting to see an acceleration of that even more so now in this environment given that people for the last couple of months have had to pretty much operate out of their bedrooms, living rooms and family rooms, whatever they've got there, in terms of living their daily lives. What that's done is that's called for individuals who in the past been somewhat reluctant to move on to the online channel or into e-commerce to have to do it. And now that they've seen what the user experience is, they've appreciated what that can mean for them. And so what we're starting to see is -- or what we are seeing is an acceleration of that secular shift. So certainly, more e-commerce, and hence, digital, and we think that's long term sustainable. What we are seeing is a negative sentiment towards cash. Fewer people want to touch cash, and that's driving a greater amount of contactless. What we are also seeing is a greater demand for data analytical capabilities, the data insights I was talking about earlier. And then given that more and more commerce is going towards the online channel, there's a greater propensity for fraud, and hence, greater demand for our services, our fraud products as part of that process. The same trend we're seeing on the consumer side, which is the shift from cash to electronic forms of payment. We're starting to see also occur in terms of dialogue we're having on the B2B side. And certainly, there's been an increased amounts of interest in terms of how we can start to electronify more and more in the nature of payments, which was historically taking place through check, for example, into electronic forms of payment. The last point I'll make is around engagement with governments. I mentioned earlier about how we're very focused on working with governments. And we are doing a bunch with them right now through this crisis as we have historically done, but more so now. We expect coming out of this crisis that the level of engagement with governments will continue to be sustained and they will be more open and more willing to partner with us given the set of assets we bring as a multi-rail company going forward.

Okay.

You asked about expenses a little bit, Bob, and how we see the employee situation kind of play out. I'm sorry, can you say that again?

Also, just your view on how you're managing expenses in this environment. And then with, I think, a high percentage of your employees working from home, does that change long-term the structure of Mastercard from an expense standpoint?

Yes. So let's talk about expenses. We've demonstrated our ability to be nimble from an expense standpoint. Our model is such that it allows us to be there. We've always maintained that as part of our annual planning exercise. When we put together what we think our outlook for the following year is likely to be, we do multiple scenarios and we do downturn scenarios. They could be mild and moderate or severe and downturn scenarios. But we not only do the scenario, we also act, put in place very specific action plans that we would take from an expense standpoint. And candidly, that has served us really well over the years and again during this COVID period as well. So the one thing I want to be very clear about, we will not [ lose the least ] stuff from an expense standpoint which will jeopardize the long-term growth prospects of this company. We're going to be smart. We're going to be disciplined. But we're also going to be apt and ready to make sure we are well positioned with the right investments to capitalize on opportunities as they present themselves. We're looking at every line item. The way we're thinking about our expense framework is we've got to make sure we're investing in those things which our customers are ready to receive. We're investing in those things where the impact of the investments, such as -- let's take advertising and marketing. The fact that those investments is -- it would be on point and will be experienced and received well. So there are line items like travel which are taking care of themselves because people are not traveling right now, but we're certainly looking hard at every line. Pro fees. We're looking hard at our various investments and saying, "These investments, we want to accelerate, and these investments, we're going to slow down because our customers are not going to be ready to accept those," or "they're in a state where they can't operate now." So let me give a little bit of color as to where we are investing. We are investing more aggressively in digital. We are aggressively investing in B2B, in our real-time rails, in our services capabilities, just to name a few. That's what's kind of going on. As it relates to the employee environment, the vast majority of employees of Mastercard are working from home. I would tell you, we don't believe that over the longer term, that's going to be the environment. I think with the availability of therapeutics and the availability of vaccines, more and more people will feel more comfortable getting back to work. In fact, if you speak anecdotally to people, a lot of them are actually anxious to get out of their current environment and get back to the office. Now there's a difference between getting back to the office and getting back to work. I would tell you, everybody's at work, they're just not in the office. And people who are working from home, my personal experience has been that the level of productivity which we're achieving from our employees and our teams across the globe is actually higher than I would have expected and higher than what we have seen in just normal times. And part of the reason I attribute is back to the culture of Mastercard, right? We as a company care deeply about employees. We invest heavily in our employees. And our employees feel personally invested to make sure that we're successful coming out of this crisis. And we're starting to really, really see the benefits of that come through in the nature of productivity from our employees at this point in time. So longer-term, look, I would tell you that we're going to be very clear that our employees need to feel comfortable and safe coming back to work. We don't see that as in where they're working from as necessarily impacting either productivity and/or how we engage with our employees and our customers going forward.

Thank you. Sachin, before you became CFO, part of your responsibilities was running the commercial services business. Mastercard launched Mastercard Business Track (sic) [ Mastercard Track Business ] Services recently. And I was wondering if you could give a little more color on -- for investors on what that is, what you're hoping to accomplish, and what you're looking at for B2B payments, what the opportunity is financially for Mastercard over the long term.

Sure. So Bob, at the Investor Day in September last year, we had sized what we thought the accounts payable opportunity within the B2B kind of vertical walls. And we thought that, that was somewhere in the vicinity of $110 trillion, right? Now the reality is there's no one single solution which will go after that $110 trillion. There's going to be a whole host of solutions. One of which is Mastercard Track Business Payment Service or what we call Mastercard Track BPS. And at its essence, at its simplest level, it is a solution which is very laser focusedly targeted on solving for pain points which are currently experienced in the accounts payable spend categories. And those are around having a more efficient account payable process; number two, making available working capital where working capital is desired by buyers and/or suppliers; number three, creating a seamless environment for the movement of data to enable better reconciliation between the accounts receivables flow and the accounts payable flows which are taking place. And doing all of this in a very safe and secure manner while providing a great user experience. So all these things which I kind of talked about right here are based on having a deep understanding of what the pain points have been in B2B, how we can go after them. So what Mastercard Track BPS does is we launched it in the U.S., like you said. We've launched it with a bunch of distribution partners. The distribution partners include companies like Global Payments, FISO, [ Rapid Exchange ], CSI, just to name a few. I really -- there's a whole bunch of companies. What do these distribution partners do? Much like in the card side of the business, right, where we sit as a network in the middle, Mastercard Track BPS is that middle network layer. There are buyers -- buyer agents and supplier agents. And the buyer agents and supplier agents, you should think about in the context, if I would translate into the card kind of terminology, would be the component of your issuers and acquirers, and building interaction points with the incorporates. The incorporates are aware there will be the receivables and the payables. And what the bulk of these distribution partners are doing is helping bring those accounts payable files in formats which are easy to capture and [ that ] enable us as a network to be able to move the data across from buyer to supplier and vice versa. So really, really important. The key attributes of Mastercard Track Business Payment Service are, we have a supplier directory. And what does a supplier directory do? It tells us what are the preferences of the supplier in terms of how they want to get paid, when they want to get paid, so on and so forth. So along with the supplier directory is a payment optimization engine. And again, the payment optimization engine enables the action to take place based on what preferences are there in the supplier directory, okay? What you've also got is, it's a multi-rail capability. So at the -- from a movement of money standpoint, this will allow for money to be moved across cards, ACH, blockchain, doesn't really matter. It could be domestic flows, it could be cross-border flows. So BPS or Mastercard Track BPS as a sense is, again, recreating a network for accounts payables, leveraging ecosystem players, the buyers and supplier payment agents, right, while creating a core set of assets, which are there, the supplier directory, payment optimization rules, engines, having multi-rail capabilities, and then allowing for other applications, such as supply chain finance applications, so on and so forth, to be layered on it in order to meet the means, which I kind of talked about, around working capital efficiency, data, and a safe and secure payment environment. We've launched it in the U.S. We're seeing very good interest in it. We're piloting it in Latin America as we speak. And then there are plans underway to actually get pilots going in the other regions as well.

Okay. Great. Thank you. It seems to have a lot of potential. You're doing a lot there. The services, Mastercard continues to invest in additional service capabilities. I think services revenues, the last time you broke it out was about 26% of revenue in 2018. Maybe it's close to 30% now. But you've made several acquisitions there as well. Can you talk about the importance of services, how that affects the revenue growth and margins of the business, and maybe some update on some of the more material acquisitions, how they're performing?

Sure. So I think it's important for us to set the stage as to what exactly our services portfolio is comprised of, but not only what it's comprised of, but why we went down this path and why we've been as successful as we have as part of how the services growth has played out. So at the highest level, we've got our data analytical capabilities, our consulting, people consulting capabilities, our managed service capabilities, our safety and security products and solutions. They're all part of our services portfolio. In addition to that, we've got some of our processing assets, our loyalty assets. That's all part of our service portfolio. We've seen tremendous amounts of growth in terms of how we've seen the services side play out. But why is it that services are important? They're important for us for multiple reasons. One, they are an engine for growth. Like I said, they're growing faster than the core, and we continue to expect them to grow faster than the core. Number two, they are a fairly important diversifier of our revenue stream. And if you just take the current COVID environment we're living in, the reality is, while your core drivers are impacted by COVID, we're seeing the benefits of diversification from services revenue come through. You saw that come through in the first quarter results. You also saw yesterday when we put out the operating metrics, we provided commentary about the demand for our services capabilities. It continues to remain very strong. So that diversification is very important. Number three, it drives differentiation, and this should never be understated. Driving differentiation is super important, not only from a customer engagement standpoint, but what this translates into is how it enables the core and causes for revenue growth and market share growth to the core. Really, really important. It's something we've actually been able to utilize to our advantage very effectively. In fact, you'll see, if you go back over the last 2 or 3 years, when we've talked about winning new business, we've typically also talked about how there are various service assets which we've used -- our services capabilities which we've used in order to be part of that, so far, win from the competition. So again, it's about diversifying revenues, being an engine for growth and differentiating at the core. All of which are really important. And it's playing up very nicely, right? We see a tremendous demand for our data and analytical capabilities. We're seeing a lot of demand for our fraud management capabilities, particularly in this environment, but it has been the case even historically, and we expect that to continue to sustain. As it relates to the acquisitions we've done here, that's a very important part. So the way we've actually driven growth in services has been both through organic and inorganic means. There's several products we've created organically which are seeing a very good traction. And then there are others in the nature of acquisitions we've done. For example, last year at this time, when I was sitting at your conference, we talked about Ethoca. We talked about several other acquisitions which Mastercard had done. On the services side, since then, we've done acquisitions around RiskRecon and SessionM as well. So let me talk a little bit about how those are performing. I think on RiskRecon, essentially, all continue to perform very well. They're performing. In fact, in the current environment, I would tell you with this -- the increased fraud attacks which are taking place, the value of the E-ZPass and the value of the RiskRecon asset are really playing out in spades. And the reason is, as you know, what I think that does is it connects issuers directly to merchants and tries to prevent fraud before fraud occurs, as through the exchange of information which takes place between the issuer and the merchant in terms of how they're seeing that traffic come through. Great demand for that right now. RiskRecon. RiskRecon is that outside in-scan of the digital footprint of not only our merchants, but our acquirers, our issuers. And actually, broadly speaking, even in the health care space, we're using this right now. Where effectively, what they do is they go out and do an outside in-scan of what the Internet facing or the web facing footprint of over corporations to identify cyber vulnerabilities. And then we leverage our data analytical capabilities, and we leverage our consulting capabilities to go and provide solutions to help fix those vulnerabilities which are there. So both of those are seeing some very good traction. Another acquisition which I did not mention but which we're seeing a lot of good traction on is a company we acquired a few years ago called Applied Predictive Technologies. Applied Predictive Technology is a test-and-learn capability, which sits in our data and services portfolio. Excellent demand in the current environment because, believe it or not, we're using that asset very actively with issuers and merchants, and I'll give you examples, to be able to help them in a controlled environment predict what certain initiatives they might look to do might result in the nature of results for them. So for example, as a lot of retail outlets shut down, merchants are trying to figure out how best to open up their retail footprint. In some instances, it might be, how do I want to manage my inventory? In other instances, it might be, what are the right times for me to keep my store open based on how the traffic is playing out of people coming in? So I'll give you an example. As everybody went to a work-from-home environment, you could have had a, let's say, a QSR, quick service restaurant chain, which would have typically served its breakfast menu between, pick a time, 6 and 9:00 in the morning. Well, as everybody's at work-from-home, you'll probably need to change that from 6 to 9 to a different time just because people are working in a different frame of mind. People might show up for breakfast at a different point in time. So I'm using those as examples of how our services assets. And this test-and-learn, in particular, is really playing its part in terms of driving very good engagement with all our customers across the board.

Thank you. Now time flies when you're having fun, and we're actually out of time. I got through about 1/3 of my questions.

Oh, okay.

But I really appreciate, Sachin, your participation. And everybody on the line, have a great conference. And thank you for kicking it off early in the morning, Sachin.

So thanks for having me, Bob. I appreciate it.

All right. Take care. Bye.

Take care. Bye.