Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Inc. conference call to discuss changes in the presentation of net revenues. [Operator Instructions] Mr. Warren Kneeshaw, Head of Investor Relations, you may begin your conference.

Thank you, Audra. Good morning, everyone, and thank you for joining us for this call to discuss our updated revenue-related disclosures. With me today are Sachin Mehra, our Chief Financial Officer; and representatives from our accounting and FP&A teams. Following some brief comments from Sachin, we will open up the call for your questions. I would like to emphasize that the purpose of this call is to address any questions you may have regarding the updated disclosures, so we would ask that you limit your questions to this matter. You can access the 8-K that outlines these changes as well as our 10-K that reflects these changes in the Investor Relations section of our website, mastercard.com, as well as through the SEC portal. Finally, as set forth in more detail in our SEC filings, I'd like to remind everyone that today's call may include forward-looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward-looking statements. Information about the factors that could affect future performance are summarized in our recent SEC filings. With that, I'll now turn the call over to our Chief Financial Officer, Sachin Mehra.

Hi, everyone, and thank you for joining us on such short notice. Last night, concurrent with the filing of our 10-K, we issued an 8-K describing changes that we are making to our revenue-related footnote disclosures and key metrics in our MD&A disclosures, in our 2022 annual report on Form 10-K. It is important to note that these modifications pertain to the presentation of our disclosures and have no impact on total net revenue presented in either historical or future periods. We regularly review our disclosures and these changes provide greater transparency, aligned with our strategic priorities and are consistent with recent interpretations related to revenue disclosures. We have also implemented these changes in connection with the customary review of our public filings. The 8-K outlines these changes and provides supplemental information for certain historical periods under this new approach, and we have set up this call to explain the changes and answer any questions that you may have. So what is changing? In addition to the geographical disaggregation of net revenues we provide in the footnotes, starting with the 10-K we filed last night and on a go-forward basis, we will revise our disclosure of disaggregated net revenue broken down into 2 new categories: payment network; and value-added services and solutions, both of which are presented net of rebates and incentives. Payment network-related revenues relate to our card network and are primarily generated by charging fees to our customers based on the gross dollar volume of activating on the products that carry the company's brands and for providing switching and other network-related services. Value-added services and solutions is comprised of revenues primarily related to cyber and intelligence, data and services, processing and gateway, ACH batch and real-time account-based payments and solutions, open banking and digital identity solutions. It is also important to note that this revised presentation does not change the way we view or manage our business nor the interdependencies between our payment service and new network capabilities. So going forward, we will be providing a holistic view of our company and will separately disclose payment network-related revenues, excluding revenues related to our various services lines and certain other solutions revenues. And for value-added services and solutions, we have consolidated all our service line related revenues in one place along with certain other solutions revenues. With this new presentation, rebates and incentives have been allocated to the category of revenue to which they pertain. The bulk of rebates and incentives relate to the payment network. In addition to these changes, and to, one, aid in your understanding of trends related to the performance of our payment network capabilities; and two, to allow for comparability to the key driver metrics, we will now be providing supplementary key metrics related to payment network-related revenues. These key metrics are: domestic assessments; cross-border assessments; transaction processing assessments; and other network assessments. These assessments represent agreed upon standard pricing provided to our customers based on the various forms of payment-related activity. We use these assessments to monitor operating performance as it facilitates comparability and provides visibility into cardholder trends. Let me describe these 4 key metrics further. Domestic assessments are charges based on activity related to cards that carry the company's brands where the merchant country and the country of issuance are the same. These assessments are primarily driven by the dollar volume of activity on cards or the number of cards issued. Cross-border assessments are charges primarily driven by cross-border dollar volume of activity. Transaction processing assessments are charges primarily driven by the number of transactions switched, that is authorized good and settled on our payment network. Other network assessments are charges for licensing, implementation and other franchise fees. These assessments do not include rebates and incentives and should not be mistaken for net revenue. In addition to these key metrics, going forward, we will discuss the amount of rebates and incentives related to the payment network in our MD&A. The 8-K lays out the new disaggregation of net revenues and the key metrics. In addition, it outlines the changes from the historical presentation. This is intended to help you bridge between the historical and revised presentation. So to sum it up, we have made the following changes to aid with your understanding of our business and to better align to guidance-related revenue disclosures. One, our net revenues will now be disaggregated into 2 categories: payment network; and value-added services and solutions, in addition to the geographic detail we provide. Two, we will be providing supplemental key metrics to help with the understanding of the performance of our payment network related revenues. And finally, we will discuss rebates and incentives associated with the payment network going forward in our MD&A. Thanks, and we will now open it up for questions. Warren?

Thanks, Sachin. Audra, we're ready to take questions.

[Operator Instructions] We'll take our first question from Lisa Ellis at MoffettNathanson.

Just -- sorry, just a little bit of a mechanics question. Apologies if I missed it. Can you just summarize what will be disclosed quarterly and in -- as part of the quarterly earnings releases versus what will be annual as part of the 10-K?

Yes. Lisa, so the quarterly and the annual will show our disaggregation of revenue by payment network and value-added services and solution. So just like I said, that will be true for quarterly, that will be true for annual. We will be discussing in our MD&A the rebates and incentives associated with our payment net book, again, in the quarterlies as well as in the annuals. So basically, everything I kind of talked about in the context of today's new presentation will be true for quarterly as well as annual.

Yes. If you look at the visibility on the rebates incentives, the key metrics on a quarterly basis. So you won't have to wait for the year-end to pick up on anything.

Okay. Great. And then, just more broadly. So I guess, just more of the strategic level, what kind of prompted you guys to decide to make this decision? I know you started to disclose some of the value-added services at kind of aggregated level at the growth level. So what kind of prompted -- what's the objective, I guess, from an investor perspective?

Yes. Look, that's a really good question. At the end of the day, let me just start off by saying nothing fundamentally is changing the way we operate our business. We just start to provide better transparency, which better aligns with the way we are executing on the strategy as a company. It would be appropriate for us to actually show how we're performing in payment networks, how we're performing value-added services and solutions. And also, when we look at it and we constantly look at this, we look at what we see in the interpretive guidance is which has been put out there. The new disaggregation, which we're showing in terms of our revenue, better aligns with this recent record of guidance. So that's kind of the couple of reasons why we went down this path.

Okay, great. And then maybe just one last one, if you don't mind, and then I'll drop, which is just can you clarify with the -- you guys have made a very extensive like initiatives around getting into B2B as well as into -- with Vocalink and [ NetSuite ] corporate services. Can you just clarify all of that related revenue in that space going to be now in value-added services? That's how I just want to confirm that.

Yes. Let me just kind of clarify and define what sits where, right? At the end of the day, I think the base principle one should assume is card network related stock payment network. And we'll have all our value-added services and solutions, which in value add services and solutions. Specific to your question, [indiscernible], our ACH-related revenues will sit in value-added services and solutions. Digital identity will sit in value-added services and solutions. Open banking will sit there. So when I kind of think about this, that's kind of what sits in value-added services and solutions. Just a point of note right here, because we do talk about new payment flows. And remember, we've broken up our new payment flows in terms of how we talk about them into 4 areas. We talk about them as remittance and disbursements, commercial point of sale, what we're doing on B2B accounts payable with virtual cards and then bill payments. Let me give you some clarity around that. Bill payments will sit in value-added services and solutions. Our commercial point of sale will sit in payment network on the guardrails. Our [indiscernible] will sit in payment network. In terms of remittances and disbursements, if we're doing domestic spend-related activity that will sit in payment network, anything which is in the cross-border account to account space will sit in our value-added services and solutions. So the principle is things which leverage our card network will be sitting in payment network, and then the rest of it sits in value-added services.

Yes. So -- and just to be a little more specific. The bill payment activity that relates to the -- through the acquisition of the corporate -- piece of the Corporate Services business and net is what we're talking about within the value-added services questions.

We'll move next to Sanjay Sakhrani at KBW.

Question, Sachin, is just how should we drive value-added services revenues on a go-forward basis? And related to that, rebates. We've always looked at rebates gross revenue, understanding you guys don't drive the revenue line that way you look at net revenues. But the rate of growth in that gross revenue -- sorry, rebates to gross revenue lines via the different segments now with payment network revenues and value-added services revenues. How should we think about the rate of change? Has that rate of change ex cross-border revenues? It's been growing quite fast. Maybe you can just help us think through that.

Sure. So firstly, I want to just say, these are not 2 segments. We are a one-segment company. We have been a one-segment company, we will continue to be a one-segment company. All we are doing here is we are reflecting for you what the nature of revenues we generate from different activities. So for example, payment network versus [ bank ]. So on your specific question, Sanjay. In terms of how to assess the performance, really, the reality is you will have visibility. Let's take payment network first then I'll come to value-add services and solutions. You will have visibility as to what our net revenue is in payment network, what the net-net revenue growth trends are. As also in the MD&A, you will have visibility as to rebates and incentives associated with the payment network are. You'll see from the information we put out last night that the vast majority of our EBIT and incentives relate to the payment network. It's approximately 95% related to the payment network. So you will have visibility to your exact point as to making assessment as to how we're seeing the rebates and incentives come through. In terms of how you would assess or how we assess the business, you know we look at the business on a composite basis. We look at it and say, how are we driving net revenue growth? Because at the end of the day, our value-added services drive payments, our payments drive value-added services. So it's all kind of very interdependent on one another. That being said, you will get to see what the net revenue growth rate on value-added services is, just for clarity. I mean, for the purposes of that, you will get to see that. So the point really is I guess the bottom line is nothing fundamentally changes in terms of how we're managing the business. We're just giving you better transparency in terms of the nature of the revenues and how those growth trends are shaping up there.

Yes. And I just -- we're not providing incremental information around our forward expectations around rebates and incentives. But as we said in the past, the winning of new business and the driving of additional volumes and transactions across the network and the ability, therefore, to offer services to those customers is the objective. And I think you've heard us on the earnings calls, you talk regularly about some of the key wins, notably recently, the Citizens win, for instance in the United States and the number elsewhere around the globe. So I mean it's all within that context that we think about the rebates and incentives.

Okay. Just one quick follow-up. Just on that payments network revenue, rebates and incentives, is this still half-and-half issuer merchant? Or has that mix changed?

We've never discussed our mix on what component of rebates and incentives goes towards the issue versus the merchant. But I will tell you, the vast majority of our rebates and incentives are towards the issuer side of the equation. But we never really put out a percentage of that.

We'll move next to Tien-Tsin Huang at JPMorgan.

It just always helps me to give examples. So if you don't mind me asking, the domestic assessment fee, I think the headline retail pricing includes a per trans fee as well as a percent fee. I'm assuming both of those are still included in the payment network line, correct? The only processing fee would be when you do issuer processing, stand-in processing and gateway. Is that -- am I reading that correctly?

Yes. So Tien-Tsin, let me clarify. So anything related to issuer processing-related activities sits in value-added services and solutions. Likewise for gateway, sits in value-added services and solutions. And you're right about stand-in as well, which is part of our services lines, which is where it sits. The domestic assessment question you had is what you exactly expect it to be, which is it's the basis points on the gross dollar volume of which runs over our network as well as the standard pricing, which we have from our customers on the number of cards issued, so on and so forth, things like that. So nothing has changed as it relates to that in terms of what we've been kind of talking about in domestic assessments.

That's probably a good point to just emphasize here, is that the way that we're determining domestic assessments is unchanged from our previous approach. There has been some small pieces, for instance, that have been moved into value-added services and solutions. But otherwise, it's directly relatable to where we were historically. So in that sense, there really is not much change. We're just bringing the value-added -- the service lines together in value-added services and then giving you more direct view into the payment networks and other things.

Okay. No, that helps me understand. One more example on just the Mastercard Send, where would that sit? Would that be...

Yes. So to the extent it leverages the card network, it sits in payment network related revenues. So for example, domestic send for the most part, leverages the card network, that's in certain payment network-related revenue. If we're doing account-to-account cross-border, which we also call as our cross-border services under the same umbrella, that will also sit in value-added services and solutions.

That's clear. One more last one for me. Just value-added. Is the order of how you listed the items here, Sachin, is that representative of what the biggest contributors are to value-added services? I think you led with the security stuff.

Yes. And Tien-Tsin, you've got kind of some level of color on that from our 2021 Investor Day. We kind of gave you a little bit of an indication as to what the breakdown is. So you should have a reaction on that. But by and large, the answer is yes to your question.

Yes. And I would just add that we kind of grouped the line items that related to our previous disclosures related to the service lines together, and then the other pieces kind of after that.

Our next question comes from Dave Koning at Baird.

I guess my question, first of all, is on margin mix. I would imagine the payment network is much higher margin. And I guess one of the main questions here is employees have grown tremendously over the last several years as you're investing. Has that dampened the value-added service line in particular? And maybe has a lot of incremental margin still to come as you leverage kind of the growth in that? Is that a good way to think about that?

Yes. So let me kind of just address this issue around margins. We look at margins for Mastercard as a whole, right, because that's how we run the business. We're running across both our value-added services and as well as our payment network. So these things are often sold together. They differentiate one another. And at the end of the day, the way we deliver, whether it's the payment network, all the value-added services, from a cost standpoint, actually leverages one another quite immensely. So the point really is, we've got to think about margins for the company as a whole. On your question around the increase in headcount. Look, we continue to invest in our strategic priorities. Yes, value-added services and solutions is a big part of our priorities, but we also continue to invest in our payment network capabilities. So it's kind of a little bit of what is the right balance of making investments should drive revenues in the short, medium and long term, which is where we are making those investments from a personnel standpoint as well as broadly speaking, as a company. And so I just want to kind of emphasize that this is not about talking about there's a separate margin for payment networks and a separate margin for Value Added Services and Solutions. It's a composite at the end of the day because that's how we run and manage the business.

Got you. Yes, that's clear. And then just a follow-up on the geographical mix. I know -- I think in total, about 1/3 of your revenue is U.S. I would imagine value-added might be higher and there might be more room for growth internationally in value added. Is that a fair way to think about it?

Dave, we think there's very good potential for value-added services across the board, right? I mean think about how we're executing on value-added services and solutions. We are doing it by closing for deeper penetration of our existing value-added services with our existing customer base. True in the U.S., there's still room to grow there as well as in the IMK. But beyond that, we are expanding our suite of value-added services, which, by the way, is brand-new territory both for customers in the U.S. as well as overseas. So the reality is that potential still continues to make sense.

Yes. The U.S. and Canada have been very good at the introduction of new services. So it's not uncommon that we would start maybe in those markets. But definitely there's applicability in a broad base when also you maybe think about the geographic footprint of where some of the acquisitions have been placed, often they've been centered in those geographies, but the whole value proposition is to extend that to our broader set of customers.

We'll go next to Jason Kupferberg at Bank of America.

So for quite a while, we've been accustomed to getting that great slide in your earnings deck every quarter with operating metrics by month, the quarter-to-date data, cross-border travel, card-present, first card not present. Are we going to continue to get those types of metrics, even if it's in the form of assessment rather than volumes?

That's right. The idea is to share both the disaggregated revenue, net revenue, but also these key metrics. And in that way, allow you to continue to have visibility into those important trends. It facilitates comparison to some of our operating metrics. And so you should think of that as being very consistent. It may -- the form may change a little bit, that's fine, but I think you'll see that you'll be able to interpret things much the way that you've been accustomed to.

Okay. Yes, no good to hear. I know obviously, there's a lot of focus on the cross-border travel piece in particular. So that's helpful. And can you just spend a minute maybe on -- a little more on just the difference between assessments and revenue just for our edification? I mean it looks like just matching off the numbers, I mean, the assessments are bigger than net revenue, but smaller than gross revenue. So just any other color there might just be helpful for our knowledge.

Yes. So again, the net revenue by its very definition, is what happens or what we generate as a company, net of rebates and incentives. So that would be one big fundamental difference between what you're seeing. And again, remember, the assessment is an operating metric is not a measure of revenue. And so at the end of the day, what we're trying to kind of assure you is we generate assessments, which is the standard pricing we charge our customers. It's what we call the P times SKU, this price times of quantity, depending on what the driver is, right? And then to drive more volume and more transactions of our network, we actually give rebates and incentives. All of that is factored into when we show our disaggregated net revenue by payment network and value-added services and solutions.

We'll go next to Darrin Peller at Wolfe Research.

Guys, thanks for this clarity. I guess when you look at the value-added services, just to be 100% clear, I mean I imagine that the majority or a lot of the transactionally-driven revenue stream is going to be coming from the lines that you show it coming from, transaction processing, et cetera. But looking at the biggest piece coming from other, just maybe you can help us just clearly understand what percentage of that is actually driven by a transaction versus by, for example, consulting fees? Or is most of it not? I mean maybe just if you could help clarify.

So Darrin, I'll take a cut at that. So in 2021 at the Investor Day, we talked about the -- within our service lines, approximately half of that related either directly or indirectly to transactions and the balance not. All of that is now together within the value-added services and solution category. And we've not updated that, but I think that that's a good historical reference to consider there. The other pieces that are within value-added services and solutions are not directly related to the card transactions. There's PCH related, there's digital identity, open banking, that sort of thing. You may -- I was wondering whether you also had a question around the residual other network fees -- or other network assessments, which is within payment networks. Those are licensing fees and various other fees associated with operating the card network. And so that's a kind of a residual piece of what we used to call other.

Okay. So when I look at the total value-add services line, I guess we could start off at that 50% number and then we can determine what's transaction processing. I think that's helpful. All right. And then just one quick follow-up. Is the thought process around not including the rebates incentives broken down in the releases versus the Qs? I think you're saying it's going to be in the MD&A of your 10-Qs. But why not just keep it all together?

Yes. I mean, look, I mean, the reality is we want to provide transparency. And as we look at interpretive guidance, and as we look at aligning to that, it's more appropriately reflected in the MD&A, which is where we're actually reflecting it going forward. The operative thing, Darrin, just to be clear, is we are very focused on making sure we are not taking away from a transparency standpoint for our investors. And -- which is why we were very deliberate about making sure that you've got to see that number today, and you get to see that number going forward for payment networks. It just happens to be in MD&A.

Okay. Okay. Well, it's all additive, so I appreciate it.

We'll go next to Trevor Williams at Jefferies.

Sachin, any way you could clarify the M&A contribution to the value-added services lines, both for '22 and '21? I know you've given M&A contribution to other revenue by quarter. So we were backing into about 3 points of growth in 2022 from M&A. So if you'd be able to clarify that, that would be great. And then the second part to that would be on the 20% medium-term outlook you've given for value-added services growth, if we should think of that as an organic rate or on more of a reported basis?

Yes. So on your first question -- so let's just take 2022, right? You're seeing value-added services growth rate of 18% on a currency-neutral basis there. And acquisitions represented roughly 4 points of that 18%. So that's what -- I think that's the question you're asking, yes, of the delta between the prior year and the current year. So what was 27% in the prior year 2021, which was 18% in 2022, 4 points of that differential is from acquisitions.

The other thing you need to remember is that in 2022, we only had Russia for one quarter.

Right. Okay. Understood. And just to clarify on the way that rebates and incentives are going to be disclosed in the Q. Are they just going to be disclosed for the payment network segment in the MD&A. I know that's 95% of R&I is tied to that segment, so are we not going to get the remaining piece that's tied to value-added services? Or do I have that wrong?

No. Our intent is to actually provide rebates and incentives for the payment network, just given the fact that they're 95% of [indiscernible] and incentives. That being said, when we talk about our performance for value-added services and solutions to the extent that trends are impacted to a material amount by rebates and incentives, we will obviously provide that kind of color as well. That's going to be important in terms of explaining what's going on from a growth rate standpoint.

The other thing I'd just add, the growth rate in '21 for value-added services is also benefits from the low base in 2020. So that's another thing to keep in mind when you're looking at that.

We'll take our final question from Bob Napoli at William Blair.

Thank you again for doing this. Just -- most of my questions have been asked and answered. Is there anything that you're -- that's different in these numbers from how you've talked about it in the past, the $6.9 billion number in 2021 that seemed to recall a $6.5 billion number disclosed previously. But is there anything different than the mix from what you have discussed in the past versus what's in these numbers?

Yes. So the business is completely unchanged underneath. The $6.5 billion, approximate $6.5 billion number that we talked about for 2021 did not include the same level of rebates and incentives as the number that you're kind of backing into for the value-added services and solution. It's just we've introduced this approach with the new disaggregation. So there's a slight -- the approach on splitting rebate incentives is reflective of this particular disaggregation. So that's different. But the business is unchanged.

Okay. And then just last question on the mix of all the different businesses that are in value-added services. Is there any -- like in the Qs or Ks, any -- will we get any update on some really interesting businesses in there? Or will we just be kind of discussed on the conference call or any plans to give further disclosure on that breakout on any [ convenient ] basis?

Yes. And so Bob, just as we're doing right now, we will always take a look at what we're doing from a disclosure standpoint. And we will make sure that we provide appropriate disclosure to allow you to do what you need to do from evaluating the performance of the business. So I would hate to tell you that it's a static view forever and ever. We will make those valuations on a going-forward basis and try and share the best information possible to give you the best transparency on a move-forward basis.

Great. All right. Well, thanks, everyone, for your time. Appreciate calling in on the short notice. If there are any follow-up questions, we'd be happy to take them. Please just reach out.

And thank you, everyone. Appreciate it.

This concludes today's conference call. You may now disconnect.