Mastercard Incorporated (MA) Earnings Call Transcript & Summary

All right. I heard our mics just go hot live, so we better get going. Welcome. Thanks for everyone for joining us, our 9:00 a.m. session on Wednesday. I am delighted to be joined by Sachin Mehra, the CFO of Mastercard. Sachin, thank you for joining us.

Thanks for having me here, Lisa.

Excellent. I would note, I feel like Sachin got to get a late start this year, because if I recall my last 4 conferences in a row, I believe Mastercard has had the 8 a.m. session. So Warren and Devin are letting you sleep in.

Thanks for being kind to me guys.

All right. Why don't you just start by giving us an update as we always want one, because we know Mastercard gets the real-time data down to the second of what we're seeing in the macro environment and consumer spending right now.

Sure. Great. First, thank you, Lisa, for having me here. So to your question on what's going on in the macro environment, I got to tell you that what we saw in Q1 was what would be a remarkably resilient consumer. Consumer spending has been strong in Q1. We talked about this as part of our first quarter earnings call. Obviously, there are puts and takes as it relates to how the health of the consumer is going to shape up on a going forward basis. There are several factors which we view will be positive, then there will be others, which we're keeping a close eye on. On the positive side, you've got continued strong employment, which is something which obviously lends to when people have jobs, they get paychecks, they get paychecks, hopefully, they feel good about spending, which should lend to what I would call a tailwind from a spending standpoint. The other thing is savings levels are still at historically high levels. So that would be something which we kind of think in the tailwind bucket. On the headwind side, something to keep an eye on certainly is things that are going on from an inflation standpoint, right? And we've all seen inflation be something which has been impacting how the Fed has been acting and what's going to happen from an interest rate standpoint. We certainly watch that. And then on the other side is what's going on from a macro environment on the geopolitical side and what are the implications of that. So we certainly keep a close eye on it. I will tell you from what we have seen in our data through the first 2 weeks of May, the drivers are very much in line with our expectations. It's -- they're generally very much in line with what we shared with you as to our thoughts for Q2. And again, we'll keep a close eye on this. I'll give you a little bit of regional color as to what we're seeing as well. So when you take something like the U.S. market, which obviously is a big market from a spend standpoint, we had talked about how through the last couple of weeks of March and into early April, we had seen a slight slowdown in spending driven by lower tax refunds primarily in lower gas prices. And -- but otherwise, I would say the consumer remains remarkably resilient. And again, think about taxes as being time-bound as we see it. And the reason I say it's time bound is because tax refunds tend to be concentrated during a window and once that window lapses, the impact of that should start to wane. At least that's kind of how we are seeing this kind of play out. The other thing I'd say is Europe remarkably resilient. It continues to hum. Things are going well in Europe, LAC likewise. And what we're seeing in EMEA is also pretty strong kind of consumer spending patterns. AP has been -- in Asia Pacific has been kind of interesting for us only because certainly, on the domestic front, you're starting to see a little bit of recovery come through markets like Hong Kong and South Korea, you're seeing some of that come through in India for us as a company. As you know, we were in this period of an embargo about 1.5 years ago, we're starting to obviously see the right back from that because we're out of embargo and things are moving along. But spending generally is healthy in Asia Pacific as well. The last point I'll make is around cross-border. Cross-border holds up pretty nicely. In Asia Pacific, it's showing the recovery we had expected. And so I feel, generally speaking, that from a macro standpoint, very much in line with where we were expecting things to shake out. There are a few other things which have gone on since earnings, which we are keeping a close eye on. Certainly, the banking crisis is something which had kind of started actually [indiscernible] prior to earnings, keeping a close eye on that. Not entirely sure as to what the long-term implications of that might be from a regulatory standpoint, i.e., increased regulation and along with increased regulation, what that really means for how customers go out from a lending standpoint. So far, we're not seeing credit get impacted for the consumer as it relates to the impacts from the banking crisis. Last point I'll make is we're closely tracking as you are probably the current dialogues going on in Washington from a U.S. debt ceiling standpoint, something to keep an eye on. Again, hard to tell how that all kind of plays out, but that's something to certainly stay close to.

And just to remind everyone, can you remind us what macroeconomic outlook you're assuming in your 2023 guidance and outlook?

Sure. So what we are assuming is in our base case is that the consumer remains resilient through the course of this year. That is very much part and parcel of what we've got from a thought standpoint when we gave you our thoughts around from a guidance standpoint has also continued recovery in cross-border. So that's kind of in our base case. We stand ready to -- we closely watch the top line we stand ready to act if we start to see any sort of slowdown take place on the top line to be able to actually pull the levers we need to pull from an expense standpoint to moderate expenses without impacting the long-term growth prospects of the company. We will do things which actually makes sense as opposed to just being reactive to the top line.

And then maybe just a quick double-click on the banking crisis turmoil, I don't know if it rises the level of the crisis, but turmoil over these last few months, realizing it's just a handful of banks, and it's more maybe affecting the small business and commercial lending market, maybe perhaps consumer. But just from a Mastercard perspective, just talk about how that's affected you at all?

Yes. Look, I mean, the card operations side of what our customers have experienced, and this includes customers who may have been impacted as part of the banking turmoil, as you called it. Card operations have continued as is where is. No impact, card business carries on, those portfolios continue to perform, which kind of logically makes sense because at the end of the day, that's a very valuable asset for whoever be interested in the banking question, right? [indiscernible] assets tend to perform well. And so that business carries on. We'll stay very close and vigilant to understanding what -- obviously, we take risk from a settlement exposure standpoint to the bank. So we're going to stay close to that. And so far, we've not seen any impact on the card operations side.

Okay. Good. All right. Well, so Mastercard recently changed the way you do your revenue disclosure always. Yes, a big kind of change from an investor perspective when that type of thing happens. Can you just walk us through what motivated you to make the changes? And what sort of the impact you would -- we should expect the changes to have?

Yes. So look, we always look at our disclosures. We want to make sure we are presenting disclosures which provide the best possible transparency to our investor base. So transparency is kind of the first thing we think about in terms of how best to represent what our business looks like, which is why we disaggregated our revenues to show them across payment networks and value-added services and solutions. It also aligns with our strategic priorities and it also aligns with recent interpretive guidance, which is put out by the SEC on a regular basis. So we think about all of those things when we kind of go down this path. The bottom line I'd like to actually leave you with on that disaggregation of revenues is fundamentally nothing changes with the business. This is a presentation and greater transparency as to what the revenues are. Our revenues are exactly -- in totality are exactly the same as we had previously presented. They will be exactly the same on a going-forward basis. But because now you will have greater transparency into value-added services and solutions, which is something a lot of our investors were asking for greater transparency on, we thought that this was the appropriate thing to do which is what we've done as part of this process. And I'm happy to talk through if you're interested to explain what is in payment networks and what's in value-added services and solutions, but that's kind of the motivation behind what we've done.

And maybe in -- yes in the value-added services side, it might be helpful to give a little -- I mean, I know we've always thought of that as like there's other revenues and then there were some other stuff crinkled around in other segments. So -- but because value-added services is such a key strategic priority, maybe just remind everyone kind of now with the new disclosures and it fully broken out, how big is that? How fast is it growing? And what the major pieces are of value-added services?

Sure. So look, I mean, first, let's define what's in value-added services and solutions, right? So we used to historically talk about services. Everything we talked about historically in the context of services sits in value-added services and solutions. In addition to that, what we've got in there is things like our real-time ACH related revenues, like our digital identity-related revenues, open banking-related revenues. That also -- which is why we call it value-added services and solutions, which is the add-on to what's there from a services standpoint. But to double-click on services, which is the vast majority of what sits in value-added services and solutions. It's primarily our cyber and intelligence capabilities. This is our fraud management capabilities and cyber threat management capabilities. It's data and analytics, it's loyalty, it's our consulting-related stuff. It's our processing assets. That's everything that sits in services. And look, that part of what we are doing from a capability standpoint continues to be in very good demand. We see tremendous opportunity down that path. We are growing it at a healthy clip. You can see that now in our numbers. You can see it historically, you could see it even in the most recent quarter that we've had good performance down that path. And so it's a key enabler of what drives the business in totality. The most important thing, which I kind of want to leave you with is, even though we've shown you this disaggregated revenues between payment networks and value-added services and solutions, you've got to think about this as a virtuous cycle. That's how we run the business. Value-added services and solutions are a key enabler of payments. Payments are a key enabler of value-added services and solutions. They're very tightly integrated, notwithstanding the fact that we're giving you this disclosure, which is there from a segregation of revenue standpoint.

And maybe just staying on services for a minute because we got into it there. Can you talk about -- so Mastercard has been talking about value-added services for many years and the last 10 years I've been covering the company you have. But now you've broken it out separately. What are the opportunities you see in services going forward? And maybe in light of that comment on Baffin Bay, one of your recent acquisitions in the cybersecurity?

Sure. So look, I mean, on services, the reason we're doing what we do from a services standpoint kind of has got 4 key criteria. One, it helps drive revenue growth of the company as a whole. Number two, it helps us differentiate our proposition across payments and new networks. Number three, it's a great source of diversification of revenues, and you saw that play out in spades during the COVID environment when payment-related revenues got impacted, services revenues held up pretty nicely. And four, it's a fantastic source of talent. So a lot of the talent we hire in that space tends to start up there, but then actually we get to move them around the company. So that's kind of the broader thinking behind why we do what we do from a value-added services and solutions standpoint. As it relates to the opportunity, if we were to just step back and you think about the primary areas with [ civil ] services are cyber intelligence and data analytics, insights and loyalty. On Cyber Intelligence, I take you back to the more macro environment. As the world has gone more digital, there's great amounts of fraud, which is migrated to that digital environment. And we believe that, that's a trend which is only going to persist and continue to grow as time goes along. So we are investing heavily in capabilities to enable our partners to be able to tackle that fraud. It's a fascinating discussion to have with your partners when you go in and you have a discussion with them about let me help solve a big cost item for you, which happens to be fraud. We'll certainly talk about switching related costs while we're talking to you about that. But if I can help you really maximize your P&L, part of which is your fraud cost, it really resonates. It resonates nicely. Similarly, when we talk about insights and analytics, it's about helping our customers optimize their portfolios, which helps them grow their top line. So the dialogue is actually a fairly strategic dialogue with our customers to say, look, we're here to help you grow your top line, we're here to help you manage major items of your expense base. And as it relates to the opportunity side, look, we've been -- we started up going down the path of taking our services to our issuing base initially. We still continue to see tremendous opportunity down that path. So deeper penetration with our existing issuing base. We move to the acquiring side of the equation. We're actually working more closely with the merchant community on some of our solutions. And this is not just in the U.S. This is on a global basis. While we're doing all of that, we're also adding to the portfolio, which takes me to your question around Baffin Bay, which is another element of expanding that portfolio to go after the customers. So let me talk a little bit about what Baffin Bay is all about. A couple of years ago, we acquired a company called RiskRecon. What RiskRecon does is it does an outside-in scan of the digital footprint of any corporation. So what you do is you effectively look into the IP address of a company, and they help through the IP address to identify where the vulnerabilities are there from a cyber standpoint. So we identify those vulnerabilities. As we've gone down that path and skilled RiskRecon, our customers have been talking to us and saying, "That's great. You're telling us where my vulnerability is, can you help me solve the problem?" This is where Baffin Bay comes into play. What Baffin Bay is that add-on where you go back to not only those customers, but others as well, to help them now prevent themselves from -- prevent those cyber vulnerabilities from really materializing, such as DDoS attacks, malware, things of that sort, which are really important aspects. So we see tremendous potential as we keep doing this. To keep meeting needs which are emerging in these areas, and Baffin Bay is just one more extension on that path.

The competitive dynamics in value-added services are a bit different. It's sort of a little bit of a different set of competitors potentially. Where -- how does Mastercard differentiate yourself in that space?

Yes. So I think to be successful in this space, obviously, it all starts with, is there a problem to be solved? Which we're identifying and which we've just spoken about as being a problem -- there is a problem to be solved. And then it's about making sure you've got fantastic data, well organized in a manner which allows you to provide high-quality confidence scores to reduce the fraud related issues, which we're talking about. I'm talking about fraud and I'll come to data insights and analytics. So you not only need the data, you need the data to be organized in a manner where you can tap into it. You need great AI models to be able to get high quality scores with high confidence. You've got to be able to then deliver that in a seamless manner to your customer because a customer might say, you can give me a great score. But you know what, if you have to do this bespoke implementation, that's a long process. I have a big tech queue, so stand in line, come to me later. We have the ability to embed a lot of these capabilities into our network. And when you embed it into the network, you basically give the customer the option to turn on or off the switch without them having to do a heavy lift from an implementation standpoint. So from a competitive landscape standpoint, when you have great data, you organize it well. You've got great AI logic to be able to clean it and can deliver it well. It puts you in a pretty good place. That doesn't mean we win always. Let's just be clear about that, right? But the reality is that it improves our chances in terms of being able to really deliver quality product to our customers.

All right. Well, I had one from the audience and remember folks, the QR codes, if you want to lob in any hot seat questions for Sachin, while we have them up here. Specifically on value-added services, can you give any color around how investors should think about the margin profile and also the recurring revenue profile of value-added services relative to the networks business?

Sure. So a couple of thoughts. One, at Investor Day in 2021, we had shared with you a little bit more color around value-added services. Specifically, we had kind of talked about how across value-added services and solutions actually value-added services at that point in time, roughly 50% of value-added services revenue was tied to transaction growth. I want to kind of put that out there because people oftentimes wonder what's the tieback to the growth in transactions, which is there. So that's important to keep in mind. A meaningful portion of value-added services, particularly on the C&I side, are recurring in nature. Back to your question. And people oftentimes ask this question around margin. I like to think about this in the context of incremental costs associated with delivering an incremental dollar of revenue. And the reason we like to do that is for every new solution we put out there, we kind of think about this and we say, how much incremental cost do you have to incur in order to generate that revenue. And that revenue is not only the revenue we generate from the value-added service, but it's also the revenue we generate from winning a brand deal because at the end of the day, remember, this helps us differentiate on the brand. So the reality is for us, as we think about the spectrum of opportunities here, things on the C&I side come with lower incremental cost for every incremental dollar of revenue. On the D&S side, which is Data and Services, what we call Data and Services, if it's something like consulting, there's a little bit higher incremental cost. If there's something like data insights and analytics, which is more platform based, there's lower incremental cost. So it's a portfolio approach. At the end of the day, what we are trying to do is we're trying to optimize the mix of all of the solutions to drive that ultimate objective, which is how do we stay relevant with our customers across both payments, services and across new networks while we're delivering this. And it's that mix piece, which is going to help us manage where is the amount of incremental cost going to go between things like C&I and D&S?

All right. Let's turn back to the core, the core payments business and focusing on your core consumer to merchant business, what are the types of things you're doing to continue to drive growth in that business? And maybe highlight specifically traction on your Buy Now Pay Later offering that you've launched last year?

Sure. So look, the outside, I'm going to say the consumer-to-merchant opportunity is still a very sizable opportunity. I know there's been a fair amount of discussion in the recent past particularly after COVID as to what the runway, which is available from a secular trend standpoint as we continue to believe this is not a 3-, 4-, 5-year opportunity from a secular opportunity standpoint, it is much longer than that. And a lot of the work we've done in terms of different markets, et cetera, et cetera, suggests that we're in the right place. So what are we doing to go after that opportunity? Number one, baseline prospects, keep winning issuer deals. Let's stop there. And you've been seeing us execute on that. We're winning issuer deals, you need to have cards in circulation, you need to have more credentials in circulation. Number two, keep growing your acceptance footprint, which is what we're doing. We just talked about it in the last earnings call that our acceptance footprint is now north of 100 million merchant locations. It's effectively doubled over the last 5 years. And we've got to keep doing that because the more the acceptance that's there, the greater the amount of ability for you to actually tap into that secular opportunity just talking about it. Number three, continue to leverage the digitization capabilities we put onto the market. These are the likes of our tokenization capabilities, Click to Pay. Number four, I would say contactless. Contactless is a key enabler of tapping into that secular opportunity. At the last earnings call, I had shared about how contactless now represents at the time of the first quarter -- in the first quarter represented approximately 58% of all in-person switch purchase transaction. And anyone who's been tracking Mastercard, has seen that only grow over a period of time, which is why is that important? It's important because when you use contactless, you tend to tap into smaller ticket payments, when you tap into smaller-ticket payments, they've historically been in cash. So you're driving that secular opportunity. So that would be the other area. And then another area would be, like you said, coming up with new and creative solutions to meet what consumers want, such as installments. So Mastercard installments is our version of getting installments made available across our entire merchant footprint and made available to our issuing community. And so really, what it is, is it's not a bespoke installment capability between 1 merchant and 1 issuer. It's more about, let's enable all our merchants to be enabled for Buy Now Pay Later and let our issuing base in our lending base be tapping into that. And we announced in Q4 of last year about how a customer like SoFi has launched our Mastercard installments. They're seeing very good success come through. It's all been done with the right principles around consumer lending, which is really, really important to us because we have learned over the past 5 decades, the importance of actually making sure we're putting products out there with the right principles from a consumer lending standpoint. The other one which we announced was with Apple Pay -- Apple Pay Later. And then as I go overseas, we've done a bunch of work on installments with the likes of Commonwealth Bank of Australia, National Australia Bank, Westpac. So there's a lot of good traction taking place. We don't believe personally that kind of it's the silver bird, which is going to be the future of payments, but it's certainly scratching a niche for consumers, and we should be present to make it available for our customers, which is what we're doing with the likes installment.

All right. Well, beyond person to merchant or consumer-to-merchant payments, Mastercard has focused for a long time on the commercial and B2B space as one of the new flows that you've been targeting. Can you just give us an update on where we are with new flows and specifically commercial and B2B?

Sure. So what we define as new flows is across 4 areas, just to recap for everybody, it's remittances and disbursements, it's commercial point of sale. In commercial point of sale, you've got the small business proposition we've got. You've got the likes of T&E, you've got the P-Card these are all on card rails, just to be clear, that the commercial point of sale. And B2B accounts payable, we've got virtual curve and then we've got other solutions which we're building to tackle the accounts payable universe. And then the fourth pillar is around bill payments. To your specific question around commercial, I would say, very interesting area, large unaddressed market, we continue to grow at a healthy clave. We talked about this in our first quarter earnings call about how our commercial volumes grew at approximately 21%. We continue to see tremendous promise. And that's across the virtual card side of the business as well as across small business. And I'll talk about those 2, in particular, on commercial. On virtual cards, we continue to be the market leader in virtual cards. This is a capability which we continue to grow and see a lot of demand for. We are embedding this capability with various other technology providers, the likes of Coupa, the likes of SAP Taulia, the likes of Sabre and Conferma Pay. And the more you do this where you create embedded finance capabilities into payment mechanisms, the more seamless you can get your card-based payments out from a virtual card standpoint. So we're seeing very good traction on that. In addition to that, we are seeing good traction on the small business side. There is still a very significant portion of spend which takes place in B2B, which happens to be in cash and check, believe it or not. That is the case. And this is where the likes of SMEs who are using cash today, the likes of SMEs who are using check today. We've got to go after them with -- this is not about reinventing the veil. It's about making sure you come up with fit-for-purpose value props on card rails to go after SMEs, along with your Mastercard's platform capability. And the platform capabilities, Lisa are other likes of our easy savings platform. So the easy savings platform is our loyalty platform, where we offer merchant-funded rewards to all Mastercard SME cardholders who are on that platform. So we have north of 40 million cardholders who are on that platform, small business cardholders who are on that platform. Where if you're a small business card holder, you have a Mastercard card, you're enrolled on that platform. You go and you conduct your business wherever you conduct, you tend to go to, say, a rental car company, you will get an always on offer as part of that process. That's where you create affinity. And it's about creating a 2-sided marketplace, which is merchants love it because they're basically getting affinity from a small business universe, which they never had an audience with in the past. The issuers like it because they're creating affinity for their cardholders to the proposition. And so we've been rolling that out. That's just one example, right? You've got the likes of things like smart data, which is an expense management tool, also made available to small and midsized companies. So while it is on card rails, the success in that space is also a function of what you do from an investment standpoint to bring in platforms and capabilities to meet the unique needs of small business owners and midsized companies. And that's what been the focus, and that's where we're generating more and more growth from.

And how should investors think about the TAM expansion that comes with new flows?

So look, I mean, I think the TAM expansion has to be thought about in multiple buckets. And I'll talk about the stuff which is more here and now as opposed to things which will happen over, call it, the next decade. Talked about commercial already, which we think is a very sizable opportunity. We had shared with you what the TAM is at the Investor Day in 2021. So I won't rehash that. What I did not talk about was remittance and disbursements, which is the other area where we see tremendous opportunity, and we're growing at a very healthy clip, not only in the U.S. but internationally. And in remittance and disbursements, these are domestic flows and these are cross-border flows. Both of which actually sit in there. This is about leveraging not only our card rails, but our multi-rail capabilities to be able to originate payments from a bank account or from a card and terminate payments onto a card or into a bank account. And the use cases are the likes of P2P payments. You've got disbursements in the insurance vertical, you've got early wage access, you've got payouts, which are -- I mean, you know the general gist. The TAM is huge. You've got to go back about that in an organized manner and you've got to go and tap depending on the marketing question, different use cases, not all use cases applicable in every market, and that's where the focus for us has been. We see good runway there. What we particularly like about this is when you do remittances and disbursements, which is what we're doing, leveraging the likes of Mastercard Send, to the extent you do it in markets in which Mastercard has got a sizable debit share. And to the extent those payments are terminated into bank accounts, which are attached with mass card credentials, you get the second lift as well. And the second lift being people tend to use your Mastercard card for the money which just came into the bank account to be spending. So you get the card economics for the spend they do there as well as you get the economics or the push payment which is going to the bank account. And so that's kind of part of what the rollout strategy has been for us.