8 things I learned from Mastercard’s Q4 2018 earnings call

I’m sure everyone knows about Mastercard; we all practically have one in our wallets. I mean, what choice do we have right? We’re practically stuck with the ‘holy trinity’ of credit cards — Visa, Mastercard, or American Express — for now. (Although Union Pay may threaten this in the future.)

Mastercard is a great example of a ‘toll operator’ business. The company is paid a transaction fee from the issuer (your bank) and the acquirer (your merchant’s bank) every time a sale is made. In 2018 alone, Mastercard processed over US$5.9 trillion worth of transactions worldwide. Inflation has no effect on Mastercard. An increase in global population and spending volume simply leads to more growth for this company.

Here are eight things I learned from listening in to Mastercard’s Q4 2018 earnings call:

1. Net revenue increased 20% year-on-year to US$14.95 billion in 2018. Excluding the impact from the adoption of the new accounting standard and acquisitions, net revenue increased by 15%. This was driven by a 14% growth in gross dollar volume, a 17% growth in switched transactions, and 18% growth in cross-border transactions. All of which are offset by an 18% increase in rebates and incentives.

2. Operating expenses increased 31% year-on-year to US$7.67 billion in 2018. Excluding the impact of the US$100 million contribution to the Mastercard Impact Fund – the company’s non-profit organization – and US$1.13 billion in litigation provisions, operating expenses increased by 15%. The litigation provisions comprised US$654 million related to a fine issued by the European Commission; US$237 million related to both the U.S. merchant class litigation and the filed and anticipated opt-out U.S. merchant cases; and US$237 million related to litigation settlements with UK and Pan-European merchants.

3. Overall net income increased 50% year-on-year to US$5.86 billion and EPS increased 53% to US$5.63 in 2018. For the year, Mastercard returned $5.9 billion in capital to shareholders – US$4.9 billion in form of share buybacks and US$1.0 billion through the distribution of dividends.

4. CEO Ajay Banga was optimistic about the outlook of the economy in 2019. Judging from the data, the U.S. remains positive with low employment and strong consumer confidence – Q4 retail spending increased 4.8% from last year. Europe is experiencing moderate growth, up 3.5% from last year. Only countries such as France, Spain, and the Netherlands showed a decline in consumer confidence. However, increased trade tensions and interest rates could easily derail economic growth.

5. CEO Ajay Banga added that Mastercard is well-positioned to take advantage of the secular shift towards digital payment. In the next three years, he expects net revenue to grow in the low-teens. And EPS to grow in the high teens with the assumption that the tax rate remains between 19% to 20% and taking into account the effects of share repurchases.

6. An analyst told the CEO that its competitor has a sanguine outlook on the economy, so why is Mastercard optimistic about the near future? Was it because Mastercard has been gaining market share? The CEO confirmed that Mastercard has been growing its market share over the past few years. The company plans to diversify its revenue into segments like services (security, processing, loyalty and rewards, analytics and consulting) which has been growing faster than their core payment business. Based on his assumption of the business, the CEO doesn’t expect a downturn in 2019, and more likely a moderation in growth.

7. An analyst asked about VocaLink, the British mobile payment provider that Mastercard acquired last year. The CEO said that the acquisition was well-received in the UK, getting contract extensions from existing customers. So far, Mastercard has implemented the software in the U.S. and is rolling out in markets such as Thailand and parts of the Nordics. Investors will hear more about the details in the next six to nine months.

8. An analyst asked about the outperformance of cross-border revenue in the past few years and wanted to know what the long-term outlook for the segment. The CEO said not to expect the 19% growth in 2018 to repeat itself; it was an extraordinary year. Most cross-border revenue is driven by e-commerce and tourism on both the retail and corporate levels. Riding on this growth trend, Mastercard uses data analytics and targeted offers to build its portfolio of clients. With the right consumer and commercial portfolios, Mastercard can then think about creating more value for them.

Kenny Quek

Kenny Quek is a research analyst at The Fifth Person. He graduated from Drexel University in Philadelphia, PA with a major in finance and previously managed a fund in the U.S. before returning to Singapore.

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