Disclaimer: Reader acknowledges that all information appearing on Divergent View is provided for informational purposes only and does not constitute financial advice.  The Divergent View does not guarantee the completeness or accuracy of any information presented herein.  Readers should consult with their own advisors and conduct their own due diligence.

Below is an ongoing record highlighting notes from select MA investor presentations and earnings calls (newest content shown first).

Citi Financial Technology Conference, 11/13/2018


Interview with Craig Vosburg, President of North America
The Divergent View Summary: Consumer expenditures have been increasing greater than 5% year over year, which has been lifting all boats including credit and debit.  Secular share shift to digital payments away from paper-based transactions (which makes up 40% of activity) will continue to be a positive tailwind.  B2B is a bigger focus now as Mastercard has developed new capabilities to allow us to participate in all B2B payment flows, such as accounts payable transactions, which have very different needs than card-based B2B flows such as employee travel.

  • North America long-term growth dynamics
    • Expect North America to be a growth market for many years to come driven by overall economic growth, expansion in personal consumption expenditures, secular shift of payments from cash/check to electronic payments (only 50-60% penetrated, so still 40% paper-based activity)
    • We also compete to win market share and participate in other payment types such as B2B, B2C, individual to individual
  • Strategy with merchants
    • Substantial part of team is dedicated to servicing merchants and developing a deeper understanding the core business of merchants
    • Merchant co-brand program is an area we’ve had success (30 programs launched) which can be a form of a loyalty program
  • Major opportunities coming up that can change the trajectory of growth in North America?
    • Will be driven by PCE growth on consumer side, secular share shift to digital payments
    • There are always deals in the market that are in play in the course of the year such as co-brands or deals with banks
    • Newer areas of payments such as B2B is an area where there are still inefficiencies and room for penetration
  • Explanation for uptick in debit spend – why is debit doing better?
    • Overall, consumer expenditures are running 5% year over year increases, which is a healthy level of spending growth (across all forms of payments)
    • A meaningful chunk of that will find its way onto credit and debit
    • In addition to that, it is about winning business. We are growing the debit business with a number of key partners
    • Increasing uptake of debit for digital transactions
  • What changed in B2B payments – why is it a bigger focus now?
    • B2B payments are 11% of total volumes, which we’ve been working on for a long time
    • The thing that is different now is that we’ve built capabilities that go beyond what feels like a card-based payment, which allows us to extend participation in B2B from card-based flows to 100% of flows which includes accounts payable transactions
    • Those accounts payable transactions have different characteristics than employee travel for example that needs a card
    • A/P has needs with managing compliance, matching invoices, etc…we are excited as we’ve invested in those capabilities
    • We can take an A/P file and manage the execution of payables on behalf of the business and optimize across the different forms of payments
  • Enable token services on all card transactions by 2020?
    • Goal is to get card numbers out of everyone’s systems and replace it with tokens which have a much higher degree of security
    • Consumers get more control over their data and payments experience including seeing every vendor that has their card credentials (and canceling those credentials on demand)

 

Third Quarter 2018 Earnings Call, 10/30/2018


The Divergent View Summary: MA reported a strong 3Q with revenue growth of 14.7% ahead of consensus of 12.6% and EPS also being consensus expectations.  Purchase volumes remained steady at 10.7% US growth (vs. 10.5% in Q2) and 17.4% international growth (vs. 18.4% in Q2).  Management maintained revenue guidance in the high-teens and opex growth in the mid-teens amidst a healthy economic backdrop.

  • Revenue up 15% (17% FX-neutral) and EPS up 36% in 3Q on an FX-neutral basis
  • Macro environment
    • Continue to see solid overall growth, but keeping an eye out on potential impacts from fiscal stimulus reductions, rising interest rates, and trade barriers which could slow global growth
    • We are also following the stronger US dollar and emerging market weakness
    • In the US, economic growth remains positive with low unemployment and high consumer confidence. Q3 retail sales up 5.2% ex auto and ex gas
    • Overall conditions in Europe remain stable with declining unemployment
    • Latam – elections in Brazil and Mexico now behind us. At this stage, we are waiting to see how the economic agendas develop
    • Asia – although consumer sentiment remains positive, trade tensions are weighing on business sentiment in China, Japan, and Korea
    • Against that backdrop, we are driving healthy double-digit volume and transaction growth
  • We have expanded our existing relationship with HSBC including new business in the UK, Hong Kong, and Mexico
  • In North America, we announced that we will be exclusive network for the Air France/KLM co-brand with Bank of America. We also expanded our partnership with Kroger.  Kroger will leverage data analytics and fraud tools from Mastercard
  • In Belgium, Ikea announced a Mastercard credit co-brand
  • PayPal – we have been selected as PayPal’s partner for their direct card issuance in Germany and the UK
  • Asia – prioritizing partnering with digital players and increasing participation in domestic transactions
    • Digital players – announced a partnership with Grab (digital wallet and ride sharing app), which will offer customers a pre-paid Mastercard within the Grab paywall as well as a physical pre-paid Mastercard. Will initially launch in Singapore and Philippines in 2019
    • In China, strengthening cross-border and mobile presence through an exclusive cross-border credit program with Ctrip (70% of bookings executed via mobile phones)
  • B2B – Mastercard Track is a global trade platform developed with Microsoft, which manages supply chain risk. First phase is focused on managing new and existing suppliers through use of our trade directory, which includes information for 150mm businesses including sanction data and automatic updates.  Envision that Track can extend value added services such as data analytics and supply chain finance
  • Mastercard Bill Pay Exchange – allow US consumers to view, manage, and pay bills instantly from their bank accounts so customers don’t have to remember multiple passwords and due dates for bills
  • Online checkout experience – last week, we announced that we are targeting to have token services on all cards by 2020 to allow consumers to store credentials with merchants without exposing card details. We are improving consumer authentication experience through Mastercard Identity Check
  • Tax reform contributed 9% to net income growth in 3Q
  • Global card growth of 6%, now have 2.5Bn Mastercard and Mastercard-branded cards globally
  • Total operating expenditures grew 10%
  • Trends through October 21st:
    • Drivers generally similar or slightly better than 3Q on a normalized basis (3Q had one less switching day)
    • Switched volume – global growth of 16% which is an increase of 2% vs. 3Q
    • In US, switched volume grew 13%, which is a sequential increase of 3%
    • Switched volume outside US up 19%
    • Cross border volumes grew 18% but more difficult comp as quarter progresses due to cryptocurrency activity last year
  • Economic environment remains healthy and continue to expect revenue growth in high teens and opex growth in mid-teens which includes impact of new revenue recognition rules and impact of acquisitions
  • Q&A with Sell-side Analysts
  • More caution on macro environment and impacts of drop in equity markets?
    • Nothing showing up in our numbers that would give us reason to be cautious. Consumer spending remains robust
    • Discussions on trade barriers, rising interest rates, etc can ultimately have an impact…but no indications in the data that would suggest caution
  • Cross border volumes
    • Continues to be strong with Q3 numbers similar to Q2 numbers
    • In Nov and Dec 2017, we saw a lot of cryptocurrency activity, which has gone down in a significant way
    • Cross border inbound volume into the US has declined in Q3
  • If economy went into recession, what would be the playbook?
    • One part of revenue is personal consumption expenditure, so if PCE slowed in the US, that would impact our revenue
    • Historically, the secular shift from cash to electronic helps growth during slow times and some countries may pick up when the US slows
    • On the expense side, we are putting money into strategic growth initiatives including people and investments in technology, so some of that may be rolled back if there was a severe downturn. During a mild downturn, would continue to pursue strategic growth initiatives
  • Pipeline for new deals and renewals?
    • Still winning share across the board and pipeline look strong
  • Long-term guidance
    • Haven’t changed our thoughts on low to mid-teens revenue growth in the very long-term which was laid out in Sept 2017 analyst day
  • Adjusted operating margins came in above last year – how much is leverage in the operating model or timing of expenses?
    • When we look at the business overall, we believe MA can put up 50% operating margins and not changing that view
    • We did better on the revenue side, which has flowed through, which we haven’t reinvested
    • We are committed to running the company with a fair degree of efficiency and profitability, but in a growth industry, there is an enormous amount of opportunity to enable the company to grow through investment
  • Unique investments into “futuristic technologies”
    • Multi-channel / Omni-channel thinking – consumers don’t think online as being separate…they look at the overall experience
    • Investments going on in brand evolution, data and analytics, technology, charge-backs, AI, etc
    • For example, we can use AI to determine if the person using the phone is actually the person who owns it, rather than someone who could have stolen it
  • Growth of B2B business? Percentage of business that could come from B2B over the long-term?
    • B2B payments is about 11% of our total volume, which is growing low to high teens depending on the quarter you look at
    • Opportunity is $120 trillion world-wide…we are going after the slice where we can bring good value propositions to bear. For example, one expansion is handling vendor payments for businesses
    • Mastercard Track – hope to integrate a payment solution
  • Share of closed loop networks in the world and how much opportunity is there to flip those to MA?
    • There are many types of closed loop systems such as those owned by banks, governments, transit systems
    • In the 20% of transactions that are digital, there is a percentage of those that are closed loops, which is part of our secular growth strategy. We go after that volume by demonstrating the inefficiency of closed loop systems