American Express, one of the world’s most unique financial services companies recently released its Q4 earnings report. The report has provided insights into the company’s financial performance and sheds light on its growth and development.
On the day reporting day, the share price closed up 10.54%
Here’s what I learned from the American Express Q4 earning call
Performance
- Total network volume for the fiscal year 2022 was up 21% to 1,552.8 compared to the previous year
- Total revenue net of Interest expense was up 25% to $52,862 million compared to the previous year
- Net income down -7% to $7514 million compared to the previous year
- Diluted EPS down -2% to $9.85 compared to $10.02 in the previous year
Higher growth despite economic slowdown
The company has achieved higher growth despite the current economic slowdown, which can be attributed to its premium customer base. This has made the company more resilient compared to its competitors, who may not have the same level of stability. The company is carefully selecting its card members and improving its credit portfolio to maintain its advantage. From a credit perspective, the card member base they have today has been better than the card member base they had pre-pandemic. Additionally, American Express has a unique advantage with a three-pronged revenue stream, including card fees, merchant revenue, and interest income, as opposed to its competitors’ single revenue source.
Operating and marketing expenses are likely to normalize going forward.
Management stated that the big increase in operating expenses resulted from their significant growth. They have improved various aspects of the business to handle the increased volume, including technology and operations. They believe they have reached the necessary scale to manage growth effectively. As a result, marketing spending is expected to remain stable, and operating expenses will not see the same level of development going forward, as they have achieved the necessary scale to handle the growth.
Investors should not be concerned about rising marketing spending.
Management state that despite the $5.5 billion in marketing spend, which is an all-time high and a decrease of 300,000 card members compared to the previous quarter is not concerning. The company is focused on marketing efficiencies and bringing higher-quality customers into the franchise. When incurring marketing expenses or acquisitions, the company looks at revenue from card fees and interest rather than card acquisition numbers. Management added that the current acquisition spree is not a bubble, and they will continue to be efficient and effective with their marketing spending.
Millennials and Gen Z are still small contributors in terms of borrowing.
Despite showing strong growth in contributions from Millennials and Gen Z, they remain a relatively small contributor to borrowing. American Express management explains that while these younger generations are more digitally engaged and invested in the company’s value proposition, they are not yet driving a significant portion of loan growth. This is because 70% of loan growth comes from existing customers rather than new customers, including the younger generations.
While American Express may have a higher share of the wallet of Millennials and Gen Z, they tend to have lower spending. However, management highlights that the lifetime value of these younger generations is expected to be significantly higher compared to older generations, such as Boomers and Gen Xers. This presents a great opportunity for the company in the long run.
Question and Answer
During the earning call, Brian Foran of Autonomous Research raised a common investor concern about the risks of a possible upcoming recession.
Management responded by stating that the company’s long-term aspiration is to grow steadily by more than 10%, regardless of recessions. He also mentioned that the company has a downside scenario built into its CECL credit reserve accounting, which assumes a baseline and makes it a downside scenario. They have considered a scenario of 8% unemployment by the third quarter of 2023. However, such large shocks could impact their long-term aspirations for a few quarters.
Management further added that the company would continue to invest judiciously and smartly, even in tough times, as cutting costs during such times would not help the company grow in the long term. Management also mentioned that during a recession, the company would move its credit criteria even further up but still acquire members, engage with them, and invest in its infrastructure and people. He emphasized that the goal of a 172-year-old company is to continue to grow over the medium and long term, and the way to do that is by investing in the right areas and retaining great people, even during tough times.