Mastercard (NASDAQ: MA) reported its fourth quarter 2022 results on Thursday 27th January:
- Did rising interest rates help improve margins and earnings?
- Or did rising interest rates force consumers to tighten their belts and reduce spending?
- What is Mastercard doing to diversify its business away from consumer credit cards?
These are key questions that we were hoping to be addressed in Mastercard’s Q4 Earnings Call.
Revenue Growth Driven by Cross-Border Transactions
Fourth quarter revenues grew by 12% to $5.8 billion on gross dollar volume (GDV) was up 8% year-on-year.
The increase in GDV was a primary driver for MA’s revenue growth and this was driven primarily by cross-border transactions, which were up 31% globally for the quarter. The bounce in travel and tourism since the pandemic has been largely positive for Mastercard.
A breakdown of revenues was given by CFO Sachin Mehra:
- Domestic assessments increased 6%, while worldwide GDV grew 8%
- Cross-border volumes increased 31%, and fees increased by 40%
- Transaction processing fees increased by 16%
- Switched transactions grew 8%
- Other revenues increased by 16%, including a 1% contribution from acquisitions
Other growth came from MA’s cyber and intelligence and data and services solutions.
The string growth in volumes and transactions was accompanied by an 18% increase in rebates and incentives.
Operating Expenses Are Up
Mehra also reported that operating expenses increased by 13%, including a three-percentage point uptick because of acquisitions.
MA has reduced marketing and advertising costs, but increased its personnel costs to support executing its strategic objectives.
Looking forward, Mehra says that MA will “continue to carefully manage our expenses as we invest in our payments, services, and new network priorities to drive short- and long-term growth. For the year, we expect operating expenses to grow at the high end of a high single-digit rate on a currency-neutral basis, excluding acquisitions and special items. Acquisitions are forecast to add about 0.5 ppt to this growth, while foreign exchange is expected to be a 1 ppt headwind for the year.”
Share Repurchases Help to Drive EPS Growth
Earnings per share (EPS) were up 19% (at $2.65) on an increase of 16% in net income. Share repurchases totaling $2.4 billion delivered $0.06 of this EPS increase.
Acquisitions reduced net income by two percentage points.
MA is continuing to repurchase its shares ─ and has spent $590 million in January 2023 doing so.
Consumer Spending Is Holding Up, But MA Expects Growth to Moderate
There’s no doubt that the bounce in consumer spending post-pandemic has boosted MA’s revenues and earnings. But with high interest rates and an uncertain economy, will this impact consumer’s ability to continue to continue spending?
MA gave something of a mixed signal here, with Sachin Mehra commenting:
“We do expect consumer spending to hold up relatively well in this environment driven in part by the strong labor market. It is important to remember that we are coming off a year of strong growth as we lap the effects of the pandemic, and we expect our go-forward growth rates to moderate accordingly.”
Consequently, MA is forecasting first-quarter 2023 revenue growth to be at the low end of a double-digit rate – reflecting in large part resilient consumer spending.
MA also expects operating expenses to grow by less than 10% ─ excluding acquisitions and special items. Acquisitions will add around 2% to operating expenses while Foreign exchange is expected to add another 1%.
CEO Michael Miebach remarked:
“The broadly resilient labor market with low unemployment and rising wages, coupled with elevated consumer savings levels, are key drivers of consumer spending. We’re also tracking efforts by the central banks to curb inflation, along with moderating energy prices and the reopening of China. So still, lots of moving pieces. From an overall consumer spending standpoint, we expect the consumer to be relatively resilient.”
MA Is Extending Payments Beyond Credit Cards
MA won some substantial new business in Q4, and extended some key partnerships – notably with Citi, Citizens, and Bank of America in the U.S; NatWest in the UK; QNB Finansbank and Trendyol in Turkey.
MA is broadening and deepening market penetration through innovative solutions that include installments, click-to-pay, and tokenization. Miebach gave an example of this innovation in tokenization:
“We’re working with car manufacturers and fintechs to integrate payments using our tokenization platform and biometric authentication capabilities. Think about the simplicity it brings to paying for gas, tolls, charging, or entertainment right from your car.
“This is a great example of Mastercard working with partners to drive the convergence of the Internet of Things, 5G and addressing consumer demand for cool digital experiences. It also highlights how we’re expanding the reach and the value of our acceptance network through new channels to support new use cases. This is just the beginning. Watch for more to come in this space.”
MA’s Expansion Into New Segments & Services
MA is aiming to leverage its services to drive core growth and expand into new segments, and thereby diversify away from Mastercard.
Using a data-driven model, the services that MA is now offering include:
- Test & Learn capabilities for companies to conduct analytics on their core business
- Advising on product development strategies
- Deploying personalization solutions
MA is also expanding the services it provides to new segments and new use cases, including governments, retailers, digital partners, and financial institutions.
MA Is Embracing New Networks
MA is expanding its differentiated services and embracing new networks, targeting open banking and digital identity.
Examples of this include leveraging its open banking capabilities to power solutions like JPMorgan’s Pay by Bank, using the Mastercard open banking platform to modernize existing ACH payments and allow customers to pay bills from their bank account in a frictionless manner.
In Europe, Mastercard is connected to more than 3,000 banks and financial institutions across 18 markets.
The Bottom Line
Mastercard has produced another strong quarter. Revenues and earnings have been helped by consumer resilience and continuing recovery in travel. It has made further progress in cementing existing partnerships and diversifying its business.
The question is this – will the labor market remain strong and consumer spending hold up?
MA is expecting slower revenue growth in Q1. Its ability to increase its income by a healthy margin may hang on its ability to control its costs. 2023 may be a more challenging environment than MA believes it will be.
Over the last five years, MA’s share price has increased by 121%, compared to an increase of 39% in the S&P 500 Index. Though it’s yield is nothing to shout at, MA has also more than doubled its dividend during this time. With a dividend payout ratio of only 19%, it can afford to continue to increase the dividend aggressively.