Q1 2022 Mastercard Inc Earnings Call
Good day and thank you for standing by welcome to the first quarter 2022, Mastercard earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that todays call.
<unk> is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Mr. Warren Nisha head of Investor Relations. Please go ahead.
Thank you.
Good morning, everyone and thank you for joining us for our first quarter 2022 earnings call with me today are Michael.
Our Chief Executive Officer, and Sachin Mehra, our Chief Financial Officer, following comments from Michael and Sachin the operator will announce your opportunity to get into the queue for the Q&A session.
Thank you for your questions.
You can access our earnings release supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website Mastercard dotcom.
The release was furnished with the SEC earlier this morning.
Our comments today regarding our financial results will be on a non-GAAP currency neutral basis, unless otherwise noted.
The release and the slide deck include reconciliations of non-GAAP measures to GAAP reported amounts.
Finally, as set forth in more detail in our earnings release I would like to remind everyone that today's call will include forward looking statements regarding mastercard's future performance.
Actual performance could differ materially from these forward looking statements.
Factors that could affect future performance are summarized at the end of the earnings release and in our recent SEC filings a replay of this call will be posted on our website for 30 days with that I'll now turn the call over to our Chief Executive Officer, Michael Leyba. Thank you Warren good morning, everyone.
Russia's invasion of Ukraine market somber start to 2022 and more returned to Europe for the first time in decades, given these extraordinary circumstances, we decided to suspend our business operations in Russia.
We did not take this decision lightly given that Mastercard has operated in Russia for more than 25 years. We are now focused on an orderly suspension of business operations in Russia, and supporting the wellbeing of our employees and their families across the whole region.
Even in the context of this challenging geopolitical environment, we're off to a strong start in 2022, we delivered robust revenue and earnings growth with further improvement in our underlying operating metrics, notably and cross border travel.
Quarter, one adjusted net revenues were up 27% and adjusted operating income up 40% versus a year ago on a non-GAAP currency neutral basis.
On the macroeconomic front consumer spending remains strong, particularly as economies across the globe continue to reopen and pandemic related restrictions are lifted.
Labor markets are thumb with low unemployment rates and rising wages weighing.
Weighing against this healthy backdrop on a number of factors that damn monitoring, including inflationary pressures supply chain constraints geopolitical uncertainties and COVID-19 infection rates and monitoring these developments, including the fiscal monetary public health care and other policy responses.
Look at this from a geographic standpoint.
U S retail spending remains healthy aided in part by the buildup of excess savings during the pandemic.
According to our quarter, one Spendingpulse report, which is based on all payment types, including cash and check U S. Retail sales ex auto ex gas were up four 7% versus a year ago in Europe spending trends are positive. Although the invasion of Ukraine has introduced risks to economic growth looking ahead.
Growth in Latin America continues to moderate following a strong rebound in 2021.
Asia has generally lagged the recovery of other regions, we're seeing several countries relaxing COVID-19 related restrictions when others are facing stronger measures.
Asia continues to have significant upside potential.
Looking at Mastercard spending trends, we continue to see strong growth domestic switched volume saw strength across a broad range of sectors, including retail utilities and professional spend we also saw strong growth in travel and entertainment, including spending with airlines travel agencies lodging and restaurants.
In terms of cross border, where the growth was particularly strong the recovery continued this quarter led by travel cross border travel reached 2019 levels as of March for the first time since the pandemic began geographically the cross border recovery has been broad based with improvement across all regions.
S border card not present ex travel continues to be strong.
Our strategy is designed to enable and capitalize on these trends and to execute against our three key strategic priorities, one expanding in payments to extending our services and three embracing new networks, Here's an update on how they're progressing against each of those.
First we're expanding in payments by continuing to grow comp payments and leaning into innovation and new payment technologies to capture other prioritize payment flows.
But driving growth in card payments through new consumer small business co brand and Fintech wins on the consumer and small business fronts I'm excited to announce an enhanced partnership with Wells Fargo, which includes several new elements one cycle, but now issue Master card small business credit cards and for the first time in almost a decade consumer propel.
Terry and co brand credit products.
We're also excited to announce a b and deepen our relationship with a long standing partner capital. One in addition to renewing our existing business. We will also be their issuing network for a larger number of new originations across both our consumer and small business products.
Heather on the small business front, we're expanding our small business portfolio with first National Bank of Omaha also partnering with the bank and Verizon to launch a new Verizon business Mastercard targeting Verizon small business customers.
In total these partnerships will help us continue growing our U S small business market share.
Outside the U S with driving commercial card growth through new partnerships with eating BW tech companies like Clorox.
We'll be flipping cars business portfolio in Mexico to Master card and are working with them to launch new programs in five additional markets across Latin America.
Turning to co brands, we've made substantial progress to ensure we are well positioned to capitalize on the return of travel you have renewed and expanded our exclusive partnership with American Airlines, one of the largest co brand programs in the United States.
American will continue to leverage our capabilities, including session M and will participate in a stockpile program to identify new Tech partners, who can help drive innovation across the airline.
And in the U K, we have launched two new barclaycard obvious cards with Barclays in international airline group loyalty outside.
Outside of travel, we've expanded our relationships with leading retailers, including a new co brand program with Victorias secret and a renewal of our Ulta beauty co brand offering both in partnership with Brent financial.
We're also continuing to advance our leadership in the digital and Fintech space with new product launches and new partnerships.
Partnering with BCA digital the digital banking almost the largest private bank in Indonesia launch a digital first Mastercard debit product catering to millennials and in Latin America, We signed a regional partnership with global payments processing platform Galli nail the partnership establishes Master card is galileo's preferred partner across several markets in Latin America.
And Dave will work to integrate and distribute several of our products and services to help their fintech customers.
In addition to driving new wins.
<unk>, our services capabilities to execute against many of the large portfolio migrations that are in flight.
In Europe , our consulting teams are engaging with our partners at Santander net west and Deutsche Bank to ensure a smooth and timely transition and to identify opportunities to optimize dose portfolios sums.
Something that is the bulk of the way through a 9 million card migration and we expect it to be complete by early next year, while net west commenced the issuance of master card at the end of last year and plans to migrate their entire 16 million card portfolio by the middle of 'twenty 'twenty, three Deutsche Bank's 10 million consumer and commercial credit and debit cards.
<unk> will be reissued as Mastercard branded cards with a credit migration starting in quarter four this year and the debit migration commencing early next year.
Similarly, our team in the U S supporting key migrations, including Gap, Inc. Merrick Bank in first Interstate bank all the migration soundtrack gapping scheduled to be completed this summer.
We're also expanding in payments by leaning into payments innovation in areas like installments and crypto currencies here are a few examples.
Our open deep Master card installments program has been very well received and is progressing. According to plan remember Mastercard installment is built into our network, making buy now pay later available to millions of consumers and merchants worldwide.
We continue to add a wide array of new lender and Fintech partners, including amount deserve I to see listening and southern bank.
And this quarter, we announced several merchant partners, who are excited to support master card installments, excluding bass pro shops and Cabela's HR.
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Sexes Avenue and Walgreens less.
<unk> customers will begin offering mastercard installments to consumers this quarter and international expansion is planned for later this year.
And we continue to build solutions to support the crypto economy with a principled approach focused on three key areas first helping consumers easily and safely purchase crypto currencies and if Ts. In addition, we are enabling consumers to spend their crypto holdings card and cashing out their crypto wallets via Mastercard send.
Second providing identity cyber and consulting services for market participants, including engaging with central banks as they design and developed Central Bank digital currencies.
Third preparing our core network to directly support digital currencies.
Making substantial progress in each of these areas this quarter the Gemini Master card, which offers crypto rewards went live across the U S. We also partner with Nextel to launch a new crypto Con in Europe , one that uses consumer digital assets as collateral to back their credit line.
And we established several other international crypto card partnerships, including banks in Europe , and opera Invesco and Belo in Latin America.
Those services Franck Mockado Libra will be leveraging cipher traces AI and CEVA cyber capabilities to bring security and trust to their digital wallets in Brazil.
Now turning to our second strategic priority services as I've noted before services support and differentiate our core products and have played a critical role, enabling many of the wins I mentioned.
We also continued to extend our services across multiple growth vectors through new payment platform capabilities, new verticals and new use cases here are a few examples first.
Earlier this month, we completed our acquisition of dynamic yield now that the transaction is closed we will combine dynamic yields personalization platform and decision engine with our session and loyalty platform and our test and learn experimentation software. The result will be a truly differentiated consumer engagement and loyalty hub for our customers.
Second we announced that we're expanding our consulting services industry, new practices dedicated to open banking and open data crypto and digital currencies and ESG, we've seen increased customer demand and our growing portfolio of successful engagements in these areas for example, with supporting hundreds Bang and Intesa Sanpaolo.
Design programs that advanced our ESG priorities, helping why Rex explore innovations in crypto.
And finally, we're expanding the breadth of our customer base and deploying our capabilities to solve for a wider range of use cases. For example, we deployed on a test and learn capabilities to help tailored brands optimized retail operations and improved marketing efficiency for the leading menswear brands and redeployed our ethics capabilities with Santander in Spain.
To help streamline dispute resolutions and prove the customer experience.
Beyond the expanding in payments and extending and services. Our third key priority area is embracing new networks. Our current focus is on two areas open banking and digital identity.
Our open banking and multi rail strategy is a converging enabling us to leverage our unique set of assets to address new flows in verticals like rent payments.
In payments the risk of a C. H returns due to insufficient funds as a significant painful on both renters and landlords to address this challenge.
Launching a new suite of smart payment Decisioning tools. These solutions use Finnish cities open banking capabilities to recommend optimal payment day and payment rail for each transaction based on cost speed and risk. The bill payment Alliance a collection of more than 2 million rental homes will be one of the first fintech partners to launch these capabilities.
And we plan to expand these solutions across a broad range of bill payment verticals.
In addition, we continue to extend our open banking reach with Finesses, He and I are by penetrating new verticals and establishing new partnerships.
To enhance our capabilities at the mortgage vertical and now expanding into the auto lending vertical.
We're leading the way in terms of provisioning permission based income employment and asset verification information and we are part of a strike who will be using our open banking capabilities for a variety of use cases.
We're also extending our open banking reach through data access agreements with partners like Pfizer, which will enable direct API connectivity to thousands of S is in the United States.
The digital identity space, a contact continued its strong performance in quarter, one securing deals with financial services companies, including Moneyline and several leading buy now pay later providers and.
In addition, we recently joined forces with Microsoft on a collaboration to improve digital transaction approval rates and reduce fraud. The solution enables issuers to optimize authorization decisions using network and merchant specific authentication data combined open banking and digital identity extend our valued before.
And after the payment transaction and into new digital transactions. These are attractive and growing opportunities and we are uniquely positioned to be successful impulse.
In summary.
Our business fundamentals remained strong and we delivered robust revenue and earnings growth again, this quarter, which also reflects our disciplined approach to expense management, we're executing against our strategic priorities, notably expanding our share with key issuers.
In addition, we've worked hard to expand our travel oriented portfolios, which positions us well to capitalize on the strong recovery in cross border travel.
And last but not least we want to reflect on what is most important the safety and wellbeing of our employees and their families who have been impacted by the work our thoughts are with them and the people of Ukraine, such and over to you.
Thanks, Michael turning to page, three which shows our financial performance for the quarter on a currency neutral basis, excluding special items and the impact of gains and losses on our equity investments.
Net revenue was up 27%, reflecting the continued execution of our strategy and the ongoing recovery in spending acquisitions contributed two ppt to this group.
These revenues were above expectation, primarily due to stronger than expected cross border and domestic volumes favorable cross border mix and FX related revenues.
Operating expenses increased 13%, including a six ppt increase from acquisitions.
Operating income was up 40%, which includes a one ppt decrease related to acquisitions.
Net income was up 61%, which includes a 20 ppt benefit due to the recognition of a one time discrete tax benefit related to a U S tax regulation published in the current period and a one ppt decrease from acquisitions.
EPS was up 65% year over year to $2 76, which includes a 36% contribution from the one time discrete tax benefit Andy.
Andy by some contribution from share repurchases during the quarter, we repurchased $2 4 billion worth of stock and an additional $599 million through April 25th 2022.
So, let's turn to page four where you can see the operational metrics for the first quarter worldwide gross dollar volume or GDP increased by 17% year over year on a local currency basis of note data related to sanctioned Russian banks was not reported to us and hence such amounts are not concluded in Q1 2022 .
In the U S. G D increased by 14% with credit growth of 31% and debit growth of 1%, reflecting the recovery of credit spending on travel and the lapping of stimulus out.
Outside of the U S volume increased 19% with credit grew 20% and debit growth of 18%.
Cross border volume was up 53% globally for the quarter with intra Europe cross border volumes up 50% and other cross border volumes up 56%, reflecting continued improvement and gravel related cross border for the first time since the onset of the pandemic Cross border volume was above 2019 levels for all regions.
<unk> and cross border travel was above 2019 levels for the first time in March.
Turning now to page five switched transactions grew 22% year over year in Q1, and what at a 150% of 2019 levels card present, and Gardner President growth rates remain strong card present growth was aided in part by increases in contactless penetration in several regions with.
<unk> as a result of the suspension of our business operations in Russia cause issued by Russian banks are no longer active on our network and are therefore excluded from our God counts. This quarter. Accordingly card growth was lower at 4%. This quarter. If you exclude Russian issued gods from current and prior years.
Our growth would have been 9%.
Globally, there are 2.9 billion Mastercard and maestro branded cards issued.
Now, let's turn to page six of the highlights on the revenue line items again described on a currency neutral basis, excluding special items unless otherwise noted.
The increase in net revenue of 27% was primarily driven by domestic and cross border transaction and volume growth as well as growth in services, partially offset by growth in rebates and incentives acquisitions contributed approximately two ppt to this growth I'd also.
Like to point out that in the first quarter the suspension of business operations in Russia had a minimal impact to the overall growth rate off the company as the loss of volume was offset by a one time benefit of lower rebates and incentives due to the absence of a customer incentive agreement renewal in Russia.
Looking quickly at the individual revenue line items domestic assessments were up 21% while worldwide GDP grew 17%. The board Ppt difference is primarily due to unreported volumes from Russian related.
Sanction customers and a favorable mix.
Cross border volume fees increased 57%, while cross border volumes increased 53% both ahead of expectations.
The boot Ppt difference is primarily due to favorable mix as higher yielding X and Craig or cross border volumes grew faster than intra Europe cross border volumes this quarter.
Transaction processing fees were up 27% what switch transactions grew 22%. The five ppt difference is primarily due to favorable cross border mix and FX related revenues.
Other revenues were up 20%, including a seven ppt contribution from acquisitions. The remaining growth was driven by our cyber <unk> intelligence and data and services solutions.
Ideally rebates and incentives were up 30%, reflecting the strong growth in volumes and transactions and new wins new deal activity.
As a percentage of gross revenues rebates and incentives were lower than expected primarily due to the absence of a planned customer incentive agreement renewal in Russia.
A higher mix of cross border revenues, and the timing of new and renewed deals.
Moving to page seven you can see that on a currency neutral basis total operating expenses increased 13%, including a six ppt impact from acquisitions excluding.
<unk> operating expenses grew 7%, primarily due to increased spending on advertising and marketing.
So those costs to support the continued investment in our strategic initiatives and increased data processing costs.
Turning to page eight let's discuss the operating metrics for the first three weeks of April for your reference to help you understand the trends in the business ex Russia. We have included an appendix later in this deck to show all the data points from the schedule. If you excluded activity from Russian issued gods from current and prior periods.
Going through the metrics in turn starting with switched volumes for the first three weeks of April we grew 23% year over year down four bpd versus Q1, primarily due to the cessation of activities in Russia if.
If you exclude Russia related volumes from the current and prior periods switch volumes grew 27% down one ppt versus Q1.
Switch transactions grew 14% year over year through the first three weeks of April down each ppb ppt from Q1, again, driven primarily by the absence of Russia related transactions of note, Russia has a relatively low average ticket size, which results in a larger relative impact this metric if.
If you exclude Russia related transactions from the current and prior periods switched transactions grew by 25% year over year or up one ppt versus Q1.
Overall cross border volumes through the first three weeks of April grew 60% year over year up seven PPD versus Q1, excluding Russia from the current and prior periods cross border volumes through the same period grew 65% year over your up protein PPD versus Q1.
Since the end of January Cross border travel has rebounded quickly as border restrictions continue to be lifted and we distance ourselves from omicron.
And the first three weeks of April Cross border travel was up 117, 9% year over year up 38 PPD versus Q1.
Cross border Gardner President, excluding travel was up 5% year over year in April a decrease of eight <unk> compared to Q1, reflecting in part the lapping of a strong comparable period year ago.
One point to emphasize is cross border travel is now above pre pandemic levels at 110% of 2019 levels.
Turning to page nine I wanted to share our thoughts on the remainder of 2022, let me start by saying that our business fundamentals remained strong as we continue to grow our customer relationships and expand our product and service offerings as Michael mentioned consumer spending remains robust, particularly as economies open further and Ben Demick related district.
<unk> are lifted.
<unk> said this we are monitoring a number of factors, including inflationary pressures supply chain constraints geopolitical uncertainties and COVID-19 infection rates at this stage, we have not seen any significant impact of these of the tumor spending.
Cross border travel is recovering rapidly as borders.
Border restrictions ease this is occurring faster than our earlier expectations, we are well positioned to capitalize on this growth with our travel oriented portfolios.
Weighing against these positive trends are the impacts of the war in Ukraine, and the suspension of our business operations in Russia.
So now taking all of this into account we continue to expect net revenues for full year 'twenty 'twenty tool to grow at the high end of a high teens rate on a currency neutral basis, excluding acquisitions and special items. So essentially we are maintaining our growth expectations in the same range as the strong cross border travel.
Recovery and strength in consumer spending helped mitigate the loss of sizable revenues in Russia and Ukraine.
Acquisitions are forecasted to add about one ppt to this growth was foreign exchange is expected to be a headwind of three to four ppt for the year, primarily due to the strengthening of the U S dollar relative to the euro.
In terms of operating expenses, we are reducing our forecast for the year to reflect cost savings related to Russia.
All of the year, we expect operating expenses to grow at a high single digit rate on a garnsey neutral basis, excluding acquisitions and special items Act.
Acquisitions are forecast to add about four to five ppt to this growth while foreign exchange is expected to be a tailwind of approximately two to three ppt for the year.
With respect to the second quarter year over year net revenue is expected to grow at the high end of a high teens rate again on a currency neutral basis. Excluding acquisitions. This reflects mostly strong consumer spending including continued improvement in cross border travel spending relative to 2019 secondly, the.
Discontinuation of revenues from Russia, and a sequential reduction in revenues related to Ukraine, and finally, the lapping of a strong year ago quarter that was aided by fiscal stimulus and the easing of pandemic related restrictions as vaccination programs rolled out.
Acquisitions are forecast to add about one ppt to this growth while foreign exchange is expected to be a headwind of approximately five to six ppt for the Bordeaux.
From an operating expense standpoint, we expect Q2 operating expenses to grow at a high single digit rate versus a year ago on a currency neutral basis, excluding acquisitions and special items.
Acquisitions are forecast to add about four to five ppt to this growth, including the acquisition of dynamic yield, which we are pleased to have just closed.
Foreign exchange is expected to be a tailwind of approximately three to four P. P D for the portable.
Other items to keep in mind on the other income and expense line. We are at an expense run rate of approximately $115 million per quarter, given the prevailing interest rates and our recent debt issuance.
This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics and finally, we expect a tax rate of approximately 18% to 19% for each of the remaining quarters of the fiscal year based on the current geographic mix of our business.
Before closing I want to briefly comment on a three year performance objectives for 2022 'twenty 'twenty four.
Clearly the elimination of Russia related revenues and the reduction of those from Ukraine create a headwind to achieving these objectives. If this would've continue it could result in a headwind of approximately two ppt to our net revenue gabler.
Having said this we are off to a strong start in 2022 with the recovery of cross border travel ahead of expectations as I. Previously mentioned, we remain focused on building long term sustainable growth for the company and net net it. It is really too early to adjust our three year performance objectives, as we work to offset some or all of these headwinds.
And with that I will turn the call back over to ward. Thank.
Thank you Sachin Tomorrow, we are now ready for the question and answer session.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question will come from the line of Sanjay <unk> with K B W. Please proceed with your question.
Thanks, and good morning.
Got a question on inflation I know the data suggests the consumer remains in good shape as.
As we look at cross trends in the vertical and as such are you seeing anything that sort of.
It's seeing some kind of negative impact on consumer spending patterns as a result of inflation I know we heard some comment on E. Commerce, maybe you could talk about that thank you.
Sanjay Thanks for your question so on the inflation side.
As such in mentioned area, we have not seen anything yet in terms of changing.
Consumer spending behaviors, but what we're seeing is in terms of the impact on the.
Vertical mix and so forth that has been a 1% increase in our switched volume that's related to gas price increases we're seeing some shifts in the airline that has a gander and inflationary pressure there from ticket prices perspective, So we'll have to see where it goes going forward.
The mentally.
Where I stand on this is the push by consumers into the digital space. They learn these habits there on their online all of that will continue and.
And we'll see where the underlying prices go and he incomes back to what we've been saying all along.
There's macro considerations in each country that is has been considered here what is monitory fiscal policy and then there is the micro aspects of the different verticals, which ones of those are carded at carded, which ones, we would see which ones we wouldn't see.
Could there be a crowding out effect of rents are gas prices, particularly in Europe , yet it might be but that's not something we can tell yet.
Thank you.
Your next question will come from the lineup Hershey to wallet with Bernstein. Please proceed with your question.
Hi, good morning.
Michael question I want to ask about cross border travel that is strong because of the year.
Even if let's say China other parts of Asia doing some back meaningfully we can still kind of get back to the normalized 30% to 40%.
Abbas. Thank you. Thank you.
Great.
Because there's so much pent up demand or does Asia, China need to come back with it.
Today the country.
And Sachin just a follow up for you can you just talk about the sensitivity of your revenue guidance.
Sure.
Thank you.
Thanks.
Thanks, Victoria. So first on your on your question on Cross border, you're absolutely right. You know cross border travel has actually come back stronger than our expectations that there continues to be pent up demand than we are in terms of how we're thinking about our guidance, we've kind of built in that improving recovery in cross border travel on a going forward basis as well.
So I just wanted to kind of get that out there, but to give you a little bit more color right.
Cross border. So cross border volumes are above 2019 levels across all regions for the first time.
I would tell you that the top 20 destinations, which represented approximately 70% of our total cross border travel pre pandemic and we're at 70% of 2019 levels. When we discussed this at our Investor community meeting.
Our now at 85% in Q1 of 2022, specifically on your question around Asia Pacific.
I think it's important to note that Asia Pacific has been slower to recover at the Asia Pacific opportunity as I see it as a four is as follows.
Asia Pacific represented.
Approximately 14% of total inbound cross border travel volumes pre pandemic.
And we're at 40% of our 2019 levels in Q1, so as you can see from this number right that there's.
That is a fair amount of recovery still remaining to come from Asia Pacific Obviously, it does matter in terms of how striction liberal in that market.
Again, the point is at the end of the day Cross border fundamentally is still very sound, it's something we've been talking about right through the pandemic, where we felt like when restrictions are eased in the volumes of cross border will come back we've seen that happen and we continue to believe fundamentally that that remains very much in place on a b in particular.
Couple of thoughts on China, one the both China, both from an inbound and outbound standpoint, we're not a very significant portion of our cross border volumes.
Pandemic in fact, I would argue that the outbound China was slightly higher than the inbound China and so when you think about recovery you got what you got to think about what restrictions are there in terms of people going into countries versus people coming out of countries and I would tell you outbound China has shown better improvement than in about China for obvious reasons as we all know that.
Lockdowns in China, and things of that sort so net net as I sit back and I think about this I think about the fundamentals of cross border being strong I think about the potential for pent up demand continued to contribute to.
The improvements in cross border travel spend and again the whole Asia Pacific region still remains a very large opportunity on a going forward basis, yeah. If I can just build on that.
We love Cross border.
But yeah, it's why we loved the trends, it's a lot of hard work and over the last two years.
I mean, the travel industry was hard hit from the outset of the pandemic, we have leaned in and as I recall over the last two years Jetblue Cafe specific British Airways Latin Latin.
Aeroplan Air Canada, you name it its a long list of where we have either expanded renewed.
One additional volumes. So we are participating in that trend and a very significant way and we've always said, it's going to happen this year and we're ready for that.
Your next question will come from the line of Reena Kumar with UBS. Please proceed with your question.
Okay.
Good morning, Thanks for taking my question.
To see the strong operating margins during the quarter 460 basis points can you discuss some of the underlying drivers outside of the return on cross border and how sustainable you feel even effort.
Chris that operating margin is going forward.
Yeah happy to take that question. So look I mean at the end of the day you know that.
The business has as we have it is is a high operating leverage business right at the end of the day incremental dollars of revenue typically flow to the bottom line.
Just given the nature of how we operate so certainly cross border recovery is playing into the recovery in operating margins, but it's not just about cross border. It's about overall strong consumer spending and cross border travel recovery all of which is contributing to the delivery of improved operating margins.
<unk> that even further is the continued strength in our services and everything we're doing along those bots. So it's everything which we are doing in terms of driving the fundamentals of our business back to the strategic priorities, Michael was talking about which is growing our payments keeping.
People are leaning in on services and then.
Invest in the new netbook space, which is really really important. So all of those factors are contributing factors to the expanding operating margins that you're seeing come through the message I'd like to leave you with on this is the following we continue to run the business for long term sustainable growth, which means effectively that we're going to continue to invest.
In a disciplined manner to ensure that we are creating the right opportunities for ourselves to deliver this long term topline growth and while we do that you know you should see the impact of that come through windows of operating models.
Next question. Please your next question will come from the line of Darrin Peller with Wolfe Research. Please proceed with your question.
Hey, Thanks, guys.
When we look at the types of opportunities on cross border that Youre seeing right. Now you clearly are positioned as he said before to take advantage of this upswing in travel.
And historically, it's been very high pass through without it and set without rebates incentives.
In relation.
So first of all just to be clear I mean should we still expect that to be the case or is there anything around the new business you've won the relationships, but Michael you mentioned earlier.
Oh that would cause that that gross yield I guess, we can say your net yield.
To be a little bit different going forward on this type of big pickup and resumption in spending on travel and then Michael just more strategically when we think about that that industry in terms of cross border payments Theres been so much change and even you guys are trying to work through opportunities for more.
Open banking opportunities across global and so does that change the ecosystem at all or is card base really how you expect to see cross border place states, they really dominant prepayments cross border overtime.
Yeah.
Thanks, Darren I'll take the first part and then Michael can address your second question. Yeah. I guess the headline is the following which is we're not seeing anything fundamentally changed in terms of the profile of our cross.
Cross border revenues.
So net net you know things are going to move around depending on how much cross border comes from intra Europe buses, you know volumes from outside of that intra Europe corridor, because as you know intra Europe is low yielding and then other cross border volumes are higher yielding but fundamentally I would tell you not much has changed I will make one point you talked about rebates and.
Centers not being there with cross border I would say that there is a lower indexation of rebates and incentives for cross border. There's always been some level of rebates and incentives, which have been associated with cross border and not nearly as high as what is that of the domestic volume environment, but we're not seeing fundamentally much change in that regard.
Right and strategically.
So Darren here's what I'd say is.
Similar lens that we took at Investor day, where we looked at different universes and different use cases, you got it at the PTO M World, where card as well established domestically, but also certainly cross border.
The industry and we very specifically with our services propositions have.
Found a way to ensure that the risk associated with these cross border transactions for merchants and for consumers are addressed sort of conversion rates and the approval rates have continuously increased and theres a lot of value broad. So there isn't much of a problem to be resolved to payment for payments for goods.
On a cross border basis, now where are we actively looking in our.
It tend to participate in all relevant payment flows were saying what other payment volumes happening cross border that we can contract Youtube is our technology through our franchise and so forth and here you know the whole space of import export and cross border accounts payable that's a space where account to account solutions makes sense for us to.
A whole we have specifically called out for you at the Investor day to focus on remittances again, that's a that's a significant opportunity for us that's all additive and expansive from our target market perspective from an opportunity perspective attractive growing opportunities. We have the technology on the cross border remittance aside our trans fast acquisition.
<unk> our buyout on the home center side all of that is coming together, it's 100 country reach so I think what we're bringing here is the multilateral network idea into this space that has been historically inefficient. So I look at this as a growth opportunity, while we're going to continue to power the cost side of the house.
Next question. Please your next question will come from the line of Lisa Ellis with Moffett Nathanson. Please proceed with your question.
Terrific. Thank you I was hoping to shine a spotlight on Latam, specifically, Brazil, just taking a peek at the supplemental Mastercard volumes are up 40% to 50% in that region.
There's also a market where you've got a local network like picks gaining a lot of traction can you just use that as an example to talk a bit about how mastercard co exist in a market like that which one of these domestic networks is a player like to exactly a customer a potential customer of ours.
Open banking or fraud or identity services.
Thank you.
Alright, So let me take that.
So first of all about Brazil, it's been a market and focused strategically important market for us for years were very well established on.
With the large banks out there Ito and others to mentioned so.
I'm actually seeing presenting country manager right. After this call. So it's a it's very much a focus we're very happy with what's going on there overall.
Overall, it's a market that drives a lot of innovation buy now pay later has been a thing in Brazil Forever Open banking is on the rise real time payments is on the rise.
So a lot of movement there.
And the P to P. A network that's been introduced by the Central Bank in the Brazil market is another push to further digitization at market. So the whole digitization in Brazil is.
Really seeing great momentum and were leaning right into that now that kind of flows that X is going after you see a lot of pizza P flows and some b to B flows so that's not necessarily.
Anything that we're particularly worried about but it's also the kind of flows as part of our multi rail strategy that we like to support.
Ourselves and we have a whole set of technologies for that.
Whatsapp pages to appoint one out which is our first flight in Brazil itself is a set of market with innovation and.
A lot of momentum there so here's our our technology powering our social network as an alternative which is an easy user experience great adoption of $4 7 million users already on that platform. So I look at it as a market that has a lot to learn from a market that we invest in.
And you know.
Webby chart pass for the new additional flows beyond card flows vary with specific local solutions, considering the size of the market.
And I'll just add Michael a couple of thoughts on Brazil. One you asked the question about the strong growth clearly the.
The combination of the macro environment, but its also the fact that we've been leaning in pretty heavily with our traditional issuers as well as our Fintech partners in that space, which has been part of the reason why we can see some of that growth come through.
In a decent manner, Lisa the second point I'd make tying back to Michael's comments around.
Biggs.
The.
The market has to be bifurcated into that in the context of both debit and credit and on the credit side, we could see tremendous growth.
Pigs, which Michael said is primarily catering to beat to be in <unk>, even if it were to actually proliferate a little bit into call. It the smaller merchants won't be to M standpoint would primarily be focused around the debit side of the equation and so credit still remains the mainstay for us in Brazil as it stands.
Your next question will come from the line of Tien Tsin Huang with Jpmorgan. Please proceed with your question.
Thank you very much and good morning, I wanted to check in on Monday.
Call it balance of trade and this whole card volume coming in and out from when the losses migrating them.
Given the update I know you mentioned wells.
And of course, they have that theyre not western Deutsche Bank are you gaining share when all is said and done I'm, just trying to get a better sense, especially in the short term.
With all the migrations and it out where you stand in the and the share gains.
Yeah.
Yeah. Thanks, Tien tsin, so everything we kind of talked about Michael talked about earlier on in this conversation was about our expanding relationships with these issuers and so with these issuers. We are gaining share that's kind of the reality of the situation again, there are puts and takes in the market right. So as I think about you know the new the.
The new relationship relationship new relationship the expanded relationship we have with wells right, that's an increasing share position with wells, which is taking place for example, there.
So the bottom line is the following which is whether it's wells capital one what we're doing with Santander Natwest.
Deutsche or you name. It you know the GAAP portfolio all of these incrementally are helping us drive our volumes.
From a holistic market standpoint, again like I said, there are puts and takes right.
But we're very very optimistic about how we're seeing business.
Translate for us.
And you know as we mentioned at the Investor Community Day.
We are growing market share across all regions and the market share growth.
Which we've seen in 16 of our top 20 markets, which is something we shared with you at the Investor Community Day is really the data points, we've put out so far.
And I should add I'm very happy you asked the question I thought these news, which is going to pass by with none of you asking about it so it's much appreciated.
Your next question will come from the line of David <unk> with Evercore ISI. Please proceed with your question.
Thank you very much cross border card not present next travel growth was solid in Q1, but it did slow throughout the quarter and into April against known very difficult comparisons can you unpack.
Cross border card not present ex travel growth by geography, especially.
Especially in Europe , and U S and how you see this playing out throughout this year, especially with.
With the return of the consumer at a physical point of sale is vaccination rates go up in other words, you see a reacceleration of E. Com later this year or do you think.
Consumer is going to be more active as kind of physical bricks and mortar locations.
Sure David So I think you're touching upon a couple of things, which are there on that card not present next traveled the reality is as cross border travel comes back you do see some give back in terms of <unk>.
Cross border Guard dogs travel card not present next travel that's a mouthful.
So the point is at the end of the day rate. There are a few factors you've got to take into consideration when you're thinking about future growth rates for cross border Guard knock brother next travel number one what's the pace of recovery on cross border travel is going to be number two what the prior year comps were on a cross border card not present next travel.
Because remember these growth rates are all influenced by prior comps as well and what was happening in the Covid environment last year, which might've costs were elevated levels of cross border Gartner crowd of present ex travel and him.
Three you do see fluctuations coming that number through as a result of crypto and crypto volumes right and so these three factors are kind of things you got to take into consideration.
The pointed as an upper level as the falling which is the consumer continues to spend on it.
In an omnichannel manner, when they can get out and spend in a physical environment. They do that when they can't spend any card not present environment. They do that we are ready to support them in both manners, whether it's through our omnichannel capabilities that we're offering our merchants and the strength, which we're seeing in Gardner president ex travel from a cross border standpoint, it's something we expect.
That trend to actually see going forward as well there might be puts and takes for all the reasons I just mentioned, but largely I think consumer behavior has changed in a manner, where they're gone more digital and youre going to see some strength come through out there.
Okay.
Your next question will come from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Hi, Good morning, just a couple of quick clarifications on the Russia, Ukraine, I heard that two points to net revenue targets to the performance objectives 22 to 24 could.
Could you help us clarify the revenue and expense impact for that going forward quarters like the second quarter third and fourth this year.
Trying to quantify that and then the second question is just what level of cross border recovery are you assuming in the guidance for.
22, thanks, so much.
Sure Brian So first I'll I'll take your question on Russia, and what there is.
Sumit. So we have suspended operations in Russia, as a result of which we're not earning any revenues related to rush initial thoughts so as it relates to revenue for the rest of the year.
We had mentioned that we had put out an 8-K about how.
Russia represented roughly 4% of our revenues in 2021, and so we assume that that 4%. It doesn't exist in any of the quarters going forward from a net revenue standpoint right.
Number two and again.
As I said in my prepared remarks that some level of.
A headwind, which we're assuming in Ukraine as well, but the reality is that's a little bit of uncertainty just because we're not entirely sure as to how the the war in Ukraine, and bowls and what the implications of that are so we built in some assumptions and that's what we've kind of given you in our overall thoughts from an expense standpoint.
You know the Russia related expenses represented roughly two.
2% of our operating expenses and again from a opex growth standpoint.
It's the way, we think about it as I mentioned.
We have taken down when we shared with you our thoughts portfolio 2022 we have taken down our opex growth rate.
On an ex acquisition a currency neutral basis.
To reflect that very impact from a ratio standpoint.
Your next question will come from the line of Ramsey El <unk> with Barclays. Please proceed with your question.
Hi, Thank you for taking my questions. This morning.
I was wondering if you could give us your latest view on it.
What.
Kind of longer term post pandemic payment slips for Mastercard.
This is related to kind of a prior question about how.
Shippers might have changed their behaviors during the pandemic do you see a different longer term mix of debit versus credit or any.
Associated impacts to the.
<unk> yield.
So there's quite a lot in the long term.
Right.
Let me start off on that so.
The structural changes that we are seeing that we've been observing without regular consumer engagement surveys over the last two years.
That have transpired with our customers as well is less.
Less cash and checks number one.
Anything digital more off number two.
The whole.
This whole notion, though has changed in the consumer's mind a couple of things going on first is consumers are really ready to move on with.
With the.
Pandemic, they want to go out there and knock off their bucket list.
Pent up demand so theres a lot increased spending back into services. So it's not a structural feature of the years to come that it's all in goods, it's going to go back to services and it's going to balance out. It's also not going to be only online and such and just said, it's going to balance out across multichannel buy in store pickup.
Have delivered do it the other way round whatever works I think consumers will go for more choices that comes right down to our multi rail strategy to an angel basically all relevant choices that are out there.
I think that's the right positioning that's what we're going to see going forward in terms of debit and credit if you will kind of get a little more granular over here there was a period in the in the early parts of the crisis people will not want to spend on credit that they can avoid it more control around their finances that was a big big tailwind for Debbie.
It received travel coming back that's more credit oriented, particularly because of the rewards are rounded.
You start to see in the crypto space. There is a whole new set of credit credit propositions. We just talked about that the Gemini awards in crypto rewards on that the next Oh card.
There's a whole thing going on I think in the end, it's going to be multiplicity around these different tools.
Your next question will come from the line of Dan <unk> with Mizuho. Please proceed with your question.
Oh, hi, thank you for taking them.
But my question is more specific if I look at.
U S trends debit.
Versus your competitor.
Over the last few quarters I am seeing.
Downward trend in your share of the mix in debit as well.
Picture in credit is there anything to call out there.
Is there particular.
80 to improve and debit or.
We're just missing something.
Very fundamental here again, just U S versus your large competitor.
Yes, so sedan theres, nothing fundamentally which is really changing as it relates to our debit bizarre put that out there in the first place you know growth rates, obviously are impacted by comps I think you get that piece I think you've got to take into consideration that there is a one portfolio, which is a debit portfolio, which is rolling off in the U S.
Which was previously announced.
Is probably impacting that gulfport of analysis that youre seeing because obviously, we're seeing the detriment of that come through in our debit metrics and that primarily is started and in the recent Boston will go on through the course of this year.
And the competitors like you're actually getting the benefit of that so that's probably the reason you're seeing some some level of divergence.
Your next question will come from the line of Andrew Jeffrey with true. Its securities. Please proceed with your question.
Hi, Good morning, I appreciate you taking the question.
Michael It's actually a a question on other revenues value added services in particular.
Ex acquisition it seems that it's D selling a little bit would perhaps expect to see that.
Growing faster.
The card business.
Can you just comment on kind of puts and takes there and what the long term trajectory is for value added services.
Andrew excellent questions as you know, we love our services business that drives growth for us. It's a differentiator, it's a margin increase or it's all of that.
The key focus is on cyber and cyber solutions on one hand, and data analytics and insights solutions. This comes back to the structural trend by the way.
More data more digital world more digital boards.
To be kept safe Moor insights for all these new people that are having businesses online on the data analytics side, so fundamentally theyre sound trends here.
If you just pick up this quarter and you do the.
I'm pegging the numbers that you have just laid out that is simply timing.
Are expecting or there's nothing to be said that theres anything changing on the growth rates of our business. So that that will continue our teams are fully engaged in.
As we looked ahead at the guidance at such engaged we assume a strong services growth Andrew I was just going to add some little bit more color on that just because I think it's important for you as you're thinking about your models going forward vaccine factor. This in.
When we talk about Russia revenues there are a few things from a Russia revenue standpoint would you might want to take into consideration one of which relates to the fact that.
Services was well penetrated in the Russia, and Ukraine markets and had strong growth and so as you think about you know.
The model and the impacts across the different line items, you're going to see impact related to lost services revenue come through in other revenues in the ensuing quarters, that's kind of point number one a few other caelian pieces on Russia related revenues as you think about the different line items, yes, we will lose the volumes and transactions, Russia was a fast growing mark.
Great.
It is low average ticket size, which I mentioned earlier, there's a high degree of contactless penetration again I think these are important things for you all to kind of keep in mind as you think about comps on a going forward basis.
The cross border issuing.
Out of Russia was mostly higher yielding interregional cross border issuing its also strong remittances and disbursements market why am I sharing all of this with you because as you think about the various metrics we've shared across all of these aspects those will get impacted as Russia stops.
Coming into play in future quarters.
Your next question will come from the line of George <unk> with Cowen. Please proceed with your question.
Great Good morning, and thanks for taking my question guys.
So I wanted to ask you called out.
Currency volatility is obviously being a benefit to your first quarter results.
What that benefit was in <unk> I know, it's a volatile time or just sort of three weeks into the next quarter, but how we can speaking about that looking into two key.
Yes, the Georgia.
Called it out because Q1 had unusually high foreign exchange volatility I mean, the reality is we don't typically talk about this because these numbers kind of go back and forth from a volatility standpoint, but there wasn't.
Unusually high FX volatility in Q1.
The output from a going forward standpoint, it's really hard to say I mean, this is one of those things where I guess.
Michael jokes with knees at you and you wouldn't be doing the job if he knew where volatility was going forward basis for for foreign exchange. So the point is at the end of the day, we've taken our best assumptions on a holistic basis for our business to share with you what our thoughts are from a full year Q2 bases on net revenue very hard to predict what the outlook going forward is good.
To be unusually high volatility does help us the other thing to keep in mind is since it's related to cross border volumes as Godfrey volumes come back that combined with the unusually high volatility has that much more of an impact <unk> I think we have time for one more question.
Our final question will come from the line of Jason Kupferberg with Bank of America. Please proceed with your question.
Thanks, guys just a quick one so just in terms of your expectation for cross border travel relative to 2019 levels last quarter, you were expecting to be at 100% by the end of this year you're already at 110% in April so what's your updated.
I'm sure on that.
Jason as I mentioned, we're assuming improving trends visit we compared to 2019 as we go forward.
We're not sharing a specific number for what that looks like in the second quarter at the end of the year, we built in our expectations in terms of the revenue guidance I've shared with you our thoughts around how that trend takes place and it was the combination of that with consumer spending and what the improving trajectory and consumer spending is it's all factored into the numbers.
Can we get a directional sense.
Rebates and incentives just for the rest of the year.
So the thing that I mentioned to you on rebates incentives and the falling which is.
We have a rich pipeline of deals we continue to execute on that as you heard from Michael in terms of some of the wins, which we've had recently.
Obviously, you get the benefit of improving cross border trends to play through.
In terms of lower months of rebates and incentives.
Impacting that and the last point I'll make on rebates and incentives as in Q1, we had this one time benefit relating to the non renewal of a Russian customer agreement.
Which you should not expect the benefit of that to come through on a going forward basis. So net net I would tell you that a lot of this is going to be.
Depending on what the timing of deals or how we put those new and renewal deals into play and what the recovery of the cross border is going to be.
Thank you.
Great. Thanks, Sachin Michael.
So thanks for your questions.
Insightful questions as always think of support for the company.
Just a start from me here we are.
We're thinking that we're going to get out of Omicron and then a few days later, we have an invasion in Europe . So for our teams around the world. It continues to be a never ending marathon and I just want to extend a thanks to everybody and the Mastercard team and with that we will see you next quarter. Thank you.
Much bye bye.
This concludes today's conference call. Thank you for participating you may now disconnect.
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