Q2 2022 Mastercard Inc Earnings Call
Yeah.
Good morning, and welcome to the Mastercard, Inc, Q2, 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there would be a question and answer session. If you'd like to ask a question. During this time press star followed by the number one on your telephone keypad. If you like to withdraw your question Press Star. One again. Thank you Werent Nisha you may begin your conference.
Thank you Julie good morning, everyone and thank you for joining us for our second quarter 2022 earnings call.
We today are Michael <unk>, our Chief Executive Officer, and Sachin Mehra, our Chief Financial Officer.
Following comments from Michael and Sachin.
We will announce your opportunity to get into the queue for the Q&A session.
Isn't that the queue will open for questions.
You can access our earnings release supplemental performance data.
Slide deck that accompany this call in the Investor Relations section of our web site Mastercard Dot com.
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.
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 information about the factors that could affect future performance are summarized at the end of our earnings release and our recent SEC filings.
This call will be posted on our website for 30 days with that I will now turn the call over to our Chief Executive Officer, Michael Miller.
Thank you Warren good morning, everyone.
Starting with the key highlights for the quarter, we delivered strong revenue and earnings growth with further improvement in our underlying operating metrics, notably and cross border travel.
Quarter, two adjusted net revenues were up 27% and adjusted operating income up 40% versus a year ago on a non-GAAP currency neutral basis, excluding special items.
On the macroeconomic front, we continue to monitor a number of factors that have both positive and negative influences on economic growth.
Inflationary pressures have remain persistent and we're now seeing central banks, taking even more aggressive steps to reduce inflation as we have seen defend yesterday the.
This situation is being compounded by geopolitical tensions and supply chain constraints, which has eased from pandemic peaks, but remain in many industries.
Scientists unemployment rates remain low wages are rising and consumer savings levels remained high.
With this backdrop consumer spending and particularly travel related spending remains strong.
Looking at this from a geographic standpoint U S retail spending remains healthy as consumers navigate a high inflation environment.
Lending has been aided by strong job creation and a buildup of excess savings during the pandemic.
According to a month to cut spending pulse, which is based on all payment types, including cash and check U S. Retail sales ex auto ex gas were up 6% in the second quarter versus a year ago.
In Europe spending trends are positive, although the risks related to both the supply of natural gas and higher interest rates remain headwinds.
Growth in Latin America continues to moderate following a strong rebound in 2021.
Asia has generally lagged the recovery of other regions by Covid related requirements have been relaxed in several countries strong restrictions remaining others.
Asia continues to have significant upside potential.
Looking more specifically at our switched volume trends domestic volumes continued to show strong roles, which with notable strength in airlines lodging and restaurants.
We've seen some shift in spend towards gas and groceries from discretionary categories like home furnishings and the U S.
Cross border continues its strong recovery as border restrictions continue to be relaxed cross border travel and quota tool has now reached 118% of 2019 levels.
Cross border card not present ex travel continued to hold up well.
Notwithstanding the strength in consumer spending we will continue to watch the environment closely including fiscal and monetary policy responses to high inflation and their potential impact on spending.
Within this environment, we will continue to be nimble in managing our expenses, we have the flexibility to respond quickly across a number of levers as we showed in 2020, having said this we will continue to invest in the business to drive top and bottom line growth over the longer term.
Well, well diversified business model and we are executing against our three key strategic priorities expanding in payments, extending our services and embracing new networks and here's an update on how we're progressing against each one of those.
First we're expanding in payments by continuing to grow card volume driving acceptance growth and leaning into innovation to capture other prioritize payment flows.
Arriving growth in card volume with new consumer small business co brand and travel wins globally.
And Canada I'm excited to announce that we secured a new partnership with CIBC that creates an opportunity for material share shift for Mastercard with the bank.
He also renewed our relationship with the Royal Bank of Canada, including a range of services that will enable us to grow our proprietary and co brand volumes with them.
In the U S. We established a new partnership agreement with the U S Bank, which extends our current debit credit co brand and small business credit programs.
Several new products, including the first large scale launch of our consumer credit products are small business credit offering and the development of buy now pay later installments solutions.
We're excited to announce that we have completed the conversion of gap, Inc. Existing 10 million card members to Mastercard across the old Navy gap Banana Republic, and that's led to a branch.
It renewed and expanded our co brands as Brooks brothers issued by city.
And we have renewed and expanded our cobranded Barnes and noble in partnership with Barclays.
Outside of North America, we have secured several new wins and renewals, including a number of deals that position us well in Asia Pacific as a region rebounds from the pandemic.
Australia, we've extended our partnership with Bendigo, and Adelaide Bank limited, enabling us to maintain exclusivity with Bendigo and converge several of their regional debit portfolios.
We're pleased to announce that National Australia Bank, and Mastercard has signed an agreement to retain and grow the master card components of Citigroup Australia's consumer business that was acquired by Knapp.
This marked the first significant issue in relationship between the two companies in years, and we look forward to partnering to grow these portfolios.
In Hong Kong, the partner with Citibank, and HK cheese loyalty program and digital ventures.
Club to launch the city the club credit card.
In India, we're happy to report that the embargo on new issuance has been lifted issuers.
Issuers have restarted card issuance and they are eager to expand business with us and examples yes bank, maybe signed a consumer credit agreement. It does enable us to maintain a majority share and includes a commitment to scale our world elite portfolio.
We've worked hard to expand our travel oriented portfolios, which positions us well to capitalize on the strong recovery of travel for example in Asia Pacific that turned into a 10 year commercial card issuance deal with trip Dot com one of the world's largest online travel agency.
In the UAE, we renewed our co brand portfolio with Marriott and the U S. We have renewed our long standing co brand relationship with Amtrak and.
And we've extended our co brand partnership with Virgin Atlantic in the U K, a partnership that will leverage our testings on innovation labs and session M loyalty assets.
We're also driving growth in payments by continuing to take.
Except as Master card is now accepted over 19 million merchant locations worldwide and we have more than doubled the number of acceptance locations over the last five years.
Martha Guy that's been driving tablet phone innovation, enabling billions of active smartphones become potential acceptance devices with over 130 deployments across 55 markets. This includes working with Apple to enable acceptance of Mastercard contactless cards and digital payments food at tap to pay on iPhone capability.
It allows businesses to accept payments directly on their iphones moms.
Master card is further empowering the ecosystem through our called Commerce capabilities, which enables our channel partners to quickly deliver cost effective acceptance.
It also provides easy access to a range of payment solutions and services, including tap on phone QR installments loyalty data and science and more via the Mastercard cloud.
In addition, we continue to drive adoption of our click to pay online guest checkout capability click to pay is now enabling over 20 markets across all regions and fractions transactions had been growing quarter over quarter.
We're expanding in payments through innovations like Master card installments are open loop buy now pay later program has been very well received master cards installment is now soon to be live with Saudi National Bank in several new partners, adding discipline to the program.
Examples include Cross River Bank.
<unk> Bank and trust Jeopardy live Oak Moca financials, and when bank in the U S as well as HSBC Natwest and J P. Morgan's payments division in the U K.
In addition, Apple recently announced Apple pay later, which uses the master card installments program.
Finally, we're driving growth in payments by leaning into innovation to capture a prioritized set of new payment flows.
<unk> disbursements and remittances commercial point of sale each of the accounts payable and consumer Bill pay is at the heart of the funds, we've been making to develop a range of capabilities that span cards account to account payments push payments and blockchain.
Whereas various stages of scaling our capabilities across these different floors, and we're making steady progress. For example, we are expanding that reach through new cross border services relationships with partners like Deutsche Bank and Vodafone in Qatar.
And U P T a leading money transfer operator in Turkey, we're targeting specific use cases and scaling distributions from each be partnerships with Mastercard send a few examples sees us all spoke but leverage then for instant payment of online winnings.
And P faithful integrate mastercard send into the payments platform to enhance the payout capabilities offered to their merchant customers in the U K and EU.
Now turning to services our services capabilities has proven to be a tremendous growth driver and differentiator for our business built on a foundation of investments and experiences built over the years.
Looking forward, we continue to see a significant opportunity for service in three primary areas.
First services will continue to enhance the value of payments. So it does make payments intelligence safe and secure for example, our identity check payment authentication service is driving double digit improvements in approval rates. They are working with pasta pay in Italy to support the deployment of the issuing portfolio.
Assisting growing their acquiring business and enhanced customer engagement approach now consulting team in Europe is engaging with ISG to help them create a seamless payment experience for their clients.
Second we see the needs of our customers expanding beyond payments, we can leverage our full suite of differentiated services to address these needs. A recent examples travelodge with utilizing our test and learn capabilities to support optimization of new investments in that business and third our services can be.
Deployed to support new networks, making our open banking and digital identity propositions, even stronger with these adjacent netbooks. Its all services that will enable us to establish a differentiated position to scale and waiting for.
For example, we recently launched a new biometric checkout program. The program outlines a set of standards from banks merchants and tech provide us helping.
Helping to ensure the security and privacy of personal data when people pay with a smile or with a wave.
Now beyond expanding in payments and extending and so this is our third key strategic priority areas embracing new networks. As a reminder, our current focus is on two areas open banking and digital identity.
We're leveraging our peninsula and ire acquisitions to extend our open banking footprint roll our customer base and deliver new solutions. This quarter, we expanded our engage partner network to include our open banking services with new Fintech partnerships, including Wala sink Tera <unk> and others.
They can now use our open banking capabilities to easily build and implement solutions for their end customers across a range of use cases from blending to payments to financial management.
In addition, we recently launched a global start as open banking program. This program enables us to co innovate with startup and tax.
Duffy finding T. A M M obese mono and paywall it as they support their path to scale.
We expanded our open banking product offering as well, we announced pay by link in Europe allows businesses to send payment request through invoice email SMS, all social media chat.
This can expedited payment of invoices in a cost efficient way, enabling both parties to better manage cash flows.
Online accounting provide avisma to narrow as using pay by link to simplify invoice payments for over 75000 small and medium sized businesses.
And then the digital identity space contact continues its strong performance signing over 200, new deals and expansions since we acquired the company just over one year ago. This includes many of the leading buy now pay later and crypto companies. It also includes real time payments software providers like ACI worldwide with leveraging.
e-commerce capabilities to help their global merchant network more accurately identify fraudulent transactions.
Open banking and digital identity are attractive and growing opportunities and Mastercard is uniquely positioned to be successful in both.
So in summary, our business fundamentals remained strong we delivered robust revenue and earnings growth again.
We're executing against our strategic priorities and payment services and new networks.
We have fortified our strong position as travel oriented portfolios to capitalize on the continued recovery in travel.
On a macroeconomic front, we continue to monitor a number of factors influencing economic and spending growth.
With all of that we will continue to manage our expenses carefully that said, we will also continue to invest in the business to drive top and bottom line growth over the longer term sorry.
<unk> 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 one ppt to this growth.
Operating expenses increased 12%, including a five ppt increase from acquisitions.
Operating income was up 40%, which includes a <unk> <unk> decrease related to acquisitions.
<unk> was up 40% year over year to $2 56.
Which includes the <unk> contribution from share repurchases.
During the quarter, we repurchased $2 4 billion worth of stock and an additional 448 million through July 22022.
So now, let's turn to page four where you can see the operational metrics for the second quarter.
Worldwide gross dollar volume or <unk> increased by 14% year over year on a local currency basis on the same basis. If you exclude Russia up on the prior period GDP increased by 19% in the U S. You did increase by 10% with credit growth of 25% reflecting.
The recovery of spending on travel.
Debit declined by 2%, excluding the impact of a roll off of a customer agreement debit increased by 1%.
Outside of the U S volume increased 16% with credit growth of 19% and debit growth of 13%.
Cross border volume was up 58% globally for the quarter, reflecting continued improvement in travel related cross border.
Turning to page five switched transactions grew 12% year over year in Q2.
Excluding Russia from the prior year switch transactions grew 22% year over year in Q2.
Card present and card not present growth rates remained strong.
Card present growth was aided in part by increases in contactless penetration in all regions when excluding Russia.
In addition, our growth was 5% or 9% if you exclude cards issued by Russian banks from the prior year God gum globally. There are 3 billion Mastercard and maestro branded cards issued.
Now, let's turn to page six for the highlights on the revenue line items again described on a currency neutral basis, excluding special items unless otherwise noted the.
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 one ppt to this growth.
Looking quickly at the individual revenue line items.
Emetic assessments were up 13%.
GDP grew 14%.
Cross border volume fees increased 61%, one cross border volumes increased 58%.
The three ppt difference is primarily due to geographic mix.
Transaction processing fees were up 22%, while switched transactions grew 12% and 10 Ppt difference is primarily due to favorable mix FX related revenues and pricing.
Other revenues were up 23%, including a three ppt contribution from acquisitions.
The remaining growth was driven by our cyber <unk> intelligence and data and services solutions finally, rebates and incentives were up 23%, reflecting the strong growth in volumes and transactions and new wins, new deal activity note rebates and incentives as a percentage of gross revenue is higher relative to Q1 2022.
Primarily due to volumes and related revenues generated from a sizable customer in Russia in Q1 with no related incentive agreement on such volumes.
Moving now to page seven you can see that on a currency neutral basis total operating expenses increased 12%, including a five ppt impact from acquisitions, excluding acquisitions and the remaining increase was primarily due to increased spending on personnel to support the continued execution of our strategic initiatives as well as unfavorable.
Foreign exchange related expenses due to the remeasurement of monetary assets and liabilities.
Turning to page eight.
As discussed the operating metrics for the first three weeks of July .
Oh your reference to help you understand the trends in the business ex Russia. We have included an appendix later in this deck, we show all the data points from the schedule. If you excluded activity from Russian issued cards from prior periods.
As a general comment our metrics are holding up well in July going forward. However, the year over year growth metrics will face tougher comps as we begin lapping periods when COVID-19 related restrictions are eased and spending levels started to rebound.
Going through the metrics in turn starting with switched volumes for the first three weeks of July we grew switch volumes, 18% year over year down three ppt versus Q2.
<unk> transactions grew 10% year over year through the first three weeks of July and down two ppt from Q2.
Overall cross border volume through the first three weeks of July grew 54% year over year down four ppt versus Q2.
Cross border travel had another quarter of strong route as border restrictions continue to be limited in the first three weeks of July Cross border travel was up 89% year over year down 55, bpd versus Q2 due to more difficult year ago comps as I just noted.
Cross border travel is now at 126% of 2019 levels up eight points versus Q2.
Cross border card not present, excluding travel was up 16% year over year in July .
The increase of nine PPD compared to Q2 reflects a reduced headwind from crypto purchases and the timing of significant E com promotional activity between the periods.
This metric continues to hold up well in relation to 2019 levels.
Turning to page nine I wanted to share our thoughts on the remainder of 2022, let.
Let me start by saying that we have strong momentum with our customers. We continue to enhance our product and service offerings and that our business fundamentals remain very strong.
Consumer spending remains robust and cross border travel has improved more quickly than expected as border restrictions ease and consumers increase their spending spending towards travel.
And there is more room to grow as those remain either restricted or have yet to recover to historical levels of growth.
For instance, based on our switched volumes easier, which represented approximately 14% of cross border inbound travel in 2019 is only at approximately 60% of 2019 levels in Q2.
Similarly, the U S UK, and Canada, which represented approximately 20% of cross border inbound travel in 2019 is at about 110% of 2019 still.
Still well below the historical trajectory.
If inbound travel to these three countries and continue to grow at the historical three year CAGR through two.
We would've expected to be at approximately 175% of 2019 levels rather than approximately 110%.
We are well positioned to capitalize on this growth with our travel oriented portfolios as.
As Michael mentioned, there are a number of macroeconomic factors that could influence future economic growth employment and beach levels consumer savings levels, persistent and elevated inflation and rising interest rates and geopolitical tensions in particular, we are monitoring each of these but on balance.
Spect, a modest improvement in cross border travel versus 2019 levels and a generally resilient consumer spending through the remainder of 2022.
Taking this all into account, including a well diversified business model, we are increasing our expectations for net revenue growth for the full year of 2022 to a low twenty's rate on a currency neutral basis, excluding acquisitions and special items acquisitions are forecasted to add about one ppt to this.
While foreign exchange is expected to be a headwind of five to six ppt for the Europe , primarily due to the strengthening of the U S dollar versus the euro.
It is worth highlighting that this performance is despite the cessation of our Russia operations in Q1.
We expect operating expenses to grow at the low end of a low double digit rate on a currency neutral basis, excluding acquisitions and special items.
This reflects continued investment in our people and strategic priorities as well as impacts from FX related expenses, primarily due to a remeasurement of monetary assets and liabilities.
Acquisitions are forecasted to add about four ppt to this growth while foreign exchange is expected to be a tailwind of approximately three to four ppt for the year.
We are prepared to quickly adjust our operating expense base as we did in 2020 should circumstances dictate.
With respect to the third quarter of 2022 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 and special items sequentially. This reflects continued strong consumer spending, including a modest improvement in cross border travel spend.
<unk> trends relative to 2019.
Reduced FX related revenues as a result of lower anticipated FX volatility and finally, the lapping of the stronger year ago quarter as the recovery took hold last year.
Acquisitions are forecast to add about one ppt to this growth while foreign exchange is expected to be a headwind of approximately seven to eight PBT for the quarter.
From an operating expense standpoint, we expect Q3 operating expenses to grow at the high end of a low double digit rate versus a year ago on a currency neutral basis, excluding acquisitions and special items.
Acquisitions are forecast to add about five ppt to this growth.
Foreign exchange is expected to be a tailwind of approximately five ppt for the quarter.
Other items to keep in mind on.
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.
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 between 19 and 21% in Q3, which includes a discrete tax item related to an unfavorable court judgment the details of which we are still assessing.
We expect a tax rate of approximately 19% in Q4.
With that I will turn the call back over to war.
Thank you Sachin Julie we're now ready for the question and answer session.
Thank you as a reminder, if you'd like to ask a question press star one on your telephone keypad, well pause for just a moment to compile the Q&A roster.
Thanks.
And your first question comes from.
Robin from Bernstein. Please go ahead.
Hi, good morning, Michael.
Michael.
You commented that.
Potential bill it's pretty interesting choice.
For credit cards I know.
The Durbin amendment for debit.
Market share is how good a creditor out in chunks.
How could be implemented gives any alternative networks.
Don't have those capabilities.
Just taking a step back can you talk about planting decisions for module by D choose master color might choose mastercards head to head in China.
Thank you.
Hi, Sheila let me start off with that.
This is so we read the same article.
Clearly, it's early stages, because we haven't seen the bill yet so.
We're all speculating here I think what what might happen.
So we'll engage will try to find out more over the weeks and months to come.
If you just assume for a moment that the article would be complete and this would actually happened a few things come to mind that are straightforward from our perspective first of all we believe in competition, we believe and a level competitive landscape and playing field and he's invested massive.
In safety and security and we focus on providing consumer choice different ways of paying credit debit whatever it is.
That's been our strategy. So we're going to look at this proposal a proposed bill through that ends.
And so that's that's the one that's the starting point for US some of the questions that you touched on.
Some points here what are the practicalities what are the technical aspects of this.
How many providers already that have made the same kind of investments to really ensure that the consumer can rely on safety and protection and so forth. Those are open question will have to see what.
The regulation actually for seeds.
Overall, the the concept of interchange as a balancing factor in the ecosystem is one that has served the ecosystem, including the consumers are well in terms of rich propositions and all of that we'll have to see what.
What becomes out of that as a whole range of questions that we've talked about over years that need to be considered by all stakeholders and we will spend the time and the effort to ensure that everybody's well informed about the puts and takes around this proposed bill.
Thank you.
Next question please.
Your next question comes from Sanjay <unk> from K K.
Please go ahead.
Thanks, Good morning, Sachin you talked about.
What's being baked into your <unk>.
Forward view on cross border as being a modest improvement in cross border, but you talked also about the long runway you still believe you have in terms of cross border could you just help us think about what's factored in versus what practically can happen as we look forward.
Sure Sanjay.
So what I shared was that we are.
You know thinking ahead in terms of cross border travel and seeing a modest improvement relative to 2019 and as you can see in our metrics Cross border travel in Q2 was at 118% and in the first three weeks of July at 126% without getting too specific as to what exactly were kind of building.
The point, we've got is the following we expect a modest improvement in travel when index back to 2019, and it's predicated on certain data points and the data points are if you think about what's gone on in Asia Pacific We've talked about how Asia Pacific from a cross border travel standpoint has been lagging and has historically not come.
Back over the last few years since Covid hit in the same ways as intra Europe has come back in fact, I shared with you the metrics as to where we stand from an inbound cross border travel standpoint in Asia Pacific. So there's a lot of room to grow there, we think that that that opportunity exists markets in Asia Pacific such as Australia, and New Zealand, Singapore, even Japan.
Started to open up and actually have opened up fairly fairly well.
The one thing, which we have always taken comfort in is that the fundamentals of cross border travel and on cross border. In total remained very solid when people have the ability to travel they have demonstrated their intent to travel and I think we've got enough data points now over the last 18 months does suggest that when barriers towards traveler lifted people.
Get on the road again, and so if you think about that and you think about the context of what's going on in Asia and the potential there we've got opportunity there, but even beyond Asia. There are several other corridor such as the U S U K and Canada, which still have not reached the historical growth levels, they're higher than their 2019 index levels from an inbound standpoint, there's still more.
Room to grow so we've kind of built all of that in in our in our thoughts for the rest of the year.
I'd like to just add to that a pine travel such a fascinating topic and certainly very central job business. It's been around a pent up demand like this is gonna be a bubble in and it's all going to go back to where it was during the last two years why would anybody that has now who has the chance to see their families and their friends against up doing that in a year from now so.
That actually doesn't make any sense. So we believed exactly the appointed and such and just made if there is a possibility people will continue to travel the way they have been before Covid. One other thing to add is.
One thing is the underlying trends that we have built in into our outlook on the data points that Satya just talked about but it's also to strengthen our position visa that travel trend.
All of the portfolio as we talked to you about American Airlines about Jetblue about Cathay specific.
Everything that we have won in the last two years, it's going to really come to bad to really make the most of this.
Next question please.
Your next question comes from <unk> Kumar from UBS. Please go ahead.
Good morning, Thanks for taking my question Joe.
Recession, Mastercard generated solid revenue and earnings growth.
Now what do you think has changed for most of the top out mastercard's. Since then that could help you generate positive results.
Potential economic downturn, even if youre not seeing that right now thank you.
But right now I think the last word as you said is instructive as we are not seeing it right now generally resilient consumer spending for the time being and we talked about the modest.
Movement in cross border.
No. It's same center spending behaviors until the end of last year and you're taking is really a long time back in 2008 and 2009 I think the first thing I would say is it's.
It's a very different scenario aside that we're looking at externally I come to the company in a moment externally is we are not having.
A crisis around unemployment, we're having high consumer spending level. So we don't have an asset bubble that looks any anything similar that what we've seen at that time, so different starting point.
I would say, it's a somewhat more benign starting point that we had.
At that time.
Now the company.
Auto looks entirely different than it looked in 2008 and nine it's a much more diversified business. It's a highly diversified business I think over largely consumer credit debit oriented at the time.
Have a whole range of card based spendings from push payments into general payments for goods and services opening up new verticals and so forth and then there is our.
Progress into new flows so that gives us resilience on underlying payments. It also our reach of our business model and how many payment transactions, we touch that allow us to build a set of services on it looks entirely different are switching ratios at that time were much much lower than they are today, which has led to a.
You know very successful services business, which we have seen in the last three years actually quite resilient. When you go into up through up and down cycles, and then we continue to build into the future to see whenever we might phase the down cycle I'll be more resilient than other activities around digital identity and.
Open banking and so forth that go into a world of open banking and move even further.
Before or after the payment transaction to give us more resilient, so that our earnings quality higher diversification and.
We've been tested we've been tested over the last two years I mean that was a down cycle and we needed to demonstrate that our agility and speed in managing our expenses make the right investment decisions. So we feel we're well positioned to navigate what's going to whatever is going to come hopefully it's positive.
Your next question comes from Darrin Peller from Wolfe Research. Please go ahead.
Okay. Thanks, guys.
Okay.
You're close.
And I think to your point it underscores that your customer base is.
Really spend on some of those areas can you just talk to talk about what youre seeing in terms of the strength, there and what kind of resilience you'd expect those to have in different economic scenarios.
Actually just one quick one on processing yields came in a lot better than RF relative to transaction growth.
Processing revenue line, you mentioned pricing other variables can you just talk about if that's sustainable spread.
Yes.
Yeah, Darren how can take the second question first I must say you were breaking up on the first part of your question. So we wanted to ask you to just paint a state that again, but on your second part of the question.
What youre seeing in transaction processing.
Growth rates relative to the broadband switch transactions is exactly like I said that three things kind of going on there right does the favorable mix piece, which I talked about there's higher FX related revenues and then there's some some elements of pricing.
Look I mean, the reality is we're operating in an environment in which you have seen a few things happened. One is the mix is shifting towards more cross border and you know we make cross border fees.
These bolt in the cross border volume fees line as well as in switched transactions. So sometimes that's kind of an overlooked element, but that's an important piece to keep in mind that we do make cross border fees on the transaction processing line and as the shift has gone towards more cross border that has helped US number two is there's.
The high levels of volatility in the foreign exchange markets. We delivered some very important services when we when we do switching of transactions and when we do the settlement of the transactions and the highly volatile FX environment, It's actually worked in our favor and on pricing.
The baseline is the following which is at the end of the day, we continue to deliver value to the ecosystem and as we put value out into the ecosystem, we price for that value and what youre seeing there is exactly that come through which is we are reflecting that in nature of pricing, you'll see puts and takes on an indifferent quarters in terms of what we may or may not do in terms of pricing depending on what we built.
<unk> is the value, we're delivering as well as what the milk market's appetite to accept that is and thats, what youre seeing them through them.
Okay. That's helpful.
Better now.
Yeah, that's much better.
I was just trying to figure out the value added services and new flows all the areas that are driving other revenues, obviously are continuing to trend very well and I mean, if you could just revisit if you you know what do you think are the top two or three drivers there and what kind of sustainability of different macro scenarios you'd expect for that just it looks like the investments you've made there are clearly paying off.
Wondering on the cyclicality of it thanks again guys.
Alright good.
<unk>.
So.
What we're seeing here is first of all in the backdrop.
Let's just pick up on the structural changes again as we have seen over the last two years.
Clearly driven by social distancing measures a significant push into more digital engagements by consumers that were sitting at home. So all of that so it's a more digital world.
So here services that help make a more digital world safer and more easily understood. That's really the general thrust of what is what's driving.
The growth and the interest from our customers across established customer sets as well as new ones earlier, I talked about travelodge as people come to us and say, hey, I want to use all of that data to get a better understanding of my business. So taking them one by one safety security.
Anything in the fraud in the fraud space and that the authentication space.
It's been a joy for US you go further into.
Cyber risk assessments are small businesses safe those many small businesses that have opened up in a more digital fashion now over the last two years and you go all the way into digital identity because in a more digital world people find they have more passwords and nobody wants really wants that so a digital identities now a solution that's really taking hold.
So that's that whole space and you saw us.
Actually it doesn't stop at current types of payments are the last thing I should add is our acquisition of sypher trace and tower going into the crypto space, making that's safer.
That is certainly something that capture consumer's interests.
One space. The second piece is what do you do with all of that data retail and Commerce Travelodge I give you. One example of many other customers I'm trying to understand.
How to make a run their business better using the payments data that has thrown off and we helped them with that our dynamic yield acquisition is one of them, where we help our customers.
Retail and commerce customers engaged our customer their end customers in a more targeted fashion I imagine a landing page that now has personalised offers in our case always with strong content from consumers and our focus on data data privacy. So those are the two headlines we do various other things and services from consulting.
King into processing related activities, and so forth, but that center.
Darrin I'll just add as it relates to how we see the other revenue line item and services in particular to what Mike was talking about we see really good demand on the customers and we've seen good growth potential. There. The reality is we are doing deeper penetration of those services with our existing customer base. We are expanding the set of services, we've got across our customer base and the total.
We're actually taking those same services and moving across to the new network side of things as well and Mike alluded to one part of that when he was talking about what we're doing with <unk>, but more broadly even not banking for example, so the potential is there and we do expect that the needle given the suite of services. We've got there's good growth potential going forward.
<unk>.
Your next question comes from Lisa Ellis from Moffett Nathan. Please go ahead.
Alright. Good morning, Thanks, guys. Good stuff here I wanted to ask a question about.
The news related recently.
To the.
Oh CFPB.
Consumer financial Protection Bureau, looking into Standalone service providers, both in the PDP space. So meeting the fraud issues, we've seen in zelle and other kind of private PDP services and then also on the BNP outside looking at the Standalone providers, there with the marketing and kind of risk management that they're doing.
Can you comment on how Mastercard is kind of positioned relative to the areas they're looking into it.
And the opportunity for Mastercard to perhaps play a larger role with Mastercard send in PDP and with Mastercard installments.
The NPL. Thank you.
Thank you Lisa So let me start off on that.
You know where where the consumer protection agency here in the U S and some other markets are going is really to ensure that there is.
The right kind of protections for consumers.
That goes all the way from responsible lending to our safety security and so forth.
The.
We follow that but if I look just in house and see what were doing if I look at our data principles, what we have done around the Mastercard installments programs to ensure.
That the participating lenders go through a vetting process and follow responsible lending.
Rules that we have set as part of our franchise, we feel well.
Well positioned.
We feel we are good industry custodian to ensure that these responsible practices are being held around now is that also an opportunity for us and all of this absolutely we have learned to partner with <unk> systems in many countries around the world with safety and security solutions to services I actually just talked about when we say Hey, you know you have a fraud.
Issue.
We get it here's a set of assets that we have a huge partner.
And in other markets, we compete head on because we simply believe we have the better solution and players not necessarily always want to partner with us. So it's a bit of a mix a give and take but it's an interesting and dynamic field that we are very focused on.
Your next question comes from Tien Tsin Huang from Jpmorgan. Please go ahead.
Okay. Thank you so much thanks for going through all of this I heard the CIBC.
I'm just curious how deal activity is going or the known conversions that you have proceeding in a timely way I don't know if there's been any change given.
Some of the macro uncertainty there and then also Sachin would you mind just rehashing the FX neutral.
Opex numbers again are you changing your underlying investment strategy or inflation assumptions, given what we've learned.
On the macro thank you.
Let me start off with the deal activity.
The momentum that we have seen over the last.
You know two years throughout throughout the pandemic, we're being union with our customers and say Hey, you know what what do you need and these are tough times I think we set ourselves up as a as a trusted partner and help to shape that deal pipeline over the current DC, which is very strong.
Deal pipeline is strong across all regions.
And we gave you a few examples today from we haven't talked much about Canada lately. So this is a these are strong wins does this is excellent.
Some of the very significant wins, we've talked about over a year ago in Europe .
But net west Deutsche Bank.
<unk> multi regional deal that behalf of Sunshine there.
They are progressing according to plan the conversions are going on I mentioned, very specifically back to United States to GAAP conversions and she's done.
On those 10 million cards, so overall.
We talked to you at the Investor Day.
In November last year that we see share growth across all of our current products.
And we continue to feel very good about that so momentum is competitive out there of course.
But I think the mix of what we have in various payment solutions as well as services.
To support our we've also re looked at how we deploy our sales resources across the company with all the acquisitions that we have so that we can do the best possible work for our customers. So overall strong momentum that I think will continue.
Yeah, and Jim on your question as it relates to the outlook for the full year of 2022 and Opex, so on a currency neutral basis.
Excluding acquisitions, we are.
Guiding along the following lines, which is on Opex that we expect to come in on a full year basis at the low end of the low double digits range.
And just to remind you on well, let me talk about Opex.
On the revenue side also we have changed our full your guide and our revenue, but again on a non-GAAP gross basis currency neutral excluding acquisitions is now Ed.
The low $20 range, which is higher than what we had shared with you previously.
Your next question comes from David <unk> from Evercore. Please go ahead.
Thank you good morning among.
Among your largest geographic regions Europe continues to generate the greatest payment volume outperformance versus our model you underscored a number of geopolitical and economic risks for Europe .
Going forward, especially as we head into the winter can you talk through Mastercard's growth algorithm, you know what that might look like in a significant economic slowdown in Europe , you know historically, you've been a big share gainer, there, particularly against the national payment networks.
The secular shift working in your favor, but if you could just kind of talk to your thought process that would be much appreciated.
Brian Let me start and then our assumption can chime in so they would be.
And matter of fact as Europe Europe is not homogenous. That's the first thing I would say when you look at.
Where are we on the on the arc of the secular shift it's very different so there's lots of opportunity.
Across the board from further Digitization.
The opportunity to go beyond Peach whim and sets of flows is wide open in Europe , the push of the European authorities to digitize beyond just installed payments.
And online payments is significantly there were well positioned with our tools in Europe , which it was pushing on open banking, which is a pushing on open an account to account, which is pushing bill pay solution. So we have all of that and I'll hop.
So we feel that there is significant opportunity and then as I said before there is uncertainty on the European macroeconomic.
Front and on the other hand macroeconomic GDP overall economy in our basket are two different things and we'll have to kind of see how that will play out.
Can't really predict that I'm from there so I have a sense, but I'm not in a business of predictions.
Your next question comes from Ramsey El <unk> from Barclays. Please go ahead.
Hi, Thanks, so much for taking my question.
I wanted to ask about some of the longer term drivers of rebates and incentives.
It seems like today are now it seems like today rebates and incentives as a percentage of gross revenues are several hundred basis points higher than they were in 2019 I guess the question is is the mix and the mix related drivers of that increase are very clear, but as we move forward over the next couple of years and your mix normalizes, we see downward pressure on rebates and incentives.
Yes.
As a percentage of gross revenues or is this something where then this new baseline is sort of here to stay and if that's the case, maybe give us some reasons why.
Sure. So I'll take that one so look I mean, I think you're well aware about the fact that rebates and incentives are influenced by a number of factors some of which you alluded to which is what's going on from a volume growth rate, what's going on from a mix standpoint, how the pipeline of new and renewal deals are looking and you take all of that into consideration, but but the reality is if you just think about about <unk>.
Where we are from a mix standpoint, particularly on cross border between where we were pre pandemic and where we are today, we still have not gone back to the historical mix levels from a cross border to domestic volume standpoint, so as that durable it's back to the mean and when I say the median means closer to what the pre pandemic levels, where you would expect to see some benefit of that.
Come through in rebates and incentives versus grows as a percentage of gross you would see that come through but the reality is that all the countervailing factors, which are also taking place right, which is a function of what the pipeline of deals looks like what the timing around that is but the basic premise is correct, which is as more cross border happens you're going to see a benefit come through in rebates.
Incentives as a percentage of gross.
Got it. Thank you so much appreciate it.
Yes.
Your next question comes from Brian Lee.
Deutsche Bank. Please go ahead.
Hi, guys good morning.
Just wanted to ask a clarification.
Opex.
The non-GAAP growth currency neutral ex acquisitions that went up from high single digits originally.
I think it was last quarter that you guided to that for the year to low end of low double digits. So I guess why the increase in Opex and is it just taking the opportunity to invest more due to the strength of the top line, but any color maybe on where some of those investments might be gone with the additional expense.
Sure Brian So a couple of things, which are about you're right. We had previously guided to high single digits and now are guiding to low end up low double digits on this non-GAAP metric on Opex.
Couple of things going on one is we have taken foreign exchange related losses on the remeasurement of our assets and liabilities. During the first two quarters order of magnitude about $70 million and you'll see all of this in our in our reports, which we publicly put out there. So that's certainly impacting it and then the couple of them.
All of the things, which to me are more critical which is we continue to invest in the long term growth of our business that which includes investing in our people.
In our hog talent market, we want to make sure. We've got the best people, we want to be there in terms of having those best people help us execute on what we've laid out as a strategic priority, which is what we're doing right here, we've always kind of following the philosophy of let's keep an eye on the topline and then kind of bolt as to what we wanted to do from an expense and investment standpoint.
And that's the philosophy you are following will continue to follow that philosophy going forward Brian .
Thank you.
Your next question comes from Dave Koning from Baird. Please go ahead.
Hey, guys. Thanks, so much and I guess my question is on cross border yields one thing that was interesting this quarter intra Europe cross border grew faster than non intra year for the first time in a long time and yield was up regardless. So it seems like you know the last few quarters mix helped a lot, but now there's there seems like another driver on top.
I guess is is that right, maybe what's that other driver and should we get faster growth in noninterest Europe kind of in coming quarters.
Sure David So you're right in terms of what the mixture between inter and intra was this quarter versus last quarter. I think there are few things to keep in mind that the mixture between endurant in growth, but there's also within the world of endured what are the corridor, which are coming back versus the borrowers which have not come back right and as you've started to see more.
The higher yielding corridors come back that's actually helping us in providing us the tailwind we're talking about right here.
So for example, you've got markets like inbound into the U S. As that starts to come back you start to see the benefit of that come through markets like Asia inbound into easier you'll start to see the benefit of that come through.
Great. Thank you.
Thank you. Your next question comes from Jason Kupferberg from Bank of America. Please go ahead.
Good morning, guys wanted to get your perspective on just the relative health of the lower income consumer versus higher income and then if you can just make some remarks about how we should think about rebates and incentives for Q3 and Q4. Thank you.
Sure Jason So on your first question, Here's what we're seeing actually overall, the consumer and consumer spending patterns are very healthy.
Again, you've got to parse the stayed out between what we see in the U S versus what we see in the rest of the world and different people have different definitions on what is lower income versus what is the affluent but let's just start with kind of that that is the frame in the U S. What you are seeing is good strength across the board, but a declining trend in terms of the growth rates on the lower end.
Ah side of things affluent spend continues to be very healthy and Gary is on a very nice way outside of the U S. We're not seeing much in the nature of a ship.
Now the affluent category spending versus what the lower income category spending so the benefits of what we've got in Mastercard by being a diversified business and being diversified from a geographical standpoint is actually helping us very nicely because independent of what happens in one market versus the other the value of what we got across the globe comes through in terms of spend less.
<unk> is here and then your second question was around rebates and incentives look ive, just talked about things, which influence rebates and incentives. So I won't kind of belabor that point, what I'll share with you is the following that we expect that rebates and incentives as a percentage of growth will be roughly similar in Q3 to what we saw in Q2.
Thank you.
Sure.
Your next question comes from Bob Napoli from William Blair. Please go ahead.
Thank you.
Good morning, I, just wanted to follow up on a lot of your comments on the open banking digital I'd.
And your investments there.
Can you maybe give some color on what you feel like the revenue Tam is for those businesses in.
What type of where you see the most opportunity with the kind of the growth trajectory is of those businesses.
Right. So you know open banking.
Let me start off.
More generally speaking so clearly a global trend one that has to stay.
Is happening in Brazil, its happening Australia, certainly was there in the United States and Europe .
The other way we approach. It is first of all have a relevant position in connectivity and then building out a bunch of use cases and the use cases that would get you to the heart of your question, where you see very different types of.
Comp revenue models.
Value exchange models first of all on connectivity itself gives you have per API call kind of logic. If you go into financial management solutions and it depends on who's our customer here and let's say, it's a fintech that could again be by by API and you could start to see as you go into lending mortgage verification.
Asset verification kind of use cases.
That's the broad range of currently what we're seeing.
No established model at this point in time, and we're investing heavily I finish city, because we feel there is a tremendous opportunity.
This is going to help to pull so many new customers into the consumers into.
Ecosystem on our financial inclusion side on the SME side, and so forth. So hard to answer very specifically right now where we are.
Those are those kind of different different kind of models and it's going to be multi geography, and it's gonna be here I'll just say yes.
Just add to that.
A couple of thoughts one I think defining any sort of Tam in open banking at this point in time, we will just be an incorrect.
Looking for a position where it doesn't exist because used cases are still to develop so I think what we see is tremendous potential with what open banking does by providing us access to a network of data that book, which comes with its own set of use cases, the second point I'll bring out is regardless of whether its open banking or digital I'd D. R.
All of our services, we think about that in the context of the revenue they generate for Mastercard The company, but it's really important to remember that they all have this as one big circular wheel.
Our open banking assets power, our payments our services Bauer our payments. So that is the collateral advantage, which comes through by virtue of being in all of these spaces, which trickles down to all parts of our business.
Thank you all right.
Thank you so much for that last question exciting space.
We're going to close the call now we're at the top of the hour I. Appreciate your time this morning.
Do you want to thank our 24000 colleagues around the world and I want to thank all of you who joined US today for your continued support for Mastercard talked to you in a quarter. Thank you so much.
This concludes today's conference call you may now disconnect.
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