Q2 2023 Mastercard Inc Earnings Call
Okay.
Good morning, My name is Andre and I will be your conference operator today.
At this time I would like to welcome everyone to the Mastercard, Inc. Q2, 2023 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
He's the only press star one wants to queue up for question as pressing star one multiple times and they affect your position in the queue.
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Mr. Devin Carr head of Investor Relations you May begin your conference.
Thank you Roger good.
Good morning, everyone and thank you for joining us for our first quarter 2023 earnings call with me today.
Michael Me back, 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.
It is only then 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 website Mastercard dotcom additions.
Additionally, 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.
Both the release and a slide deck include reconciliations of non-GAAP measures to GAAP reported amounts.
Finally, as set forth in more detail in our earnings release I'd 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 in our recent SEC filings a replay of this call we've posted on our website for 30 days.
With that I will now turn the call over to our Chief Executive Officer, Michael Me back. Thank you Devin good morning, everyone.
So starting with the Big picture, our momentum continued into the second quarter with net revenue up 15% and operating income up 16% both versus a year ago on a non-GAAP currency neutral basis.
Once again, demonstrating the strong fundamentals of our business consumer spending has remained resilient with spend on experiences and travel remains a focus.
On the macroeconomic front, we continue to monitor a number of factors first the overall labor market remains strong, including wage growth and consumers continue to be supported by credit and savings.
The key factors of consumer spending.
The efforts of central banks to curb inflation is showing signs of progress. Despite this inflation remains elevated and we are in a period of tight monetary policy across many countries economic.
Economic growth will continue to vary country by country and sector by sector.
Our switched volume trends domestic volume growth remains healthy we continue to see strength in <unk> with some recent moderation in both inflation and spend in select international markets.
Cross border travel continues to show strength, reaching 154% of 2019 levels in the second quarter, we remain well positioned to capitalize on this trend with our travel oriented portfolios in our initiatives in areas like loyalty and marketing.
Cross border card not present ex travel continues to hold up well.
The monitoring the environment closely and are ready to adjust investment levels as appropriate while maintaining focus on all key strategic priorities. As a reminder, these priorities are one expanding in payments to extending our services and three embracing new networks.
First we're expanding in payments by continuing to win deals with a diverse set of customers powering growth and acceptance capturing a prioritized set of new payment flows and exploring new ways to ensure payment choice by leveraging multiple alternatives, including card rails E. C. H blockchain and open banking Act.
The top of this list, we are winning deals across the globe through a combination of our innovative products differentiated services and our solution selling approach.
I'll share a few examples from each region, let's start in Europe , where we announced a significant win with when he credit across all card products.
We expanded our partnership and put in place a first of its kind single card multimarket strategy spanning 13 banks 12 markets and 20 million cards.
Only credit selected Mastercard, Utah innovative digital capabilities shared focus on sustainability and proven ability to support their clients needs.
In Germany, the previously announced conversion of approximately $10 million of Deutsche Bank's credit and debit cards to Master card has now started.
These wins build on our prior success in the U K, where there are now 16 million Natwest debit Mastercards live in market.
When combined with the Suntan, Dan first direct migrations, approximately 27 million debit cards have now shifted to Mastercard across these three portfolios in the U K.
Turning to North America.
Master card with partner with Psi serves money network for all U S state and federal government benefit and wage disbursement debit programs.
Up North coast.
<unk> capital Canada's largest pet.
The real credit Union will be converting their consumer and small business portfolios to Mastercard.
The partnership highlights our shared commitment to local communities with issuance through Columbia financial services.
In addition, we have a new agreement with Tim Hortons, the largest fixed service restaurant brand in Canada, Tim Hortons relaunch, a new master card credit card and we'll be using a broad set of master cards digital analytics and fraud services and technologies.
Our relationship with Santander in Latin America continues to grow.
In Mexico, we established a long term exclusive deal with open bank their new digital Bank. We also renewed this yesterday rewards co brand credit card, sometimes as key offering within the consumer portfolio.
In Brazil, we will be Sunday as exclusive partner across their commercial portfolio.
And we've expanded our partnership with Posco in secret D. One of Brazil's largest credit unions.
In Asia Pacific, We've extended our relationship with standard chartered bank, which will enable us to grow our consumer credit presence across key markets in the region.
We've also expanded our partnership with HSBC through the launch of the travel ban Cod in Singapore, Malaysia, and Vietnam travel one will provide instant inapt rewards redemption powered by the master card reward system.
With all of these cards people do need a place to use them, we continue to power growth and acceptance.
By establishing new partnerships and scaling new technologies this quarter, we announced partnerships with both Ali and Wechat pay to enable international travelers to easily link any mastercard credit or debit card to Ali PE and Wechat pay digital wallets. The partnership allows visitors to make payments with tens of millions of QR code merchants across.
China I, just returned from China, where I saw firsthand. How this is helping international travelers shop and pay and more places in a simple way.
It's like paying like a local and this will be valuable as inbound cross border travel to China approvals from approximately 50% of 2019 levels in the second quarter.
In the online environment, we are scaling our click to pay capability to enhance the guest checkout experience click to pay transactions grew over 70% year over year in the second quarter.
And the technology is now live in 30 markets in the quarter, we added Chile, Bahrain in Slovakia and that West group became the first bank in the U K to go life with click to pay push provisioning for cardholders.
Shifting to new payment flows we are making tangible progress in this area.
And commercial point of sale, we've extended our partnership with Brexit to support the international expansion of their commercial portfolios.
We expanded our relationship with my P. O S continuing to drive new merchant acceptance across more than 30 European market, but also migrating their small business debit portfolio to Mastercard.
And we've established an exclusive partnership with Australia, and Linda ROE finance to introduce credit cards to their small business customers later this year.
And need to be accounts payable we remain the market leaders in virtual card.
We continue to drive growth by tapping into new use cases for example, we established an exclusive partnership with easy transfer in greater China. This competitive slip leverages, our virtual card capabilities to support cross border tuition payments for international students.
We're also making it easy for buyers and suppliers to integrate virtual cards introduced technology platform state already use.
Building on our prior announcements with S. A P and Cooper, if recently partnered with J E T to integrate all virtual car technology into death payables platform.
And on the supplier side, we launched Monster card receivables manager, let's build trust the solution streamlines the processing of virtual card transactions with suppliers and automates. The integration of reconciliation data into accounts receivable systems. This is a great solution and it builds on partnerships with companies like Booz payment solution.
<unk>, who had been working closely with Mastercard to expand and optimize commercial acceptance.
Sure.
And finally in new flows we continue to deploy our disbursement and remittances capabilities in new ways and across new geographies in the U S. Dupont with top sports gaming processor into Czechs, who will make mastercard send available to gaming operators for payouts.
And on the cross border front, they partner with Us sardonyx changing cutoff to facilitate remittance services and support cross border travel.
I'll work in real time ACTH continues to support these new flows are historical approach has been to expand our infrastructure our reach into new markets going forward, we will be focusing on delivering and scaling in the markets. We already are serving well building applications and services in these key locations in line with our overall strategic and financial objectives.
And at blockchain, we're introducing the Mastercard multi token network MTN MTN is a set of foundational capabilities designed to make transactions within digital asset in blockchain ecosystems.
Secure scalable and interoperable Billy.
I believe in the potential of blockchain technologies, however, regulated money such as bank deposits in CVD sees needs to be part of the solution and they should inter operate with traditional systems. We can help with that MTN is the natural evolution of the work we have already done in this space. The initial sandbox will kick off in the U K This summer.
Now turning to services, our services informed decision, making of our customers they help them create stronger connections and greater loyalty pay.
Payments and services reinforce each other multiplying our impact and the value we deliver to all our partners. All services helped many draw drive many of the wins I mentioned earlier.
So here are a few additional examples.
The recently launched our consumer fraud risk solution, which leverages, our latest AI capabilities and a unique network view of real time payments I, just mentioned to help banks predict and prevent payment scams.
AI is a foundational technology used across our business and it has been a game changer in helping identify such fraud patterns. These partner with nine U K banks, including Barclays Lloyds Bank, Halifax Bank of Scotland, Natwest, Monzo NTSB to stop scam payments before funds. These are victims account.
He has been one of the first banks to adopt the solution indicated that it has already dramatically increased its fraud detection since deploying the capability.
We're combining our loyalty consulting analytics and identity services in different ways to help our customers capitalize on the travel recovery. This quarter, we extended our broad based partnership with Expedia group together, we will combine mastercard's loyalty solution with Expedia has extensive travel supply to naval Mastercard cardholders to book.
Travel using loyalty points.
We also partnered with Thomas Cook in India to issue prepaid cards for international travel to proposition includes cardholder access.
So over 450 cross border travel offers through Mastercard traveler rewards.
And earlier this month I met with our partners at Deutsche Bank Lufthansa in Frankfurt, We resigned a re signed resigned our long standing partnerships with Lufthansa group towards Mars and more loyalty program and welcome Deutsche Bank as the new issuing partner in this enhanced relationship that you'll see a combination of our loyalty solutions personal.
<unk> capabilities and digital user experience has helped.
The partnership take off to the next level using airlines speak we're also leveraging our personalization and test and learn capabilities to help our partners across the ecosystem enhance the customer experience and improve acquisition and conversion rates.
For example, the combined dynamic yield personalization capabilities with all marketing services to drive digital customer acquisition for Echo Bank in Nigeria.
In addition, HP, Inc has partnered with us to deploy personalized content for their consumers across Canada and Europe .
And on the merchant side, we are working with 711 in Australia, using our test and learn capabilities to support the rollout of new store concepts involved it's food and beverage offerings.
Our third strategic priority area is embracing new networks with a focus on open banking and digital identity.
We continue to make progress in open banking and established a series of new and expanded collaborations this quarter, putting ones with Freddie Mac Agua.
Oh go on based out of France, and <unk> in the UAE. These entities will leverage all smart and consumer permission data to drive increased financial inclusion and make digital interactions simpler and safer.
Turning to digital identity, we're driving adoption across several new verticals, including travel ticketing retail and financial institutions.
Traveler provide a flight hub is using our identity solutions to help travelers booked their new next adventure.
Sports teams across the U S, including the New Jersey Devils use these solutions to enable fans to buy tickets, while reducing fraud and ticketing platforms.
The League baseball used our new detect technology to ensure that all star votes were authentic for this year's all star game.
In retail you partner with Ikea was using a concept to help reduce friction and fraud.
And financial institutions like Greenwood of digital banking platform for Black and Latinx communities are using our capabilities to centigrade consumers in real time, making financial empowerment, a reality for more people.
So in summary.
We delivered another strong quarter of revenue and earnings growth supported by resilient consumer spending, particularly in travel and experiences.
Strong deal momentum continues with new wins and expanded relationships, how about services across a range of partners, including only credit Beiser, Tim Hortons Rex and many more.
Our differentiated capabilities diversified business model and focused strategy positions us well to capitalize on the significant opportunity ahead.
<unk> over to you.
Michael So 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 15%, reflecting resilient consumer spending and the continued recovery of cross border travel as well as the continued growth in our value added services and solutions operating expenses increased 13%, including a minimal impact from acquisitions.
And operating income was up 16%, including a minimal impact from acquisitions.
Net income and EPS increased 11% and 14% respectively, both reflecting a sizable discrete tax expense this quarter related to foreign tax legislation enacted in Brazil.
EPS of $2.89 includes a 22% reduction due to the discrete tax expense I just mentioned and then <unk> contribution from share repurchases during the quarter, we repurchased $2 4 billion worth of stock and an additional 497 million through July 24 2023.
So, let's turn to page four where you can see the operational metrics for the second quarter.
Worldwide gross dollar volume or G. D V increased by 12% year over year on a local currency basis in the U S. G. D D increased by 6% with credit growth of 8% and debit growth of 3%.
Outside of the U S volume increased 16% with credit growth of 14% and debit growth of 17% off note. We have now completed the Natwest debit migration in the UK.
Overall cross border volume increased 24% globally for the quarter on a local currency basis, reflecting continued improvement in travel related cross border spending.
While this is sequentially lower versus Q1. This is due to tougher comps as we opened up post omicron last year. When you look at the trend versus 2019, you see continued strength for example cross border travel is at 154% of 2019 levels in Q2, which was up six ppt from the prior quarter.
On the same basis cross border card not present, excluding travel continues to hold up well in relation to 2019 levels up two ppt from the prior quarter to 210%.
Yeah.
Turning to page five switched transactions grew 17% year over year in Q2, both card present and card not present growth rates remained strong card present growth was aided in part by increases in contactless penetration as contactless now represents over 60% of all inputs and switched to purchase transactions.
In addition card growth was 8%.
Globally, there are $3 2 billion Mastercard and maestro branded cards issued.
Turning to slide six for a look into our net revenues for the second quarter, which came in above our expectations. As a reminder, earlier this year, we revised our disaggregated revenue disclosure net revenues are now broken down into two new categories payment network and value added services and solutions now getting into the numbers.
Described on a currency neutral basis.
Payment network net revenue increased 14%, primarily driven by domestic and cross border transaction and volume growth and also includes growth in rebates incentives Amy.
Aman network net revenue was higher than anticipated, primarily due to higher revenues related to FX volatility and the timing of planned deal activity.
Have you added services and solutions net revenue increased 16%, primarily due to the continued healthy growth of our cyber intelligence solutions, driven by our underlying driver growth and the demand for our fraud and security solutions and strong demand for consulting and marketing services, which was partially offset by other solutions.
Now, let's turn to page seven to discuss key metrics related to the payment networks again described on a currency neutral basis, unless otherwise noted.
Looking quickly at each key metric.
Domestic assessments were up 11% while worldwide G. D. V grew 12% the difference is primarily driven by mix.
Cross border assessments increased 29%, while cross border volumes increased 24% to five ppt difference is primarily due to favorable mix as higher yielding ex intra Europe cross border volumes grew faster than intra Europe cross border volumes this quarter.
Transaction processing assessments were up 16%, while switched transactions grew 17%.
The one ppt difference is primarily due to lower revenues related to FX volatility versus the prior year.
Although network assessments related to licensing implementation and other franchise fees were $270 million. This quarter. As a reminder, these other network assessments may fluctuate from period to period.
Moving onto page eight you can see that on a non-GAAP garnsey neutral basis, excluding special items total adjusted operating expenses increased 13%, primarily due to increased spending on personnel to support the continued execution of our strategic initiatives.
Now turning to page nine let me first comment on the operating metrics trends in the second quarter versus 2019 overall spending has remained resilient when viewed your over your on a sequential basis. We are seeing some moderation in both inflation and spend in select international markets as well as.
As more difficult comps.
As it relates to the first three weeks of July our metrics are holding up well.
And really in line with Q2 when indexed to 2019.
Just for your information we have included all the data points from this schedule excluding activity from Russian issued cards from current and prior periods in the appendix.
Turning to page 10, I wanted to share our thoughts on the remainder of the year.
Let me start by saying that our business fundamentals continued to remain strong as overall consumer spending remains healthy and we continue to deepen our relationships with partners across the globe.
Domestic spending patterns have broadly normalized post pandemic.
Ross border travel continues to grow at a healthy pace now above 150% of 2019 levels, while the travel recovery has progress well in most regions, there remain pockets of opportunity, notably into and out of China.
We remain well positioned to capitalize on this continued growth with our travel oriented portfolios and related service offerings Cross border card not present ex travel continues to hold up well.
While we are monitoring a number of macro and geopolitical factors a base case scenario for the Euro continues to assume consumer spending remains resilient buoyed by strong labor market.
And reflects current spending dynamics and the ongoing recovery of cross border travel.
Paul Your our outlook is broadly unchanged, we expect net revenue growth for the full year of 2023 to remain in the low teens range on a currency neutral basis, excluding acquisitions and special items.
As a reminder, this growth rate would have been approximately one and a half P. P T.
Higher if you exclude Russia related revenues from 'twenty to 'twenty two.
Foreign exchange is expected to be a tailwind of one ppt for the year and we expect a minimal impact from acquisitions.
Our expectations for operating expense for the year are also unchanged with growth expected to be at the high end of a high single digit rate on a currency neutral basis, excluding acquisitions and special items acquisitions.
Acquisitions are forecasted to add about one ppt to this growth and foreign exchange is expected to be a headwind of approximately zero to one ppt for the year.
As Michael mentioned, we are prepared to proactively adjust our operating expenses, if we see meaningful changes to topline growth.
With respect to the third quarter Euro where your net revenue is expected to grow at a low double digit rate again on a currency neutral basis, excluding acquisitions and special items.
Coming off a strong Q2 this sequentially reflects a lower anticipated contribution to growth from our revenues related to FX volatility.
Okay.
Foreign exchange is expected to be a tailwind of approximately three P. P. T and acquisitions are not expected to have much of an impact for the quarter from an operating expense standpoint.
We expect Q3 growth to be at the high end of a high single digit rate versus a year ago on a currency neutral basis, excluding acquisitions.
Special items.
Acquisitions are forecast to add approximately zero to one ppt to this growth and foreign exchange is expected to be a headwind of approximately one to two ppt.
Other items to keep in mind first on the other income and expense line, we forecast an expense of approximately $19 million for Q3, this excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics.
Second we expect our non-GAAP tax rate of between 18, and 19% for Q3 and Q4 based on the current geographic mix of our business and the recent U S tax guidance that allows for more tax credits to be claimed related to 'twenty to 'twenty, two and 2023 and with that I will turn the call back over to Kevin. Thank you.
We are now ready to begin the question and answer session.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Please only press star one wants to queue up for question as pressing star one multiple times may affect your position in the queue.
We will take our first question from Tien Tsin Huang at J P. Morgan.
Hi, good morning.
Good to talk to you guys just wanted to ask on the Unicredit.
When there.
Nice one just outside the top 10, it looks like in Europe . So you mentioned a multimarket strategy is what they're going after and I heard sustainability also.
That's the reason for the win I'm just I'm just curious.
Thinking about this as a case study.
A new trend why are they employment strategy now in the wake of the <unk>.
Uncertainty open banking and there's a lot of.
Talk about Pan European schemes and whatnot. So I'm just just wanted to study was a little bit and if there's any comments on timing and pricing as well. Thanks.
Hi, Tien tsin.
Thanks for the question. So this is.
Antacid Gwen we're excited about that as I laid out it's it's very unique.
This is a pan European banks are cutting across our 13 banks are in 12 markets.
It's a wide it's a wide strategy. Therefore, a single card multi multi market and it cuts across a lot of our digital capabilities. So I think the breadth of our offering on the digital first site as well as our services are a key aspect of US winning this particular portfolio the sustainability part we see it.
Across all.
All range of customers, who are all looking at climate is the question of essentially to solve what cannot be done the consumption question in the context of payments theres. So many angles to it our prices kind of tradition.
She planting itself was plays into that so that is a particularly important are two only credit. So here again, we had a meeting of the minds and he and it comes down to as part of the migration and you've alluded to this in your question can we stand ready to serve their needs from day one.
The migration starts we've proven this with Deutsche Bank with proven it with Natwest and so forth. So this is something that is not new to us. So we're excited to see this unfold.
Over the near future.
That's great. Thank you Mike.
Okay.
We'll go next to her.
<unk> at Bernstein.
Good morning. Thank you for taking my question, Michael I want to ask about fed now, which is now finally launched and I know you've commented on this before.
Do you know anything from.
And then he said if you'd be kidney potential retail tenants use cases.
You've had a lot of experience working alongside.
Some of them.
Are you thinking about fed now into this can happen.
Thank you.
Thanks, Rashida, yeah, but we're all monitoring what fed and I was doing there now going live. So this is clearly a milestone a good opportunity to look at this topic again you know.
Our view on this really hasnt changed so you need to count in the end it comes down to what do you what problem you're trying to solve what our merchants are looking for our merchants are looking for reach to consumers. So scale matters a lot.
Our consumers looking for consumers are looking for safe ways to pay in a predictable fashion ubiquitously available.
So those are all factors that that Hasnt changed.
<unk> with this with this launch we built at acceptance we have a brand the two interlocking circles that represent trusts so that addresses a lot of.
Our merchants and consumers are looking for on these strengths and to position the proposition over years contactless tap on phone buy now pay later master card installments click to pay and so forth.
So that's good the Mastercard debit proposition is strong and we keep evolving that so it's well understood. Now said now is launching so as we look at that.
We will obviously continue to compete and offer our services to our banking and issuing partners at the same time in.
In our experience to your question. We have stayed close to these systems and various other countries, India and ending up partnering with most of them are with most of them. So he will have to see where it goes live.
Live going life doesn't mean that it is broadly available yet it is early days as you said Oh no it.
It doesn't have features it doesn't have a consumer platform as such you can't access it through your mobile banking App all of that is what our solution. Today provides so we'll have to see where it goes head on competition, but a mindset of partnership where and when it makes sense for us and where this goes it.
It is important to say that we do have solutions for these systems. If you look at the chase pay by bank solution that we put into the market. So that is exactly leveraging these kind of flows that would run across these systems generally PGP focused.
Some non card penetration verticals around across these these.
These particular systems, so we see that as an opportunity and she's by bank one.
One of those ways to going after that at least on a similar kind of solutions in the U K and Europe and so forth. So more to come we will stay very close at this point in time.
I think we have the better solution in the market.
Very helpful.
We'll go next to Sanjay suck Ronny I K B W.
Thanks, Good morning.
I had a question on the bed routing rules.
Debit.
Card not present transactions went through in July just curious sort of how you see the opportunity there.
It would seem like you are in a good position to take some share.
Right. So you know well the clarification came to networks available as the first of July .
So we put that in place and we said, we would and we're ready to do that it's still early days, we have to see where that goes but as you rightly said John day on Sunday, we stand ready to compete.
Yeah that is certainly we will look for any opportunity and I'm sure we will find it.
Great. Thanks.
Yeah.
Next we'll go to Lisa Ellis at Moffett Nathan.
Hi, good morning, Thanks for taking my question.
In the prepared remarks, you highlighted that with Mastercard real time Ath strategy here.
The phase of transitioning from building out infrastructure to focusing more on cutting applications and services.
Just kind of taking a step back you know, it's always been a big differentiator for Mastercard that you own infrastructure and fast ACTH with vocal Lincoln net net corporate services can you just kind of comment a bit on the movie over that last six or seven years like how has that helped.
Differentiate mastercard in the you know in terms of being able to capture account to account network payments new.
Flows et cetera. Thank you.
Thanks, Lisa so real time payments.
When the rise of real time payments started our 2016 and 17 and so forth N V invested into vocal link it was clear at the time that we wanted to be any infrastructure infrastructure application services. There was a bit of a logic at the time, we needed the street cred and we needed the talent. So we can participate in this trend from day.
One that was the Oh there was the first.
First season of the movie so to say to stick with your analogy you know where we are today, we built out a enviable and unique position in real time payments, having a footprint.
In 13 of the top 50, GDP countries, where he ran and partially operate a real time payment infrastructure. Our strategy was we will be in the markets that matter and we don't want them to be in the market that don't matter. So we feel we've reached that point and now it's really to drive up scale and use that infrastructure position.
The business in itself of running these systems in these markets is attractive enough as we pointed out we're going to focus on building out a set of applications and services on top of that you'll recall from the prepared remarks, where I talked about the.
The scan the anti scam solution in the U K with these non U K banks. It's a fantastic example of how our expertise in these markets has positioned us to rally nine banks around the table to come up with a market wide solution now not everything that we will do will be market wide solutions that will be individual customer solutions that we feel.
So we have muscle in this space, it's not going to go away. So all of these government payment systems out there more and more real time payment solutions will come up and I think we will be in demand and because we've done it for a long time will have a seat at the table.
Thank you.
Well move next to Darrin Peller at Wolfe Research.
Okay.
Hey, Thanks, guys can we.
Quick touch on value added services for a moment I mean, it's been a good tailwind for some time I think it grew just about a point below transactions. This time around and you mentioned strength in cyber and some other categories offset by that were offsetting other so I'd be curious to get a little more detail as to what where the strengths and weaknesses of value added services now including the.
And then more importantly, just how much room do you think you have across those different categories to keep keep that growth alive and cross sell into your meaningful payments business.
Right.
So let me start and then Sachin can add a bit.
Around yes it.
The various dynamics around growth rates and so forth.
So as I said in prepared remarks.
Payments and services complement each other you know the strategy is a combination of both and of the extend that into new networks. So that's that's the starting point we remain convinced that that is a key reason that all of those wins I just talked about earlier are happening so.
Central to our strategy.
Our services in aggregate continue to grow faster than the core. So we continue to different diversify our revenue base. We liked that we want to continue to do that there's a whole range of services to choose from yeah. We could do lots of things we have pruned our strategy when it comes to processing because we didn't feel that was such a differentiator.
But we felt that cyber security in a world that is rapidly digitizing is just going to drive the biggest demand and we're seeing that coming through in the numbers when I look into our C&I business, which grow at a very healthy clip.
If you think about our DNS and data analytics business here, Yeah, we keep on building out the value chain. It's a vertically integrated value chain do you have maybe you have to test and learn we have loyalty and you go all the way into personalization that is before after during the transaction helping out.
Customers run a better business.
I don't see an end to the demand in fact that is key to our segment diversification strategy. So running at a healthy clip I don't see any moderation here, where this is continuing we will continue to grow and you should see us continue to build out across the key aspects of services and cyber security and data analytics into.
So we love this business and we'll continue to nourish it.
Hey, Darrin it's session good morning.
Couple of additional thoughts so so Michael kind of covered off the strength, we continue to see in our value added services and solutions.
And that is indeed, the case, but you got to remember that growth rates move around quarter to quarter I'm on this area and so we should all focus on the longer term trends out here.
As it relates specifically to Q2.
When you look at growth rates for value added services solutions in Q2 of 16% I assume we're looking at the sequential trend out there one point to keep in mind is that.
There was a one ppt drop in Q2 on a go into a acquisition. So Q1 had the impact of acquisitions Q2 doesn't have it because it's kind of lap that acquisition period. So that's one piece and then specifically in my comments I talked about the strength in cyber and intelligence as well as in some of our data and services capabilities was offset by the solutions and.
It's really all about what the growth rate trends are for cyber and intelligence and data and services relative to growth rates and things like realtime UCH, especially on the infrastructure level. So when we talk about other solutions think about it in the context of things like realtime ACTH, which tend to grow at a lower pace. There. So historically, what we had spoken about was just.
Services now we're talking about value added services and solutions. When we think about services in the historical context in Q2 that services growth rate was more like 18%. So just for a reference point for you on that.
Understood.
Very helpful. Thanks.
Well move next to Timothy Ciano at Credit Suisse.
Great. Thank you for taking the question I wanted to dig in a little bit on another business. It is important to your both your volume and your revenue growth algorithm over the medium term, which will be Mastercard send you touched a little bit on some of the cross border use cases I believe many of the initial use cases, where much more domestic but it's evolving over time, maybe you could just dig in a little.
A bit more to some of the cross border use cases that are really gaining traction.
Alright, so Timothy let me start off with that so our sand or sand business domestic and cross border together, that's how we look at it there there's a big chunk in there which is a cross border.
Disbursement remittances as you rightly said the way that we go after that is by adding new geographies. I gave you three markets that we've added this year chili Bahrain in Slovakia. So there is tremendous reach unparalleled reach in what we have in our cross border proposition Hunter.
100 countries around the world.
And then there's new ways to go after it and that is the use cases, so earlier when I was talking about gaming our gaming pay out some of that is domestic some of that is international.
The whole workers' remittances piece of hard dawn in Qatar those aren't important corridor is be very specifically go. After these corridors middle east into South Asia, and so forth. So it's pretty methodical.
But there's another way that which I haven't talked about on how to accelerate this business and this is how we make it easier for customers to onboard with us. So cross border service Express, which is kind of pre packaged solution around cross border payments is another way.
For us to accelerate this business.
So new geographies and new use cases corridor specific great methodology, I think we have the right kind of assets here across our home center integration across our transfer acquisition the master craft propriety system in our card reach so all in this is growing at a very healthy pace and we like.
That business a lot we are experts in cross border as you know on the card side in the building that out here over here in remittances and disbursements.
Excellent. Thank you for taking the question.
Well go to our next question from Reena Kumar at UBS.
Good morning, Michael and Sachin. Thanks for taking my question I'll give you in the past have just stopped heartbeat, a fever remains a large opportunity for Mastercard and you talk about what trends you're seeing in BTB payments in this macro environment, how you're progressing against capturing the Tam and if you're seeing any slowdown in corporate spending as companies potentially tighten their budget.
Sure.
Thank you Ray now I'm noticing a lot of questions coming for me. It means that there isn't a lot of questions on the numbers, which is fantastic and I love to talk about <unk>.
Yeah, Let me take the lens array now that's a little bit broader here on commercial overall so.
I feel like I'm repeating myself here, but you know we're choosing priorities because they are growing at a healthy clip. So and so is the story for commercial growing at a healthy clip.
So this is you'll be seeing a quarter over quarter year on a quarter to year over year growth above the consumer side. There is particular strength in our international markets business and we.
We've sustained elevated levels of growth when we compare this back to 2019, all the noise of Covid out of the out of it yeah. We have two main focuses in this area. One is commercial point of sale and the other one is our b to B accounts payable business commercial point of sale now this is a tremendous.
Total market opportunity is massive Tam out there and it's slightly penetrated by cards today.
The way we look at this is this isn't really about building new systems. This is about penetrating with the tools that we have today targeting Smes and corporate T E purchasing fleet all of that with our existing capabilities that we have plus a complementary.
Solutions like smart data and easy savings and so forth. So a lot of cash and checks out there a lot of opportunity with cards that we have today. So we leveraged at do we build out a separate vertical in the company, we're focusing hard and we see the growth rewarding us for that.
On the <unk> side. This is accounts payable trusted relationships. This is invoice payments and so forth. This is an even larger tam.
With a lot of clear pinpoints companies are looking to automate these processes digitize. These processes get rid of the paper and virtual cards is a solution that works tremendously well, we as I called it out earlier, we are the leaders in virtual cards.
But the solution isn't perfect. So we invest a lot of energy through our product teams to make it better and better what I was saying earlier on receivable manager. This is a way to automate the acceptance of virtual card payments build it into the accounts receivable system automated through get the benefits of virtual cards without some of the manual processes that we have.
To go through over the past year. So this is a real breakthrough this business is going to be hugely important for us going forward, we called it out in November 2021 at our strategy day at one of our biggest growth opportunities. We feel we're ahead in the market and we see the healthy growth and that will be remaining a focus for us.
Yeah.
We'll go next to Ashwin <unk> Citi.
Hey.
Good quarter guys Michael since.
Since you say that.
He is not getting enough questions, maybe I'll ask a numbers question.
Yes.
I wanted to figure out sort of the cadence of operating expense.
<unk> for Q, it sort of looks like.
It looks like Youre exiting the year.
A little bit.
A little bit higher than than N D TQ levels in terms of growth so.
What's causing that as well as.
I know I know you're.
Cadence of spending.
Spending tends to be.
Longer term in nature, but are there product or service callouts in terms of the types of investments that you're making.
Most importantly now.
Hey, Ashwin good morning.
You know look what we've shared with you with our thoughts around what we think operating expenses. It looked like in the third quarter and I've given you what the full year numbers are or what our expectations for the full year numbers are so I think you can kind of back into.
But our operating expense growth rate is going to be or is expected to be in the fourth quarter.
Nothing unusual going on from an Opex standpoint in Q4.
Honestly I would tell you if you look at it on a year over year basis growth rates. You know you. When you you back into those numbers you can see there's nothing really unusual going on there.
Broadly speaking on Opex, here's what I would say it could be.
We remain focused on driving our operating expenses in what matters. It's the strategic priorities, it's making sure we're channeling our capital in the appropriate manner to drive growth both in the short medium and long term and that's what we'll continue to do as you know we are a people business to a large extent because a lot of what we do from a tech development standpoint.
<unk> is our own people a lot of what we do from a sales standpoint is wrong people. So that's what we invest in so when you see growth rates in terms of operating expenses I tend to call out personnel as one of the line items essentially for that reason alone which is the growth comes from people and people are the ones, who actually bring the assets that are there for which allow us to deliver that revenue, but really no.
Nothing unusual going on from an Opex standpoint.
You know as we exit the year.
Okay, great. Thank you.
Yes, so we keep top and bottom line growth in mind, but you know there is a tremendous opportunity ahead of US right. Now. So we are using this tailwind that we're currently seeing to continue to invest you'll see the list of wins the gross momentum.
Momentum indeed, a beta growth momentum in services. This is the time to continue to a nurse that business and invest in you will see us do that in a very prudent and disciplined fashion.
Understood.
We'll go next to Dan <unk> at Mizuho.
Hey, guys. Thank you so much for taking my question I. Appreciate it just a quick question on the guidance like you know obviously results were very strong.
Exceeded your second quarter guidance on revenue like what was the thought process.
We're not seeing the guidance for the year. Thank you.
So Dan a couple of thoughts here one.
Again remember we shared guidance in terms of ranges and that's what we've shared out here as well right and you know when you think about ranges you know that's what they are in essence, a point number two is you know some of the beat which we had in Q2 as I mentioned in my prepared remarks was driven by what we call timing of <unk>.
<unk>, we still expect to be active in the markets. We still expect to vigorously compete in these markets and so I kind of intentionally mentioned that is timing only because we do expect that as the year progresses, we will continue to be active in the market. So you know I.
I think you should take that into consideration as well and then my only other comment I'd make is in Q1, we had modestly increase our thoughts relative to what we had shared right at the start of the year. So when you bring all of that together right that's kind of our thinking behind what we've shed from our full year guidance standpoint.
Okay.
Got it thank you so much.
Sure.
We'll go next to Bob Napoli of William Blair.
Thank you and good morning.
On open banking guys match has been pretty aggressive in investing in open banking, but I'd just like some additional thoughts maybe on how that's progressing and then how open banking maybe fits into other strategies like embedded finance and banking as a service.
Alright, so open banking.
As you are as you know, we specifically called that out as one of two opportunities and <unk> networks.
The trend is here to stay that's a that's pretty clear. This this whole notion of.
People get to use their data footprint to avail, better financial services, there's a lot more regulation coming around at PST three in Europe is coming out of this this this train is a hedge.
<unk> has left the station that's good we're on it.
The way we look at it is.
We have to move beyond connectivity, we had a good start we are well connected here in the U S through our fitness of the asset and in Europe through our IL assets.
We're very busy now building use cases on top of that and this is where we think the future is going initial demands of affinity was very clearly in lending oriented use cases and asset verification use cases that feels that is where the demand is today to <unk> earlier point, where do we invest invest where we see the demand in the.
Near term event, so that is a that.
That is where we're optimizing but you're already starting to see is we're going beyond these lending use cases.
Without.
Solutions like our changed by paper.
Pay by Bank solution here in the U S. This is using our payments success indicator, which is using open banking data to tell a villa. This is a good time when there is balance on an account. These now build out is what the payment success indicator does that is powered by mastercard's open banking technology. So near term use cases clear that's working connector.
<unk>, we're well positioned without two assets and we're very busy building out use cases, and obviously, we're excited to see pay by bank.
With chase launch in the third quarter as we said to you.
Thank you.
Okay.
We'll take our next question from David Excuse me, David <unk> with Evercore ISI.
Thank you good morning Cross border volume growth remains very strong, but on slide nine clearly there's a deceleration from April growth through June , especially in cross border travel. So my question is for the second half what growth rate in cross border volume is embedded in your guidance and then if you could go a little bit.
Under the Hood, what do you see in cross border travel volumes.
There may be a little more texture on what you're seeing by country in Europe you gave.
Overall data and some thoughts on China.
Sure David So a couple of thoughts first.
At the highest level, which is the value prop of cross border travel still remains incredibly strong.
So we've got a strong value prop we have a strong presence in the market as you'll remember as we were going through COVID-19. When everybody had stopped traveling we use that as an opportunity to continue to bolster our position in cross border and that's paying dividends right. Now. The fact that we were building portfolios and winning portfolios at that point in time is helping us actually.
Drive strong growth in cross border broadly speaking, but also in travel now specific to your question around trends I think youre looking at year over year growth rates.
When you are looking at what the cross border traffic trajectory is month over month of declines you were talking about I didn't guide you to look at the right hand side of slide nine which talks about.
The the numbers indexed to 2019 and there you could see actually there's an accelerating trend in cross border travel. So said differently you can see that in Q1, our cross border travel.
As a percentage of your 2019 was 148% in Q2, there was 154% in the first three weeks of July that's 157%. The reason that's important is because the year over year growth rates are getting impacted by tougher comps from last year and I think that's important to actually keep in mind.
In terms of regional color I would say that you know regions are performing well you know look I mean, the beauty of what we've got at Mastercard is a diversified business model is diversified across multiple dimensions across payments and services across products across channels of seal across regions and the fact that we've got this present strong presence across various regions.
Helps us.
In the cross border side, as well and really what we're seeing is good sustained growth in cross border both on travel as well as non travel across the globe, we're seeing accelerating trends in Asia Pacific, which we had very much expected and spoken about that's what youre seeing coming through in the nature of the numbers here. We still think there are pockets of opportunity on a going forward basis in particular.
Going into China, and coming out of China, just as a reference point Michael talked about how.
Cross border travel inbound into China stood at approximately 50% of 2019 levels in Q2 that just goes to show what the opportunity of meeting there is Conversely cross border travel outbound from China with approximately 70% in Q2, and so that will do.
<unk> will give you an indication of where the opportunities lie on a going forward basis as we continue to do what we're doing in terms of you know winning more portfolios enriching our proposition leering services, such as our loyalty programs that just helps us position us well on a going forward basis. So that's the kind of color I'd like to share with you on this broadly speaking I think we're in a very good place.
As it relates to cross border, but it wasn't one thing to add here that is the current imbalance in the market between demand and supply. So there is still an unlocked there as in airline capacity airport capacity and all of that will unlock so the combination of the underlying desire to travel.
How that trend is coming through our position strong position in the travel industry with our portfolio's Expedia and Lufthansa just to add to her.
Here and this unlock of capacity over time will be a very good mix and this is an exciting space people just want to be out there.
Okay.
We'll go next to Dan Perlin at RBC.
Thanks, Good morning.
I just wanted to maybe dig a little deeper on the commentary around this moderation in inflation and spending Sachin that you called out.
Particularly what can you tell us about.
The down draft in average tickets during the current quarter and then maybe more specifically are you seeing any discernible signs or indications of trade downs from the consumer that would be high corollaries to slightly weaker consumer spending as opposed to this resiliency that it sounds like you guys are continuing to talk about thank you.
Sure Dan So couple of thoughts I mean, it's no surprise I think you guys are all seeing that inflation, while still remaining at high levels has started to moderate right. So youre seeing that come through in terms of the the nature of spend right with a nominal value business in the end of the day rate completion declining inflation quarter over quarter, we'll have an impactful.
That was important to actually call out and then I also talked about how there's a moderation in select markets International markets. The reality is when you look at markets and this is not broad based right. There are select markets, where lets take a market like the U K at the end of the day rising interest rates.
And.
The high inflation levels ultimately, we will put a squeeze on people's ability to spend that doesn't mean that the consumer isn't necessarily a resilient consumer remains resilient on a more holistic basis, but at the margin rate. What you start to see is as say for example, mortgages get reset when mortgages get reset to get reset at a higher <unk>.
First rates, what it's doing is it's squeezing the wallet or share of wallet, which would be available for other discretionary categories of spend so youre going to see a little bit of that trend come through which is what we were kind of calling out but all of that's factored into our thinking as we think about the rest of the year and in my full year guidance. So thats really in essence, what we what kind of things.
So again I'll summarize it by saying, there's you know recent reductions in inflation, there's a little bit of moderation in select international markets.
And really we haven't seen this as being broad based we havent seen does is something which as you know clothing concerns for us it's very much in line with what we've been thinking about it from a from a guidance standpoint, and I'll remind you that at the end of the day Cross border continues to be strong back to the question, which David just asked so we kind of bring that altogether right. We feel good about what the strength of the consumers.
Excellent.
We have time for one more question.
And we will take that question from Bryan Keane of Deutsche Bank.
Hi, guys. Good morning, Thanks for fitting me in just wanted to ask about ex FX volatility and how it impacts the model.
I know cross border adjustment revenue growth was above volume. So it had a positive yield I think in your peers. One of your peers reports it was actually negative and they called out the lack of FX volatility. So just trying to understand how it impacts mastercard's model.
Hi, Brian So post.
No the what.
When we talk about FX volatility, you'll see that in our numbers and transaction processing assessments not in cross border assessments.
It is tied to the activity of all its clear and settle which is why it sits in transaction processing assessments.
And what I called out was the higher.
Growth rate is.
Mmm.
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