Mastercard Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Global payments technology company; unaudited quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods. The company connects payment participants and provides payment-network services and value-added services and solutions.
Financial performance and liquidity
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Net revenue | $6.269 billion; +14% reported | $12.017 billion; +13% reported |
| Operating income / margin | $3.656 billion / 58.3% (54.9% in Q2 2022) | $6.792 billion / 56.5% (56.0% in H1 2022) |
| Net income | $2.845 billion; +25% | $5.206 billion; +6% |
| Diluted EPS | $3.00; +28% | $5.47; +9% |
| Operating cash flow | Not separately stated for the quarter | $4.617 billion, versus $4.239 billion |
Q2 revenue comprised $4.073 billion from the payment network and $2.196 billion from value-added services and solutions. Six-month currency-neutral revenue growth was 15%. Management attributed growth to payment volumes, cross-border activity, switched transactions, and demand for cyber, fraud, security, consulting and other services. Mastercard-branded GDV grew 12% in local currency in Q2; cross-border volume grew 24% in local currency. These operating indicators are not revenue measures.
Q2 GAAP diluted EPS includes a $123 million net gain on equity investments; six-month results include an $89 million net loss on equity investments and $231 million of litigation provisions. On the company’s non-GAAP adjusted basis, Q2 diluted EPS was $2.89 (+13%) and six-month diluted EPS was $5.69 (+7%). Non-GAAP figures exclude specified investment gains/losses and special items and should not be treated as GAAP results.
At June 30, cash and cash equivalents were $6.170 billion; cash, cash equivalents and investments totaled $6.5 billion, excluding restricted cash. Total debt was $15.620 billion, including $1.336 billion short-term debt. An $8 billion revolving credit facility was undrawn; the company reported sufficient liquidity for operating needs, commitments and potential obligations. Six-month investing cash outflow was $615 million and financing cash outflow was $4.734 billion. The company repurchased $5.294 billion of shares and paid $1.086 billion in dividends during the first half.
Changes versus prior comparable periods
- Q2 reported revenue rose 14%; operating income rose 21%, net income rose 25%, and diluted EPS rose 28%. Q2 operating margin expanded 3.4 percentage points.
- For the first half, revenue rose 13%, but net income rose 6% and diluted EPS 9%; the effective tax rate increased to 20.6% from 11.9%.
- Operating expenses increased 5% in Q2 and 11% in the first half. Adjusted expenses grew 13% and 12%, respectively, on a currency-neutral basis, primarily reflecting higher personnel costs and investment in strategic initiatives.
- The higher tax rate reflected a $212 million discrete tax expense related to a U.S. foreign tax credit valuation allowance and the higher U.K. statutory rate. The 2022 comparison benefited from a $333 million valuation-allowance release.
- Debt increased from $14.023 billion at year-end 2022, including $1.5 billion of new U.S. notes issued in March 2023. Cash, cash equivalents and investments declined from $7.4 billion at year-end.
Outlook, commentary, risks and unusual items
The filing provides no specific forward revenue, earnings or margin guidance. Management said existing liquidity, operating cash generation and capital-market access should meet expected operating and other needs. It intends to continue quarterly dividends, subject to board discretion.
- Key risks include interchange and surcharge regulation and litigation, competition and pricing pressure, customer and merchant relationships, privacy and cybersecurity incidents, technological change, foreign exchange and economic conditions, and regulatory or geopolitical developments.
- Litigation remains a material uncertainty. Accrued litigation was $1.079 billion at June 30, including a $1.067 billion reserve for U.S. merchant damages and opt-out matters. Unresolved U.K. and Pan-European merchant damages claims totaled approximately £1.1 billion; the filing says potential losses in several proceedings cannot be estimated.
- Other matters include a U.K. consumer collective claim seeking more than £10 billion, ATM-rule litigation with alleged aggregate damages exceeding $1 billion against defendants, and a U.S. Justice Department civil investigative demand concerning Mastercard’s debit program. The FTC finalized a debit-routing consent agreement in May 2023 with no monetary penalty.
- Mastercard guaranteed settlement for many customer transactions. Estimated net settlement exposure was $59.511 billion after risk mitigation arrangements; exposure is generally short-term, and the company reports historically low losses from customer settlement failures.
- In July 2023, after quarter-end, the company modified and combined two INR term loans, extending their maturity to July 2024. The U.S. Treasury also issued tax guidance after quarter-end; Mastercard was evaluating its impact.
Important facts for investors to verify
- How much ongoing revenue and margin growth is supported by payment volumes and value-added services, and how much is affected by rebates, currency and acquisitions?
- What are the eventual costs and timing of U.S., U.K. and European interchange and other legal proceedings, beyond amounts accrued?
- How will the $212 million tax charge and subsequent U.S. Treasury guidance affect the effective tax rate and deferred tax assets?
- Can operating cash generation sustain the level of share repurchases, dividends, investment and debt obligations?
- How do settlement exposures and the DOJ inquiry evolve, and do they prompt changes to business practices or financial obligations?