Mastercard Inc. Form 10-Q — Third Quarter 2022
Reporting period: Three and nine months ended September 30, 2022; comparative figures are for the same periods in 2021. Financial statements are unaudited. Mastercard operates a global payments network and related services business.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $5.756B | $4.985B | $16.420B | $13.668B |
| Operating income | $3.112B | $2.717B | $9.080B | $7.255B |
| Operating margin | 54.1% | 54.5% | 55.3% | 53.1% |
| Net income | $2.499B | $2.414B | $7.405B | $6.308B |
| Diluted EPS | $2.58 | $2.44 | $7.60 | $6.35 |
Q3 revenue rose 15% reported and 23% currency-neutral on an adjusted basis; adjusted operating margin was 57.7%, up 1.0 percentage point. Adjusted net income increased 11% reported and 20% currency-neutral, and adjusted diluted EPS increased 13% and 22%, respectively. For the nine-month period, adjusted revenue grew 20% reported and 25% currency-neutral; adjusted margin was 57.7%, up 3.3 points, and adjusted diluted EPS rose 32% reported and 40% currency-neutral. Adjusted measures exclude equity investment gains or losses, specified special items and related tax effects.
Q3 growth reflected local-currency gross dollar volume growth of 11%, cross-border volume growth of 44%, and switched transaction growth of 9%. Cross-border volume fees increased 41% reported; transaction processing revenue increased 15%. Other revenue rose 17%, with growth attributed in part to Cyber & Intelligence and Data & Services. Higher rebates and incentives, up 20% reported, partially offset gross revenue growth. A stronger U.S. dollar reduced reported growth: Q3 gross dollar volume grew 4% in U.S. dollars versus 11% in local currency.
Q3 GAAP operating expenses increased 17%; the period included a $208 million litigation provision, primarily related to U.K. merchant settlement developments. Other income and expense was a net expense of $40 million versus net income of $99 million a year earlier, reflecting substantially lower equity investment gains. For the first nine months, equity investment results were a $133 million loss versus a $534 million gain in 2021.
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $8.095B, versus $6.274B in 2021. Investing used $1.120B, compared with $4.834B, largely because of lower acquisition spending; financing used $6.714B, including $6.339B of share repurchases and $1.430B of dividends.
- At September 30, cash and cash equivalents were $7.633B; cash, cash equivalents and investments totaled $8.0B, excluding restricted cash. The company reported $6.0B of unused revolving credit availability and no borrowings under its commercial paper program or credit facility.
- Total debt was $14.534B, including $957M short-term debt and $13.577B long-term debt, compared with $13.901B at year-end 2021. A €700M note, valued at $680M at quarter-end, matured in December 2022; an INR term loan of $278M was due in July 2023.
- Current assets were $16.823B and current liabilities $13.476B. Mastercard said available liquidity, operating cash generation and capital-market access were sufficient for expected operating and other needs.
- During the first nine months, Mastercard repurchased 18.3 million shares for $6.339B and had $5.588B of repurchase authorization remaining at September 30. The quarterly dividend was $0.49 per share.
Material changes, outlook and risks
- Russia: Mastercard suspended business operations in Russia in March 2022. Russia represented approximately 4% of 2021 net revenue. The company said the suspension affected 2022 performance and was expected to continue affecting full-year 2022 results; the extent of future effects was uncertain. Nine-month direct net charges were $30M before tax; no directly related charge was recorded in Q3.
- Litigation: The company recorded Q3 litigation charges of $208M and a further $133M in Q2 for a U.S. merchant opt-out estimate change. Accrued litigation was $1.086B at September 30, including a $908M reserve for U.S. merchant damages-class and opt-out matters. Unresolved U.K. merchant damages claims were approximately £1B; a separate proposed U.K. collective action claimed approximately £0.5B. Mastercard also disclosed other interchange, ATM surcharge, EMV liability-shift, consumer class-action and regulatory matters. Outcomes and potential exposure in several proceedings could not be estimated clearly.
- Settlement exposure: Mastercard guarantees settlement of many customer transactions. Estimated gross exposure was $62.045B and net exposure after risk mitigants was $53.321B. The company reported historically low losses but noted that historical experience may not predict future losses and that regional or global economic conditions could affect customer failures.
- Other risks and contingencies: Management identified regulatory and interchange actions, competition and pricing pressure, technology and cybersecurity incidents, customer concentration or changes, foreign exchange and economic conditions, and litigation as risks. It also noted currency devaluation and exchange controls in certain markets. A $333M first-quarter 2022 U.S. tax benefit from a valuation allowance release affected the nine-month tax rate; Q3 tax expense also included a discrete charge tied to an unfavorable court ruling.
- Guidance: The filing provides no specific numerical revenue, earnings or margin guidance. Management described continued investment in payments, services and network capabilities and stated that liquidity was adequate, while cautioning that Russia-related impacts and other uncertainties remained.
Key facts for investors to verify
- Whether payment-volume and cross-border growth continue, and how currency movements affect reported results.
- Whether growth in rebates and incentives, operating expenses and litigation provisions alters revenue conversion and margins.
- Developments in U.S. and European merchant litigation, including settlement amounts, reserve adequacy and possible changes to business practices.
- The duration and financial consequences of the Russia suspension, alongside other geopolitical and regulatory developments.
- Debt maturities, cash generation and settlement-guarantee exposure, including the availability and effectiveness of risk mitigants.
- The effect of equity investment volatility and discrete tax items when comparing reported results with adjusted measures.