Mastercard Incorporated — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited consolidated results. Mastercard operates a global payments technology network and provides payment-network and value-added services.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Net revenue | $6.533 billion (+14%) | $5.756 billion | $18.550 billion (+13%) | $16.420 billion |
| Operating income | $3.844 billion (+24%) | $3.112 billion | $10.636 billion (+17%) | $9.080 billion |
| Operating margin | 58.8% | 54.1% | 57.3% | 55.3% |
| Net income | $3.198 billion (+28%) | $2.499 billion | $8.404 billion (+13%) | $7.405 billion |
| Diluted EPS | $3.39 (+31%) | $2.58 | $8.85 (+16%) | $7.60 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $7.850 billion | $8.095 billion |
Q3 revenue grew in both payment network (+12%) and value-added services and solutions (+17%). International Markets revenue was $4.424 billion, versus $2.109 billion in North American Markets. Currency-neutral adjusted revenue growth was 11% for Q3 and 14% for the nine-month period. Management attributed growth to higher domestic and cross-border activity, more switched transactions, and demand for cyber and intelligence, consulting, marketing and loyalty services.
Q3 Mastercard-branded gross dollar volume grew 11% in local currency, cross-border volume grew 21% in local currency, and switched transactions increased 15%. For the nine months, local-currency gross dollar volume grew 13% and cross-border volume grew 26%. These operating indicators are not the same as revenue.
Expenses, cash flow, debt and liquidity
- Q3 operating expenses rose 2% to $2.689 billion; excluding litigation provisions and other specified items, adjusted expenses grew 9% currency-neutral, including one percentage point from acquisitions. Nine-month reported expenses rose 8%; adjusted currency-neutral expenses rose 11%, primarily reflecting personnel costs and investment in strategic initiatives.
- Q3 effective tax rate was 15.0%, down from 18.6%; the nine-month rate was 18.6%, up from 14.3%. The nine-month comparison reflects a $333 million valuation-allowance release in 2022 and a $327 million valuation-allowance expense in 2023, partly offset by increased ability to claim certain U.S. foreign tax credits.
- Nine-month operating cash flow was $7.850 billion, down $245 million year over year. Investing used $1.137 billion and financing used $7.138 billion. Cash, cash equivalents and investments totaled $7.5 billion at September 30; restricted cash and equivalents were an additional $1.9 billion.
- Total debt was $15.6 billion, compared with $14.0 billion at year-end 2022; $1.337 billion was short-term. Mastercard issued $1.5 billion of U.S. notes in March 2023 and had no borrowings under its $8 billion revolving facility or commercial paper program. Management said available liquidity, cash generation and capital access were sufficient for expected operating and other needs.
- During the first nine months, Mastercard repurchased 19.2 million shares for $7.2 billion and paid $1.6 billion in dividends. Remaining repurchase authorization was approximately $5.0 billion at September 30.
Material changes, outlook and risks
- Reported Q3 operating margin expanded 4.8 percentage points year over year; nine-month margin expanded 2.0 points. GAAP results also reflect investment fair-value movements and litigation provisions; adjusted measures exclude specified items and are not GAAP substitutes.
- A U.S. merchant damages-class settlement became final in August 2023. Mastercard reduced litigation accruals and restricted settlement cash by $600 million, including accrued interest. It recorded a further $211 million accrual in Q1 related to merchant opt-outs; the nine-month litigation provision was $231 million.
- Material legal exposures remain, including unresolved U.K. and Pan-European merchant damages claims of approximately £1.1 billion, a U.K. consumer collective action claiming more than £10 billion, and a proposed U.K. merchant action claiming approximately £0.5 billion. Other matters include U.S. ATM surcharge litigation, EMV liability-shift litigation and a U.S. DOJ investigation into the debit program. The filing does not provide a clear estimate of potential losses for many proceedings.
- The FTC finalized a consent agreement concerning debit routing in May 2023; it requires Mastercard to provide primary account numbers for routing tokenized online debit transactions and carries no monetary penalty. Mastercard said it is cooperating with the DOJ’s March 2023 civil investigative demand.
- No specific forward-looking financial guidance is provided in the supplied filing text. Management described ongoing investment in payments, services and network capabilities. Key risks include payments regulation and interchange challenges, litigation, competition and pricing pressure, cybersecurity or service disruptions, technology change, customer relationships, foreign exchange and global economic conditions, and settlement guarantees.
- Estimated net settlement exposure was $61.993 billion after risk mitigations at September 30, up from $55.661 billion at year-end 2022. Management noted the exposure is generally short-term and historical settlement losses have been low, but historical experience may not predict future losses.
Most important facts for investors to verify
- Whether payment volumes, cross-border activity and value-added services growth continue to support revenue growth, and how currency movements affect reported results.
- How expense growth, customer incentives and personnel investment affect operating-margin expansion.
- Developments in U.S., U.K. and European interchange litigation, including the opt-out claims, consumer collective actions and associated reserve adequacy.
- Changes to the U.S. debit business arising from the FTC agreement or DOJ investigation, and any further regulatory or legislative action.
- Debt maturities and refinancing needs, liquidity availability, and settlement exposure under adverse customer or market conditions.
- Future recognition of U.S. foreign tax credits and valuation-allowance changes, which contributed to substantial year-over-year variation in the nine-month tax rate.