Mastercard Incorporated — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Mastercard operates a global payments technology network connecting consumers, financial institutions, merchants, governments and other organizations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $4.113 billion | $3.665 billion | $8.002 billion | $7.245 billion |
| Operating income | $2.397 billion | $1.936 billion | $4.610 billion | $3.761 billion |
| Operating margin | 58.3% | 52.8% | 57.6% | 51.9% |
| Net income | $2.048 billion | $1.569 billion | $3.910 billion | $3.061 billion |
| Diluted EPS | $2.00 | $1.50 | $3.80 | $2.91 |
| Operating cash flow | Not separately provided for the quarter | $2.848 billion | $2.524 billion |
- Q2 net revenue grew 12% year over year (15% currency-neutral); first-half revenue grew 10% (14% currency-neutral). Growth reflected transaction and payment-volume expansion, cross-border activity, and services revenue.
- Q2 switched transactions increased 18%; cross-border volume grew 16% in local currency and gross dollar volume grew 13% in local currency. First-half growth was 17%, 15% and 12%, respectively.
- Other revenue rose 23% in Q2 and 18% in the first half, driven by Cyber & Intelligence and Data & Services. Rebates and incentives increased 16% and 17%, respectively, tempering net revenue growth.
- Reported Q2 net income and EPS benefited from a $143 million equity-investment gain. Comparable 2018 periods included litigation provisions of $225 million in Q2 and $342 million in the first half. Excluding equity gains and specified special items, adjusted Q2 net income increased 11% and adjusted diluted EPS 14%; first-half adjusted net income increased 13% and adjusted EPS 16%.
- Adjusted operating margin was 58.3% in Q2 versus 59.0% a year earlier; first-half adjusted margin was 57.6% versus 56.6%. Adjusted expenses grew 17% and 11% currency-neutral, respectively, reflecting strategic investment, foreign-exchange losses versus prior-year gains, and acquisitions.
Cash, debt and liquidity
- At June 30, 2019, cash and cash equivalents were $5.691 billion; cash, cash equivalents and investments totaled $6.5 billion, excluding $1.8 billion of restricted cash and equivalents. Unused credit availability was $4.5 billion.
- Six-month operating cash flow was $2.848 billion; investing cash outflow was $554 million and financing cash outflow was $3.160 billion. Cash, cash equivalents and restricted cash/equivalents ended the period at $7.445 billion, down from $8.337 billion at year-end 2018.
- Total debt was $7.806 billion, up from $6.334 billion at year-end. Mastercard issued $2.0 billion of notes in May 2019, due 2029 and 2049, and repaid $500 million of notes that matured. No commercial paper or revolving-credit borrowings were outstanding; the notes are not subject to financial covenants.
- Current assets were $14.165 billion and current liabilities $9.497 billion. Management stated existing liquidity, operating cash generation, borrowing capacity and capital-market access were sufficient for expected operating and other needs.
- The company repurchased 16.4 million shares for $3.741 billion and paid $677 million in dividends during the first half. Remaining repurchase authorization was $3.060 billion at June 30.
Changes, outlook and risks
- Revenue growth was strong, but higher rebates and incentives and higher adjusted operating expenses absorbed part of that growth. Reported expense comparisons were also affected by the absence of 2018 litigation charges.
- Mastercard completed acquisitions with total consideration of $784 million in the first half; purchase accounting remained preliminary. It also reported commitments to acquire businesses totaling $1.2 billion, all closed by the filing date.
- No specific earnings or revenue guidance was provided in the filing. Management cited continued investment in digital infrastructure, safety and security, data analytics, strategic development and geographic expansion.
- U.S. merchant interchange litigation remains significant: the damages-class settlement had preliminary approval, with a final approval hearing scheduled for November 2019 and a termination option if more than 25% of merchant purchase volume opts out. Separate rules-relief negotiations continued. Accrued reserves for the U.S. merchant class and opt-out matters were $916 million; related restricted settlement cash was $662 million. The company said it could not estimate potential liability if the matters were litigated to a final outcome.
- The European Commission imposed a €571 million fine over the historic central acquiring rule, paid in April 2019; the company had recorded a $654 million charge in 2018. Changes to interregional interchange fees were scheduled to take effect in Q4 2019. Other European merchant claims and appeals, including a proposed U.K. consumer action seeking more than £14 billion, remain unresolved.
- Estimated gross settlement exposure was $51.653 billion, offset by $5.084 billion of collateral, leaving $46.569 billion net uncollateralized exposure. Mastercard said historical losses were low, but future outcomes may differ and may be affected by customer, regional or global conditions.
- Other principal risks include interchange regulation and litigation, competition and pricing pressure, cybersecurity and service disruption, privacy regulation, technology changes, customer relationships, economic and currency volatility, tax matters, acquisitions and reputational risks. A hypothetical 10% adverse foreign-exchange move could cause an estimated $129 million fair-value loss on outstanding currency derivatives.
Important facts for investors to verify
- Track revenue drivers, transaction and cross-border growth, rebates/incentives, and currency-neutral versus reported trends.
- Assess operating-cost growth and distinguish recurring operating performance from equity gains, foreign-exchange effects and litigation-related comparison items.
- Monitor the U.S. merchant settlement approval, opt-outs, rules-relief claims, reserve adequacy and remaining European litigation exposure.
- Review acquisition integration, purchase-accounting revisions, and the effects of investment spending on margins and cash flow.
- Monitor debt growth, capital returns, liquidity and the scale of settlement guarantees relative to available collateral.