Mastercard Incorporated — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited. Mastercard is a global payments technology company connecting consumers, merchants, financial institutions, governments and other organizations.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $3.335B | $4.113B | $7.344B | $8.002B |
| Operating income | $1.707B | $2.397B | $3.918B | $4.610B |
| Operating margin | 51.2% | 58.3% | 53.3% | 57.6% |
| Net income | $1.420B | $2.048B | $3.113B | $3.910B |
| Diluted EPS | $1.41 | $2.00 | $3.08 | $3.80 |
- Q2 net revenue declined 19% as reported, or 17% currency-neutral; six-month net revenue declined 8% as reported, or 6% currency-neutral.
- Q2 operating expenses were down 5% year over year, largely reflecting lower advertising, travel and professional-fee spending. Six-month operating expenses increased 1%.
- Q2 results included a $75M net gain on equity investments and $22M of litigation charges. For the six months, equity investments produced a $99M net loss and litigation charges totaled $28M.
- Effective tax rates were 16.0% in Q2 and 15.4% for the six months, versus 18.7% and 17.2%, respectively, in 2019. Management attributed the lower rates primarily to geographic earnings mix.
Cash flow, liquidity and debt
- Six-month operating cash flow was $3.317B, versus $2.848B in 2019; investing cash outflow was $626M, versus $554M. Financing provided $1.691B, compared with $3.160B of financing outflow in 2019.
- Cash and cash equivalents were $11.137B at June 30, 2020, and cash, cash equivalents and investments totaled $11.5B. Restricted cash and customer security deposits are additional but not freely available liquidity.
- Long-term debt was $12.498B, up from $8.527B at December 31, 2019. The increase primarily reflects $4B of notes issued in March for general corporate purposes. No borrowings were outstanding under the $6B revolving credit facility or commercial paper program; the revolver expires in November 2024.
- Operating cash flow funded, among other items, $804M of dividends and $1.383B of share repurchases during the first half. Mastercard made no share repurchases in Q2. The quarterly dividend was $0.40 per share.
Material changes and operating trends
- COVID-19 materially weakened payment activity. In Q2, local-currency gross dollar volume fell 10%, cross-border volume fell 45%, and switched transactions declined 10%. Cross-border volume remained particularly affected by travel restrictions.
- Q2 revenue by source reflected a 54% decline in cross-border volume fees and a 12% decline in domestic assessments, partly offset by 12% growth in other revenue. Transaction-processing revenue fell 7%.
- Management reported that switched-transaction trends improved progressively from early-Q2 lows as restrictions eased and U.S. fiscal stimulus took effect. Cross-border trends improved modestly but remained significantly depressed. The duration and total economic impact of the pandemic remained uncertain.
- Mastercard acquired businesses for $185M cash in the first half; preliminary purchase accounting included $140M of goodwill. Pending acquisitions included Finicity for $825M, potentially plus a $160M earn-out, and Nets Denmark Corporate Services for €2.85B. The company expected these transactions to close in Q4 and Q3 2020, respectively, subject to conditions and approvals.
Outlook, risks and contingencies
- The filing provides no specific full-year 2020 revenue or earnings guidance. Management cautioned that interim results may not indicate full-year performance and that pandemic effects were highly uncertain.
- Key risks include prolonged COVID-19 effects on spending and travel, regulatory and legal challenges to interchange and acceptance rules, competition and pricing pressure, cybersecurity or service disruptions, foreign-exchange movements, and settlement exposures.
- Estimated net uncollateralized settlement exposure was $38.809B at June 30, down from $51.028B at year-end. Mastercard said settlement exposure is generally short-term and that historical losses from customer failures have been low; actual losses could nevertheless rise in adverse economic conditions.
- Accrued litigation was $853M at June 30; the reserve for U.S. merchant damages-class and opt-out matters was $831M. Mastercard could not estimate potential liability if those matters were litigated to a final outcome. The U.K. Supreme Court ruled against Mastercard and Visa on a liability issue concerning U.K. domestic interchange fees and returned merchant cases to lower courts for further proceedings. Separate U.K. and European merchant claims continue.
- The FTC initiated a formal investigation in June into Mastercard’s compliance with debit-routing provisions of the Durbin Amendment; the company said it was cooperating. Other proceedings include ATM surcharge litigation and a U.K. consumer collective-action matter.
- Management stated that existing liquidity, operating cash generation and capital-market access were sufficient for expected operating needs, commitments and potential obligations, while noting that credit-market conditions and legal outcomes could affect liquidity.
Important facts for investors to verify
- Whether payment volumes, particularly cross-border activity, continued to recover after June 30 and how that translated into revenue and margins.
- The scale and duration of COVID-19 impacts, including any renewed restrictions or lasting changes in consumer and business spending.
- Developments, reserve adequacy and potential cash requirements from U.S., U.K. and European interchange litigation, and the FTC debit-routing investigation.
- Debt, liquidity and settlement-risk developments, including collateral coverage and the company’s ability to manage its large settlement guarantees.
- Completion, final purchase accounting and integration of the Finicity and Nets transactions, including their financing and expected contribution.