Mastercard Incorporated — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless stated otherwise. Financial statements are unaudited. Mastercard operates a global payments network and related services business.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $5.167 billion | $4.155 billion | +24% reported; +27% currency-neutral, adjusted |
| Operating expenses | $2.217 billion | $1.958 billion | +13% |
| Operating income | $2.950 billion | $2.197 billion | +34% |
| Operating margin | 57.1% | 52.9% | +4.2 percentage points |
| Net income | $2.631 billion | $1.828 billion | +44% |
| Diluted EPS | $2.68 | $1.83 | +46% |
| Cash from operations | $1.782 billion | $1.463 billion | +$319 million |
Adjusted non-GAAP results: net revenue was $5.136 billion, adjusted operating expenses were $2.182 billion, adjusted operating margin was 57.5%, adjusted net income was $2.702 billion and adjusted diluted EPS was $2.76. Currency-neutral adjusted net income and EPS increased 61% and 65%, respectively. These measures exclude equity investment gains and losses, specified special items and related tax effects; they are not GAAP measures.
Revenue growth reflected increased activity: gross dollar volume rose 17% in local currency, cross-border volume increased 53% in local currency, and switched transactions increased 22% (24% excluding Russia). Cross-border fees rose 50% reported; transaction processing revenue increased 24%. Rebates and incentives, which reduce revenue, increased 26% reported.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $6.879 billion; cash, cash equivalents and investments totaled $7.3 billion. The company also had a $6 billion unused revolving credit facility, expiring in November 2026, and no borrowings under that facility or its commercial paper program.
- Total debt was $14.6 billion, versus $13.9 billion at December 31, 2021. The company issued €750 million of notes due 2029 in February. The earliest stated maturity was €700 million of notes due December 2022.
- Current assets were $15.953 billion and current liabilities were $11.928 billion. These totals include restricted customer settlement deposits and related obligations.
- Q1 investing cash outflow was $287 million, compared with $3.560 billion in Q1 2021, when acquisitions accounted for substantial cash use. Financing cash outflow was $2.154 billion, mainly reflecting share repurchases and dividends. Cash, cash equivalents and restricted cash decreased by $687 million during the quarter.
- Mastercard repurchased 6.8 million shares for $2.408 billion at an average $355.13 per share and paid $479 million in dividends. Remaining repurchase authorization was approximately $9.5 billion.
Material changes, outlook and unusual items
- Russia and Ukraine: Mastercard suspended business operations in Russia in March 2022 in response to the invasion and related sanctions. Russian-issued cards are no longer supported on its network, and Mastercard-issued cards outside Russia do not work at Russian merchants or ATMs. Management said the actions affected results to date and are expected to affect full-year 2022 performance. Russia represented approximately 4% of 2021 net revenue. Q1 Russia-related special-item net charge was $4 million; the company cautioned that further impacts depend on uncertain developments.
- Tax benefit: The reported effective tax rate fell to 5.1% from 16.5%, primarily due to a $333 million valuation-allowance release related to U.S. foreign tax credit carryforwards. New regulations also limit the company’s ability to generate certain foreign tax credits beginning in 2022. The tax benefit materially contributed to reported earnings growth.
- Equity investments: Q1 included a $76 million net loss on equity investments, versus a $94 million gain a year earlier, primarily from fair-value changes. Adjusted other expense was flat year over year.
- Business investment and acquisitions: Adjusted operating expenses rose 13% currency-neutral, including six percentage points from acquisitions; increased marketing, personnel and data-processing costs also contributed. The company entered an agreement to acquire Dynamic Yield, which closed in April 2022, after quarter-end. It had acquired businesses for total consideration of $4.7 billion in 2021.
- Guidance: The supplied filing text gives no specific numerical revenue, earnings or margin guidance. Management stated that it believed cash, operating cash generation and access to capital were sufficient for expected operating and other requirements.
- Legal and settlement exposures: The company reported a $797 million litigation provision, including a $782 million reserve for U.S. merchant damages-class and opt-out matters. It held $585 million in restricted cash for the damages-class settlement fund. Mastercard could not estimate potential liability if those U.S. matters were litigated to final outcomes. Unresolved European merchant damages claims were approximately £1 billion; a U.K. consumer collective action seeks more than £14 billion, although the certified class was narrowed. The filing says adverse legal or regulatory outcomes could require payments or changes to business practices.
- Other risk: Mastercard guarantees settlement of many transactions. Estimated net settlement exposure was $48.330 billion after $7.884 billion in risk mitigation arrangements; gross exposure was $56.214 billion. Historical settlement losses have been low, but management cautions that past experience may not predict future losses.
Most important facts for investors to verify
- How the Russia suspension, sanctions, and related economic conditions affect revenue and operating performance through 2022 and beyond.
- Underlying earnings growth after separating the $333 million tax benefit, equity investment volatility, Russia-related items and acquisition contributions.
- Developments in U.S. interchange litigation, European merchant and consumer claims, and other regulatory matters, including potential amounts not estimable by the company.
- Cash generation and liquidity after substantial repurchases and dividends, alongside $14.6 billion of debt and near-term debt maturities.
- Whether payment volumes, cross-border activity and incentive costs sustain the quarter’s growth, and how reported results compare with the company’s adjusted, currency-neutral measures.