Mastercard Incorporated — Form 10-Q Summary
Business context and period. Mastercard operates a global payments technology network, generating revenue from payment volumes, transaction processing and related services. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $3.898B (+15%) | $3.398B | $11.143B (+21%) | $9.185B |
| Operating income | $2.287B (+18%) | $1.941B | $6.048B (+19%) | $5.100B |
| Operating margin | 58.7% | 57.1% | 54.3% | 55.5% |
| Net income | $1.899B (+33%) | $1.430B | $4.960B (+34%) | $3.688B |
| Diluted EPS | $1.82 (+36%) | $1.34 | $4.73 (+38%) | $3.43 |
| Effective tax rate | 16.1% | 26.0% | 17.2% | 26.8% |
Amounts are in U.S. dollars. Currency-neutral net revenue growth was 17% for Q3 and 20% for the nine-month period. Nine-month adjusted operating margin, excluding specified special items, was 57.6%, up from 55.7%; reported margin fell, mainly reflecting litigation provisions.
Revenue drivers: Q3 domestic assessments rose 20%, cross-border volume fees 16%, transaction processing 15%, and other revenue 10%. Switched transactions grew 16% in Q3 and 17% year to date after adjustment for Venezuela deconsolidation; cross-border volume increased 17% and 19% on a local-currency basis, respectively. Higher rebates and incentives partially offset revenue growth.
Cash flow and liquidity: Nine-month operating cash flow was $4.891B, versus $3.841B in 2017. Investing used $237M, compared with $1.623B, primarily reflecting prior-year acquisitions and current-period investment proceeds. Financing used $3.833B, including $4.045B of repurchases and $785M of dividends. Cash, cash equivalents and investments totaled $8.5B at September 30, excluding restricted balances; unused credit availability was $3.8B. Management stated available liquidity, operating cash generation and borrowing capacity were sufficient for expected needs.
Debt: Total debt was $6.358B, up from $5.424B at year-end 2017, including $1B of notes issued in February. The earliest maturity was $500M due April 2019. No commercial-paper or revolving-facility borrowings were outstanding; the $3.75B revolver expires in October 2022.
Changes, outlook and risks
- Accounting change: Mastercard adopted the new revenue standard in 2018; prior periods were not restated. The standard changes customer-incentive timing and records certain market-development contributions and expenditures gross, increasing both revenue and expense. It added $100M to Q3 revenue and $312M to nine-month revenue as reported; management said it also increased nine-month net income by $148M.
- Tax and unusual items: Lower U.S. statutory tax rates, geographic earnings mix and $65M of discrete deferred tax benefits contributed to lower effective tax rates. Nine-month litigation provisions were $371M, including a $210M second-quarter provision related to U.S. merchant litigation and opt-out cases. Adjusted results exclude designated litigation and tax items and are non-GAAP.
- Legal contingencies: The company recorded a $912M reserve for U.S. merchant class and filed or anticipated opt-out cases. A September 2018 Damages Class settlement awaited preliminary court approval; separate Rules Relief Class claims remained unresolved. The company could not estimate potential liability if the matters were litigated to a final outcome. European Commission proceedings over interchange fees could result in fines potentially exceeding $1B, but no loss range was estimable. European and U.K. merchant claims and appeals also continued.
- Settlement exposure: Estimated gross settlement exposure was $47.484B, with $4.613B of collateral and $42.871B net uncollateralized exposure. The guarantee is typically short term; management reported historically low losses, while warning that economic or financial deterioration could increase risk.
- Management outlook: The filing provides no specific forward revenue or earnings guidance. Management cited continued investment in strategic initiatives, digital infrastructure, safety and security, data analytics and geographic expansion. It also noted uncertainty from global economic and political conditions, currency movements, competition, regulation, litigation, cybersecurity and customer concentration.
Important facts for investors to verify
- Progress and court approval of the U.S. Damages Class settlement, exposure to opt-out cases, and status of the unresolved Rules Relief Class claims.
- Developments in European Commission, U.K. and other interchange proceedings, including potential fines, settlements and appeals.
- How much reported growth reflects underlying payment activity versus the revenue-standard change, foreign exchange and other comparability effects.
- Sustainability of growth in rebates and incentives, operating costs and margins, and the lower effective tax rate.
- Settlement-risk exposures, liquidity needs and the company’s capacity to fund repurchases, dividends and debt maturities.