Mastercard Incorporated — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial statements are unaudited; amounts are in U.S. dollars. Mastercard operates a global payments technology network.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $4.467B | $3.898B | $12.469B | $11.143B |
| Operating income | $2.655B | $2.287B | $7.265B | $6.048B |
| Operating margin | 59.4% | 58.7% | 58.3% | 54.3% |
| Net income | $2.108B | $1.899B | $6.018B | $4.960B |
| Diluted EPS | $2.07 | $1.82 | $5.87 | $4.73 |
- Q3 net revenue rose 15% year over year, or 16% currency-neutral; nine-month revenue increased 12%, or 15% currency-neutral. Growth reflected higher transaction volumes and payment-related services, partly offset by rebates and incentives, which rose 20% in Q3 and 18% year to date.
- Switched transactions grew 20% in Q3 and 18% year to date. Cross-border volume increased 17% and 16%, respectively, on a local-currency basis.
- GAAP net income growth was 11% for Q3 and 21% year to date; diluted EPS increased 14% and 24%. Lower diluted share counts, down 2% in both comparisons, supported per-share growth.
- Adjusted, currency-neutral diluted EPS growth was 23% in Q3 and 21% year to date. These are non-GAAP measures; the company’s adjustments exclude equity-investment gains and losses, special items and related tax effects.
Cash flow, liquidity and capital
- For the first nine months, operating cash flow was $5.203B, versus $4.891B a year earlier. Investing used $1.180B, including $1.170B for business acquisitions; financing used $5.285B. Cash, cash equivalents and restricted cash totaled $6.972B at period end, down from $8.337B at year-end 2018.
- Cash, cash equivalents and investments were $5.9B, excluding restricted cash of $1.9B. Mastercard also had $4.5B of unused credit availability and no borrowings under its commercial paper program or revolving credit facility.
- Total debt was $7.735B, up from $6.334B at December 31, 2018. The company issued $2.0B of notes in May and repaid $500M of maturing debt. Stockholders’ equity was $4.949B, compared with $5.395B at year-end.
- Share repurchases totaled $5.503B for the nine months (22.8M shares); dividends paid were $1.012B. The company stated that existing liquidity, cash generation and borrowing capacity should be sufficient for expected operating and capital needs.
Material changes and unusual items
- Nine-month operating expenses increased 2% reported, but 10% on an adjusted basis, reflecting investment in strategic initiatives and acquisitions; Q3 expenses rose 12% reported and 15% adjusted. The prior-year comparisons included $371M of litigation provisions year to date, versus none in 2019.
- Q3 included a $100M net loss on equity investments; the nine-month period recorded a $48M net gain. Excluding equity-investment movements, management said other income and expense was relatively flat, with higher interest expense partly offset by other gains.
- Acquisitions completed in the first nine months cost approximately $1.2B. Mastercard also agreed to acquire most of Nets Denmark’s Corporate Services business for approximately €2.85B, subject to regulatory approval and other closing conditions; closing was anticipated in the first half of 2020. Additional approximately $290M cash acquisitions were announced in October.
- Adoption of lease accounting added $375M of right-of-use assets at January 1, 2019. At September 30, operating lease liabilities totaled $484M; approximately $285M of additional lease assets and liabilities were expected when signed leases commence.
Risks, contingencies and outlook
- Merchant litigation: The U.S. damages-class settlement remained subject to final court approval, scheduled for November 2019. Merchants representing slightly more than 25% of class interchange volume opted out; negotiations with some opt-outs were underway. The company accrued $920M for the damages class and filed and anticipated opt-out cases. A separate rules-relief class matter remained unresolved.
- Other legal exposure: Mastercard faces continuing interchange-related claims and regulatory matters in the U.S., Canada and Europe, plus ATM surcharge and other litigation. It stated that it generally could not estimate potential losses for these proceedings. The U.K. consumer collective action alleges damages exceeding £14B; the filing describes ongoing appeals and proceedings, not a determined liability.
- The European Commission’s €571M fine concerning a historic central-acquiring rule was paid in April 2019; a $654M charge had been recorded in 2018. Changes to interregional interchange fees were to take effect in Q4 2019.
- Mastercard’s settlement guarantee exposure was estimated at $53.884B gross, less $4.503B collateral, for $49.381B net uncollateralized exposure. Exposure is typically short-term; the company reported historically low losses from customer failures but noted that this history may not predict future losses.
- Management gave no specific quantitative revenue, earnings or margin guidance in the supplied filing text. It cited continued strategic investment and identified regulation, litigation, competition, technology change, cybersecurity, customer relationships and global economic conditions among material risks.
Key facts for investors to verify
- Final approval and funding requirements for the U.S. merchant damages settlement, and potential exposure from opt-out merchants and the separate rules-relief claims.
- Whether transaction, cross-border and other-services growth continues to offset rising customer incentives and operating investment.
- Cash generation and liquidity after substantial buybacks and dividends, and the effect of the planned Nets acquisition on debt and capital allocation.
- The impact of equity-investment fair-value changes, foreign-exchange movements and tax items on reported versus adjusted results.
- Developments in major interchange and other legal proceedings, including matters for which the filing says loss estimates are unavailable.