Mastercard Inc. 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, for Mastercard Incorporated, a global payment solutions company. The filing is unaudited and includes consolidated financial statements for the three and nine months ended September 30, 2008, compared to the same periods in 2007. The company operates in approximately 210 countries and territories, processing transactions in over 160 currencies.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Revenues | $1,338 million | $3,767 million |
| Operating Income (Loss) | ($279 million) | ($997 million) |
| Net Income (Loss) | ($194 million) | ($493 million) |
| Diluted EPS | ($1.49) | ($3.79) |
| Cash and Cash Equivalents | $2,071 million (as of Sep 30, 2008) | |
| Operating Cash Flow (9 months) | $931 million | |
| Total Assets | $7,273 million | |
| Total Liabilities | $5,503 million | |
| Stockholders' Equity | $1,765 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 23.6% for the quarter and 25.8% year-to-date, driven by increased transaction volumes (13.0% and 14.0% growth respectively) and pricing increases. Foreign currency fluctuations contributed positively to revenue growth.
- Profitability Impact: The company reported a net loss for both periods, a stark contrast to net income in 2007. This was primarily due to litigation settlement charges of $828 million for the quarter and $2.48 billion for the nine months ended September 30, 2008.
- Operating Expenses: Total operating expenses surged 121.7% (quarter) and 131.4% (nine months) year-over-year. Excluding litigation settlements, operating expenses increased only 8.3% and 11.3%, respectively.
- Investment Portfolio: The company reclassified $219 million of Auction Rate Securities (ARS) from short-term to long-term available-for-sale securities due to market illiquidity and recorded a temporary impairment within accumulated other comprehensive income.
Guidance, Outlook, and Risks
- Litigation Settlements:
- Discover Settlement: Agreed to a total settlement of $2.75 billion with Visa; Mastercard's share is $863 million, payable in November 2008.
- American Express Settlement: Agreed to pay up to $1.8 billion over 12 quarters (starting Q3 2008), contingent on American Express's U.S. Global Network Services billings. The present value recorded was $1.65 billion.
- Regulatory Risks: Significant ongoing proceedings include the European Commission's decision requiring Mastercard to cease applying default cross-border interchange fees in the EEA by June 21, 2008. Mastercard has appealed this decision. Other jurisdictions (UK, Poland, New Zealand, Australia, South Africa) are also reviewing interchange fees and "honor all cards" rules.
- Economic Environment: Management notes that tightening credit, bank failures, and inflation are slowing transaction growth in the U.S. and some non-U.S. markets, though emerging markets continue to show strong growth.
- Liquidity: The company maintains a strong liquidity position with $2.8 billion in cash, cash equivalents, and current available-for-sale securities. It has a $2.5 billion committed unsecured revolving credit facility with no borrowings outstanding.
Key Facts for Investor Verification
- Non-GAAP Adjustments: Verify the reconciliation of operating expenses and effective tax rates excluding litigation settlements to understand core operational performance.
- Future Cash Obligations: Confirm the timing and amounts of future litigation payments, specifically the $863 million Discover payment due in November 2008 and the quarterly American Express payments.
- ARS Valuation: Review the methodology for the 10% discount applied to the $219 million ARS portfolio and the potential for further impairment if market liquidity does not improve.
- Regulatory Compliance: Monitor the outcome of the appeal against the European Commission's decision and the status of interchange fee investigations in other key markets.
- Share Repurchases: Note that the company completed its $1.25 billion authorized share repurchase program during the nine months ended September 30, 2008.