Mastercard Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are to Q1 2020 unless otherwise noted. Mastercard operates a global payments technology network connecting consumers, financial institutions, merchants, governments and other organizations.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $4.155 billion | $4.009 billion | +4% reported; +2% currency-neutral |
| Operating expenses | $1.958 billion | $1.798 billion | +9% |
| Operating income | $2.197 billion | $2.211 billion | -1% |
| Operating margin | 52.9% | 55.2% | -2.3 percentage points |
| Net income | $1.828 billion | $1.693 billion | +8% |
| Diluted EPS | $1.83 | $1.68 | +9% |
| Adjusted net income (non-GAAP) | $1.741 billion | $1.844 billion | -6%; -6% currency-neutral |
| Adjusted diluted EPS (non-GAAP) | $1.74 | $1.83 | -5% |
Revenue mix showed domestic assessments of $1.798 billion (+7%), transaction processing of $2.351 billion (+7%), and other revenues of $1.347 billion (+27%). Cross-border volume fees fell 23% to $932 million. Rebates and incentives, which reduce revenue, rose 6% to $2.273 billion. Other revenue growth included acquisitions and gains in Cyber & Intelligence and Data & Services solutions.
Gross dollar volume grew 8% in local currency and switched transactions grew 9%; cross-border volume declined 17% in local currency. GAAP net income benefited from a $94 million gain on equity investments, compared with a $174 million loss in Q1 2020. This comparison helps explain why adjusted earnings declined despite higher reported net income.
Cash flow, liquidity and debt
- Operating cash flow was $1.463 billion, down from $1.859 billion. Management cited settlement timing and higher customer incentive payments, partly offset by estimated tax-payment timing.
- Investing cash outflow was $3.560 billion, largely reflecting the $3.6 billion Nets Corporate Services acquisition. Financing cash outflow was $606 million.
- Cash, cash equivalents and investments totaled $7.7 billion at quarter-end, excluding $2.4 billion of restricted cash and restricted cash equivalents. An undrawn $6.0 billion revolving credit facility was available; there were no borrowings under the facility or commercial paper program.
- Total debt was $13.9 billion, versus $12.7 billion at December 31, 2020. Mastercard issued $1.3 billion of notes in March; $650 million of principal was due in November 2021, its earliest stated maturity. Debt had no financial covenants.
- Mastercard repurchased 3.9 million shares for $1.4 billion and paid $439 million in dividends. The quarterly dividend was $0.44 per share.
Material changes, outlook and risks
- On March 5, Mastercard acquired a majority of Nets Denmark’s Corporate Services business for approximately $3.6 billion in cash. Preliminary purchase accounting included $2.1 billion of goodwill and $1.6 billion of acquired intangible assets; valuations remained subject to adjustment.
- After quarter-end, Mastercard agreed to acquire Ekata for $850 million, subject to regulatory review and customary conditions, with closing expected within six months.
- Management said pandemic-related effects continued to weigh on performance, particularly cross-border activity, but key metric growth improved as the company began lapping initial pandemic impacts. The duration and economic effects of COVID-19 remained uncertain. The filing provides no quantified earnings or revenue guidance.
- Adjusted operating expenses rose 7% currency-neutral; management attributed the increase to acquisitions and the comparison with prior-year hedging gains. Excluding those effects, expenses were flat. Advertising and marketing spending remained lower amid the pandemic.
- Legal and regulatory matters remain significant. The company recorded $841 million in accrued litigation at March 31, including a $783 million reserve for U.S. merchant damages-class and opt-out cases; it also held $586 million in restricted cash for the damages-class settlement fund. Mastercard could not estimate potential liability if the matters were litigated to final outcomes.
- Other disclosed exposures include U.K. and European merchant interchange claims, U.S. ATM surcharge and EMV liability-shift litigation, and an FTC investigation of debit-routing compliance. Mastercard said adverse outcomes could require payments or changes to business practices. Its net uncollateralized settlement exposure was $46.1 billion, although exposure is typically short-term and historical losses have been low.
- Other risks include COVID-19, payments regulation and interchange challenges, competition and pricing pressure, cybersecurity or service disruptions, customer and settlement failures, foreign exchange movements, and litigation. Management stated that existing liquidity, operating cash generation and capital-market access were sufficient for expected operating and other requirements.
Investor facts to verify
- Whether the improvement in transaction and gross-volume trends can persist, and how quickly cross-border activity recovers.
- Whether revenue growth translates into improved margins and adjusted earnings, given higher expenses and incentive costs.
- The final purchase accounting and integration outcomes for Nets, and the closing and economics of the announced Ekata acquisition.
- Developments in interchange-related and other litigation, including adequacy of reserves and possible effects on cash, operations or business rules.
- Debt maturity and capital-return plans, alongside cash generation and the size of restricted versus available liquidity.