Mastercard Incorporated — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, compared with Q1 2022. Mastercard operates a global payments network and provides value-added services and solutions.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $5.748 billion | $5.167 billion | +11% reported; +15% adjusted, currency-neutral |
| Operating income | $3.136 billion | $2.950 billion | +6% |
| Operating margin | 54.6% | 57.1% | Down 2.5 percentage points |
| Net income | $2.361 billion | $2.631 billion | Down 10% |
| Diluted EPS | $2.47 | $2.68 | Down 8% |
| Operating cash flow | $1.919 billion | $1.782 billion | Up $137 million |
Payment network revenue was $3.650 billion, up 7%; value-added services and solutions revenue was $2.098 billion, up 19%. Adjusted operating margin was 58.2%, up 0.7 percentage points; adjusted diluted EPS was $2.80, up 1% reported and 4% currency-neutral. Adjusted figures exclude equity investment gains or losses and specified special items and are non-GAAP measures.
Operating expenses rose 18% to $2.612 billion, including a $211 million litigation provision. Excluding specified items, expenses rose 10%, or 12% currency-neutral, with higher personnel costs cited as the main operational driver. GAAP effective tax rate was 17.2%, versus 5.1% a year earlier; the prior-year rate benefited from a $333 million discrete tax benefit related to U.S. tax regulations.
Cash, debt and liquidity
Cash and cash equivalents were $6.566 billion at March 31, down from $7.008 billion at year-end. Cash, cash equivalents and investments totaled $7.0 billion; restricted cash and restricted cash equivalents were $2.2 billion. Mastercard reported $8.0 billion of unused credit availability and no borrowings under its commercial paper program or revolving credit facility.
Total debt was $15.6 billion, up from $14.0 billion at December 31, 2022. In March, the company issued $1.5 billion of senior notes, with net proceeds of $1.489 billion. The earliest debt maturity was a $277 million INR term loan due July 2023; an additional $61 million INR loan due that month was entered into in April.
Investing cash outflow was $397 million, including $242 million of capitalized software. Financing cash outflow was $1.955 billion, including $2.878 billion of share repurchases and $545 million of dividends. Mastercard repurchased 8.0 million shares at an average $361.70 per share; $9.3 billion remained authorized for repurchases.
Business trends and material changes
- Currency-neutral gross dollar volume grew 15%; cross-border volume grew 35%. Switched transactions increased 12% reported, or 20% when adjusted for Russia-related comparison effects.
- Currency-neutral growth was broad-based: payment network revenue increased 10% and value-added services and solutions increased 21%. Management cited volume and transaction growth, new and renewed customer deals, and demand for cyber, intelligence, identity, analytics and consulting services.
- Reported results included $212 million of net losses on equity investments, primarily fair-value adjustments, compared with $76 million of losses in Q1 2022. The 2023 quarter also included the $211 million litigation provision. These items contributed to GAAP net income declining despite revenue growth.
Outlook, risks and contingencies
The filing provides no specific quantitative revenue or earnings guidance. Management said existing cash, operating cash generation and capital-market access were sufficient for anticipated operating needs, commitments and potential obligations, while noting that credit-market conditions and legal outcomes could affect liquidity.
Material risks include interchange-fee and merchant acceptance litigation and regulation, competition and pricing pressure, cybersecurity incidents or service disruptions, customer and settlement risk, foreign-exchange movements, and geopolitical and economic conditions. Net settlement exposure under transaction guarantees was $55.2 billion after $9.6 billion of risk mitigations; Mastercard said historical losses from customer settlement failures had been low, but past experience may not predict future losses.
U.S. merchant litigation remains significant: the company recorded an additional $211 million provision for opt-out merchant claims, bringing accrued reserves for the Damages Class and opt-out cases to $1.094 billion. Mastercard said the reserve is its best estimate of probable liabilities, but it cannot estimate potential liability if the matters proceed to final litigation outcomes. Separately, a proposed U.K. consumer collective action seeks more than £14 billion; the filing describes other substantial merchant claims and proceedings without providing estimable loss ranges for many matters.
The Department of Justice issued a Civil Investigative Demand in March 2023 concerning Mastercard’s U.S. debit program and competition; the company is cooperating. A proposed FTC consent agreement would provide primary account numbers for routing tokenized online debit transactions to alternative networks; finalization was pending. Mastercard also disclosed a Serbian competition authority Statement of Objections in April 2023.
Most important facts for investors to verify
- Whether volume and value-added services growth continue, and how rebates, incentives, currency and customer deals affect net revenue and margins.
- How the U.S. merchant litigation reserve, opt-out claims and other interchange cases develop, including whether additional charges or settlements are required.
- The outcome and potential business effects of the DOJ investigation and FTC consent process.
- Debt maturity and refinancing plans, particularly the July 2023 INR loans, alongside continued repurchases and dividends.
- Whether equity investment valuation changes and the unusually low Q1 2022 tax comparison continue to distort GAAP earnings trends.