Mastercard Incorporated — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. Mastercard operates a global payments technology network.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $3.837B | $4.467B | $11.181B | $12.469B |
| Operating income | $2.105B | $2.655B | $6.023B | $7.265B |
| Operating margin | 54.9% | 59.4% | 53.9% | 58.3% |
| Net income | $1.513B | $2.108B | $4.626B | $6.018B |
| Diluted EPS | $1.51 | $2.07 | $4.59 | $5.87 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $4.971B | $5.203B |
- Q3 revenue fell 14%; operating income fell 21%; net income fell 28%. Nine-month revenue declined 10%, operating income 17%, and net income 23% year over year.
- Currency-neutral adjusted diluted EPS was $1.60 in Q3, down 25%, and $4.78 for nine months, down 16%. These are non-GAAP measures; adjusted results exclude equity investment gains and losses, specified special items, and related tax impacts.
- Q3 cross-border volume fell 36% in local currency, while gross dollar volume grew 1% and switched transactions grew 5%. For nine months, cross-border volume fell 29%, gross dollar volume 0.4%, and switched transactions grew 2%.
- Q3 transaction processing revenue increased 1%, other revenue 5%, and domestic assessments 2%; cross-border volume-fee revenue fell 48%. Nine-month other revenue increased 14%, while cross-border fees declined 36%.
- Q3 operating expenses declined 4%, reflecting lower advertising, travel, personnel and professional-fee spending; nine-month expenses declined 1%. Advertising and marketing fell 26% in Q3 and 36% for nine months.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $10.225B and investments were $0.400B. Management reported $10.6B in cash, cash equivalents and investments, plus a $6.0B unused revolving credit facility. Restricted cash is excluded from that liquidity figure.
- Long-term debt was $12.574B, versus $8.527B at December 31, 2019. Mastercard issued $4.0B of senior notes in March 2020; no borrowings were outstanding under its commercial paper program or credit facility. Earliest stated debt maturity: $650M in November 2021.
- Nine-month operating cash flow was $4.971B; investing cash outflow was $0.825B and financing cash outflow was $0.777B. Cash, cash equivalents and restricted cash totaled $12.404B at period end.
- Mastercard repurchased 11.2M shares for $3.443B and paid $1.206B in dividends during the first nine months. It repurchased 6.5M shares for $2.1B in Q3. Remaining repurchase authorization was $4.861B.
- Management stated existing liquidity, operating cash generation and capital-market access were sufficient for expected operating needs and obligations, while noting that credit-market conditions or legal outcomes could impair liquidity or capital access.
Material developments, outlook and risks
- COVID-19: Management attributed weaker results primarily to the pandemic. Switched transactions improved through Q2 and Q3, with positive growth beginning early in Q3; gross dollar volume recovered to slight local-currency growth in Q3. Cross-border activity remained severely affected by reduced travel, though trends improved modestly. The pandemic’s duration and financial impact remained uncertain.
- Acquisitions: Mastercard agreed to acquire Finicity for $825M, with a potential earn-out of up to $160M; closing was expected in Q4 2020 subject to conditions. The proposed Nets Denmark Corporate Services acquisition was valued at approximately $3.33B and anticipated for Q1 2021, subject to conditions.
- Legal and regulatory exposure: The company reported $798M in accrued litigation, including $784M for U.S. merchant interchange class and opt-out matters; $586M of restricted cash was held in a related settlement fund. U.K. and European merchant interchange claims, ATM surcharge litigation and other proceedings remain outstanding. The FTC opened an investigation into debit-routing compliance under the Durbin Amendment.
- Settlement risk: Estimated gross settlement exposure was $48.607B, with $4.140B of collateral and $44.467B net uncollateralized exposure. Mastercard described the exposure as short term, typically a few days, and reported historically low customer-failure losses.
- No specific financial guidance was provided in the supplied filing text. Management described substantial uncertainty around pandemic effects and noted risks from regulation, litigation, competition, technology, cybersecurity, foreign exchange and global economic conditions.
- Other notable items: nine-month losses on equity investments were $190M, largely unrealized fair-value adjustments; interest expense rose to $275M from $160M. A $28M litigation provision was recorded for the nine months, including $22M of Q2 charges related to U.K. and Pan-European matters.
Important facts for investors to verify
- Whether cross-border spending and travel recover, and whether transaction growth translates into revenue and margin improvement.
- How COVID-19, economic conditions and currency movements affect volumes, incentives and operating expenses.
- Potential outcomes and cash requirements from interchange, ATM, liability-shift, consumer and regulatory matters, including the FTC investigation.
- Debt levels, refinancing needs and capacity to sustain dividends and buybacks alongside acquisitions and other obligations.
- Completion, final purchase accounting and financial contribution of the Finicity and Nets transactions.
- Reconciliation of GAAP and non-GAAP results, particularly the effects of equity valuation changes, litigation items and tax adjustments.