Mastercard Incorporated (MA) Management Presents at William Blair Growth Stock Conference (Transcript)

About: Mastercard Incorporated (MA)
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Earning Call Audio

Mastercard Incorporated (NYSE:MA) William Blair Growth Stock Conference June 5, 2019 9:00 AM ET

Company Participants

Sachin Mehra - Chief Financial Officer

Conference Call Participants

Bob Napoli - William Blair

Bob Napoli

My name is Bob Napoli. I'd like to welcome everybody to William Blair's 39th Annual Growth Stock Conference, our first one here at the Loews Hotel. So, they're all getting used to that. For a complete list of disclosures, please go to

We're thrilled to have with us to kick-off the conference Mastercard's CFO, Sachin Mehra. Sachin is riding on a high of his own since becoming CFO a few months ago. Being a Virginia Darden graduate, they won the Lacrosse Championship and more importantly the NCAA Basketball Championship, maybe more importantly. And then he also realized that since he became CFO, the stock has performed quite well and it's now up about 60-fold from its IPO price of $4 a share. So, it's been pretty good.

Now, Sachin has been with Mastercard since 2010 in various operating positions with the company, most recently running the B2B business, one of the more exciting places in the Fintech space. And now Sachin with that background and now coming into the CFO role, what have you learned from your operating that you would bring to the CFO role?

Sachin Mehra

Yes. Good morning everyone and thanks for having me here, Bob, I appreciate it. And thank you all for your interest in the company. So, Bob to your question like you mentioned I've been with the company for now actually tomorrow it will be nine years and it's my daughter's birthday as well.

So, anyway it's been a good ride. I've learned a ton. I came into the company as our Corporate Treasurer. I was then the CFO for our North American business. Then as Bob mentioned, I ran our B2B business and then I was our Chief Financial Operations Officer for the last year. And that was part of the transition planning which Martina and the management team was doing to ensure that there was a seamless transition to the CFO job.

But to your question as it relates to what I've learned, look I think the model which we've got here at Mastercard is a fairly compelling model. I mean it's a good business, it's -- not only is it a good industry, we're well-positioned in that industry given our assets and our client base and how we've gone to market with that.

And what I've learned and seen is it's important for us as a company not to just rest on our laurels and the reality is we don't. We actually actively every day look left, look right. We make sure we're seeing what's going on in the environment. We understand it's a dynamic environment outside. The good news is we're a company with 50%-plus operating margins. The not-so-good news is the world knows about it and people think that's an important and interesting place to go after.

So, it's our job to make sure we stay vigilant and that's what we do. And we make sure we're in touch with what are the new and emerging trends taking place so that we can actually assert our position in those trends and that's really, really important. And that's something which we will continue as a company going forward.

So, everything I've seen over my nine years here has been very much around driving hard on actually further solidifying the strengths which we've got and then actually building new modes around new lines of businesses which we've been launching lately.

Question-and-Answer Session

Q - Bob Napoli

Thank you. Now, management has suggested that the economic environment might not be as strong as it was a year ago. I was wondering if you could maybe give us your thoughts on the global economy, maybe give us some thoughts of various markets -- trends in various markets currently.

Sachin Mehra

So, I have no real update from what we've shared on our earnings call. As we mentioned on our earnings call, we see solid overall growth in 2019 with some level of moderation relative to prior years.

As I look around the globe, what I see is the following; in the U.S., there's solid growth which we observed. There's strong consumer confidence, there's low unemployment rates, those are all positive trends.

As I move over to Europe, I kind of think about it and I say there's moderate growth. There's different levels of growth in different markets. That market continues to grow nicely for us at Mastercard. When I move into the Latin American market, we see more in the nature of mixed growth. There are countries like Brazil and Chile which show greater market strength. There's a little bit more of a weakness in Mexico. And then Asia Pacific with all the trade uncertainties which are there, it remains a mixed market as we see it. But really no update from what we shared with you in our earnings call.

Bob Napoli

Now, I mean your payment volume growth did, while still double digit, did slow down in the first quarter. And I think there's an expectation. I think your update through April was a little bit of an acceleration. Are you confident then that acceleration being sustainable through the year?

Sachin Mehra

Yes. A couple of points to note. Again, as I mentioned in the first quarter earnings call, the first quarter and the result is on the first quarter as it relates to payment volume growth when you look at it sequentially compared to Q4. The reason they're down is primarily because of a couple of factors. The timing of Easter this year happened to fall more in the April-ish time frame as opposed to March of last year. So that certainly has an impact. And there's a differing number of processing days and this is a technicality in the payment industry, where the number of processing days matters in terms of how you actually reflect the volume, so really not much more to say about that.

When I think about the April metrics, the thing I will say is three weeks don't make the quarter. We certainly did see all our metrics up in the first three weeks of April compared to March. But it's for the exact same reasons why they were down in the first quarter relative to Q4 which is April happened to have Easter this year -- happening in April as opposed to March. So, again, I wouldn't get too carried away with the first three weeks. I would say three weeks don't make a quarter, but certainly trends are up from what we see in terms of the volumes which we saw in the first quarter.

Bob Napoli

Thank you. Now your cross-border business is a very important business. I think it's about 23% of gross revenue somewhere in that range. And you guys have outperformed on cross-border, but there has been some slowdown, I think broadly or at least a view or concern about slowdown. First of all, why have you outperformed in cross-border? And then, are there structural things that are causing the slowdown in cross-border?

Sachin Mehra

So Bob, you're right. I mean cross-border is an important part of our business. Let me just set some perspective as it relates to how we think about the cross-border business. Last year, we had a really good year from a cross-border standpoint. We grew our volumes in cross-border at roughly 18% last year. So, by definition, that sets up tougher comps for growth rate this year. But all of that being said, really the way you should think about it is exactly what we shared with you as part of what we shared at the earnings call which is this year we expect cross-border growth to be in the mid-teens.

And as I think, we sit back and I think about the reasons why Mastercard is performing from a cross-border standpoint, it comes down to basic blocking and tackling. And I know that kind of sounds like a fairly bland answer, but the reality is winning in cross-border on things which are controllable for us -- and I say controllable because there are elements which impact cross-border volume which are non-controllable by us such as what's the macroeconomic environment, what's going on with currencies, the devaluations taking place, is there a level of trade uncertainty which exist. All of those factors impact cross-border volume.

But things we control will come down to blocking and tackling, which is making sure we've got the right portfolios, which are cross-border heavy, making sure we are actually optimizing those portfolios to drive performance of them. And it helps when we're winning share because when you win share and you win share over the right portfolios, it does drive the metrics in the right direction.

I will point out that Mastercard cross-border volumes are for Mastercard-branded transactions only. And as some of you might know, we are doing conversions of what is Maestro branded volume to Debit Mastercard and that impacts our cross-border metrics as well.

Bob Napoli

That conversion of Maestro is -- I mean, I think that's -- is it as simple as converting the Maestro to a Mastercard brand and the revenue is twofold? What if the utilization goes up that much? Is it that -- and its still -- Maestro was still what 20% of your cards?

Sachin Mehra

Yes. So there are roughly 500 million cards -- approximately 500 million cards which are Maestro branded cards. The answer to your question as it relates to the conversion of Maestro to Debit Mastercard is the following; the theory around it is very sound. People don't dispute that, it's important to actually have debit products which are enabled not only for point-of-sale use, but for online use as well.

And when we go from debit - from Maestro to Debit Mastercard that's what happens. People get to use a product which is capable of being used online, offline and that's the case. The actual transition of Maestro to Mastercard -- Debit Mastercard is something which will take time to play out. And we've been observing that over a couple of years' time.

And the reason is, issuers have to make decisions as it relates to actually whether they want to do a proactive pull of Maestro cards from the market to replace them with Debit MasterCard’s or find events or specific events as to when they would actually cause that conversion to take place.

So for example, let's take a market like India. The Indian market was migrating to EMV. As part of the migration they needed to reissue cards. When they reissued cards, they pulled the Maestro cards in the market and replaced them with Debit Mastercard.

And you'll see that happen in several other markets. But this will be a journey. This will take some time. And they're still -- like I said the 500 million cards in total, it will take some time to actually implement.

Bob Napoli

Thank you. You put out - Mastercard put out some updated targets, 3-year targets late last year and low-teens revenue growth high-teens EPS growth and then it'd be your -- this is a much bigger company than it used to be. I mean that is -- can you talk about those targets versus historical levels? And your confidence in being able to grow that at those types of rates even though you're dramatically larger than you used to be?

Sachin Mehra

Sure. I think it's important to understand how we think about growth at this company. And it's kind of predicated on multiple pillars, right. The first of which is, what do we think will happen from a PCE standpoint or personal consumption expenditure. The second being, what's our view as it relates to secular shift which is the move from cash and check to electronic forms of payment. The third is, what we think will happen from a market share standpoint; i.e., our ability to actually gain share in the market?

And the fourth is, what do we think we can achieve in the nature of revenue growth with some of the new businesses we're setting up, as well as our services business which is already in existence and which we've been kind of banging away at for some time now?

So let's talk about each one of those components which go into the thinking around what we've set out in the nature of 3-year performance objectives.

On PCE, it's our assumption and it's anybody's guess, but it's our assumption that PCE will generally grow in the 4% to 5% range. And that's typically what will contribute to our buildup in terms of volumes and revenue and so on and so forth. The secular trends still remain very favorable, right? I mean there's been a fair amount of conversion which has taken place from cash and check to electronic forms of payment.

But as you go around the globe, the opportunity still remains pretty intense. There's a lot of opportunity which remains to actually move cash and check to electronic forms of payment. We built that into our expectations as it relates to things we can do to actually accelerate that. Things like contact-less, things like growing acceptance in various markets these are all important attributes to actually grow -- ensure that the secular trends remain in our favor.

And then on share, the reality is we won share recently. There are deals we've announced which remain to be implemented which will actually come in through the 3-year window which we're talking about. And then, we have made assumptions as it relates to what we think we're well positioned to win on a going-forward basis, which also comes into the planning and the factoring. And then, the last piece of that three-year objective is our services business.

So our services business comprises of Mastercard Advisors, which is our consulting – payments consulting business. It's a managed services business, which we have which help in terms of implementation of some of our programs with our customers, and our data analytics business. That's all part of what we think about the nature of Mastercard Advisors.

And then, we have a safety and security business, which we call cyber and intelligence. These are fraud products, which we actually sell to our customers which we work with our customers to embed to us to actually help them get better performance in their portfolios. And there are several other areas to our services business. But we've seen good growth in that business. We continue to expect that our services business will grow at a faster pace than our core business. It's a key enabler of our core business. And when you put all of this together and you think about the opportunity set, it's how we actually develop what our three-year performance objectives are.

Bob Napoli

Okay. Thank you. Now, I mean one of the talking about technology, and we'll talk about B2B in a minute, but the contactless and around the globe and I guess we now are seeing implementation of contactless in a big way in the mass transit in several big cities. What have you seen in other countries like Australia and the U.K.? And is mass transit a key enabler? And do you expect that to help accelerate growth in the U.S. market? I still find – I have my contactless card and I can use it. There's a lot of places you can use it, but people look at me like I have two heads when I try to use it. I get a – it's still not well understood.

Sachin Mehra

Yeah. So here's what I would say. I think contactless is actually very interesting. We've got use cases like you said in Australia, the U.K., Poland, Canada which have been big adopters of contactless technology. And we've seen some really positive trends come through with that. What's important to drive adoption of contactless is a few things. The obvious one being making sure, we've got a critical mass of issuers and a critical mass of merchants, who are actually using the technology, super important. We're well on our path as it relates to getting there as it relates to the U.S. But beyond that, it's important to actually have contactless products for everyday use cases because it's – the more you make it habitual, the better it's going to be.

So when you think about transit and you think about people going to work everyday over the subway system and the fact that they have to tap and go, if that's a pleasurable user experience, which it is by the way, when you can take your Mastercard card you can go on to four, five and six line in New York and just tap and go that's pretty seamless. That works pretty well compared to having to swipe your MetroCard through and/or have to load up your MetroCard every so often.

So that's worked well in markets like the U.K. where the London Transit authority went open-loop with Mastercard as well as other brands. And these options have been fantastic, but not only in the transit use case. What also happens is when people get used to that technology, they actually start to use it at other points of sale. And so our observation is when people use it in call it London Transit, when they step out of the Tube station, they tend to go to the next vendor there. It's a coffee shop or somewhere you're buying newspaper and they go tap and go again. And that's really important, because it causes for displacement of cash, which is a big advantage.

So people spend more when they – our observation from the markets where this has happened is, they spend more, they use it more frequently, it displaces cash and the cash its displacing is low-ticket value stuff, which is the harder stuff to get at, right? And these are all important attributes to drive secular shift.

Bob Napoli

Thank you. B2B payments I mean, you ran that business and there's a lot going on. I know you partnered with AvidXchange and probably, Paymode-X, the Bottomline they're here today, 3Core, WEX all those guys. But having -- I mean the big question I think, Al Kelly from Visa was quoted saying, he believes that they're doing about $1 trillion of corporate payments and that could grow tenfold over time. It's a huge market $120 trillion by some estimate -- or $100 trillion of AP. What are your thoughts? The big question I get a lot of times is why now? Why is it happening all of a sudden? Do you see these -- some of these private companies growing at very high rates?

Sachin Mehra

Yeah. So it's important to understand the journey, which is taking place in B2B. So actually it's important to understand the journey, which is taking place for card payments principally. So as the card networks started to operate there was a big focus on what I call the P2M sector, the person-to-merchant payment sector. Cards worked well at the point of sale. And the point of sale being when you go into a store you buy stuff and you walk out.

What cards do is they establish trust between the buyer and the seller because the buyer doesn't know the seller, the seller doesn't know the buyer. The person who's checking me out from say Target will only let me walk out with those goods and services to the extent there's a valid authorization code from my Mastercard card. They establish trust.

We took that use case and we said where does it apply in B2B payments or what we call commercial payments? And we've been doing this for some time now. We've used it in the small and mid size enterprise space what we call the SME space, in corporate T&E card, in the procurement card space, as well as in the fleet card space.

So Mastercard has invested in the space for many, many, many years. So it's not new news as it relates to B2B. It's just taking a different view and I'll share what that different view is here.

So at the point of sale, we've been participating through our card products for some time now. Bob you mentioned the opportunity at $120 trillion. It's important to understand how much of that $120 trillion takes place at the point of sale versus how much takes place in the accounts payable segment.

And this is an important -- so when I was in the B2B business one of the things I spend some time doing is trying to understand what the needs we're trying to solve are. At the point of sale, the need we're trying to solve is that of establishing trust between the buyer and the seller. And yes, of course, you want to control payment environment and you want to make sure that there's liquidity and working capital provided as part of that process.

Of that $120 trillion, $20 trillion occurs at the point of sale. Of that $20 trillion as an industry roughly $2 trillion has been carded thus far. So when I think about secular trends and the potential for secular trends, I see some runway there between the $20 trillion and the $2 trillion especially as you start thinking about different markets around the globe where the adoption levels are pretty low.

We continue to push hard and we push hard on that. Winning in that space is not only about putting the card proposition out there just to be clear. Winning in that space has got to do -- it's a combination of the card proposition plus the investments you make in platforms to support the use cases such as corporate T&E and B2B require expense reporting solutions. They require data warehouses to actually provide enhanced data. There's a lot of minutia, which goes into that business.

Now let's talk about the $100 trillion opportunity, which is the remaining piece, which is the big slug. The first thing I'll say is we're not going to go after all of that $100 trillion. There are pieces of that $100 trillion where there are real pain points to be solved for, which makes sense for us to go after and we're very focused on driving down that path. And we're doing that with the assets we actually have as well as the assets we continue to build and we continue to partner with other people on as well as buy.

And let me give a few examples as to how that kind of goes around. So when I think about the accounts payable space, why is it different from the point of sale space? In the point of sale you need to establish trust. In the accounts payable space, a buyer and a seller already know one another.

If a company is buying goods and services from another company they've typically gotten to understand one another. They've done due diligence. They actually enter into a contract. There's shipment of goods and services which takes place. There's an invoice which follows. And there's typically some sort of credit terms which are established for the payment to be made.

So this is not about necessarily establishing trust. This is around making sure you're meeting other needs, and the big need out there you're solving for is ensuring that there is adequate and good data which -- of companies the payments which are being made to ensure that there's good cash reconciliation, which takes place. And there's the need for working capital, and there's a need for safe and secure payment environment.

Mastercard has been playing in that space with our virtual card capability. We're the leaders in that space. We've done a great job. We'll continue to bang away at that. There's a use case for that. The use case is one around driving in the accounts payable space payments to those who need working capital data and a controlled payment environment.

But there are several other products and capabilities, which we're putting out at the market. We talk about Mastercard Track. We talk about our Mastercard Send card out, which is there, our Mastercard B2B Hub.

So there's a lot of activity in that space. The thing I will leave you with is the following, which is adoption in the space is going to take some time. We've got a great set of assets. We continue to build on that set of assets. It's about playing with ecosystem players, and actually rolling out in a very disciplined manner products and services which are solving true pain points as opposed to just trying to take a product, which is trying to find a problem to solve as opposed to the other way around.

Bob Napoli

Where are you finding more success on the AP side? And is that geographically based?

Sachin Mehra

By and large what we see in the AP side is typical trends start to originate in the U.S. and then they start to proliferate in other markets. And I'll give you examples, right?

So our virtual card capability has been something which has been very successful. It started originally in the U.S. We're starting to see that proliferate in other parts of the globe. Good use cases from an AP standpoint across several verticals. It could be in the travel vertical. It could be in several other verticals, right?

Take the Mastercard B2B Hub. It originated in the U.S. We're seeing very good interest in that capability. We're also seeing interest in that in markets like Australia. We announced that we're partnering with a company call MYOB, which is a very big player in the small and mid-sized enterprise space in Australia. And the use case and the utility of the B2B Hub is something, which is very attractive there as well.

So you'll see us go in a disciplined manner market-by-market. Not every market is going to be right for Mastercard B2B Hub, but by and large we see good use cases around that.

Bob Napoli

Thank you. Mastercard had not been real active in the M&A front for a couple of years. And then I think there have been four acquisitions like over the last six to nine months or so, and I think the discussion on the earnings call was a pretty active pipeline. So is there something that Mastercard has viewed opportunistically has changed that has led to more M&A? Which will impact?

Sachin Mehra

Yes. Let me just put that in perspective. First, there's nothing changed as it relates to our M&A strategy. The way we think about M&A and/or our business is the following: it all starts with what is the strategy we're trying to accomplish.

And once we know what we want to do, let's pick a product. We have a certain strategy we want to do in a particular product line or a consumer segment or whatever the case might be. We will look at what is the set of assets we've got, what is the distribution capabilities we've got. And then we will identify if we have gaps in order to actually make sure that we close those gaps to meet -- help us meet our strategy.

We might decide to build, buy or partner. And the buy and/or partner is where the M&A piece kind of comes into play. And what you've seen in the first quarter of this year or the first four months of this year is just the culmination of several things, which were already in flight, which came to fruition. So I wouldn't call that as necessarily a change in strategy. It's just an extension of what we've been doing for some time now and will continue to do on a going-forward basis, where it makes sense. If it lends to the strategy and it makes good economic and financial sense, we'll go after it.

So we announced -- you alluded to this Bob, we announced a few acquisitions. We announced the acquisition of a company called Transactis. We announced the acquisition of a company call Ethoca another one called Vyze and another one called Transfast. They all lend to different parts of our strategy. Transfast lends to our account-to-account cross-border space. Ethoca is -- lends to our safety and security capabilities. Transactis is very interesting the bill payment space something which we've been talking about for some time now and we're actually advancing our thinking around that. And then Vyze is around providing a technology platform for installment lending and/or consumer financing. So it's really -- it starts with strategy, it ends with strategy. These are all enablers to help us execute.

Bob Napoli

Does it give you any concern? Or have you gotten any feedback? You guys have done a great job with fintech partnerships and obviously you have great bank relationships. Any concerns for any of those partners that maybe you're getting a little bit too close to their businesses?

Sachin Mehra

Yes. In our company there's a lot of active dialogue and there's a constant reminder which we kind of give all of our ourselves which is we're a B2B2C company. It's very important we recognize that. We generate scale because we leverage the distribution of our distribution partners, whether they're the banks as issuers or they're the acquirers or whoever the case might be. In some instances, it might be non-bank financial institutions. In other instances, they might be ERP players who are actually in the ecosystem.

And so in each one of these what we're very cognizant of is actually making sure, we're building a set of capabilities to provide good choice to our customers, our customers being banks and financial institutions and/or other distribution partners to help them reach their end customer to provide them a superior value prop. So very good question, but not one where we've actually experienced much in the nature of pushback from our customers.

Bob Napoli

China has -- The World Trade Organization essentially was trying to force China to open their payments market several years ago. And I mean, your predecessor Martina when I talked to her she was not very happy with what's going on in China and opening up that market. And obviously, we have the trade -- somewhat of a trade battle going on here. What is going on in China? Is that an opportunity? You also have a significant cross-border business. Is that at risk? And are they opening up?

Sachin Mehra

Yes. So I think China is an important market and I mean, I'm kind of stating the obvious here. It's a market which has a tremendous amount of potential. As you know, we currently don't participate in the domestic volumes in the China market, because we're not allowed to participate in those domestic volumes. We continue to think about that from a strategy standpoint. We continue to push for our ability to play in the domestic market. I can't tell you when that's going to happen, because nobody really knows. We'll continue to work that. It's not part of our financial profile today.

We're not expecting for -- and when we shared our three-year performance objectives, we did not assume that we will have volumes coming in from the domestic aspects of China on that. There are things we can do in China, which we do, do and have done for many years, which is participate in cross-border flows. So we work very actively with our Chinese issuing partners to actually put our value propositions to enable Chinese cardholders who are traveling overseas to use their Mastercard cards, which are dual-branded cards issued by Chinese issuers in the overseas environment. And that's something we actively do and will continue to do on a going-forward basis.

Bob Napoli

This is obvious. The stock has done and your Visa and Mastercard have performed so well. What -- and I generally ask what can go wrong. Nothing has been -- regulatory concerns the FANG is competing against you and Alipay from China. What is it that you are most concerned about? I mean, sure cyber security is way up there, but where can Mastercard have problems in the future?

Sachin Mehra

Yeah. So, I go back to what are the drivers of growth for this company, right? I kind of think and go back to the whole PCE, secular share, market share growth and growth of new businesses and services businesses and I kind of think about it in that context, right? We don't control PCE. I can't really tell you what's going to happen there, and I can't overly worry about that.

What I can do is we need to be prepared if there was going to be some sort of change in the PCE environment i.e. there was some sort of macro downturn that we can react in the appropriate manner. And we've demonstrated our ability to do that in the last recession the 2008/2009 recession. So, it's definitely something we think about. We think about it in the context of how we would actually react to it. We can't control the outcome of that, right?

You mentioned regulation and I just think the nature of the industry we're in, regulation is just a reality. We've navigated that -- through that really nicely in the past and will continue to do that on a going forward basis. We see that actually manifest itself in multiple ways. We see it manifest itself in the nature of nationalism. And I give you the example of India where there's this recent demand which is they are trying to actually hold data on soil. We will comply. It's a requirement. We will comply. We're very engaged with the government about the pros and cons of what they're trying to achieve as part of that process. But it's all about staying on your front foot when these things come around as opposed to trying to fight them, right? It's about making sure people understand what are the pros and cons of what they're about to do from a nationalism standpoint and trying to understand what their objectives are as part of that.

Then you can see something in the nature of protectionism ala China. You could see something in nature of regulation which is what happens in the interchanged regimes of different parts of the globe. And most recently you've seen that happen in the interregional interchange coming out of Europe, right, so cross-border transactions. The reality is we've navigated through this stuff in the past. We'll continue to do that on a going forward basis. It's just the reality of our business.

The most important thing for me is we've got to keep our eyes open. It goes back to what I said right at the get-go. Look left, look right, make sure we're engaged and make sure we're actually truly articulating the value we as a payment network bring to our customers, which includes our banks, which includes our merchants, which includes various other stakeholders such as governments. That's super important for us.

Bob Napoli

Great. Thank you. I believe we're out of time. I want to thank you Sachin.

Sachin Mehra


Bob Napoli

Warren Kneeshaw from Investor Relations, thank you very much. We have a breakout upstairs in the Mayor Room. Thank you very much.

Sachin Mehra

Thanks Bob. Thanks everyone.