FX Headwinds Weighed On MasterCard’s Revenue, But Outlook Strong
MasterCard (NYSE:MA) announced results for its quarter ended December on Friday, January 29. The payments giant reported a 4.4% increase in revenue to $2.5 billion. [1] However, excluding the impact of currency fluctuations, the company reported net revenue growth of 9%. [2] Net income grew by 11% on a year-over-year basis to $890 million. [3] MasterCard is dependent on consumption patterns, so slowing growth in emerging markets such as China and Brazil poses a big threat to its growth potential. However, the resilience of the U.S. economy and expectations of strength in Europe offer some reprieve for the company. Below, we take a closer look at how each of the segments for MasterCard performed this quarter and its future prospects.
Strong Fundamentals
MasterCard face significant foreign exchange headwinds during the quarter, as revenue growth would have been over 500 basis points higher if not for the impact of weak foreign currencies. [4] However, the company’s strong fundamentals and operational discipline ensured that revenue growth resulted in EPS growth. The company’s Gross Dollar Volume (GDV) grew at a rate of 12% to $1.2 trillion over the quarter, with the total number of processed transactions growing to 12.3 billion. [4] GDV growth was higher in markets outside the U.S. at 14%, compared to the U.S. where it grew at 8%. [4] Meanwhile, the company’s operating expenses only grew at 1% for the quarter, with most of that going towards opportunities that are expected to contribute to future growth. [3]
Competition To Intensify
The two biggest revenue generators for MasterCard are its services and data processing segments. Since product offerings in these segments are fairly standardized across the board, companies primarily compete on price. This was seen last year when American Express lost long time partner Costco to Visa, as the latter offered a near zero-fee contract compared to the 0.6% American Express charged per transaction. In 2016, we expect MasterCard and American Express to vie for several retailers to issue store-affiliated cards. MasterCard is generally dominant in this area but American Express will try to fight hard after losing partners in 2015.
China Opportunity
Meanwhile, MasterCard is working on closing deals with Bank of China and ICBC, two of the five biggest state-held commercial banks in China, to partner on their mobile payment products. [4] Additionally, several Chinese banks are beginning to issue single-branded cards on international networks, creating opportunities for MasterCard to sell its fraud management products and other programs. [4] The Chinese market is a big opportunity for MasterCard. The total value of credit card transactions in the region is estimated at $7 trillion, so if the company can even capture a small share of the market, it can grow its revenues significantly in 2016 and 2017. [4] These partnerships, along with the company’s growing spending on acquisitions to maintain its market share in the payments market, might put some pressure on operating margins over the next few years. This is reflected in the management’s guidance for a decline in operating margins to 50% over the next three years compared to the 2014 level of 54%. [4]
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