Earnings Preview: American Express Focusing On Increasing The Reach Of Its Network And Lowering Operating Costs

American Express (NYSE: AXP) is set to report earnings for the first quarter of fiscal year 2017 on Wednesday, April 19. Over the previous quarters, the company has been focusing on mitigating the impact of losing out on co-branding partners such as Costco, Jet Blue Airways, and Fidelity Investments. American Express has been trying to do this by adding new co-branding partners to its payment network and figuring out ways to increase the number of places its debit and credit cards are accepted at.

Since the company gets close to two-thirds of its revenue from transaction fees charged on transactions executed on its network, it is highly important for the company to increase the number of transactions that take place on its network. The way to do this is to either increase the number of transactions made by customers who already have American Express issued debit or credit cards, or to increase the number of such cards in circulation. The loss of co-branding partners such as Costco and Jet Blue Airways was a big deal for the company considering this background. However, AXP has been trying to sign up new co-branding partners. Sam’s Club, a special warehouse club run by Walmart for the sale of electronic goods, and deals with Uber and Airbnb were a step in this direction. The limitation for American Express is that it has built its brand around getting customers with a high net spend. In return, the company charges a transaction fee that is nearly three times as high as that charged by Visa and Master Card. As a result of this, very few places outside the metros in the U.S. accept American Express issued cards. Adding Uber and Airbnb to its network is one way of expanding the company’s reach.

Additionally, the company is trying to lower its operating costs to keep margins high. In 2016, American Express reduced its operating costs by 3.9% compared to 2015 costs. The company achieved this despite a 17.4% increase in marketing expenses and a 12% increase in costs related to member services. Most of the reduction was a result of lowering an item the company classified as “Other Expenses” by 66%. As a percentage of overall costs, this item was around 4% of overall company expenditures. It is not clear what items were included in its calculation but it will be interesting to see if the company can continue doing this going forward.

Have more questions about American Express? See the links below:

• How Much Did American Express’ Revenue & Net Profit Grow In The Last Five Years?
• How Much Can American Express’ Revenue Grow In The Next Five Years?
• What Is American Express’ Fundamental Value Based On Expected 2016 Results?
• How Has American Express’ Revenue Composition Changed In The Last Five Years?

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