Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard Incorporated Q2, 2024 Earnings Conference Call. [Operator Instructions]. Mr. Devin Corr, Head of Investor Relations, you may begin your conference..

Thank you, Julianne. Good morning, everyone, and thank you for joining us for our second quarter 2024 earnings call. With me today are Michael Miebach, our Chief Executive Officer; and Sachin Mehra, our Chief Financial Officer.

Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session. It is only then, that the queue will open for questions.

You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com. Additionally, the release was furnished with the SEC earlier this morning.

Our comments today regarding our financial results will be on a non-GAAP currency-neutral basis unless otherwise noted. Both the release and the slide deck include reconciliations of non-GAAP measures to GAAP reported amounts.

Finally, as set forth in more detail in our earnings release, I'd like to remind everyone that today's call will include forward-looking statements regarding Mastercard's future performance. Actual performance could differ materially from these forward-looking statements.

Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings. A replay of this call will be posted on our website for 30 days. With that, I will now turn the call over to our Chief Executive Officer, Michael Miebach..

Thank you, Devin. Good morning everyone. The headline this quarter we delivered very strong results powered by broad based momentum across all aspects of our business. Second quarter net revenues were up 13% and adjusted net income up 24% versus a year ago on a non-GAAP, currency neutral basis.

These results were underpinned by healthy consumer spending, including strong cross border volume growth of 17% year-over-year on a local currency basis and value added services and solutions. Net revenue grew 19% year-over-year on a currency neutral basis.

The macroeconomic environment remains mixed and we continue to monitor the positives and negatives. A few to note, strength in consumer spending continues to be supported by a solid labor market and wage growth.

While there are some signs of labor market growth moderating, this is off very strong levels of job creation, as in also, inflation and interest rates remain in focus. We've seen inflation cool, but to varying degrees across carded and non-carded categories. Price levels are still elevated for many goods and services.

Interest rates also remain elevated, but many central banks have started to ease and economic indicators support broader rate reductions.

While tailwinds and headwinds to economic growth remain on balance, we remain positive about our growth outlook, but that as a backdrop, we remain focused on executing our strategic priorities, which fuel our growth algorithm across core payments, new payment flows and services.

You may remember that we recently announced organizational changes to further increase our focus on these priorities. They included the realignment of both regional operations and payments and services to support our growth algorithm. These changes were designed to accelerate growth and unlock capacity to invest in long-term business opportunities.

This also helps us continue to deliver positive operating leverage over the long-term. For example, we plan to redeploy resources into growth markets with high cash levels.

We will invest in opening acceptance in new verticals, and we will continue to apply technology to help us realize even more of the shift to digital across both consumer and commercial.

We will also enhance and expand our value added services, such as in data analytics, fraud and cybersecurity, particularly as we further embed AI into our products and services. As a result of this organizational realignment, which positions us well for the long-term growth, we expect to incur a onetime restructuring charge in the third quarter.

Now, moving on to an update on some specific elements of our growth algorithm. In payments, we're driving growth by winning and retaining deals, and we're tapping into the vast secular shift opportunity by expanding in new geographies and further digitizing the payments ecosystem. Let's start with our continued deal momentum.

I'm happy to announce that Varo Bank will convert their debit and credit portfolios to Mastercard. They were the first all digital bank to receive a national charter in the United States. Varo chose Mastercard due to our differentiated data insights, merchant funded offers platform and our ability to seamlessly integrate into their technology stack.

We extended our enterprise agreement with Wells Fargo and partnered to launch the Attune World Elite Mastercard. This is our first proprietary consumer credit program with the bank. We also want to renew deals this quarter with key US prepaid partners, including our H&R Block, Blackhawk network, relevate and dash solutions.

In aggregate, these partnerships will drive meaningful increase in our US prepaid market share. In Canada, we extended our longstanding partnership with the National Bank of Canada across consumer credit, commercial and prepaid for the next decade.

And PostaPay, who already issues millions of Mastercard cards in Italy, has expanded our collaboration to drive additional growth across debit and prepaid. Let's deep dive into a few specific verticals and geographies. Travel is, of course a key focus. It has strong growth potential and a meaningful cross border component.

Travel is also a natural fit with our virtual car technology and our marketing loyalty and consulting capabilities. We executed several new travel partnerships this quarter. We signed a deal with global digital payments provider checkout.com to enable them to deploy their virtual card issuing solution to their online travel agency customers.

We also announced a multi-year agreement with Wells Fargo and Expedia to launch two new co-brand cards with a range of unique travel benefits. And we executed a new co-brand deal with Dashen and Ethiopian Airlines, the largest airline in Africa.This builds on a co-brand deal with RwandAir and INM Rwanda that we initiated earlier this year.

I'm sure it wasn't lost on you that these two last deals I mentioned are in Africa. The continent is a great example of the vast secular opportunity in emerging markets. External sources estimate that approximately 90% of transactions in Africa are made in cash.

We are committed to the digital transformation of the regions and we're doing so by ranking up our investments, developing new partnerships and rapidly expanding our acceptance footprint. For example, Africa is the world's largest adopter of mobile money accounts.

Our partnerships with large Telco's and mobile network operators like Airtel, MTN, Vodafone Egypt and others put us in a great position to accelerate inclusion and cash conversion. On the acceptance front, we've more than tripled the number of acceptance locations in Africa over the last five years.

We recently signed deals with the Commercial bank of Ethiopia, the largest bank in the country, and I&M Bank in Kenya. These partnerships will enable us to increase share in both markets. In Nigeria and Ghana In Nigeria and Ghana, we partner with BlueSoft Financial, who will work with fintechs across the region to issue Mastercard cards.

Also, our Mastercard move capabilities are the foundation for a new cross-border money movement solution with Access Bank Group. Together, we're enabling businesses and consumers in several African markets to send and receive international payments across over 140 countries.

Now this secular opportunity is not limited to Africa, we see opportunities around the globe. Think about emerging markets in Latin America and Asia Pacific. Fully capitalizing on that secular trend requires that we continue to innovate to support the digital economy at scale, and we're doing just that.

We're enhancing the checkout experience and expanding our tap-on-phone acceptance capabilities. We're scaling our contactless technology in areas like transit, and we are driving the ongoing conversion of Maestro to Debit Mastercard. Let's dig into one, online shopping. It must be simple and it must work on all devices and all channels.

That's why we are leaning into a new area of one-click payments. We announced that we will phase out manual card entry for e-commerce payments in Europe by 2030 in favor of a one-click checkout button. There are three foundational components to this effort, all anchored on driving simplicity and security. First, tokenization.

Tokenization replaces payment credentials with a digitally secure token. When deployed, fraud rates decrease and approval rates improve. So launching a decade ago, the technology has been broadly adopted around the world. In fact, we surpassed $22 billion tokenized transactions in the first half of 2024, up 49% versus a year ago. Second is Click to Pay.

Click to Pay simplifies online guest checkout by eliminating the need to manually enter payment credentials. Guest checkout becomes as easy as remembering your e-mail address. It also makes checkout more secure using the token technology I just mentioned. We are working with our merchants and bank partners to drive adoption.

Click to Pay transactions more than doubled year-over-year in the first half of 2024. And third, up payment passes. Passkeys eliminate the need for passwords or text for onetime pass cold. They allow consumers to authenticate online, purchases using a fingerprint or facial features that you use every day when opening your phone.

When combined, these powerful technologies are enabling us to deliver on our promise of a simple and secure one-click online checkout experience for consumers. We also continue to enhance in-store checkout. For example, we are scaling our biometric checkout program to new regions.

In Europe, we're partnering with Polish Fintech payee to allow shoppers to pay with a simple glance. And in Latin America, we are working with Ingenico, so that consumers that participate in supermarkets can pay with a wave. We're also working at pace to migrate Maestro cards to Debit Mastercard outside the United States.

Shifting to Debit Mastercard is a critical element of our strategy as we see a 2x spend lift on cards once they are migrated. This is primarily due to the ability to capture both cross-border and online spend on debit Mastercard.

The first half of 2024, we converted over 14 million cards, which brings us to almost 300 million cards migrated since 2016. These innovations are examples of the investments we are making to differentiate the MasterCard experience versus other payment methods like P2P or local payment schemes.

We also continue to capture the large secular opportunity in targeted new payment flows. Today, I will focus on commercial, starting with accounts payable payments. We are operating from a position of strength. Our market-leading virtual card capabilities have been deployed with over 90 issuers worldwide.

Additionally, we are integrating our technology into four of the top five leading global procure-to-pay solution providers, completed the integration of our virtual card technology into Oracle Cloud ERP and commenced invoice payments for the first HSBC corporate customer in US.

On the supplier side, we signed several acquirers onto Mastercard receivables managers. This includes Elavon, whose customers are using our AI-powered platform to streamline the process of accepting virtual cards. We also continue to expand distribution of our virtual cards, signing new deals with Brex and ad groups world first.

On commercial point of sale, we're increasing the distribution of our commercial card products worldwide. In the US, the Wells Fargo small business credit card portfolio migration is now complete.

In Europe, we've extended our partnership with Virgin Money to continue growing our small business portfolio, and our partnership with SAP Concur, which automatically integrates our corporate card data into Concur expense is yielding results.

Large insurer Score awarded their T&E card program to Mastercard based on the value delivered through this joint offering. And finally, we're executing against our strategy to penetrate new B2B verticals.

This quarter, we signed an exclusive partnership with Latin America, with CBC, the largest Pepsi distributor in the region, and the fintech enabler YalloTech Migo payments. This partnership will provide car distribution acceptance and financial education to almost two million retailers.

These small businesses can now use their Mastercard small business cards to purchase inventory and other items. In the health care space, we signed an exclusive partnership with the Medical Tourism Association. They will now accept cards from consumers and utilize virtual cards to make cross-border payments to medical providers.

Separately, we are working with Square to broaden card acceptance amongst smaller health care providers in the U.K. Now turning to services, payments support our services and vice versa. Services played an important part in winning many of the deals I just mentioned. And the strong payments drivers helped fuel services growth.

That, coupled with strong demand drove 19% value-add services and solutions net revenue growth in the second quarter on a year-over-year currency neutral basis, this is our powerful flywheel turning.

I'm excited about our momentum and the future potential whether it's deepening penetration of existing customers, launching new capabilities or distributing our services in new ways and across new customer and transaction types. A few examples.

First, our services help to improve MasterCard issuer portfolio performance, thereby supporting our customers' core business objectives.

For example, SEB in the Baltics is building their customer loyalty strategy together with Mastercard and Revolut is working with us to develop and execute their marketing strategy, launching campaigns across the U.K., Ireland and Italy.

We're also deploying our services across non-FIs, helping to diversify our business and capture a new set of growth opportunities. Customers as varied as Paramount and McDonald's in Taiwan are using our test and learn capabilities to address core business needs, including media measurement and new product introductions.

And we're working with LATAM Airlines in Brazil to optimize their co-brand portfolio and develop innovative marketing campaigns. We're partnering to distribute our capabilities in new and more efficient ways, Salesforce has integrated our dispute resolution services into its financial services cloud.

This enables banks and other financial institutions to handle disputes and prevent chargebacks more effectively. And KPMG Norway has partnered with the Norwegian government to distribute our risk recount capabilities. The solution will help hundreds of local governments evaluate their cyber risk posture and that of their suppliers.

Turning to open banking, we continue to make strong progress in scaling new use cases. I'll use our account opening and account linking use case as an example. Klarna in the US is now using Mastercard's open banking for this purpose.

PayPal will leverage account linking, balance check and transaction history for their wallet in the US and Jack Henry will distribute these capabilities to streamline the account opening process for hundreds of issuers they support. So with that, I'll wrap it up. In summary, we delivered another strong quarter of revenue and earnings growth.

We're driving growth by winning and retaining deals, we're penetrating the substantial secular opportunity, and we continue to see strong demand for our services. Now our differentiated capabilities, diversified business model and focused strategy position us well to capitalize on the significant opportunity ahead of us. Sachin, over to you..

Thanks, Michael. Turning to Page 3, which shows our financial performance for the second quarter on a currency-neutral basis excluding where applicable, special items and the impact of gains and losses on our equity investments. Net revenue was up 13%, reflecting continued growth in our payment network and our value-added services and solutions.

Operating expenses increased 10%, including a minimal impact from acquisitions. And operating income was up 15%, including a minimal impact from acquisitions.

Net income and EPS increased 24% and 27%, respectively, both reflecting the strong operating income growth as well as a lower tax rate in the current quarter compared to Q2, 2023, primarily due to a sizable discrete tax expense in the prior year as well as the change in the geographic mix of earnings.

EPS was $3.59, which includes a $0.07 contribution from share repurchases. During the quarter, we repurchased $2.6 billion worth of stock and an additional $820 million through July 26, 2024. So let's turn to Page 4, where I'll speak to the growth rates of some of our key drivers for the second quarter on a local currency basis.

Worldwide Gross Dollar Volume, or GDV, increased by 9% year-over-year. In the US, GDV increased by 6% with credit growth of 6% and debit growth of 7%. Debit growth was aided by the conversion of a previously announced debit win in the US Outside of the US, volume increased 11% with credit growth of 10% and debit growth of 11%.

Overall, cross-border volume increased 17% globally for the quarter, reflecting continued strong growth in both travel and non-travel related cross-border spending. Turning to Page 5. Switched transactions grew 11% year-over-year in Q2, both card present and card-not-present growth rates remain strong.

Card present growth was aided in part by an increase in contactless penetration as contactless now represents approximately 69% of all in-person switched purchase transactions. In addition, card growth was 7%. Globally, there are 3.4 billion Mastercard and Maestro-branded cards are issued.

Turning to Slide 6 for a look into our net revenue growth rates for the second quarter discussed on a currency-neutral basis. Payment network net revenue increased 9%, primarily driven by domestic and cross-border transaction and volume growth.

It also includes growth in rebates and incentives, which were lower than anticipated, primarily due to the timing of planned deal activity.

Value-added services and solutions net revenue increased 19%, primarily driven by growth in our underlying drivers Strong demand for our consulting, data analytics and marketing services and the scaling of our fraud and security and our identity and authentication solutions.

Now let's turn to Page 7 to discuss key metrics related to the payment network. Again, all growth rates are described on a currency-neutral basis unless otherwise noted. Looking quickly at each key metric. Domestic assessments were up 7%, while worldwide GDV grew 9%, primarily due to mix.

Cross-border assessments increased 21%, while cross-border volumes increased 17%, the four ppt difference is primarily driven by mix and pricing. Transaction processing assessments were up 13%, while switch transactions grew 11%. The two ppt difference is primarily due to mix and pricing. Other network assessments were $244 million this quarter.

As a reminder, these assessments primarily relate to licensing, implementation and other franchise fees and may fluctuate from period to period. Moving on to Page 8. You can see that on a non-GAAP currency-neutral basis, excluding special items, total adjusted operating expenses increased 10%, which includes a minimal impact from acquisitions.

The growth in operating expenses was primarily due to increased spending to support the continued execution of our strategic initiatives as well as an increase in indirect taxes as discussed on our Q4 2023 earnings call. This was partially offset by the timing of advertising and marketing spend within the year. Turning to Page 9.

Let me comment on the operating metric trends in the second quarter and then through the first four weeks of July. As a reminder, our Q1 switch metrics include the impact of the leap year in 2024, which added just over one ppt to growth across each of switched volumes, switch transactions and cross-border volumes.

In addition, our switch metrics in Q1 and April were impacted by the timing of Easter, which occurred at the end of Q1 this year as compared to in April in 2023.

After adjusting for the leap year, the timing of Easter and excluding the benefit from the US debit portfolio when I previously discussed, our switch metrics in Q2 were generally stable sequentially in the US and across the globe. Looking at the first four weeks of July, trends remained generally stable versus Q2. Turning to Page 10.

I wanted to share our thoughts for the remainder of the year. As Michael said, there are a number of economic headwinds and tailwinds that we are monitoring, and we remain focused on executing on our strategy. Business fundamentals remain strong as evidenced by the results we delivered this quarter across all aspects of our business.

Our diversified business model underpinned by healthy consumer spending, the continued secular shift to digital forms of payment and strong demand for our value-added services and solutions continues to position us well for the opportunities ahead. Overall, we remain positive about the growth outlook. Now turning to Q3, 2024.

Year-over-year net revenue growth is expected to be at the high end of a low double-digit range on a currency-neutral basis, excluding acquisitions. Acquisitions are forecasted to have a minimal impact to this growth rate while we expect a one to two ppt headwind from foreign exchange for the quarter.

From an operating expense standpoint, we expect Q3 operating expense growth to be at the low double-digit range versus a year ago, again, on a currency-neutral basis, excluding acquisitions and special items.

We expect higher growth in advertising and marketing in Q3 compared to the first half of the year primarily driven by the cadence of spend related to our sponsorship activities. Acquisitions are forecasted to have a minimal impact to this OpEx growth for the quarter, while we expect a 0 to one ppt tailwind from foreign exchange.

Separately, as Michael mentioned, as part of our recent reorganization, we expect to record a onetime restructuring charge in Q3 of approximately $190 million. This will be recorded as a special item and excluded from our non-GAAP metrics.

We expect these actions will free up capacity to further invest in our strategic priorities as we continue to execute on our growth algorithm. We also expect they will contribute to delivering positive operating leverage over the long term.

As it relates to the full year we expect net revenue to grow at the high end of a low double-digit range on a currency-neutral basis, excluding acquisitions. Acquisitions are forecasted to have a minimal impact for the year, and foreign exchange is now expected to be a headwind of approximately one ppt for the year.

In terms of operating expenses, our expectations for the full year are to grow at the low end of a low double-digit range on a currency-neutral basis, excluding acquisitions and special items. Acquisitions and foreign exchange are forecasted to have a minimal impact to this growth for the year. Other items to keep in mind.

On other income and expenses, in Q3, we expect an expense of approximately $100 million. This assumes the prevailing interest rates and debt levels continue and excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics.

Finally, we expect a non-GAAP tax rate of between 17% and 18% for Q3 and 17% to 17.5% on a full year basis, all based on the current geographic mix of our business. One last point. I wanted to let you know that we are planning to host an Investor Day in New York on November 13. We look forward to discussing our future plans with you at that time.

And with that, I will turn the call back over to Devin..

Thank you, Sachin. Julianne, please open the call for questions now..

[Operator Instructions] Our first question comes from Harshita Rawat from Bernstein. Please go ahead, your line is open..

Good morning.

Michael, can you talk about US merchant litigation, the settlement rejection and the ball forward from here? How should we think about the range of outcomes?.

Right. Thanks, Harshita. You're not asking about the secular opportunity. I know the same. So the merchant settlement. So the first thing I would say is we're disappointed where this has landed for now. And I would describe it as we respectfully disagree with the court's ruling to reject the settlement.

This has been negotiated over many years across many parties. I think with best intentions, and they would have produced a lot of benefits for consumers, for merchants and across all parties. So this is now not happening. We are obviously ready and we will take all efforts to ensure that a solution is found before it goes to trial, engage our parties.

We've done this in previous scenarios before. It's difficult to speculate our outcomes at this point. But I think this intention to lean in and see how we can provide more security predictability to merchants and to banks and our parties here is what's driving us.

So there's a number of co-defendants in this, and everybody will obviously take their own decisions here. But across the board, obviously, there has to be a dialogue and we find the best outcome of this..

Our next question comes from Trevor Williams from Jefferies. Please go ahead. Your line is open..

Great. Thanks a lot. I wanted to ask on rebates and incentives growth. I think that came in a little bit better than you guys have been expecting for 2Q. Sachin, if you could just unpack some of the upside there relative to expectations and then any help for what you're expecting for R&I growth over the next couple of quarters..

Sure. Thanks, Trevor. So you're right. As I mentioned in my prepared remarks, our rebates and incentives did come in slightly lower than our expectations for the second quarter. I just want to kind of take it up a level, just to kind of remind everybody, we're very active in the markets.

We are constantly looking at what opportunities exist with existing customers and then with who could be potential new customers. And we have a view on what our pipeline of activities is.

So the vast majority of what we had in the nature of better or, I would say, lower rebates and incentives in the second quarter were driven by some of those -- that deal activity not materializing in the second quarter. It still remains in the pipeline. It's still something we expect will occur as the year progresses.

And then more specifically, as it relates to Q3, we expect that our rebates and incentives as a percentage of our payment network assessments will be higher than it was in Q2. And it's essentially based on exactly what I just said, which is it's a very rich deal pipeline that we have. And again, this is more of a timing issue than anything else..

It comes back to the point. In the end, we want to be in the transactional floor. We want to be relevant to our customers. We want to be relevant in the eyes of the consumers that they have a Mastercard product in their hand, and we fight for the deals that we find strategically relevant that also meet our financial criteria.

In the end, it all has to add up in combination between payments and services that our net revenue yield develops positively and that we keep in focus..

Our next question comes from Dan Perlin from RBC. Please go ahead. Your line is open..

Thanks. Good morning. Can we just spend a second on the realignment of the organization a little bit? I know you talk about it to create capacity and drive incremental growth. I think the question I have is how should we think about that in driving kind of new constituencies as you talk about new verticals and maybe expansion of data analytics.

And then more specifically, how does that open up the aperture of the network as we think about that going forward?.

Right, Dan. So as I said earlier, the idea here is to accelerate growth. The idea is not to reposition our strategy. We've articulated our strategy. You'll hear more of that in the investor community meeting in November and how we see that play out in more detail across our core payment solutions, new flows and the services portfolio.

I purposefully stated the point on markets with high cash penetration. So here is as I laid out in the context of Africa, but there's more in other emerging markets around the world, there's a tremendous opportunity here. So we want to strengthen our front line.

It's also clear that the recipe to participate in the secular opportunity emerging markets isn't the same as in developed markets. So we're investing in product and so forth. It's pretty clear that on the services side, as far as the areas of focus are concerned.

We continue to be guided by underlying strong secular trends, and one of that is for really any of our corporate partners and B2B partners that they want to make sense of their enterprise data and make better decisions.

And how do we do that? We do that by leveraging our artificial intelligence solutions set of assistance, a set of fine-tuning how they could have more personalized suggestions to their end consumers, et cetera, et cetera.

That's one part, help our customers make better decisions, not changing, but very specific solutions with a higher weightage to AI. And then on the security side and the cybersecurity side, all of this data has to be kept safe. We kept saying that for years. That's a strong secular trend in itself, and making sure that we fine-tune our solutions here.

We've got to move faster because the bad guys are also moving faster, and they have the similar technology tools at their hand now. So leveraging artificial intelligence, an example I gave last quarter around Decision Intelligence Pro, that's predicting what is the next card that might be frauded.

Before it actually happens, those kind of solutions provide significant lift to our customers in terms of preventing fraud obviously giving peace of mind to their consumers and overall helping our business, and it's a close link to our payments underlying payments business.

So all of that -- it's largely the same strategy, but we're really focusing on very specific aspects of that, and there are other aspects of our portfolio that we're going to dial down as a result of this effort..

Our next question comes from David Togut from Evercore ISI. Please go ahead. Your line is open..

Thank you. Good morning, Michael and Sachin. Europe continues to be your largest geo by GDV and also highly differentiated growth there continues. Would appreciate your look forward on cash digitization opportunity, thoughts on the consumer. And then the outlook also for cross-border travel in and out of Europe..

Right. So let me start. I want to anchor on what you -- how you framed your question. It's been a strong growth story for us in Europe. That's Continental Europe as well as the U.K. We've seen tremendous share growth there.

And that's really focusing down and investing more locally in Europe, have a better presence there, engage with national governments as well as with European institutions, which we feel very European and Europe. That's the first thing I would say.

When I come back to the times of COVID, it was -- there was a large set of economies in Europe that were lagging, I would argue on the digitization front, changing behaviors to consumers have increased the pressure to digitize further, and it has happened. So we've seen Europe catch up and obviously shows in our numbers.

But back to the point of secular opportunity we just discussed. If you look at the economies in Germany, in Italy, there's significant cash in the higher double digits that we're seeing that and we can go after and we will continue to go after. So I continue to expect a growth opportunity there.

But it's also true that there are markets that are so highly digitized today that the secular opportunity in itself is something that from cash to check isn't really happening. And there, you come to the point about what are the emerging business models in a highly digitized world. The Nordics is a good example of that.

There's a whole new set of business models coming up, and we're supporting those fintechs which is why Europe is one of the geographies around the world where we have a tremendous position in fintech and other market leaders in those partnerships. So I'm excited about the Europe outlook, and we continue to invest there. Bottom line..

And David, on your question around cross-border in and out of Europe, a couple of thoughts around there. Look, I mean, globally, I would say we're well positioned from a cross-border standpoint. You can see that in our metrics.

And then as it relates to Europe, back to what Michael just said, as we've been winning portfolios, there's been a mix of portfolios We've been there, some of which are high cross-border and others are lowered from a cross-border standpoint.

The idea is to actually be in the flow, participate and create opportunities for ourselves to actually leverage our services, our loyalty assets in order to drive cross-border, whether it's Europe or anywhere else in the world.

Last point I'll make is sensitivity to foreign exchange rates, right? Strong dollar certainly helps in terms of the inbound into Europe because you tend to see a lot more travel from the US actually show up in Europe as part of that process.

So again, we feel good about the cross-border opportunity, not only in out of Europe, but globally for the company..

Right. And one last point to add on -- based on the financial frame that Sachin just put around it, back to the R&I question. So in Europe, we really feel we are well positioned in the market from a share perspective. So this aspect of financial discipline as we continue to look for deals and partnerships in Europe really rises to the top..

Next question comes from Darrin Peller from Wolfe Research. Please go ahead, your line is open..

Hey guys, thanks. It's good to see the stability into July and the US volume side.

So if you could just help us understand a little more on the cadence if there's anything from CrowdStrike or weather? And then I guess, really, Michael, also, more importantly, just the ability for you guys to win these portfolios, if you could help us just remind us understanding what the driving factors are? How much of it is -- if there's any competitive pricing dynamics, how much of it might be just mass, maybe a little bit more of what you see ahead..

Yes. Why don't I take the first part of that question, Darrin. In terms of the trends we've seen for the first four weeks of July, like I said, look, I mean, general stability and drivers across the board. And you can see that on Page 9 of our presentation.

And really, I mean, to your question as to whether there was an impact from the events over with CrowdStrike or weather. I mean the reality is the weather piece has a little bit of an impact. That's what I would actually mention. But it's kind of muted in terms of the context that we've got now four weeks' worth of data in there.

And so the reality is these things kind of happen, they come a particular week, if you look at it, it might look lower or higher and then there might be a catch-up factor which takes place as we tend to follow.

By and large, we feel good about what we're seeing from a consumer spending standpoint, and that's reflective of what you see on the metrics right here..

Right. And then the second part of your question, the [indiscernible] market in the US and same as Europe since we just talked about, remains incredibly competitive. I think we haven't seen such elevated level of competition and payments that we're currently seeing. You see a lot of movements in the market.

There's banks looking at network opportunities and so forth. So there's a lot going on. But it's also true that for us, we continue to broaden our payment solutions and our service offerings. And really, that comes to that part of your question is what matters here. What matters here is that we can help our customers run their business in a better way.

So what are they trying to do and our solutions helping data insights, cybersecurity certainly matter. The fact that cards isn't the best answer to all payments, but there is also a multi-rail set of solutions that customers are looking for. We have all of that. So that puts us in a differentiated position.

We're trying to not to sell product but really come in with solutions through our sales force. That's working for us, but it's pretty clear. We have to be financially competitive. That always matters.

But if you can have a conversation around the top line outcome with your customer vis-a-vis the cost of payments that changes the dialogue quite significantly. So when I talk to CEOs and the customer side, that's what they're really interested in. So that's working. That's a lot of value that we bring, and we price for that.

So we continue to price for that. You've heard us mention pricing changes in the last quarter. So we do that wherever we see the opportunity. Tokenization is a great example. We've invested in tokenization and we needed to scale it up.

Now we have an opportunity to build a whole set of services on top of the basic token that we can price for and that we feel we should price for because they drive a better outcome in terms of better approval rates, lower fraud and so forth for our customers.

So I think we're well positioned in a very competitive market, and we're going to continue to try to keep that edge..

Our next question comes from Dave Koning from Baird. Please go ahead. Your line is open..

Yes.Hey, guys. Thank you. And I guess my question on the cross-border line, you've had a very nice positive divergence between constant currency revenues and constant currency volumes. This quarter was about 4%. And I think for 13 quarters in a row, it's been nicely positive.

In prior years, it was pretty close to neutral, sometimes even a little negative.

Why does that continue to be positive? And how should we think of that going forward? Is that going to stay that nice positive divergence?.

Yes, David. So look, I mean, it's like I said, right, it's been driven by favorable mix and a little bit of pricing in the second quarter. The reality is that the mix piece is really what's been actually causing that positive divergence you're talking about. As you are aware, our cross-border volumes are -- and we show you the metrics on this.

We have intra-Europe cross-border and then we have other cross-border. Intra-Europe is lower yielding, other cross-border is high yielding for us. And so as you think about this, if the other cross-border volumes are growing at a faster pace than intra-Europe, you tend to see that positive divergence.

I'll remind you, during COVID, we actually had the reverse phenomenon take place. We had intra-Europe growing faster than other cross-border and you actually had the reverse happening, which is you had cross-border assessment is growing at a slower clip than the actual underlying driver growth. So that's really what we mean by mix there.

And then, of course, there's a pricing which we do back to the point Michael was making around the value we deliver, which is another contributing factor in the second quarter..

Our next question comes from Sanjay Sakhrani from KBW. Please go ahead. Your line is open..

Thanks. Good morning. I was wondering, Sachin, could you just talk about the share gain benefits in the quarter and maybe what's on the horizon. I think you mentioned it in the context of incentives. And then just specific to some of the revenue items or revenue lines.

When I look at domestic assessment revenue, that kind of slowed from a trend line that we've seen that was much stronger. I know some of it was FX. But was there anything else similar for other revenues. Those were down a little bit.

I know it's a smaller line, but any call-outs there?.

So I'll take -- I think there are three questions there. So I'm going to take all three of them, which is -- on domestic assessments, it's -- the delta you're seeing in terms of domestic assessment is growing at 7% compared to GDP growing at 9%, and is primarily being driven by mix.

I need to remind everybody that GDV and domestic assessments is not a perfect proxy, just because in domestic assessments, there's a whole bunch of other stuff which is there. You've got card fees. You've got a bunch of stuff going on in there. So there's always going to be some level of kind of difference in terms of growth rates there.

But what we like to call out is what are the salient features or factors which are causing for that -- for the different growth rates between domestic assessments and GDV growth. And when I talk about mix there, just so that you're clear, I mean, the mix could come from a whole host of things. So for example, our GDV includes our cross-border volumes.

Our domestic assessments do not include our cross-border-related revenues. And so what you've got is with GDV growing you don't have the associated cross-border revenue, which is there, which would come in terms of domestic assessments. You could also have changes in geographic mix.

You've got high-yielding and lower-yielding regions and depending on the growth rate of regions, you might see deltas come to the positive or the negative there. So that, Sanjay, is the domestic assessment piece. On the other payment network revenues, again, look, I mean, this is not something which we are necessarily focused on as a business.

That is -- it's one of the things which is required to run the network. It's a range of things from licensing fees, implementation fees, franchise fees, things of that sort. And those things move around.

So I wouldn't get too fussed about the fact that in one quarter, it grows at an exceptional pace in the next quarter is actually going the opposite direction. Just because, first, the number is fairly small. And second, it's -- there's a whole host of reasons why that might happen.

For example, as customers get more compliant, you might have less than the nature of compliance fees that you're charging them. So that's a good thing for the network, by the way, over the long term.

And then the last point you asked, actually the first question you asked, which was around share gain benefits in the quarter -- the one I called out really was around the debit conversion in the US And we have previously announced this. We announced our win of the debit portfolio from citizens.

We are super pleased with our relationship with citizens. That conversion is going exceptionally well. That conversion for the most part was complete in the second quarter. So we had new [ costs ] which were sent out to customers. So there's a little bit of that, which is there.

Again, but what I wanted to share was that when we're looking at drivers, right, between Q2 and the first four weeks of July, or for that matter between Q1 and Q2. When you take out the impact of these share wins, there's still underlying stability in terms of consumer spending trends.

On share gains, just so that you've got the overall picture, right? So we've talked a little bit about systems. We had the Webster win. You've got a whole bunch of stuff which will roll on, and those will be multiyear kind of conversions, which will come through. In particular, I'd call out UniCredit.

So in UniCredit, we had announced this deal win in 2023. While that conversion is underway. That will be over a multiyear kind of time frame again. Deutsche Bank, again, the conversion is underway. It will take a couple of years before you actually start to set of completion of that. So all of these things will play out over time..

Our next question comes from Tien-Tsin Huang from JPMorgan. Just go ahead, your line is open..

Thank you. Good results here. Just on the value-added services and solutions, that accelerated.

I know there's an easy comp from the first quarter, but any interesting trends in terms of composition of growth within VAS and any call out for the second half of the year in terms of VAS growth?.

Right. Tien-Tsin, good to hear you. 19%, a strong growth rate for sure. The usual suspects in terms of driving for growth is the payments related part of this, particularly on the cybersecurity side. So that continues to grow and grow very well. So there's more need for more fraud solutions. That's one thing.

And on the data analytics side, we continue to see great interest, as I laid out in remarks, test and learn, for example. So I'll give you a number of examples how customers are trying to figure out what kind of campaigns make sense, how can they serve their customers better and so forth. So no particular change there.

I think the fundamental trend that I touched on earlier in an earlier response, more infusion of AI across the board to make these products scale better and be more effective, that's certainly a trend. Overall, the whole mix of this is largely unchanged.

We continue to invest in newer aspects of our services portfolio, particularly in the open banking side. I talked through a couple of use cases here. They still have scale up in a significant way, but we feel we're well positioned in Europe, Australia and the US on the open banking side. So good to see.

We said in the first quarter where we had a slightly lower growth rate. We're going to be higher quarter -- every single quarter for the rest of this year, and that is playing out as predicted. So occasionally, you have tougher comps and so forth, but this is a pretty solid trend for us..

Our next question comes from Dan Dolev from Mizuho, please go ahead. Your line is open..

Oh, hey, guys. Good morning. Thank you for taking my question last quarter. I believe you gave us a cadence on rebates and incentives, growing slower in the second half versus the first half. Can you maybe give us a little bit more color on to the cadence of rebates and incentives this year. And great results again..

Dan, yes, last quarter, I shared with you a point of view around what we thought rebates and incentives would look like in the second quarter. And what we had said is it would be flat to slightly lower for the second quarter.

And in the second quarter, rebates and incentives came in lower than the first quarter, lower than even what we had expected for the reasons which I mentioned earlier, which is the timing of deal activity.

And then today, I shared with you what I think will be rebates and incentives in the third quarter, which we expect that rebates and incentives as a percentage of payment network assessments will be higher in the third quarter compared to the second quarter. We really haven't shared much on nature of rebates and incentives beyond that.

So really just for clarification, that's what I want to share with you..

Our next question comes from Andrew Jeffrey from William Blair. Please go ahead. Your line is open..

Hi. Good morning. Thanks for taking the question.

Michael, I want to ask about open banking and particularly in the US hearing some conflicting things about the price of real-time payments, interchange in real-time payments, I guess, versus debit, especially Durbin-regulated debit and perhaps the enthusiasm on consumers' behalf to pay from their bank accounts, but maybe some charge back and customer service dispute issues that banks are facing.

I just wonder if you could maybe parse some of the puts and takes and give an outlook on the future of open banking, particularly in the US.

Right. So interesting, you call that out. I just mentioned that just before. And I said it's not quite where I think most market participants would have wished open banking got to over the years. And that applies, I think, globally.

Here in the United States, when I look at open banking with a focus on particular services, a set of actions around account opening or account linking or data aggregation or things like that, we see good momentum. I talked about that earlier.

When it comes to payments, the payment side of open banking, it's still true that the value that the card ecosystem brings is significant, and you made a point on chargebacks. That is -- it's not comfortable if there is a problem, and then there is no established way to get your money back. On cards, we do that. The same is for fraud protection.

I think we know exactly how that works in the world of card payments. It's not so clear yet in the world of counter account payments.

Nevertheless, it's our role as an ecosystem custodian to understand where emerging technologies are going, whereas customer interest going that consumers want to use their data footprint to get better services, well, absolutely. First of all, that starts with data protection and data consent management, which we invest a lot of energy on.

But then to say, all right, how could this kind of technology be used. So we do invest in it, which is why we called out open banking as an element of kind of future-oriented activity for us and investment. What we currently see are those use cases that I mentioned, they are the most near-term opportunity. And this is around lending.

It's around account Opening, account linking, asset verification, and more recently around data aggregation. Our smart subscription solution is one example of that. That works really well for consumers. If you got 15 subscriptions and you see them in one place and it makes a real difference. So I think it's evolving.

It's evolving and we're at the forefront of evolving it, but we're also trying to make sure that it's understood that the value we bring through cards is really unparalleled..

Our next question comes from Fahed Kunwar from Redburn Atlantic. Please go ahead. Your line is open..

Hi both. Thanks for taking the question. Just wanted to ask about profitability. Obviously, there's a lot of various moving parts with VAS growing really nicely, cross-border.

How do you think about margin expansion, though versus kind of investing in all of these various product areas in distribution and the products themselves, should we expect margins to carry on expanding as they have been? Or will there be continued areas of investment that you think will kind of drive expenses higher from here?.

So a couple of thoughts here for you, which is, number one, I think we mentioned in the past and this philosophy of ours remains unchanged, which is we aspire to deliver positive operating leverage, which is showing -- driving net revenue growth at a faster clip than operating expense growth over the long term.

So that's really what the aspiration is for how we're running the business. The most important thing to remember is we're running the business for top line growth and bottom line growth. And in order to do that, we keep a very close eye on making investments to drive growth in the near term, medium term and long term.

So yes, we are investing in things which will drive growth in the near, medium and long term. That is super essential from our perspective, not only because that's what our shareholders desire, but also because we believe the set of opportunities in front of us are sizable.

And so for us to leave those opportunities underinvested would be a bad move for the long-term health of our company. So we will continue to invest in the business. We will do that with the strategic priorities, which Michael has laid out.

With that focus, we will constantly look at those priorities to see how the market conditions are evolving, and we will pivot as necessary. But the general kind of flow is, yes, we will continue to invest in the growth of our business because we see tremendous opportunity on a going-forward basis..

Our next question comes from Paul Golding from Macquarie Capital. Please go ahead. Your line is open..

Thanks so much for taking the question. I wanted to ask about AI in a fraud sense. I know that you're incorporating AI into your products and presumably as part of VAS to combat fraud.

Just wanted to ask what you're seeing in terms of the offense of fraud using AI and how that might accelerate the adoption of your new products and your investment in new products around AI to combat that..

Right. So with rapid digitization around the world, we've seen a lot of new entrants into the ecosystem. A lot of small businesses have digitized post-COVID as you see in emerging markets, a lot of people for the first time using digital solutions.

So digitalization is growing, vulnerabilities are growing and technology in the hands of fraudsters is also evolving. So this makes for an environment where players like ourselves who oversee an ecosystem, a franchise between banks and merchants and for the benefit of the end consumer need to really invest in safety and security. We've done that.

And AI isn't actually anything new for us. So we've -- for the better part of a decade, we've been using AI. This is a discrete machine learning technology to really predict where is the next problem and analyze data of -- that we have and the data that our customers have to prevent fraud. So that's been very successful.

As far as generative AI is concerned, evolving technology here, there's obviously an opportunity for us to understand more data in a quicker way. And we have used that initially to you to train our AI models, our discriminative AI models using generative AI to create artificial data set. So that was the first step.

And then we went into putting out a new set of products. I mentioned Decision Intelligence.

Our Decision Intelligence is that we've had for a long time, machine learning driven that was predicting fraud outcomes and now we're using more data sets to -- that are externally available, stole the card data and so forth to understand where our fraud vulnerabilities might be.

The lift is tremendous, 20%, we see in terms of effectiveness out of that product. So we start to see demand for the whole reason on the vulnerabilities that I talked about. So we expect continued growth. We also expect the fraudsters to come up with new techniques themselves, we need to continue to evolve.

So I believe that the penetration of generative AI and our fraud and cybersecurity product that will only expand. Now I talked a lot about transaction-related fraud. The vectors around cybersecurity, obviously much broader. It's prediction of fraud. It is what's the general cybersecurity posture of a company, risk recon capabilities and so forth.

We try to cover the whole ecosystem and become a true strategic partner of our customers. So if anything, this whole space is going to grow further, and you're going to continue to see us invest in that area..

We time for one more question, Julianne..

Our last question will come from Andrew Schmidt from Citi. Please go ahead. Your line is open..

Hi, Michael. Hey, Sachin, thanks for squeezing me in. I just want to double-click on macro viewpoint. If I hear in the message correctly, it sounds like not mix, but consumer spend trends are stable for the most part.

If you could just double click on that and let us know if there's any divergence amongst different consumer demographics and correspondingly what that might mean for debit versus credit, transaction sizes, anything like that, that would be super helpful..

Right. So at the outset of my prepared remarks, I talked about the puts and takes on inflation, on the prices. The bottom line there is that for now, the consumer is supported, and that's pretty much irrelevant of income cohort, is supported by a strong labor market. So that's fundamentally true, and it's fundamentally true around the world.

But it's in aggregate, but it's not a uniform answer. The picture obviously plays out very differently country-by-country. We have a very global business. So we look at what is the Central Bank of Japan doing and we saw that today. They raised rates. And then Europe, you see Germany came through with actually a small recession in the past quarter.

So there's a lot of back and forth. But that fundamental point that the consumer is supported by a strong labor market and some wage growth. I think that's true, and we don't expect any dramatic changes on that front, and that's why we remain positive about the outlook. You peel the onion a bit further, you look into different cohorts.

And it's pretty clear that when it comes to higher income versus lower income, if you spend on an expensive trip or an experiences during the summer, whatever you're trying to do, you have more income, then you can do more of that and you have less income and you can do less of that. What we generally see though as a function of the digital economy.

The higher-end consumer, but certainly the mid-income and lower-income consumer is much more empowered, empowered by having more data and the ability to look for a better deal. And that's what everybody is trying to do to make things add up and work for them that they still want to do that trip.

So all of that together overall adds up to a picture that we feel pretty good, at least about our side of the business. And why do I say that? Because inflation and prices cut across carded and non-carded. But we are obviously particularly positioned. So you saw that rise. And right now, you see a lot of inflation in auto insurance and rent.

That's not necessarily so much carded. So these are all the things that we think through comes back down to the fundamental point in aggregate, we see healthy consumer spending and don't see that changing in the short term..

And Andrew, I'll just add one point, and Michael touched on this before, which is at the end of the day, our diversified business model lends really well in different environments because at the end of the day, right, we are geographically diversified. We've got great diversification across debit and credit.

We've got good diversification around channels of spend. So the reality is when these puts and takes take place in certain sectors of the economy, a dollar spent on one sector versus the dollar spent on the other sector, we're relatively indifferent so long as it's got to spend.

And that diversification really helps our business the way we are actually structured, which has not happened by chat. It's happened by design. And so that's something which is super important for us..

Thank you. Now I'll hand it back to Michael for any closing comments..

All right. Thanks, Devin. So everybody past, we talked about the momentum and a good quarter. all of this obviously only happens because it takes the hard work of our colleagues at Mastercard, I thank them, and I also want to thank you for your support for Mastercard.

We're looking forward to speak to you in a quarter from now and hopefully see some of you at our Investor Day Community Meeting on November 13 in New York. Thank you very much..

This concludes today's conference call. Thank you for your participation. You may now disconnect..