萬事達 (MA) 2018 Q4 法說會逐字稿

Good morning.

My name is Heidi, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Mastercard Q4 Full Year 2018 Earnings Conference Call.

(Operator Instructions)

Warren Kneeshaw, Head of Investor Relations, you may begin your conference.

Thank you, Heidi.

Good morning, everyone, and thank you for joining us for our fourth quarter 2018 earnings call.

With me today are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer.

Following comments from Ajay and Martina, 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 currency-neutral basis and exclude special items, unless otherwise noted.

Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents.

Please note that due to our decision to deconsolidate our Venezuelan entity starting at the beginning of 2018, we have been providing additional information regarding our switched transaction and card growth rates.

The adjusted growth rates eliminate Venezuelan switched transactions and card counts from prior periods.

In addition, starting this quarter, we are providing further adjusted growth rates for switched transactions and adjusted growth rates for cross-border volume to normalize for the effects of differing switching days between periods.

These adjustments have been made to current and prior quarters.

This information is being provided so that you can better understand the underlying growth rates of our operating metrics.

Our comments on the call today will be on the basis of these adjusted growth rates.

A couple of other comments.

As many of you are aware, we recently announced an agreement on the terms of a recommended offer to buy Earthport.

We will not be at liberty to further comment on this potential transaction as it is regulated by the takeover panel in the U.K.

I'd also like to announce that we are planning to hold our next investment community meeting on September 12, 2019.

We initially planned to hold this event in Q2 but have settled on a September date as a result of some scheduling issues.

Finally, as set forth in more detail in our earnings release, I would 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'll now turn the call over to our President and Chief Executive Officer, Ajay Banga.

Thank you, Warren, and good morning, everybody.

So we had a very strong end to the year, bringing 2018 to a record close.

For the year, revenue was up 20%; EPS, up 41%, and these are both on a currency-neutral basis and excluding special items.

If you exclude the impact of accounting changes, acquisitions and the $100 million contribution to what we are now referring to as the Mastercard Impact Fund, that affect year-over-year growth comparisons.

So basically, apples-to-apples, our underlying net revenue growth was up 15%, and operating income was up 21%.

These results essentially reflect broad-based growth across each of our regions and I think are a clear reflection of our focus on execution.

We continue to invest in the business for the long term and believe that we are very well positioned to drive strong growth in the future, and Martina will describe this in much more detail when she lays out our new multiyear performance objectives.

Turning to the macroeconomic environment, we continue to see solid overall growth and expect this to continue in 2019, although with some moderation.

Having said this, like others, we're keeping a close eye on a number of items: increased trade tensions, rising interest rates and other economic and political factors that could slow growth over the longer term.

In the U.S., economic growth remains positive with low unemployment and overall still healthy consumer confidence.

Our spending cost estimates for Q4 show retail sales remained strong, up 4.8% versus a year ago same period, ex-auto, ex-gas.

In Europe, we continue to see moderate growth, with U.K. spending holding up really, really well, again, according to our spending cost estimates, with year-over-year retail sales up 3.5% in Q4, ex auto, gas and restaurants, despite the debate around Brexit.

We have, however, seen some recent declines in consumer confidence in countries such as France, Spain and The Netherlands.

In Latin America, we're watching to see how the economic and fiscal policies develop in both Brazil and Mexico, now that the elections are behind us.

We are seeing some positive consumer and business confidence indicators in Brazil, in particular.

We're monitoring a few potential headwinds in Asia, including trade negotiations and the talked about slowdown in the Chinese economy.

As we don't participate domestically in China, this has a limited impact to us directly.

But given the size of the Chinese economy, it does impact the global economic picture.

So against this backdrop, we just continue to see a strong secular shift to electronic forms of payment, and we are driving healthy double-digit volume and transaction growth for Mastercard across most of our markets.

And as I said earlier, these results are a function of us successfully executing against our strategy.

We are growing our core products and diversifying our customer base, and we are building out new capabilities.

And I'm just going to give you a few examples.

First, we are driving growth in the core with new wins like Westpac Bank, one of the largest banks in Australia.

They will become an exclusive Mastercard issuer for all their Westpac-branded consumer credit and business card portfolios, and we retain exclusivity across their debit business.

Westpac will also leverage several of our value-added services, such as Advisors and loyalty platforms.

In addition, we renewed our agreement in New Zealand, securing the majority of Westpac's credit and debit portfolios and flipping their loyalty platform.

We've also executed 3 renewals with leading banks across several markets.

So we signed a long-term deal with Credit Agricole, the largest bank in France, which includes new consumer and commercial issuance beyond our existing base.

And as part of that deal, they will also use a range of our data analytics platforms, including Applied Predictive Technologies, APT, to help optimize their customer acquisition and retention efforts.

In The Netherlands, we renewed our partnership with Rabobank, enabling us to maintain a leading market share position in credit and debit in that country.

And in China, we will be the exclusive international scheme partner for ICBC's global travel plus card.

On the co-brand front, we signed a long-term extension with WestJet in Canada; won a new co-brand program at Square, which will enable Square sellers to access their receivables through a Mastercard debit card.

We were selected as the partner for JetBlue programs across 19 Caribbean markets, which, together with our U.S. co-brand, make us the partner on each of JetBlue's co-brands around the world.

I'm also pleased to report that our major U.S. co-brand conversions have been successfully launched.

L.L.Bean and Kroger are fully converted.

And Cabela's, which are all contactless card, by the way, is scheduled to be completed by the end of this quarter.

In addition, to building co-brand relationships with merchants, we're also diversifying our customer base through partnerships with governments.

One recent example is in Mexico with BANSEFI, the commercial banking arm of the Mexican government, where we have just been chosen to help distribute a wide range of social benefit disbursements to citizens across the country.

This exclusive program will involve the issuance of approximately 20 million new debit cards that will be used to receive and spend social benefit payments.

So turning to B2B, we continue to see momentum in our core commercial card business.

We're developing a new fleet co-brand product with U.S. Bank that enables greater customer choice by combining U.S. Bank's proprietary closed-loop fleet product with our broad, open-loop acceptance footprint.

We're also making progress in the accounts payable space, taking the Mastercard B2B Hub model international through a new partnership which I think is very exciting, with MYOB in Australia and New Zealand.

MYOB provides an invoice-capture facility, supplier-enablement payments and payroll solutions for small- and big-sized businesses, and brings the local market expertise and customer relationships that are critical to success for these kinds of businesses in the B2B space.

The initial launch will focus on invoice payments and payroll solutions distributed to MYOB's existing customers.

In the U.S., we are expanding virtual card distribution through an exclusive partnership with Bill.com and Comdata.

Now this partnership integrates our virtual cards within Bill.com's automated accounts payable solution, and that should enable us to reach their 60,000 customers who, by the way, currently make over $60 billion in annual payments.

The addition of these virtual cards creates a safe, seamless and secure way for businesses to be paid and provides the data needed to help merchants easily match payments with receivables.

On the digital front, we are driving the adoption of new capabilities to improve the customer experience and enhance safety and security across all transaction types and channels.

So a few examples, in the U.S., contactless momentum continues to grow on both issuing and acceptance sides.

We have received commitments from issuers representing approximately 2/3 of our total U.S. consumer volume to issue contactless cards within the next 2 years.

Now this includes Citi, Capital One, KeyBank, Santander, HSBC and others.

We're also working with leading processors like FIS to bring contactless to smaller issuers and to credit unions.

On the acceptance side, large retailers like Target and CVS have announced that they will now accept contactless payments.

And in total today, over half of the U.S. card-present transactions are happening at contactless-enabled merchant locations.

And we continue to scale our merchant tokenization service with partners who have recurring bill pay models, including large telcos like AT&T and insurance companies such as Liberty Mutual.

And we are supporting merchants and acquirers via our Payment Gateway Services, which provides a white-labeled technology platform for payment processing for fraud prevention and for digital payment acceptance.

And JPMorgan Chase has selected Mastercard Gateway Services to enhance its global connectivity and support of alternative payments, as they continue to expand global digital payment solutions for their merchants.

And finally, we are partnering with digital players who offer payment capabilities through new devices and channels.

And for instance, in Poland, we just recently announced the strategic alliance with Blik, a mobile payment system provider, and this integrates a virtual tokenized Mastercard debit card, so Blik users can make contactless payments at any Mastercard acceptance location.

In South Africa, Bank Zero, which is a new bank with no physical branches and has app-only value prop, will be issuing debit Mastercard in 2019.

And in Taiwan, E. Sun Bank will launch a Mastercard co-brand with Pi Wallet, which is a leading mobile wallet provider in that country.

So with all of those updates, let me now turn the call over to Martina for an update on our financial results, operational metrics and going forward estimations of growth.

Martina?

Thanks, Ajay, and good morning, everyone.

Turning to Page 3, you will see that we delivered another very strong quarter to end the year.

Here are a few highlights on a currency-neutral basis, excluding special items related to certain legal and tax matters.

Net revenue grew 17%, in line with our expectations and closing out a great year of growth.

This includes a 5 ppt benefit from the new revenue recognition rules.

Excluding this benefit, revenue growth was 12%.

Operating income grew by 21%, including a 7 ppt benefit due to the new revenue recognition rules.

Net income was up 36%, reflecting strong operating results and the impact of the U.S. tax reform, which contributed approximately 12 ppt to this net income growth.

And EPS was $1.55, up by 40% year-over-year, with share repurchases contributing $0.03 per share.

During the quarter, we repurchased about $888 million worth of stock and an additional $773 million through January 30, 2019.

Let me turn to Page 4 where you can see the operational metrics for the fourth quarter.

Worldwide gross dollar volume, or GDV, growth was 14% on a local currency basis, up 1 ppt from last quarter.

We saw solid double-digit growth across all regions.

U.S. GDV grew 10%, up approximately 1 ppt from last quarter, with strength in consumer credit driven by the implementation of recent deal wins.

And outside of the U.S., volume growth was 16%, slightly up from last quarter.

Cross-border volume grew at 17% on a local currency basis, in line with expectations and driven by double-digit growth in all regions except for Latin America.

Q4 cross-border growth was slightly lower than the growth you saw in Q3, primarily due to the high volume of cryptocurrency wallet funding in Q4 of 2017.

Turning to Page 5. Switched transactions continued to show strong growth at 17% globally.

We saw healthy growth in switched transactions across all regions, led by Europe and the U.S. In addition, global cards growth was 7%, and globally, there are 2.5 billion Mastercard and Maestro-branded cards issued.

So now let's turn to Page 6 for highlights on a few of the revenue line items, again, described on a currency-neutral basis unless otherwise noted.

The 17% net revenue increase was primarily driven by strong volume and transaction growth as well as growth in our services offerings, partially offset by rebates and incentives.

The new revenue recognition rules contributed 5 ppt to the growth rate.

As I said before, excluding this, net revenue growth was 12%.

Looking quickly at the individual revenue line items.

So domestic assessments grew 18%, while worldwide GDV grew 14%.

And the difference is mainly due to the new revenue recognition rules with some pricing offset by mix.

Cross-border volume fees grew 16%, while cross-border volume grew 17%.

The 1 ppt difference is mainly due to higher intra-Europe growth.

Transaction processing fees grew 17%, in line with the 17% growth that we saw in switched transactions.

And finally, other revenues were particularly strong this quarter, up 19%, driven by increases in our Advisors and safety and security services.

Moving on to Page 7, you can see that on a currency-neutral basis and excluding special items, total operating expenses increased 14%, which includes a 2 ppt increase related to the new revenue recognition rules and acquisitions.

The remaining 12% was primarily related to the company's continued investments and strategic initiatives.

So turning to Slide 8, let me first discuss what we have seen through the first 4 weeks of January.

The numbers through January 28 are as follows: starting with switched volume, we saw global growth of 15%, similar to the fourth quarter.

In the U.S., our switched volume grew 12%, a sequential increase of 1 ppt with strength in both credit and debit.

Switched volume outside the U.S. grew 17%, and that's down 2 ppt from the fourth quarter, was still strong at slightly slower growth in Europe.

And globally, switched transaction growth was 17%, similar to the fourth quarter.

With respect to cross-border, our volumes grew 12% globally, down 5 ppt sequentially.

So let me put this 12% in perspective.

In 2019, we will face difficult year-over-year comps due to the strong cross-border growth we saw in 2018.

This is especially true for January as we are lapping significant cryptocurrency wallet funding and particularly strong European activity, in part due to the timing of certain holidays a year ago.

This has been further impacted by some poor weather conditions in Europe this year.

For the year, we expect cross-border growth will be about mid-teens, and this is contemplated in our thoughts for revenue growth for the year.

So now I'm going to switch gears a little bit and talk about our long-term performance objectives, and we will start here on Slide 9, how we did against our 2016 to 2018 performance objectives, which were set out on a currency-neutral basis, excluding special items and acquisitions made during the period and were built off an earnings base that excluded certain onetime tax benefits recognized in 2015.

So recall that we actually updated our estimates last February for the impact of the new revenue recognition rules and the U.S. tax reforms.

So as you can see here on the slide, we delivered very strong results over this period.

Net revenue grew at a CAGR of 15%, slightly ahead of our most recent estimate.

We achieved our annual margin commitment and delivered 28% compound annual EPS growth over the period, which includes a 3 percentage point benefit due to U.S. tax reform.

So now I'm turning to Slide 10 to lay out our new performance objectives, again, for a 3-year period, so from 2019 to 2021.

And as usual, all the numbers I'm going to give you will be on a currency-neutral basis, excluding future acquisitions and special items.

So based on the excellent performance over the last few years, we believe that we are very well positioned to continue to: one, grow our core consumer and commercial business through expanded solutions and market share growth, enhance our digital capabilities to enable more online and mobile transactions in a seamless and secure way and grow our overall acceptance footprint; two, advance our B2B capabilities with new solutions like the Mastercard B2B Hub and Mastercard Track.

At the same time, we will continue to lay the groundwork for future growth and faster payments by investment in infrastructure, applications and value-added services; and finally, further expand our capabilities in services such as safety and security solutions, data analytics and loyalty, which together we expect to grow faster than the core business.

As a result, we believe that we can deliver a low teens compound annual net revenue growth rate over the next 3 years.

This is based on a PCE growth of approximately 4% to 5% globally and, therefore, does not assume a significant economic downturn.

These objectives also exclude progress on our goal of entering the domestic payment market in China and reflect minimal net pricing over the period.

In terms of our operating margin objective, we continue to focus on top and bottom line growth by investing for the long term.

As you all know, we are not managing to a particular margin outcome.

But for those of you who would like to see some assurance that we continue to be prudent with our investments and expenses, we're keeping the minimum 50% annual operating margin threshold as part of our long-term performance objectives.

So consistent with the revenue profile I just described and based on the 2018 non-GAAP EPS number of $6.49, which excludes special charges, we expect a high teens earnings per share CAGR over the 2019 to 2021 period.

This assumes a tax rate of 19% to 20% and includes the impact of continued share repurchases.

So now let me give you a little bit more for our thoughts on 2019, and you can see that on Slide 11.

Again, I will describe those on a currency-neutral basis and exclude special items and future acquisitions.

We anticipate continued strong growth in our business in 2019 but have assumed a slight moderation in the overall economic environment from 2018.

So for net revenue, we expect to grow at a low teens rate.

In the first quarter, growth will be about 2 ppt lower than the annual estimate, primarily due to the difficult comps in the year ago quarter.

You may recall that in Q1 last year, we had a relatively strong cross-border and services revenues and relatively low rebates and incentives.

And as this normalizes through the year, as we implement business wins, we expect that the currency-neutral net revenue growth rate will increase in the balance of the year.

Foreign exchange is expected to be about a 2 ppt headwind to annual growth.

And given the current strength in the U.S. dollar, this will be a much larger headwind in the first quarter at about 5 ppt due to the profile of the year ago exchange rates.

On operating expenses, we expect growth for the year at the high end of the high single-digit range, as we continue to invest in expanding our digital solutions, safety and security products, data analytics, geographic expansion and platforms to address new payment flows.

In the first quarter, we also intend to fund the Mastercard Impact Fund at a similar level to what we contributed last year in Q1.

Based on current rate, we expect foreign exchange to have a 1 ppt tailwind to operating expenses for the year and a 2 ppt tailwind for the quarter.

From a sensitivity standpoint, a $0.01 change in the value of the U.S. dollar relative to the euro is expected to have just under a $50 million annual impact to revenue, considering both transactional and translational effects.

Similarly, the $0.01 change in the value of the U.S. dollar relative to the Brazilian real is expected to have an approximately $25 million annual impact to revenue.

We estimate the tax rates to be approximately 19% to 20% for the year.

So with that, let me turn the call back to Warren to begin our Q&A session.

Warren?

Thank you, Martina.

Heidi, we're now ready for the question-and-answer session.

(Operator Instructions) And your first question comes from the line of Craig Maurer with Autonomous Research.

Two questions for you.

First, versus what your main competitor said last night, your commentary on the global outlook seems far more sanguine.

Is this a reflection of generally Mastercard's progress in taking share globally and how that's informing your view of the year?

And secondly, to what degree should we expect progress in Vocalink this year and progress in real-time ACH payments across geographies?

Okay.

I think the first part is a combination of 2 or 3 things.

One of which is, yes, we have been growing share for the last few years, and that gives us some degree of a better leg to stand on.

But remember, we've also been diversifying our revenues with more legs to the revenue stool, so to say, which include services.

And as Martina told you, we expect services revenue to grow faster than our core payments revenue.

And so they do have a sense in our business of our numbers.

I cannot compare those to what competitors feel.

Remember, I'm talking about ours as the vision of our company, and I feel relatively good about those numbers.

The part about the world economy as a whole, I mean, look, it's based on assessments of travel and knowledge and research and data.

And my sense is that our worldwide economic situation is still in a relatively good place, even though we are reaching the 10th year of a global expansion.

And will that change over the next year or 2?

Who knows?

Will it change someday?

For sure.

Just I don't think that 2019 is a year in which you will see more than some moderation.

That's our current assumption over 2018.

That moderation is built into Martina's commentary about the way we think about our performance in 2019.

So that's the way we have put our parts together.

The part about Vocalink and about Fast ACH.

We are -- my sense is, first of all, in the U.K., Vocalink's position and business and its relationships with all the contracts we have has received good support and extension.

So that's a good thing.

In markets outside software has been implemented in the U.S. and is rolling out.

It's there in a number of markets, in Thailand and parts of the Nordics.

We believe that tons of opportunity is coming along for infrastructure in a number of countries.

Now once the RFP is won, it takes years to actually put those switches up on the ground.

There's also opportunities to partner with domestic switches to improve their capabilities, some of which you will see us talk about over the next 6 to 9 months.

But you should remember that to me, faster payments is not a strength, like digital payments and acceptance.

These are marathons, and we are willing to play the marathon.

Your next question comes from the line of Moshe Orenbuch with Crédit Suisse.

Maybe we could kind of talk about the outlook in the U.S. I mean, you alluded to some wins, and I think Cabela's was certainly one of them.

Are there others that we would see during 2019 that are going to be converted?

And how do you think about the underlying situation?

Is there likely an impact from what's going on with tax refunds in terms of either amounts or timing of consumer spending?

We don't really see a very significant change in terms of what we see in our numbers from the U.S. When you look at the GDV growth in the United States, in fact, we had a little bit of a higher GDV growth versus Q3 that is predominantly driven because of the conversions and the wins that we had.

We continue to see some of that for the rest of 2019.

And even when you slit -- when you split that out, we believe that the U.S. is actually still performing relatively well.

We also see, actually, relatively good cross-border trends from people traveling from the U.S. to other countries.

We saw a very, very small decline from other countries traveling into the U.S. given the stronger U.S. dollar, but it was a relatively small decline from growth rate.

So it's still growing, but it was just a little bit of a smaller growth rate.

So we feel relatively good.

As you heard what I said in my prepared remarks as well as what Ajay reinforced, 2019, in our numbers, we put a little bit of a moderation from a personal consumption expenditure in there.

Personal consumption expenditure worldwide last year was a little over 5%, like 5.3%, 5.4%.

And you can see that we've put a little bit of a lower number for our 2019 numbers also for our 3-year long-term performance outlook in there because, at some point in time, you do have to expect a bit of a downturn.

Your next question comes from the line of Ramsey El-Assal with Barclays.

You mentioned in guidance that your 3-year CAGR does not -- includes minimal pricing.

I guess, just very generally speaking, how would you characterize your ability to take price versus the last 3-year cycle or even prior to that?

So Ramsey, we really have not made any significant changes on the philosophy of how we do pricing.

Pricing is value added.

The customer has to feel that they would like to have that product and that service, and that, that product and that service brings value add to the company, to the customer.

And therefore, we are getting compensated for it.

And we really have not changed that in any shape or form.

And as part of that, of course, from time to time, we are able to make some price adjustments.

But believe me, these are not only up-price adjustments.

Some are also actually down-price adjustments.

And that's what we do from a list price point of view.

We do it in many countries around the world.

Some is regional pricing.

In addition to that, you have to factor in, of course, deal pricing.

And this is a competitive situation.

As you know, it gets more and more competitive as you're talking about larger clients.

Larger clients are more demanding than some various smaller clients.

And so you have to be responsive to that.

And so our comment about minimal pricing includes, really, both of those components, list price and the changes that we make from time to time as well as deal pricing.

And your next question comes from the line of Tien-Tsin Huang with JPMorgan.

I just want to expand on Craig and Ramsey's question.

And I'm looking at the next 3 years versus the past 3 years.

I'm curious if you see a difference in where the growth is actually coming from.

Does it -- it feels like you have more contribution from fintechs than the net new logo wins.

Is that fair?

And does your cycle guidance include any meaningful contribution from the new payment flows that you've been investing a bunch in?

Yes, Tien-Tsin, it includes all those.

I'd say, as Martina has said, clearly, we expect our diversified revenues from services from these new businesses to give us a higher growth rate than what we will get from our core payments over the coming 3 years.

And that's what you would expect, considering they're growing off: one, a smaller base; and two, we are really getting into our stride with some of those, which we've been investing in for 3, 4, 5 years.

There are others where the investment is 1 and 2 years old, and those probably will only show results, hopefully, maybe towards the latter part of this next 3-year cycle or maybe even in the next 3-year cycle after that.

And that's kind of the marathon comment that I was making in response to Craig.

So it's a mix of stuff where you should expect us to continue to grow our services revenue at a faster rate than our core payments revenue.

Within our core payments, clearly, you see growth and secular movement to electronic forms, of course, helps, and share wins help, and a broader and expanded platform of products helps.

So does acceptance and so does digitization.

So it's a mix of things that are built into growing the core, diversifying our client base.

But remember that building new services will give us more than the other 2 growth rates over the next 3 years.

Yes.

And just to add to that, on the B2B side, of course, that is also adding something to the bottom line, and that's where we're looking at it in 2 different parts: one, our commercial business that we have today, which is really our core commercial business, which is more card-based, that is continuing to grow.

Actually, we are seeing very good growth rates in that.

But in addition to that, all the B2B verticals that we are building out both from a domestic and from a cross-border point of view, such as the B2B Hub, such as Mastercard Track.

And again, as Ajay said, we think that by the end of the period, you are going to see some added numbers because of that.

That's why I was -- Tien-Tsin, I was talking about being excited about the MYOB business in Australia.

I was just in Australia last week, and it's a really interesting effort to take the B2B Hub outside of the U.S. So that's early days.

That's one of those that we're in the early stage of investing.

Your next question comes from the line of Lisa Ellis with MoffettNathanson.

My question is related to the longer-term trends around cross-border.

I was just looking back, and I mean, back in, I guess, fiscal '16, your overall cross-border volume growth on an FX-neutral basis was around 12%, more or less in line with purchase volumes.

But then it upticked in '17 to about 15%, upticked again in '18 to more like 18%.

And I know you said it's going to moderate a little bit but still be strong in '19.

Can you just -- putting aside the sort of quarterly gyrations, can you just talk about that evolution over a multiyear period?

Like what's driving that sustained outperformance?

I think Martina, you've mentioned before that you've kind of got an internal team focused on it.

Can you just give a little bit more color there to give us a sense for where that's headed over the longer term?

Yes.

I mean, we really have a multifaceted effort, really kind of like they're running this like a business in terms of what we're doing from a cross-border focused point of view.

And you're seeing the fruits of the labor really coming through, even though, I have to tell you, 2019, where we have a 19% cross-border growth, as we had said before, that was extraordinary, and you shouldn't expect that to repeat itself every year...

In 2018.

In 2018.

So in...

Yes.

We are already in '19 mentally, but we are still talking '18.

So 2019, yes, that's why I guided you guys more to around a mid-teens rate.

So all of the work that we have been doing, obviously, it all starts on what kind of portfolios you are going after, right, what kind of clients are you working with, what kind of portfolios are you getting from the clients.

But then, secondly, once you have the portfolios, you have to do very particular things in order to get cross-border growth going in terms of how people are using that particular product, how you make sure that people know that this is a fantastic product to use, that if you do certain things, you actually get the best foreign exchange rates, which Mastercard can give.

So there are many, many different facets, which allow us to work.

And by the way, this comes out of our Advisors group in a very big way with a client in terms of optimizing those kind of portfolios.

And we have a very honed skill in order to be able to do that.

In addition to that, when you look at the various verticals -- so what I talk mostly about right now is the consumer and the commercial portfolios where travelers are actually using the cards, where it's being used in the e-commerce space.

As you know, we have also focused, for many years now, really, on the virtual card product that is being used by a number of our clients also in the sense of a cross-border transaction.

And that has made a fairly significant difference over those years.

Lisa, the only thing I'd add to you is put an envelope around this and start with the thinking of cross-border as both determined by the level of travel and tourism on the one hand at a consumer level, combined with corporate travel and commercial travel at a commercial level, combined with cross-border e-commerce.

When you look at all 3 together, you get what the market is growing at in a secular way.

How much you extract from that secular growth is the effort that our team tries to put in using analytics and data and targeted offers, the types that Martina is referring to.

And then the third part of it is, if you have the right portfolios, you can get a little bit more out of it.

And I think we've got a little bit of all of those working, some as tailwinds, some as headwinds.

I'm pretty certain that most people and most companies in this space will try and do things of the type we are talking about.

This is not rocket science.

It's a question of disciplined execution.

And your next question comes from the line of James Friedman with Susquehanna.

It's Jamie.

I just want to ask, with regard to the cycle guidance, I realized that services is contemplated to grow in excess of the corporate average.

Is commercial writ large, including B2B, is that also contemplated to grow faster than corporate average?

Jamie, we're really not providing any individual guidance on this.

So most of the commercial portfolio is part of the core.

And as you just heard us say, the new stuff in B2B, we are building out as we speak.

So that's the B2B Hub, that is Mastercard Track and a number of things that we're doing on the cross-border space.

And your next question comes from the line of Eric Wasserstrom with UBS.

Two questions, please.

The first, Martina, just on the -- going back to the 3-year performance objectives, just intuitively, the delta between the low teens on revenue and the high teens on EPS, if we extrapolate the current level of share repurchases, it still implies something around 100 basis points of annual operating margin improvement.

So can you just maybe touch on that issue?

So listen, as I said in my prepared remarks, we only do not run the company by just expanding operating margin.

We run the company for top line growth and bottom line growth.

And depending on how you put it together, and you just said it, you can do math, I can do math.

By itself, it might imply an expansion in the operating margin, but I don't want you to take this to the bank because investments will continue to be made in a number of areas in order to continue to have the top line grow for many, many years to come.

So we have that flexibility to be able to do that.

Just in terms of management philosophy, this is very important.

We do not measure ourselves by expansion of operating margin.

We do not.

If you were to do that, you would think that we would be in an industry of a very mature type where expansion of margin is what I should be holding up as my management objective.

So I feel we're in a growth industry with enormous opportunity that I've been saying for the last decade, for the next decade.

In that industry, having the management disciplined to focus on expanding the franchise but doing it in a profitable way is the way we present our goals.

So the idea of sticking to a minimum operating margin -- and just for you all, every investor, sell and buy side, do realize that we are not throwing the company out of the water.

We are really working it hard and working every line of the P&L, but also to be honest to the way in which we operate every day and every minute of the day, which is grow the franchise and do it profitably as compared to find ways to expand the operating margin as the only management objective.

That's what we are trying to give you as a trending of the (inaudible).

Given to myself, I would even have dropped the idea of talking about the 50% operating margin because we are beyond it already.

I'm just doing it to reassure you that we are sensible and disciplined about managing profitably.

Got it.

Okay.

That's very clear.

And then, Ajay, if I could just follow up on one strategic initiative, the expansion of the B2B Hub into Australia.

Is that targeting a similar sort of middle-market corporate profile?

And can you give us a sense of how you're defining the TAM opportunity?

Yes.

No, it's targeting small and middle-market, not just middle-market.

In fact, MYOB is one of the most interesting providers of local, on-the-ground expertise in providing payments and supply enablement and reconciliation services to both small and middle-market corporate clients in Australia.

And this partnership with them that has been a year in the making is actually very interesting for us because it is validation of the idea of the B2B Hub that originated in the United States has been possible in another market.

And I want to take it to more markets as the next few years go by.

That's the objective.

But right now, in Australia, we're just focused on executing it well to get to the 60,000 customers that MYOB has.

As I've said, we've got a fairly large volume of revenue and payment size going through them.

It kind of gives you risk assessment, supply enablement, payments capability, reconciliation of payments versus what's due in the bill.

It gives you all that capability through this relationship with MYOB.

And your next question comes from the line of Darrin Peller with Wolfe Research.

Quick question on e-com growth, when you think about -- I'm sorry, on overall cross-border growth.

I mean, in terms of the deceleration, can you just quickly touch on the components?

Was e-com holding up?

Was the physical point-of-sale?

And then what kind of contribution from Maestro?

And Ajay, just a higher-level question, when you think about the backdrop of an uncertain macro, can we revisit your willingness and ability to manage expenses, if it were necessary?

And how much are you able to -- could you see a low single-digit expense growth if the economy really turned?

I'm just curious on your thoughts.

Okay.

First of all, on cross-border.

So let me give you a little bit more detail.

2018, Ajay said, was 19% for the whole year.

The fourth quarter of 2018 was 17%.

And in part was obviously because of the cryptocurrency that we had in the year ago quarter, and then there are a few ups and downs, quite frankly.

Just to give you a little bit more detail on this one.

So for instance, when you look at Brazil, when you look at Argentina, of course, with the devaluation of the currency, there was a bit of an impact on it.

In [season], we had a deal lapping.

In Canada, because of the stronger U.S. dollar, you have that a little bit going down.

But that all was offset pretty much by a terrific performance in China and in Japan, and that's why you're not seeing a lot of variations in the Q4 numbers.

And then when you go to January, 28 days, the 28-day number, down to the 12%, it -- pretty much all of these factors were the same factors other than the ones that are called out, which were on top of it, right?

The year ago quarter had particularly large European cross-border in it, and part of it was because of how the French take vacation, by the way.

And then this year, we were hit by the snowstorm that started in -- at the end of the first week of January...

I just want you to know, she's married to a Frenchman, just to be clear.

I don't want to start a political circumstance, but she is married to a Frenchman.

So that is a little bit -- was it -- was a hit on that one.

And we called out the cryptocurrency on that one already.

So there is really nothing that serious going on, and that's why we have the confidence for the rest of the year.

On e-com, you asked a particular question on that.

Cross-border e-com, we saw the growth rate just going down a tad.

To your question on expenses, I'm not going to tell you what number we could come to because I don't know until we are dealing with it again.

We -- just as a fact, in the 9 and 10 -- 2009 and '10 period, you should know that if we see a sustained economic downturn, then is when we'd like to take a look at some of the expenses.

My desire to play with expenses only works in a sustained downturn.

If it's a quarter here or a quarter there, I'd be loathe to stop investing in the right things, whether it's new product development or it's service capability or it's even the investment in the brand.

But we've got a number of levers in our expenses, some of which have a shorter-term turnaround, some of which have a longer-term impact.

And you should -- if you go back and look at our behavior around expenses some years ago, we're very committed to be managing our way through it.

As you can imagine, when we make budgets for the year, we go through upside and downside scenarios.

And given all the chatter in the environment around 2019, we've been even more careful this year in our downside scenario and our thinking around it.

Yes.

And I think I certainly say it many times, we don't leave this up just to scenarios.

We actually operationalize these scenarios.

So if we ever see that something is happening in particular in the economic environment and we need to course correct from an expense point of view, all of our business units already know today what they would have to do, and it will take them very little time to revisit the plan and to execute the way that we should be executing for you guys.

And your next question comes from the line of Jim Schneider with Goldman Sachs.

I was wondering if you could maybe make just one question and one clarification.

First of all, you talked about the various drivers of the longer-term outlook.

But can you maybe quantify for us or dimensionalize the size of the B2B opportunities, especially for accounts payable and receivable?

And how big that could potentially be towards the end of your forecast outlook period?

And then maybe as a clarification, talk about exactly how much of a PCE slowdown you're expecting in 2019 relative to the broader longer outlook period.

Jim, it really sounds like we should be helping you with your modeling questions.

So listen, I'm not going to give you a lot more on B2B.

You're going to have to reflect back to what we talked about the overall B2B opportunity, which is $120 trillion opportunity, and what we said is that we are going after very particular slices of that B2B opportunity.

So we're not going to run after all of the $120 trillion.

And some of the things that we're already investing in like the B2B Hub, like Track, like what you're hearing from us from a cross-border point of view, actually attacking those kinds of opportunities.

And of course, over the next 3 to 5 to 7 years, we are going to expect that some of that will manifest itself in revenue growth.

For your 2019 question, really, what we did is we put it in a moderate downturn.

So it's something that we can digest within the thoughts that I gave you from a low teens revenue number for 2019.

Your next question comes from the line of Harshita Rawat with Bernstein.

I want to ask about emerging markets.

Now emerging markets such as India are likely a decent portion of what you can see with your business addressable market.

And on one hand, these markets are greenfield with a lot of growth opportunities.

On the other hand, the competitive landscape is very different, and you also have some accelerating government intervention and expansion by Chinese giants.

So in that context, can you talk about some of the steps you're taking to grow these markets and mitigate the risk of share losses and the risk of being disadvantaged by government nationalism?

The emerging markets are certainly attractive for the next decade or 2. I would tell you that of the total revenue that they comprise today of our business, you would be surprised at how small they are in the totality.

So I think you've got to just think through, like I said even in my remarks in China, we really don't play in the domestic market as of now.

And so the impact on us directly is relatively small.

India is an interesting market as well.

It's growing well.

But at the end of the day, the total impact to our revenue is still relatively small.

That does not mean that a decade from now, they won't be more attractive markets.

They're growing and they're attractive.

Their dynamics are different, as you said.

We are trying to play on multiple levels.

The first is, we believe that our attitude towards the emerging markets, be it Asia or Africa or Latin America or the Middle East, is that we are there because the governments want us there.

And so we go there with respect to that government and its sovereignty, and we try and work with them in a way that shows that we bring value to their economy to convert from cash to electronic payments, to get safer transactions with better data being used for safety and services of that type as well as to get simple, seamless experiences, expand acceptance, improve the tax net, do things that governments find to be useful, and also distribute services to the bottom of the pyramid, so financial inclusion.

That's why you find us working so hard on expanding inclusive growth around the world.

That's why we made that commitment of 500 million people to be reached by 2020.

We're now at 360-plus million and counting.

We just got 20 million more in Mexico that I've talked about.

So you can see us approaching it, first, from a societal and government level with respect for what they need for their citizenry.

We do request as far as possible that we get a level playing field to be able to compete and bring the best of quality and the best of capability so the local consumer can win.

If after that, if the government chooses to bias the system in some way towards the local player versus another player, that's their decision.

They're entitled to make a decision in their market, playing by their rules or whatever they're signed up for global engagement.

That's up to that country.

If their rules require them to open their market, they should.

If their rules allow them to operate in a closed market, they should.

It's their decision.

That's the first part.

Then the rest of it is the playable field for everyone else, best quality product, no differentiation on what's offered there versus the developed market, best quality of pricing, best capability of people being attached to it, global technology, global data, global cyber security standards, one technology release around the world.

So if you learn something in one country it's available to every emerging market.

Trying doing that market by market, it's very expensive.

That's what we are trying to do, just tackling it piece by piece, working on acceptance right from various points.

And look at India.

Acceptance in India has grown to more than 5 million points from 1 million a couple of years ago, not just because of our efforts but also because of the government's efforts to make it happen, or in QR acceptance in India.

So India still has a huge opportunity.

That's 60 million merchants.

We have reached 5 million.

There's 55 million more to go.

So my concern is this, and I'm going to shut up after this, on this topic about our share from within a small pie is electronic payments.

My interest is more in growing the pie of electronic payments in the emerging markets.

I think that opportunity is much more liberating and much more thoughtful than trying to argue about your share in a small pie.

We've come to the end of our allotted time.

So Ajay, any final comments?

Sure.

Thank you all for your questions.

And a few closing thoughts.

We had a very strong end to the year, bringing 2018 to a record close.

We are executing against our strategy.

We're growing our core products and diversifying our customer base, and we are building new capabilities in so many sectors and services.

We continue to drive solid deal momentum.

And I think Martina and I are very pleased to our plan and the company's new performance objective.

We feel we have positioned ourselves well with our investments and our execution to drive continued strong growth in the future.

So with that, thank you for your continuing support of all of us in the company, and thank you for joining us today.

And with that, this concludes today's conference call.

You may now disconnect.