萬事達 (MA) 2019 Q1 法說會逐字稿

Good morning.

My name is Tasha, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Mastercard Q1 2019 Earnings Conference Call.

(Operator Instructions)

Thank you.

I'd now like to turn the call over to your host, Warren Kneeshaw, Head of Investor Relations.

Please go ahead.

Thank you, Tasha.

Good morning, everyone, and thank you for joining us for our first quarter 2019 earnings call.

With me today are Ajay Banga, our President and Chief Executive Officer; and Sachin Mehra, our Chief Financial Officer.

Following comments from Ajay 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 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 the growth rates we provide for switched volume, switched transactions and cross-border volume have been adjusted to normalize for the effects of differing switching days between periods.

These adjustments have been made in current and prior quarters.

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

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

We do not normalize GDV growth rates.

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 will now turn the call over to our President and Chief Executive Officer, Ajay Banga.

Thank you, Warren, and good morning, everybody.

We are off to a solid start this year, revenues up 13%; EPS, up 24% versus the year ago, as Warren said, on a currency-neutral basis and excluding special items.

I think these results reflect our strong operational focus and our continued growth across each of our regions.

And at the same time, we are continuing to invest in the business for the long term as you've probably noticed with some of our recent product and acquisition-related announcements.

Let me start with the macroeconomic environment as usual.

You may recall that, last quarter, we said that we expected solid overall growth to continue in 2019 with some moderation, and our view has not changed from that.

That said, we're still monitoring a number of items, such as ongoing trade negotiations and other economic and political factors that could affect growth over the medium to longer term.

U.S. economic growth remains strong: low unemployment, healthy consumer confidence.

Retail sales grew 3.5% versus a year ago ex auto, ex gas, according to our SpendingPulse estimates.

And that reflects some moderation as expected as well as some impact from the shift in the timing of Easter this year.

So in Europe, we continue to see moderate growth.

Consumer confidence remains mixed, with declines in places like the U.K., Ireland and the Netherlands.

But despite the uncertainty surrounding Brexit, U.K. retail spending remains healthy, again, according to what we see in SpendingPulse.

Asia Pacific has been impacted by trade policy instability.

We've continued to monitor the strength of the Chinese economy.

But having said that, we are seeing modest GDP growth in the region overall, and that's kind of underpinned by favorable monetary policies and generally stable labor market conditions.

In Latin America, the outlook is mixed.

There's positive signs in Brazil and Chile, and they're tempered by some weakness in Mexico.

Similarly, in the Middle East and Africa region, we are seeing healthy growth in countries such as Egypt, with some softness in the oil-producing markets.

Meanwhile, our business continues to drive healthy double-digit volume and transaction growth across most of our markets by successfully executing against our strategy.

What I'm going to do is give you a few examples of how we are growing our core products, diversifying our customer base and building new areas for our business.

Let me start with growing our core products, where, I believe, we've continued to make good progress in providing people with simple and safe ways to pay with credit, debit, prepaid and commercial products.

And it's not a card.

The physical card is just 1 form factor, as you've heard me say in the past.

We are equally focused on seamlessly delivering our products digitally.

Earlier this month, Apple announced the Apple Card with Mastercard and Goldman Sachs.

And available this summer, this is a credit product that's designed for the iPhone that leverages Mastercard's tokenization technology, our fraud tools and our chargeback KPIs.

Customers can immediately access the digital version of the card in their Apple Wallet.

They can also get a physical companion card.

With attractive rewards and extensive security features, the user experience is frictionless.

In addition, we look forward to collaborating further with Goldman's consumer business markets to bring new products and services to market over time.

Also pleased to be the payment center for T-Mobile's new mobile-first checking account, T-Mobile MONEY, which consumers can open and manage online or with an app on their smartphones, and they can withdraw funds using a Mastercard debit card.

Turning to markets outside of the U.S. I think we continue to make significant progress.

We are pleased to announce the expansion of our partnership with Santander in Brazil to expand our share of the credit, debit and commercial portfolios of the fast-growing customer.

We also extended our long-term agreement with Rogers Bank, which is a key strategic partner for us in Canada, further expanding the services we provide on their current portfolios.

And we are advancing our efforts to increase market share in Europe, with BNP Paribas in France flipping more than 4 million credit cards in a long-term deal that will be accompanied by a full suite of services, including spending controls and alerts as well as Identity Check mobile security features.

In addition, we have some great examples of customers with closed-loop systems who continue to see value in open-loop Mastercard cards because of broader acceptance and digital capabilities.

One of these, an example, is credit system in Brazil, which is converting 7 million private-label cards to Mastercard contactless co-branded cards to open up international acceptance to their cardholders.

Now on the commercial side, we are pleased to be Citibank's exclusive network for its cross-border B2B virtual card program in China.

And the initial focus there is on enabling Chinese online travel agencies to make payments to hotels, hotel aggregators and airlines outside of China.

And that same win, to help our customers provide greater transparency and certainty in cross-border payments, as you know, we have announced an agreement to acquire Transfast, a global cross-border account-to-account money transfer network.

We look forward to complementing and enhancing our solutions with their network reach, with their strong compliance capabilities, flexible technology and some very robust foreign exchange tools.

By the way, we've currently worked with Transfast in support of our P2P and B2B capabilities through Mastercard Send.

And while on Mastercard Send, just to give you a quick update, we continue to see healthy growth, and we are continuing to develop a number of different use cases.

Send currently powers 7 of the major mobile P2P programs in the United States, and we are working to grow our customer base.

On the cross-border front, a number of our issuers are leveraging Send to provide faster and more cost-effective and transparent cross-border payments to their customers.

Bank of Montreal is the latest to announce that it will implement Send for its Canadian business and commercial banking clients.

And the initial focus there is on bank account transfers, and there are additional plans for payments to mobile wallets and cards internationally.

So now, from growing the core, turning to the second pillar of our strategy.

With the work we are doing on diversifying our customer base and strengthening our footprint in some of these new geographies, we are building relationships with merchants, processors, digital players and a number of other partners to help drive their businesses forward.

So I'm going to highlight a few specific examples on the co-brand area, including our renewal with Target in the U.S., a new program with Japan Airlines and with Falabella, which is the largest retailer in Chile.

We also entered into an agreement with MercadoLibre, the largest e-commerce marketplace in Latin America, to make their platform safer and more convenient, with tokenization, seamless authentication tools and contactless prepaid card programs across Brazil, Argentina and Mexico.

And while doing all this, we try to find ways all the time to look for methods to improve our local presence, particularly in areas where there is low electronic payment penetration.

That's why our partnerships with and the investments in Network International, which is a preeminent local processor in the Middle East and Africa region; and also Jumia, an e-commerce platform spanning 14 countries in Africa, we think these will accelerate our efforts to deliver a sustained shift from cash and checks to electronic payments in these markets.

Mastercard will be Network International's preferred partner for processing, acceptance and value-added services with the safety and security and data analytics.

And our relationship with Jumia will include co-brand card issuance for consumers as well as commercial payments on their platform and also the use of our payments gateway.

And finally, the third pillar of our strategy is building new areas of our business.

And we do this in a way that leverages the core and differentiates our offerings, in particular, with services and new payment flows.

So a few examples for you.

Safety and security products remain a key area of focus.

We recently announced the acquisition of Ethoca, a global e-commerce fraud and dispute management network.

What this does is to enable the sharing of intelligence between merchants and issuers in over 40 countries.

Whenever a fraudulent or disputed transaction is identified, near-real-time information is sent to the merchant so they can stop delivery and refund the cardholder and avoid the chargeback process.

And as a result, both merchants and issuers benefit from reduced costs.

With more than 5,000 merchants, including top e-commerce brands, such as Google and Walmart, and over 4,000 issuers already participating, we look forward to continuing to scale Ethoca's network.

Now we're also looking for ways to help our partners improve their customers' user experiences.

That's why we acquired Vyze, a platform that connects merchants with multiple lenders; opens up a wide range of financing options, including installments, to consumers online and in store; and complements Mastercard's existing card and ACH-based solutions.

Vyze's merchant customers, like Home Depot, Microsoft, Samsung, for them, multiple lenders help to increase customer financing approval rates, decrease card abandonment and, ultimately, therefore increase sales.

At the same time, they benefit lenders by providing access to new customers through these channels.

And just to be clear, we are not changing our model in taking credit risk.

We are merely the platform provider here, connecting retailers and multiple lenders.

Now with respect to our processing services, pleased that Citibank will be using our payments gateway to support digital commerce enablement for their existing institutional clients.

Now our gateway connection to numerous acquirers and digital wallets will provide a single, consolidated payments view for these large merchants who have a relationship with Citibank and make it simpler for them to accept payments on a global scale.

And moving on to the work we are doing to capture new payment flows beyond traditional card rails.

We have, this quarter, reached a number of significant milestones in expanding our real-time account-to-account capabilities with our Vocalink assets.

First, you must have heard recently that we have been chosen to enhance the InstaPay real-time retail payment system in the Philippines.

Now this includes operating the infrastructure for and providing anti-money laundering tools to an institution call BancNet, which is the national clearing switch in the Philippines.

We will do this through a regional payments hub in Asia Pacific using leading-edge ISO 20022 messaging, which streamlines communications and provides enhanced transaction data.

Second, we are licensing our real-time payment software to the Saudi Arabian Monetary Authority, SAMA, to upgrade their system, providing similar capabilities to what we already have in place in the United States, Ireland and Singapore.

These wins build upon the announcement we made late last year about our partnership in Peru to modernize and operate the Peruvian electronic payments infrastructure.

And we remain involved in a number of similar RFPs around the globe.

So as you can see, we're making real progress in expanding our geographic footprint for real-time payments in Asia, in the Middle East and Latin America, while adding value to governments and central banks to help their citizens and their economies.

So before I turn the call over to Sachin, I'd like to thank Martina, who's not on this call, who is probably on a beach somewhere, for both her years of dedication to Mastercard's growth but also for ensuring that we're left in good hands upon her retirement with a very well-prepared and chosen successor.

And now it's my pleasure to introduce Sachin Mehra, our Chief Financial Officer.

Sachin?

Thanks, Ajay, and good morning, everyone.

First, I would like to say that I am very excited about the opportunity ahead, and I look forward to working with each of you and to meeting those of you I have not met yet.

Turning to Page 3, we had a solid start to the year.

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

Net revenue grew 13%, driven by solid momentum in our core, and was slightly ahead of our expectations due to services growth.

Operating income grew by 20%, and net income was up 21%, reflecting our strong operating performance.

EPS was $1.78, up 24% year-over-year, with share repurchases contributing $0.04 per share.

During the quarter, we repurchased $1.8 billion worth of stock and an additional $467 million through April 25, 2019.

So now let's turn to Page 4, where you can see the operational metrics for the first quarter.

Just as a reminder, as Warren said, we don't normalize GDV growth rates.

Worldwide gross dollar volume, or GDV, growth was 12% on a local currency basis, down 2 ppt from last quarter, in part, due to the impact of the differing number of processing days between periods as well as some other factors, such as the delay in the timing of Easter this year.

This was much as expected.

U.S. GDV grew 8%, down approximately 2 ppt from last quarter, with credit and debit growth of 9% and 6%, respectively.

Outside of the U.S., volume growth was 13%, down 3 ppt from last quarter.

Cross-border volume grew at 13% on a local currency basis, in line with expectations and driven by double-digit growth in several regions.

This Q1 growth was down sequentially, due primarily to difficult year ago comps.

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, card growth was 7%.

Globally, there are 2.5 billion Mastercard and Maestro-branded cards issued.

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 13% net revenue increase was primarily driven by strong transaction and volume growth as well as growth in our services offerings, partially offset by rebates and incentives.

Looking quickly at the individual line items.

Domestic assessments grew 16%, while worldwide GDV grew 12%.

The difference is mainly due to pricing and the differing number of processing days between periods, partially offset by mix.

Cross-border volume fees grew 15% while cross-border volume grew 13%.

The 2 ppt difference is mainly driven by pricing, partially offset by mix.

Transaction processing fees grew 16%, in line with the 17% growth in switched transactions.

Finally, other revenues were up 14%, driven by growth in our cyber and intelligence and data and services solutions.

Moving to Page 7. You can see that, on a currency-neutral basis and excluding special items, total operating expenses increased 5%, primarily related to the company's continued investments in strategic initiatives.

This was lower than expected due to the timing of certain marketing initiatives, which we now expect will mostly occur in the second quarter.

Turning to Slide 8. Let's discuss what we've seen through the first 3 weeks of April, where all of our drivers are up versus what we saw in Q1.

Please remember that year-over-year comparisons across all drivers in April are aided by the timing of when Easter fell this year, and that 3 weeks does not make a quarter.

The numbers through April 21 are as follows: Starting with switched volume, we saw global growth of 18%, an increase of 4 ppt to the first quarter.

In the U.S., our switched volume grew 15%, a sequential increase of 5 ppt, with strength in both credit and debit.

Switched volume outside the U.S. grew 21%, up 4 ppt from the first quarter, primarily driven by Europe.

Globally, switched transaction growth was 20%, a sequential increase of 3 ppt, primarily driven by Europe and the U.S. With respect to cross-border, our volumes grew 17% globally, a sequential increase of 4 ppt, in part, due to the timing of Easter as well as the tougher year ago comps we saw in Q1.

This was consistent with our expectations.

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

Turning to our thoughts for the year that I will describe on a currency-neutral basis excluding special items and acquisitions.

I will separately comment on acquisitions in a moment.

Overall, not much has changed.

We had a solid first quarter, and our view on the economy is broadly similar, with continued overall growth albeit with some moderation versus 2018.

In terms of net revenue, we continue to expect growth at a low-teens rate for the year, with second quarter growth consistent with or slightly better than what we saw in Q1.

We expect FX to be a 2 ppt headwind to revenue for the year and about a 3 ppt headwind for the quarter.

On operating expenses, we are still planning to grow at a high end of high single-digits rate for the year.

We expect Q2 operating expenses to grow at approximately twice the annual growth rate due to the lapping of a significant hedging gain a year ago and increased marketing spend.

Year-over-year, FX will be a tailwind to OpEx of about 1 ppt for both the year and Q2.

In terms of the tax rate, we now expect to be closer to the bottom end of the 19% to 20% range for the year due to the higher-than-anticipated discrete tax benefits we saw in Q1.

Now moving on to the impact of acquisitions.

As Ajay mentioned, we announced a number of acquisitions that either have closed or are expected to close this year.

We estimate they will be about $0.06 to $0.08 dilutive for the year, with the impact starting in Q2 and building progressively throughout the year, driven primarily by purchase accounting and integration-related costs.

One further item.

As a reminder, as of January 2018, certain equity investments are required to be marked-to-market based on observable price movements.

We have been following this new standard, and it has had a relatively minor impact on our results since inception.

In April, we made investments in 2 companies, as Ajay mentioned, that have since become public.

Valuation volatility will therefore increase as a result of the unpredictable nature of public equity markets.

Accordingly, starting in Q2, we will be updating our non-GAAP methodology to exclude the impact of fair market value gains and losses on our equity investments.

We are excluding these items as we believe this will facilitate a better understanding of our operating performance and provide a more meaningful comparison of our results between periods.

Please note that our long-term performance objectives and our thoughts for 2019 exclude such gains or losses.

We will provide you full visibility to the impact of the fair market value gains and losses on our equity investments as we do with the impact of special items and foreign currency, which we will continue to exclude from our non-GAAP measures.

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

Thanks, Sachin.

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

(Operator Instructions) And our first question comes from the line of Sanjay Sakhrani from KBW.

I guess I had a question unrelated to some of the stuff you talked about, which was TSB Bank's decision to stick with Visa after committing to you guys.

Could you just talk about the observations there?

Sure.

TSB has taken with us some credit and is currently staying with Visa on debit, and the reason is very simple.

As you know, they've had to focus their attention on their technology circumstances when they were doing a migration of their technology platform.

And the bank is very focused on getting that done right and looking after their customers and meeting their responsibilities on that front.

In the midst of that, to add the migration of a debit book would have added unnecessary risk as well as customer reputational issues to them.

And therefore, what they've thought about is, "Hold on, and we'll see later." And I think that's the right thing to do if I was in their place, and I actually respect their decision.

Our next question comes from the line of Tien-Tsin Huang from JPMorgan.

Can you hear me?

Yes.

Just wanted to make sure you can hear me.

Just maybe a couple of quick ones.

Just on the modernizing payment systems in the Philippines, in Peru and et cetera, just curious, once you're beyond the build period, what's the run opportunity for Mastercard?

Do you become an intermediary?

Or are you in an advantaged position to power these intermediaries?

Just trying to understand what happens beyond the build phase.

And then maybe for Sachin, just the incentive line with some of these fintech deals like at BOCOM and then TSB, as Sanjay asked, any considerations throughout the next 2 or 3 quarters?

So Sachin will answer that incentive, and then, I will give you the answer later on the Philippines.

Go ahead, Sachin.

Okay.

So on your question as it relates to incentives, our incentives continue to be very much in line with our expectations.

We expect for deal activity to pick up in Q2, but other than that, not much in the nature of changes as it relates to our expectations on incentives.

And Tien-Tsin, on the ACH platforms, so what we're trying to do, it depends on what kind of RFP and what kind of deal is constructed.

In the Philippines and Peru, the deal is a bit more complete in the form of having infrastructure operation also included in it.

In other words, it could be only the software as it is in Saudi or in the clearinghouse in the United States or in Singapore's case.

If it's only software, there, it becomes a different ability to intervene in the payment flow.

So if it's only software, what we are trying to do is to build apps which work off that software, but also to build value-added data analytics tools like the anti-money laundering tools and so on, which we have built in other markets, and so we can bring them to these countries where there's software.

Also, to provide scheme-related thinking around chargebacks, disputes, fraud management, that kind of stuff.

Sorry, that's the software idea, whereas infrastructure, it's a little different.

It'll be a little bit more like the U.K. in some ways, where we actually run the basic infrastructure, and then we can build products and scheme rules on top of that as well.

So these are 2 slightly divergent paths, and it depends on what each country wants for their local instant or fast ACH payment system as these RFPs sort of open up over the next few years.

What I'm -- what I was trying to say today was that this has been some time coming because these RFP processes are slower than the usual, but they get done, and we just -- this quarter, there were 2. There's others as well.

And there's more RFPs in the process that we are deeply in negotiation on.

Our next question comes from the line of David Togut from Evercore ISI.

What impact do you see from the 2 big mergers just recently announced, Fiserv-First Data and then FIS-WorldPay, on Mastercard's growth opportunities?

And then as a related question, both companies or in both merger situations, they've called out growth opportunities in B2B.

I'm curious how you can work with them in addressing B2B.

Sure, David.

Look, we work very closely with issuer processors in many markets and especially in the United States, which has a more fragmented payments ecosystem than a number of other markets.

And I sort of fully expect to continue to partner with these folks.

We've talked to all them, as you can imagine, including me personally.

The M&A doesn't change that.

We've got teams working with them to determine how best to collaborate to make them win while also getting our work done.

Remember, they play a really important part in the ecosystem for banks and credit unions of all sizes, and mostly they help to distribute our products and services.

And so I kind of feel like there's lots of opportunity there, both in the consumer payments side but also in the B2B side.

But it's just too early to demand any of them done.

They're both very busy with their own transactions, as you can imagine, and they need to get that done well because that's their first commitment.

And then we can really get deeply involved in what else we could do together with the merged entities.

Meanwhile, individual partnerships with the separate entities continue, okay?

Just to be clear, it's the merged entities that have a whole new game, but the merger has got to finish before you can do that.

Our next question comes from the line of Bob Napoli from William Blair.

I mean, Mastercard has been very active on the M&A front.

And I was just hoping, Ajay, to get a little more clarity on additional potential areas that you're looking to build up through the M&A.

And is there still a very healthy pipeline?

Maybe an update on the strategy, the M&A strategy and pipeline.

Yes, yes, yes.

I mean I think Sachin's sort of baptism by fire on this is the fact that, in his first quarter, we delivered a couple of extra M&A deals to him, just to keep him happy and make him realize that he needs to do a little bit of work, and it won't be an easy thing to follow in Martina's somewhat large shoes.

So I hope she's not listening, for God's sake.

But the -- your question's a much deeper one.

Here's the deal.

We have not changed our M&A strategy over the years that I've been talking about this.

We are trying to use both organic and inorganic ways to grow in the spaces that we think give us possible growth areas for the next decade or 2. Hence, safety and security; hence, data analytics and information systems; hence, digital identity systems; hence, B2B and cross-border payments, all of these AI, all of these are intertwined in the idea of building out new capabilities and new services, more or less, pretty neatly placed in the third block of our strategy, which is in the grow, diversify and build.

Most of these are in the build space.

And that's how we have built these services organically and inorganically to, now, 26%, 27% of our revenue.

That's the objective.

At the same time, I'm also trying to build the capability to be available and present across all rails of payment, not just card but also non-card rails.

And hence, the Vocalink acquisition and the acquisitions that are going on in B2B spaces to deliver sort of usage results against those.

So that's what's going on.

Nothing's changed in that.

You will find us active participants in these spaces in loyalty and rewards and those kinds of places over the next few periods as well.

We have a relatively active pipeline.

I mean, Sachin could tell you that his team has -- I don't know, Sachin, during a year, 20 to 30 such deals?

Yes, that would be correct, 20 to 30 such deals which would be actively due-diligenced.

The list of deals we would actually scope out would be much broader than that.

And just to reiterate what Ajay said, it all kind of starts with the strategy, and then we kind of figured out from there on what's the best way to achieve the strategy between build, buy and partner.

And so the M&A component is 1 big piece of that but not the only one.

Some of these deals, actually, a number of them, emanate from us partnering with these people on a commercial deal first.

Transfast is an example of that recently.

But this has been the case in the past as well.

With a number of the transactions we have done, we end up -- like Brighterion, we ended up being a constructive partner of theirs, having a commercial relationship, and then it changes over time into the possibility of an acquisition.

So we are trying to use a mix of these outright acquisitions as well as minority stakes as well as, in the case of fintechs and start-ups, a series of early investments as a way of making the company have a layer of its business exposed to all that's new and exciting, which we don't believe we have a full, always 100% right to be the only ones thinking of new ideas.

And so this is a good way to get external thinking, external quality of people, get external -- maybe some product quality or some distribution strength that we may not have.

So Ethoca, for example, has both product software but also distribution to 4,000, 5,000 merchants and 4,000 issuers whom they are tied up with.

Transfast has compliance capabilities, FX capabilities but also distribution in a number of countries and licenses to operate in a number of those countries.

So different things come together in how we make the transaction, but the pipeline's robust, and if you can do 1 or 2 transactions a year out of the 20 or 30 we look at, that would be a good year.

It just happened that in this quarter, a couple of extra ones came through.

Our next question comes from the line of Tom McCrohan from Mizuho.

Can you remind us how much of your cross-border volume occurs in the first quarter?

I think there's some seasonality.

I just want to confirm that.

Tom, I just want to make sure I heard that question correctly.

How much of our cross-border volume?

What was your question?

Yes.

Occurs in the first quarter.

I think you have -- I think that's one of the weaker quarters.

I just want to confirm the seasonality.

Yes.

From a seasonality standpoint, what I'd tell you is Q3 typically sees a little bit more in the nature of volume on cross-border.

But for the most part, in the remaining quarters, it's pretty stable.

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

I had a 2-part question on some regulatory items.

First is on the secure customer authentication rule coming out later in Europe this year, whether you think that will be any type of -- constitute any type of pressure on European volumes later on in the year.

And then second is a more broader question about data localization requirements and having to build out redundant processing capabilities in different national jurisdictions, over time, whether that also constitutes anything like a headwind to operating leverage or any type of incremental pressure.

If you can comment on those 2 things, I'd appreciate it.

Sure.

So the secure authentication rules, as you can imagine, we've been kind of looking at the entire PSD2 implications for both us, merchants and banks in the system as well as the new entrants, PSPs and AISPs who are entering into the European payment system.

I actually think that secure customer authentication is an opportunity for a company like ours that has the capabilities, skills and tool set to provide this to all the players there.

Merchants will need it.

Banks will need it.

These new PSPs and AISPs will need to connect properly into the system to ensure that the entire payments ecosystem is kept safe and secure.

So for us, I see this, actually, as an opportunity to deliver new value-added services.

And in past meetings, we've talked about how that's one of the planks of what we are building out as part of our PSD2 strategy.

I'm sure other networks are, too.

This is not about trying to be competitively advantaged.

This is about trying to do the right thing for the payments ecosystem.

The second part, the part about data localization, that's an interesting question.

It came up a couple of earnings calls ago as well.

And mostly, that tend to do with India in that case.

And I'd say around the world, in some cases, data localization, like in India, has got real policy ramifications.

In others, countries that they engage with us realize that data localization may not be to their benefit.

And let me explain that for a second first.

The challenge with data localization is actually not the expense, which is what your question comes from, because that's just a question of putting up some more servers and storing the data on soil.

And to be honest with you, in an expense base of our type, putting a few more servers on soil in a country even as large as India with the volumes of an India is interesting, but it's not really a big deal.

It's -- the bigger deal is the fact that by doing so, you end up with data that loses this predictive power compared to the wealth of data that generates much higher predictive power when it's combined across many more countries, many more types of transactions, many more types of consumers, many more types of customers.

If you talk to anybody in the space of AI or machine learning or good old-fashioned data analytics, you'll find that they will tell you that the more the data, the more varietals of data, the more widespread and ubiquitous the data you get, the better the predictive power.

The moment countries Balkanize that data, they may say they are doing it for security reasons.

It is not completely clear to me that, in actual fact, it gives them better security on predicting for fraud and anti-money laundering and capabilities on that front than data which is more widely shared.

Now, we will comply and we have complied in India.

And we will comply elsewhere with whatever rules a country finally chooses because we operate there, because that's what the rules are.

But it's our job to try to educate them to what we think, and it's their job to decide what's right for them.

And then we do what we've got to do after that.

So that's what we've done in India, we've complied.

In other countries, we've managed to turn back that thinking based on this logic that I just gave you.

Our next question comes from the line of Bryan Keane from Deutsche Bank.

Just wanted to ask about the higher expenses expected in Q2.

Sounds like most of that is going to be marketing spend.

Maybe some of that is from acquisitions.

So just trying to understand maybe where the higher expenses are going, especially on the marketing side, anything in particular.

And then secondly, just on the strong data so far through April 21, is there a way to think about how much of that is from Easter versus easier comps versus better economy, share gains, et cetera?

Yes.

Bryan, let me make sure I am clarifying the Q2 comment out here, which is we're expecting double the growth rate relative to our full year thoughts on OpEx in Q2.

And that growth rate differential is being driven, as I mentioned in my prepared remarks, by the fact that, last year, in our operating expenses, we had the benefit of a fairly sizable FX hedging gain.

So I think you need to take that into consideration as you think about the marketing expenses for -- or rather the operating expenses for Q2.

In addition to that, we also expect we'll increase marketing spend in Q2.

As I mentioned, in Q1, our marketing expenses came in lower than expected.

This was just part of what goes on.

As we run our business, we kind of make evaluations as it relates to when's the optimal time for us to put marketing out in relation to -- relative to various sponsorship assets and other initiatives which we've got going on, and this is just par for the course as part of that process.

So nothing unusual that I would flag.

On your second question on April 21 data, I will tell you, look, I mean April 21 data is impacted by the timing of Easter.

And I think you need to take that into consideration just especially given the fact that there's 21 days' worth of data which we're presenting to you, and 3 weeks are not going to make the quarter.

So I would tell you that, by and large, that the growth trends look solid, as we've mentioned, for Q1, and we continue to see that going forward as well.

But timing of Easter plays a big part in terms of what we are seeing in our April 21 metrics.

Our next question comes from the line of Craig Maurer from Autonomous Research.

Two questions.

One, have you seen any uptick in local network competition anywhere around the world?

And secondly, the settlement with the European Commission that was seemingly announced yesterday on interregional cross-border, obviously, that will have an effect on the fee income of banks issuing cards that are being used in Europe.

So thinking Citi for you guys.

Do you -- can you foresee an impact on the rewards that those banks are offering on those cards' cross-border business, if you're going to see a significant reduction in that fee income?

Sure, sure, Craig.

First, the second one.

That settlement with the European Commission, as you know, we kind of discussed it in the fourth quarter earnings call.

I asked Tim Murphy, my GC sitting here.

He's dying to answer a question, but maybe you could -- was it in Q4, Tim?

Yes, Ajay.

So we briefed investors in December of last year, and there's really no change following what we shared in December.

It's just a process update.

So that's what you've seen since December, nothing new.

A big part of [ours], will it impact the rewards that different banks offer, not just Citi, but this is for all banks that would have people traveling into European Union territory.

It impacts anybody, Australians and Chinese and Americans and everybody else and perhaps -- soon.

So the fact there is it's a relatively small proportion of the total interchange revenue that most of these banks generate.

It's also a relatively small proportion of the total revenue which comes out of not just interchange but revolving and other fees.

And therefore, it is not my assessment that there will be that big an impact on their P&L.

Now remember that the reduced rates of 20 and 30 apply to physical card present, whereas, for card-not-present e-commerce transactions, the rate for debit are 115 basis points and the rate for credit is 150 basis points.

And so that's factored into the commentary I'm giving you about the impact for banking institutions.

It's not that it's not relevant.

It is relevant.

It's just that it's not enough to, I think, change their marketing practices directly in this form.

Your question about local networks.

I haven't seen an uptick or a downtick in any relevant, strong way over the last 6 months to a year.

Local networks have been strong across the world in different forms over the years.

I mean the EU and every country in the EU has had a local network since well before, I mean, since 20, 25 years ago.

Mexico has had them.

Canada has had them.

Brazil and Colombia and Argentina used to have them.

China has had it since a long time.

Korea has had them.

So there's not one kind of example here.

In fact, if you look at the number of our transactions that we actually pass through our own rails of the total, today, it's 56% of our transactions.

Ten years back, when I joined, it was 40-something-percent.

So even 10 years ago, the majority of our transactions were being taken by local networks in some form for the actual processing of that transaction.

We had other ways to raise revenue from the activity around that transaction, but the processing was going through local rails very often.

Directionally, the number has reduced over the years as they've made inroads in a number of marketplaces.

Our next question comes from the line of Lisa Ellis from MoffettNathanson.

Welcome, Sachin, to the calls.

A couple from me.

First, Ajay, can you comment on China and, specifically, the news reports about a potential joint venture announcement with Nets Union there?

And then second one is related to the Vyze acquisition and around doing enabling extension of credit transactionally at the point of sale.

Just from a vision perspective, can you comment, as you look out about building this out -- this capability out with Mastercard over the next few years, what that's going to look like?

Or how should be thinking about it?

Is it almost like another rail?

And what's Mastercard's role in differentiation exactly there?

Okay.

So China, I'm not going to comment on a newspaper article.

I mean, I wish I was asked for comments in the newspaper articles that give me blood pressure, but nobody does.

This one doesn't really give me blood pressure.

It's just what somebody wrote there based on what they picked up locally.

We are -- this much I will tell you, I'm very committed to finding an appropriate and sensible way to enter the domestic Chinese market.

And I'm making every effort possible across the company to get to the right place and getting the requisite licenses to be able to do that.

And I think, as soon as we've got something substantial or real to tell you, we will, trust me.

We just don't have anything real or substantial today because this movie hasn't played out yet.

So it's going to take some time to play out.

And even after it plays out in terms of, let's say, we do get some form of an approval, even after that, there's a yearlong process of national security clearances before you can actually start operating domestically on the ground in China.

So this is like a couple of years away, at least, before we can give you something that's more interesting than just desires, right?

That's the first thing.

On Vyze, Vyze, to me, is interesting.

I don't yet know how well to answer that question for you because I don't yet know how big this could be.

Installment lending, to me, is a really interesting aspect, installment lending at the point of sale.

Installment lending through a bank has been going on for a long time.

But the idea of allowing a consumer at the point of sale to opt into an installment loan, in some ways, it's been going on for a long time in sales finance businesses in places like Brazil, where ever since my years -- years back at Citibank, we used to see this happening, where the transaction at the point of sale had an automatic installment plan built into what was the card payment that was being used by a consumer.

That's kind of -- it didn't spread everywhere.

It spread in different ways into the U.S. in the consumer finance business mostly.

It didn't really spread to the middle class or the upper class there.

But it's spreading around the world in some ways.

In Australia, there are a couple of players who've launched installment lending.

In the U.S., those players have -- 1 or 2 of them are coming here, others locally are doing this.

It's banks, it's fintechs, it's merchants.

Everyone seems to be interested in the space.

But I don't know yet how to tell you how big it could be or where it could go because I don't really know yet how well it will catch on with the consumer.

We are certainly putting our foot in the water with this acquisition.

Remember, it's not us extending the credit.

We're just creating the platform between the merchant and the institution, the bank or the fintech, which we, in turn, pass the loan on to a bank.

That's what we are really doing.

I think I can add a lot of differentiated value in the form of AI, in the form of better tools to identify consumers and help to -- help people underwrite.

There's a lot of things we could do with our data analytics and our information services business.

Remember that we could also do a lot of things with loyalty and rewards which could be connected over time into the installment loan system.

So I don't yet know where this will go.

It's interesting.

I've got my foot in the water, and we'll see.

It's not different from the way we entered other services 4 or 5 years ago, put our foot in the water before we took the full plunge.

Our next question comes from the line of Eric Wasserstrom from UBS.

If -- I was wondering, maybe Sachin, could you help remind us about sort of all of the components that attribute to your strength in cross-border?

I think you have some portfolio wins that should be helping year-over-year, some Maestro conversions.

Can you just remind us of all the factors that support that figure?

Sure.

Look, I mean, as a company, we remain incredibly focused on cross-border drivers.

And as we said in previous earnings calls, Mastercard had set up the center of excellence within Mastercard, where, basically, there's this tremendous focus on how we can do good knowledge sharing across the company on what can drive cross-border volumes for this company.

Really, it all kind of starts with making sure that we have actually truly identified what are the right portfolios to go after from a cross-border standpoint.

So as we sit back and we think about it, we leverage our services business with their data analytics capabilities to identify what are the right portfolios to go after.

And those are the ones where there's a larger propensity of cross-border.

Thereafter, we go after trying to optimize those portfolios in the best way possible.

So to the extent we identify portfolios of our customers which might be underperforming, we work with them through our consulting practice and our managed services practice in our Advisors business to try and actually drive for better and more optimized cross-border focus there.

But even beyond that, it's about focusing on the right verticals.

So for example, in the wholesale travel space, this is an area where Mastercard has been historically very much focused and has been, actually, a leader.

And that contributes to cross-border.

And then finally, I would say, on a similar basis, if you think about digital banks and things of that sort, these would be areas where we would focus.

Again, going back to the theme of what are the right portfolios to go after and how do you optimize those, that's really what we're doing.

It kind of sounds like basic blocking and tackling, but sometimes you actually really have to go down that path to actually make it come through.

And that's what we're doing.

And Eric, as I said last time, there's -- I'm sure there are other efforts through similar stuff, this is not rocket science.

So it's just -- it's in the execution, and it's in getting it done.

And yes, Maestro-to-Mastercard conversions do give us some tailwind because, clearly, Maestro utilization in e-commerce is challenging.

Mastercard debit allows a better utilization.

And that will continue for a while because we haven't completed those migrations in every location that we'd like to.

Great.

And if I can just follow up, Ajay, any update on the B2B hub?

I know that you launched it in Australia, I think, a quarter ago.

And any update on its international or domestic advancement?

No, not really.

That -- in fact, we discussed it in the last quarter call, as you're right.

Its physical launch is actually happening as we speak, and it's very early days.

But that's the one we are focused on.

The whole B2B space has opportunities.

The hubs, one way of getting to it, as you know, the directory and track in enabling that directory to be fully built out the right way across the world is another one.

Payments optimization engines are getting built into it.

We're just doing a series of things, and hopefully, Transfast will enable and help us even more.

Meanwhile, Send continues to chug along.

That's why I talked about Bank of Montreal and what it's trying to do with Send.

It's doing it for its commercial and business banking clients as well.

So there's a series of tools that are being played in the B2B space.

Our next question comes from the line of Don Fandetti from Wells Fargo.

Ajay, [sorry], a 2-part question.

I guess in the U.S., Mastercard has had a pretty good track record on these co-brand wins, but it's been a while since we've seen any kind of major sort of bank portfolio flip.

Do you expect to see any market share change over the next year or 2 there?

And then separately, any update on the Commonpay button from e-commerce now that the industry has had some time to digest it?

How are you guys feeling about the penetration opportunity?

Yes.

So on the first one, big bank portfolios, there have been some over the last year or 2 that we've talked about and we have won on, from Pass with Capital One to Pass with Bank of America and the like, and those are still helping us grow share.

In fact, if you look at the way our credit numbers are growing in the U.S., part of that is co-brands, that's Cabela's and Kroger and the like.

But part of it is also these bank portfolios that have been switching over to us.

I don't see any huge swings in bank books moving around right now.

But they're actively in every transition and every transaction that happens.

But I don't see huge ones moving around as we speak as of now.

On the SRC progress, we are looking, as we said, the industry to launch this in the second half of 2019.

It's probably going to end up first in the U.S. and then get to additional markets over the next 6 to 18 months.

And I think you'll find that the feedback we are getting from issuers and merchants is very constructive to EMVCo.

We're trying to adapt to that feedback and get it rolled out.

All the technology build and branding work is happening as we speak.

But I still remain pretty optimistic about what SRC could do for the industry and for the consumer and for the merchant and the issuer: simpler to connect to, one connection for all brands, easier to manage for the consumer, kind of trying to replicate the physical experience of 1 terminal to convert that to a physical -- or to a digital experience of 1 button kind of idea.

That's what we're trying to get to.

Our next question comes from the line of Darrin Peller from Wolfe Research.

Look, you had a -- I think you had a 200 basis points tough compare in the quarter and then with the FX.

It looks like you clearly outperformed this quarter, growing around 13% constant currency.

So first, just what drove the surprise to the upside versus what I think you initially thought when you talked about your guidance from last quarter for the first quarter trends?

And then do you think that the soft spot we saw on cross-border, whether it was fourth quarter or perhaps early first quarter, was more of an anomaly at this point?

Do you feel better about the trends you're seeing?

Yes.

So Darrin, I'll take that question.

So as it relates to the first quarter, it's -- like I mentioned in my prepared remarks, we've slightly exceeded what our expectations were as it relates to our performance from a revenue standpoint, driven by the strength in our services business.

So we also saw, from an FX standpoint, slightly lower impact on FX in the first quarter relative to what we originally thought.

So those were a couple of factors which might you want to kind of take into consideration as you're thinking about it.

On your other question for cross-border, you've got to remember that cross-border, last year in Q1, we had a 20% growth rate in cross-border.

And those tough comps are a large part of what we're seeing in terms of the results in Q1 of this year.

You'll remember, when we talked about cross-border performance last year, we actually were fairly explicit about saying that we don't expect our normal run rates to be like what we saw in the first half of last year.

So as you think about our business, we continue to believe that our cross-border is trending and performing as we would normally see it actually performing.

So I wouldn't make too much of swings between quarters because you're already doing comparisons between year-over-year tough comps.

Our business continues to grow well.

We like what we see in terms of our portfolio.

Just a little bit more color, if it's helpful, from a cross-border standpoint.

The U.S. outbound volumes continue to hold up pretty nicely, and our China business, from a cross-border standpoint, is -- continues to grow also in the high single digits, much like we've seen historically.

So all in all, business carries on as we've expected it to be.

Thanks, Sachin.

Ajay, do you have any final comments?

Everyone, thank you all for your questions, and I want to wrap up with a few closing thoughts.

The first, we had a solid start to the year, reflecting the strong operational focus, execution focus and continued growth across each of our regions.

And we're executing against our strategy with a couple of particularly noteworthy milestones this quarter.

The first one being the progress in extending our real-time payments capabilities in Asia, in Latin America and in the Middle East.

And secondly, we announced these strategic acquisitions and partnerships that we think will complement our existing products and services and position the company well for the next decade or 2 of growth as well.

So with that, I'd like to thank you for your continued support for the company and for joining us today.

This concludes today's conference.

You may now disconnect.