Mastercard (MA -0.19%) is tired of being seen as second fiddle in the payment network industry, and it's striving to become the top dog in payments. With an emphasis on new technology, Mastercard believes that it can gain an edge both over its historical archrival and newer players in the payment space. So far, that's been a solid strategy, but the competition among payment-services providers has only gotten fiercer in recent years.
Coming into Tuesday's third-quarter financial report, Mastercard investors were optimistic that the card company would continue to post double-digit percentage gains on the top and bottom lines, riding the trend toward greater use of electronic payments solutions. Mastercard's results were even better than most had hoped, and the company has confidence that it's following a smart strategy toward maximizing its growth opportunities. Let's take a closer look at Mastercard to see what's ahead for the payment giant.
More records for Mastercard
Mastercard's third-quarter results surpassed some of the most optimistic predictions from market participants. Revenue soared 18% to $3.40 billion, rocketing past the 14% growth rate that most of those following the stock had hoped to see. Net income climbed to $1.43 billion, up 21% from year-ago levels, and the resulting $1.34 per share in earnings was considerably better than the consensus forecast from investors for $1.23. Both figures were records for the company.
Mastercard's fundamental metrics remained strong. Gross dollar volume climbed 10% to $1.4 trillion, while switched transactions were up by 17% to 16.9 billion. Cross-border volumes were up 15% when measured in local currency, and acquisitions played a small but significant role in driving Mastercard higher, contributing about 2.5 percentage points to the card company's revenue growth. The company reported 2.41 billion outstanding Mastercard and Maestro cards in circulation, which was up by about 137 million cards over the past 12 months.
Mastercard's cost-cutting strategy didn't do quite as well as it had in previous quarters, but the company had a reasonable excuse. Operating expenses were up 20% from year-ago levels, outpacing revenue growth, but eight percentage points of that boost came from acquisition-related activity. Lower tax rates helped to offset higher interest expenses in driving Mastercard's bottom-line performance.
Looking at the company's geographical exposure, growth outside the U.S. remained more robust than that from Mastercard's domestic operations. Gross dollar volume jumped 13% outside the U.S. compared to just 6.1% domestically, and similar disparities were present in purchase volume, the number of purchase transactions, and overall cash volume gains. The differences were especially notable in looking at Mastercard's debit card programs, in which domestic growth has come to a near-standstill in comparison to much bigger gains abroad.
What's ahead for Mastercard?
CEO Ajay Banga emphasized how Mastercard's attention to security is giving it an important competitive advantage in strengthening its relationships with customers and financial partners. "Our investments in technology like biometrics, tokens, encryption, and artificial intelligence," Banga said, "are redefining the way both consumers and transactions are protected." The CEO noted that Mastercard has built up positive momentum in improving how it does business generally.
One interesting way in which new security protocols are changing the way people do business came up earlier this month. Mastercard said that it would stop requiring signatures for credit and debit card purchases, aligning the practice with how mobile and online payments work. Although that might seem to degrade security levels, Mastercard is confident that its other security measures make the additional step of verifying signatures unnecessarily burdensome in slowing the checkout process.
Meanwhile, many investors will be pleased that Mastercard continued to buy back its stock aggressively during the quarter. The card giant spent $838 million to purchase 6.4 million shares, and already in the first few weeks of the fourth quarter, Mastercard has spent another $286 million on buybacks of 2 million shares. Even with that activity, Mastercard has another $2 billion authorized for future repurchases.
Mastercard investors were pleased with the news, and the stock climbed by nearly 1.5% in pre-market trading following the announcement. It might take a while for Mastercard to catch up to its industry rival, but the results that the payment network company has put up lately show its dedication to matching and surpassing the fortunes of all of its competitors.