The battle among payment network providers has come down to a two-company race, and Mastercard (NYSE:MA) wants to cross the finish line first. Despite a history of lagging behind its archrival, Mastercard is fighting hard to surpass its biggest industry peer, and its mix of strategic vision and execution has served the company well recently.
Coming into Thursday's fourth-quarter financial report, Mastercard investors had high hopes for a strong finish to 2017, setting the stage for further advances in 2018. The company didn't disappoint on either score, and with strong economic conditions taking hold worldwide, the prospects for payment processing growth have never looked better. Let's look more closely at Mastercard and what it's likely to experience in the coming year.
Mastercard charges ahead
Mastercard's fourth-quarter results showed accelerating gains in several key metrics. Sales were up 20% to $3.31 billion, which was even better than the 18% gains that investors had expected to see, and that Mastercard put up in the third quarter. Net income was down sharply on a GAAP basis due to one-time impacts from tax reform, but after accounting for those hits, adjusted income of $1.2 billion worked out to adjusted earnings of $1.14 per share, topping the consensus forecast for $1.12 per share.
Tax reform dealt a hit to Mastercard in the short run. The company took a charge of $873 million, or $0.82 per share, stemming from the provisions of the new tax laws, which included deemed repatriation tax on foreign earnings and revaluation of deferred tax assets and liabilities.
Yet looking at Mastercard's fundamental business, things continued to look good. Gross dollar volume growth accelerated to 13%, coming in at $1.4 trillion, and switched transactions rose by 17% to 17.7 billion. Cross-border volumes were up 17% in local currency terms. Acquisitions added about 3 percentage points to overall revenue growth, driven largely by Vocalink. The company reported a greater than 10% rise in the number of outstanding Mastercard credit, charge, debit, and prepaid cards in circulation, amounting to a total of 2.4 billion cards when you add in Maestro-branded products.
Operating expense discipline was also a key driver for Mastercard's success. Adjusting for special items, the card giant saw a 17% rise in operating costs, lagging behind the pace of sales growth and thereby boosting margin figures. Lower effective tax rates should help to bolster those gains going forward.
As we've seen repeatedly, international operations showed stronger growth than U.S. business. Gross dollar volume jumped 15% in local currency terms compared to 9% growth domestically, and purchase volume growth showed a similar 15% to 10% comparison. Worldwide, Mastercard has more than triple the number of cards outstanding than it does in the U.S. market, and the card company's overseas exposure looks poised to remain essential in driving overall growth.
Can Mastercard have a great 2018?
CEO Ajay Banga expressed his satisfaction at Mastercard's results. "We're pleased to have finished 2017 with strong results for the quarter and full year," Banga said, "driven by the solid execution of our strategy." The CEO also noted that ongoing investments in digital initiatives as well as safety and security measures are paying off with new business and further growth.
Mastercard also continues to consider its own shares to be a smart investment. It paid about $1 billion to purchase 6.9 million shares of its stock during the fourth quarter, and after the end of the period, the company spent another $287 million to buy back 1.8 million shares during the month of January. That still leaves about $5 billion remaining under existing repurchase authorizations thanks to the recent $4 billion boost in December, leaving Mastercard with plenty of room for further buyback activity in 2018.
Mastercard investors were happy with how the company did, and the stock jumped more than 3% in pre-market trading following the announcement. With good conditions worldwide, Mastercard's efforts to capture as much of the growth of the payment network industry as possible have been paying off well, and that seems likely to persist throughout 2018 and beyond.