In what is becoming old hat for investors, after Mastercard Inc (MA -1.21%) reported its first-quarter earnings, shares popped on the news even as the rest of the market trended downward. Not only did the payments network beat expectations when it reported its results earlier this month, it also raised its full-year guidance. The jump in share price, of course, was accompanied by another strong performance from the company's fundamentals.
Mastercard's net revenue grew to $3.58 billion, a 31% increase year over year, and its earnings per share rose to $1.50, an even better 49% year-over-year increase. This strong top- and bottom-line growth was fueled by the company's 17% increase in switched transactions, the number of times a Mastercard account is used to facilitate a purchase, and a 14% increase in gross dollar volume, the total dollar amount of all transactions across Mastercard's network.
|Mastercard Metrics||Q1 2018||Q1 2017||Change|
|Net revenue||$3.58 billion||$2.73 billion||31%|
|Switched transactions||16.7 billion||14.7 billion||17%|
|Gross payment volume||$1.42 trillion||$1.19 trillion||14%|
|Other revenues segment||$748 million||$561 million||33%|
After reading through the company's conference call, the one thing that stood out the most is how many doors the acquisition of Vocalink seems to be opening for the company. While Mastercard has long used bolt-on acquisitions to opportunistically improve its offerings, Vocalink seems to be different. Not only is it immediately accretive to Mastercard's revenue growth, but it's also giving the company several longer-term growth opportunities. Let's take a closer look at what Vocalink gives Mastercard today and how it could give its parent company the upper hand over arch-rival Visa Inc (V -1.06%) in the years ahead.
Mastercard's "other" growth
VocaLink provides instant electronic bank account transfers, also known as Fast ACH, in key financial markets around the world including the U.K., Singapore, and Thailand. Most of Vocalink's revenue is accounted for in Mastercard's Other Revenues segment. This segment encompasses several services Mastercard offers its financial institution clients such as loyalty reward management, fraud protection, and data analytics. Last year, Mastercard management made it clear these services were differentiating it from its competition and helping it secure new deals with banks and merchants alike.
While this classification of revenue has long been smaller relative to Mastercard's other revenue streams, it is growing rapidly. In Q1, Other Revenues grew to $748 million, a whopping 33% increase year over year! CFO Martina Hund-Mejean stated that without Vocalink's contributions to this segment, the annual growth rate would have been closer to 23%. While much of this contribution to growth is because the company is still lapping its initial acquisition, it's impossible not to notice the many opportunities Mastercard is exploiting thanks to Vocalink.
In the conference call, Mastercard management stated Vocalink was eyeing opportunities to expand its services internationally, especially as countries begin to update their clearing houses. Clearing houses are financial institutions that facilitate payments between banks within individual countries. The Automatic Clearing House (ACH) is the electronic payment system banks use within the U.S. to settle and clear payments. ACH payments are especially popular for processes such as direct deposit and bill payments because they are cheap. Unfortunately, they are also slow, which provides the opportunity for Vocalink's fast ACH capabilities.
Countries looking to upgrade their antiquated systems to enable Fast ACH are turning to Vocalink, for single applications in some places but, also, to run the entire country's infrastructure. In the conference call, CEO Ajay Banga said:
"The U.K. is where we not only participate in helping the infrastructure, we run it. In other countries like in the United States, it's our software that's powering the clearinghouse which is in the process of rolling out this instant ACH systems ... One where we are more than just software and also helping them actually manage their capabilities. We do that in Sweden. We do that in Singapore."
In these cases, Vocalink earns a licensing fee, Hund-Mejean pointed out, a basic fee for the payments made across the network. However, even more lucrative opportunities abound. In Thailand, for example, Vocalink is powering PromptPay, a mobile payment system that enables bank transfers using a citizen ID number. As of April, more than 40 million users had signed up for the service which has facilitated about $16 billion in payment volume over the past six months alone. In the United Kingdom, Vocalink is behind the Pay by Bank app, which allows consumers to make purchases using a direct debit straight from their bank account at the point-of-sale.
Why B2B is the place 2B
Mastercard also believes Vocalink gives it a leg up on the competition by giving it the most comprehensive B2B (business-to-business) payment offerings. Both Mastercard and Visa have recently turned their attention to the B2B space, as a potentially huge, relatively untapped, area of growth. Hund-Mejean estimated the payment volume in the space could be as much as $124 trillion, of which "only" about $20 trillion or so is negotiated at the point-of-sale.
In the conference call, after highlighting the many complications and inefficiencies in the B2B market as it exists today, Banga said Mastercard's cross-border capabilities combined with Vocalink's domestic ACH capabilities, gives the company a unique edge and skill set that allows him to approach potential clients with confidence, saying:
That's where Mastercard Send and HomeSend on the one hand combined with Vocalink on the other is, to me, the killer app. So today I can go to the bank and go there and say I can meet your B2B needs. You want them through ACH and direct debit, talk to me. You want them through virtual cards, talk to me. You want them through commercial cards, talk to me. You want them through any aspect, I can help you. And I can help you Mr. Bank, and Mr. Medium and Small Merchant by making life easier for you, quicker for you, more efficient, easier to reconcile and streamline. That is our B2B strategy.
Winners keep winning
Mastercard has returned an astounding 555% to investors over the past ten years, more than six times the S&P 500 index's return over that same period. Given its trailing twelve months EPS of $5.08 and based on my own calculations, the company currently trades at a steep P/E ratio of about 36 -- certainly not cheap! Given the huge run-up in price and the company's expensive valuation, some investors might be reluctant to add at these prices. Yet given the many tailwinds at its back and the opportunities its Vocalink acquisition is presenting to the company, Mastercard seems to be a case of a winner that keeps winning.