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How Is MasterCard Posting Operating Margin in Mid-50%?

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Higher rebates and discounts

MasterCard’s (MA) rebates and incentives increased by 18% to $1.0 billion in the first quarter of 2016. These were higher than expected mainly due to the timing of some deals in the works and some acquisitions. MasterCard is focusing on finalizing more partnerships rather than spending directly on marketing efforts. The company’s advertising and marketing expenses declined by 5% to $135 million in 1Q16 compared to $142 million in 1Q15.

The company’s general and administrative expenses include personnel, network and processing, and professional fees. General and administrative expenses rose by 34% to $868 million in 1Q16 compared to 1Q15. This was higher mainly due to severance costs related to acquisitions.

MasterCard achieved a total revenue of $9.5 billion in fiscal 2015. Here’s how some of MasterCard’s peers in the payment processing industry fared with their revenues in fiscal 2015:

  • Visa (V) – $13.9 billion
  • American Express (AXP) – $35.9 billion
  • Discover Financial Services (DFS) – $7.6 billion

Together, these companies account for 2.4% of the iShares Russell 1000 Growth ETF (IWF).

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M&A expenses

MasterCard’s operating expenses, including M&A (merger and acquisition) costs adjusted for currency impact, rose 4%. The company posted an operating margin of 55%, which was in line with the prior year’s quarter.

Operating income for the first quarter of 2016 remained flat, or a 4% increase adjusted for currency, versus the year-ago period. In 2015, the company posted an operating margin of 54%, which was similar to the prior year’s period. For 2015, operating income was $5.2 billion, an increase of 2% compared to 2014.

In the final part of our series, let’s look at MasterCard’s expectations for moderate growth and steady valuations.

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