Mastercard's Momentum Continues as CEO Focuses on Security -- 2nd Update

Mastercard Inc. reported its highest revenue jump of the year due to a mix of increased consumer spending, market-share gains against smaller networks abroad and the continuing shift of payments from cash to cards.

The company said Tuesday its third-quarter revenue rose 18% from a year earlier to $3.4 billion. Analysts polled by Thomson Reuters expected revenue to rise to $3.28 billion. Mastercard's profit topped analysts' estimates, as it has for the past several quarters. It increased 21% in the third quarter to $1.43 billion, or $1.34 a share, compared with $1.18 billion, or $1.08 a share, a year ago. Analysts expected Mastercard to earn $1.23 a share.

But the company also reported higher expenses from a year ago and raised its expense guidance for 2017. Mastercard said it expects operating expense growth to be at the top end of the high single-digit range. That compared with high single-digit guidance at its investor day on Sept. 7.

In the third quarter, operating expenses rose 20% from a year ago because of acquisitions and continued investments in new payment technology and other initiatives.

Mastercard also disclosed separately Tuesday that a potential regulatory fine looms. The company said potential fines tied to European Commission objections to its inter-regional interchange fees could exceed $1 billion, "based upon recent interactions" Mastercard has had with the Commission. Mastercard added it "cannot estimate a possible range of loss at this time" but expects to have greater clarity in the fourth quarter of 2017 or early 2018.

"Any charge would go directly against earnings as Mastercard has not established a reserve," Bill Carcache, a Nomura Instinet analyst, wrote in a note Tuesday. A fine exceeding $1 billion could shave about 62 cents, or 12% off of 2018 earnings-per-share estimates, the analyst said, adding this would be a nonrecurring expense and wouldn't affect longer-term views of the company.

Mastercard shares, which were down nearly 2% at one point Tuesday, were about flat in afternoon trading.

Shares in both Mastercard and rival Visa Inc., which are the networks on which most credit- and debit-card transactions are processed in the U.S. and many markets abroad, are up more than 40% this year. That is due in large part to more robust consumer spending and strengthening economies, particularly in Brazil and the Asia-Pacific region.

The value of transactions processed on Mastercard's network, or gross dollar volume transactions, increased 10% in its third quarter to $1.4 trillion. In the U.S. gross dollar volume increased 6% from a year prior.

Mastercard chief Ajay Banga announced several new partnerships on the company's earnings call, including a new prepaid program with Automatic Data Processing Inc., the largest payroll provider in the U.S. In Japan, Mastercard will be the exclusive co-brand partner for Costco Wholesale Corp. starting early next year.

In September, the company announced that Bank of America Inc.'s cash-rewards credit card will switch to Mastercard from Visa for new cardholders beginning in 2018.

Mastercard is also testing ways to diversify into other payment forms beyond cards. That includes ACH technology, which allows for fast payments from one bank account to another, that will be launched soon in the U.S., Mr. Banga said. Separately, Mastercard earlier this month announced it is building a blockchain solution for its business customers. Blockchain is the technology that underpins digital currency bitcoin.

Mr. Banga added that security is top of mind for the company, especially in the wake of the Equifax Inc. breach.

"It's no secret right now that protection of consumer data is a hot topic," he said. "Safety and security is a key priority."

Mr. Banga said that as the company's momentum continues to grow, it has been spending to ensure customer data is protected.

He said the firm recently added an early detection system that alerts card issuers to the risk of future fraudulent activities. The company has also rolled out tokenization for consumer-card information that companies keep stored, lessening the chances that card credentials can be fraudulently used when companies' databases are breached. Mastercard said Netflix is the first company to use its service.

Like Visa, Mastercard has been focused on expanding into China's domestic market now that the U.S. and Chinese governments reached an agreement that is supposed to increase access to the Chinese economy for electronic-payments providers. Martina Hund-Mejean, chief financial officer at Mastercard, said on the earnings call that "a number of banks" recently returned to issuing dual-branded cards that also run on the Mastercard network when consumers use those cards while traveling outside China.

In Europe, the company is taking market share from smaller domestic networks, Ms. Hund-Mejean said in an interview. The companies are owned by the banks and don't have the wherewithal to make cybersecurity and other investments that are needed, she said.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

October 31, 2017 14:47 ET (18:47 GMT)