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pww.comMastercard Incorporated, Q2 2010 Earnings Call, Aug-03-2010 - NYSE:MA

NYSE:MA

Barbara Gasper [Executives] 💬

Barbara Gasper, the Head of Investor Relations for Mastercard, made the following statements during the Q2 2010 Earnings Call:

  1. Opening Remarks:

    • She thanked the operator and welcomed everyone to the Mastercard Second Quarter Earnings Conference Call.
    • She introduced herself and mentioned that she would be hosting the call.
    • She stated that Ajay Banga, the President and Chief Executive Officer, and Martina Hund-Mejean, the Chief Financial Officer, would be joining her on the call.

  2. Logistics and Materials:

    • She informed the participants that the earnings release and the slide deck for the call could be found in the Investor Relations section of the Mastercard website at mastercard.com.
    • She mentioned that the materials had also been attached to an 8-K filed with the SEC earlier that morning.
    • She noted that a replay of the call would be posted on the website for one week through August 10.

  3. Forward-Looking Statements Disclaimer:

    • She reminded everyone that the call might include forward-looking statements about Mastercard’s future performance.
    • She cautioned that actual performance could differ materially from what is suggested by the comments made during the call.
    • She referred to the factors that could affect future performance, which are summarized at the end of the press release and contained in recent SEC filings.

  4. Transition to CEO:

    • She turned the call over to Ajay Banga, the CEO, for his remarks.

  5. Q&A Session:

    • After Martina Hund-Mejean's presentation, Barbara Gasper thanked her and announced the start of the question-and-answer session.
    • She requested that participants limit themselves to a single question and then queue back in for additional questions.

  6. Closing Comments:

    • At the end of the call, Barbara Gasper thanked Ajay Banga for his closing thoughts and thanked everyone for their participation.

    • She mentioned the upcoming Investor Day on September 15 and expressed excitement about continuing the discussion about the business and strategy.

    • She concluded the call by thanking everyone again and wished them a wonderful day.

Ajaypal S. Banga [Former CEO & Director] 💬

Ajaypal S. Banga, the then-President and CEO of Mastercard Incorporated, provided the following comments during the Q2 2010 Earnings Call:

  1. Financial Performance Overview:

    • Mastercard reported solid financial results for the second quarter of 2010, with net revenue growth of 6.7% (as reported) and 7.9% (on a constant-currency basis).
    • Gross dollar volume grew 8.5% on a local-currency basis, and cross-border volume grew 15.2%.
    • Process transaction growth was flat due to the continued roll-off of several U.S. and U.K. debit portfolios. Excluding these reconversions, underlying transaction growth was around 10%.
    • Operating margin improved to 52.6%, a nine-percentage point expansion over the previous year's second quarter.
    • Net income growth was roughly 31% (or 34% on a constant-currency basis).

  2. Global Business Environment:

    • Global macroeconomic improvements contributed to the quarter's progress, with non-U.S. markets becoming a bigger contributor to the business.
    • International markets now account for 55% of total revenue, up from about 50% two or three years ago.
    • Volume growth outside the U.S. outpaced U.S. growth, with strong double-digit growth in the Asia/Pacific and Latin America regions.
    • Despite European macroeconomic challenges, volume growth in Europe remained healthy.

  3. U.S. Economic Recovery:

    • There were conflicting signals regarding the U.S. economic recovery, with unemployment, retail sales, and consumer confidence data indicating potential ups and downs.
    • Consumer behavior showed mixed signals, with declines in fine dining, luxury retail, and furniture spend, but increases in hotel and airline spend.
    • Mastercard's process credit volume growth was slightly positive but declined as the quarter progressed, driven by consumer credit.
    • Process debit volume growth remained constant at about 20%, excluding portfolio de-conversions.

  4. Durbin Amendment Impact:

    • Mastercard is awaiting Federal Reserve regulations regarding the Durbin Amendment's impact on the industry and the company.
    • The company will work constructively with the Federal Reserve during the implementation phase to ensure informed decision-making.
    • Regardless of the outcome, Mastercard believes the shift to electronic payments will continue, and U.S. consumers are unlikely to revert to cash and checks.
    • Issuers will need to adapt to meet consumer needs, and Mastercard will support them with various payment products, including credit, charge, and prepaid options.

  5. Strategic Initiatives and Partnerships:

    • Mastercard announced an expansion of its relationship with Telefónica to include a co-brand deal for its Mobistar brand in 11 countries.
    • A joint venture with Smart Communications was announced to build a mobile payment infrastructure starting in Brazil.
    • Mastercard launched MoneySend with the Bank of China, enabling Chinese consumers to receive international money transfers.
    • Sberbank in Russia upgraded its passbook savings accounts to include Maestro debit cards, enhancing online and mobile banking access.
    • Citi leveraged Mastercard's inControl platform to bring enhanced security and budgeting capabilities to its consumer cardholders.
    • The PayPass transit pilot in New York City was expanded to include more transit systems, making commuting faster and easier.

  6. Future Outlook:

    • Mastercard is focused on executing its strategies globally, pursuing opportunities to grow electronic payments and deliver convenience and security for customers.
    • The company remains committed to its objectives for the 2009 to 2011 period, including annual margin expansion of 3 to 5 percentage points and average annual net income growth of 20% to 30%.

  7. Closing Thoughts:

    • Ajaypal S. Banga expressed optimism about Mastercard's future growth prospects, emphasizing the company's presence in 210 countries and its resilience through economic cycles.

    • He highlighted ongoing innovations and strategic initiatives aimed at capitalizing on growth opportunities, especially in the areas of e-commerce, mobile, and prepaid payments.

Martina Therese Sophie Hund-Mejean [Former Chief Financial Officer] 💬

Martina Therese Sophie Hund-Mejean, the former Chief Financial Officer of Mastercard Incorporated, provided a detailed financial update during the Q2 2010 earnings call. Here is a summary of her remarks:

  1. Financial Performance Overview:

    • Net revenue grew 6.7% over the previous year's second quarter to $1.4 billion.
    • On a constant-currency basis, net revenue grew 7.9%.
    • Revenue growth was driven by a 15.2% increase in cross-border volume and an 8.5% increase in gross dollar volume on a local-currency basis.
    • Pricing contributed approximately four percentage points to net revenue growth.
    • Additional rebates and incentives, primarily due to new and renewed customer agreements, offset some of the positive factors.

  2. Operating Expenses:

    • Operating expenses declined 10.4% compared to the previous year's second quarter.
    • The decline was primarily due to lower severance costs and savings from reduced headcount.

  3. Operating Income and Margin:

    • Operating income was $717 million, resulting in an operating margin of 52.6%.
    • This represented a 9.1 percentage point improvement over the previous year's second quarter.

  4. Net Income:

    • Net income was $458 million or $3.49 per diluted share, up roughly 31% over the second quarter of 2009.

  5. Business Drivers:

    • Cross-border volume growth was the strongest it had been since the third quarter of 2008.
    • Worldwide gross dollar volume (GDV) was up 8.5% on a local-currency basis.
    • U.S. GDV was down 0.5%, but showed sequential improvement compared to a decline of 1.1% in the first quarter of the year.
    • GDV outside the U.S. grew 14.5% on a local-currency basis.
    • Worldwide credit GDV grew 6.1% on a local-currency basis.
    • Worldwide debit GDV grew 13.2% on a local-currency basis.
    • Purchase volume grew 7.9% on a local-currency basis.
    • Cross-border volume growth was up 15.2% on a local-currency basis.

  6. Process Transactions:

    • Process transactions were essentially flat, about 0.1% compared to the previous year's quarter.
    • Growth in Asia/Pacific, Middle East, Africa, and Latin America offset the loss of debit portfolios in the U.S. and U.K.

  7. Revenue Components:

    • Domestic assessments increased 11% due to increased volumes and the impact of price increases.
    • Cross-border volume fees increased by 34.5%, with more than half of the increase due to a pricing adjustment in October 2009.
    • Transaction processing fees increased 6%, with pricing contributing approximately two percentage points of growth.
    • Other revenues decreased 5.2%, primarily driven by lower compliance and research fees.

  8. Rebates and Incentives:

    • Rebates and incentives grew $119 million, with approximately $55 million of the increase due to rebates associated with revised cross-border pricing.
    • The remainder was attributed to new and renewed customer agreements and rebates related to higher volumes.
    • Rebates and incentives represented 25.3% of gross revenue, up from 21.2% in the previous year's second quarter.

  9. Expenses:

    • Total operating expenses decreased 10.4%.
    • General and administrative expenses decreased 14.5%, primarily due to lower personnel expenses.
    • Advertising and marketing spend and depreciation and amortization were roughly flat for the quarter.

  10. Cash Flow and Balance Sheet Highlights:

    • Generated $343 million in cash from operations in the second quarter.
    • Ended the quarter with cash, cash equivalents, and other liquid investments of $3.5 billion.

  11. Outlook for 2010:

    • Anticipated some tempering in top-line growth in the second half of 2010 due to tougher comparisons and uncertainty in the U.S. economic recovery.
    • Expected rebates and incentives as a percentage of gross revenue to average 26% to 27% for the full year.
    • Forecasted total operating expenses for 2010 to be flat to slightly down from 2009 levels, including severance charges.
    • Expected G&A to be down from 2009 levels, including severance.
    • Forecasted advertising and marketing to be up by mid-single digits from the full year 2009 spend.
    • Assumed an effective tax rate of 34.5% for 2010.

  12. Maestro Card Process Volumes Update:

    • Cross-border volumes grew approximately 15% globally.
    • Asia/Pacific region demonstrated the strongest growth.
    • U.S. saw a little bit of softening, although it remained positive.
    • Total U.S. processed volumes growth was down about 2% in July, slightly lower than the month of June due to the continued roll-off of debit portfolios.
    • U.S. credit processed volume was trending flat in July.
    • U.S. debit processed volume growth, which was about flat for the second quarter, was trending down 5% in July, but up 21% when excluding the impact of debit roll-offs.
    • Total processed volume growth for the rest of the world continued at a similar pace to what was seen in the first and second quarters.

  13. 2010 Financial Guidance:

    • Expected some tempering in top-line growth in the second half of 2010.

    • Expected contra as a percentage of gross revenue to average 26% to 27% for the full year.

    • Expected total operating expenses for 2010 to be flat to slightly down from 2009 levels.

    • Continued to assume an effective tax rate of 34.5% for 2010.

    • Remained committed to the objective for the 2009 to 2011 period of annual margin expansion of three to five percentage points and average annual net income growth of 20% to 30%.

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