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pww.comMastercard Incorporated, Q3 2010 Earnings Call, Nov 02, 2010 - NYSE:MA

NYSE:MA

Barbara Gasper [Executives] 💬

Barbara Gasper, the Head of Investor Relations for Mastercard, made the following remarks during the Q3 2010 Earnings Call:

  1. Opening Remarks:

    • Thanked the operator and welcomed everyone to the Third Quarter MasterCard Inc's Earnings Conference Call.
    • Introduced herself and the other executives present: Ajay Banga, President and Chief Executive Officer, and Martina Hund-Mejean, Chief Financial Officer.
    • Provided an overview of the agenda, mentioning that Ajay and Martina would provide highlights about the business and the third quarter results, followed by a Q&A session.

  2. Presentation Logistics:

    • Noted that the earnings release and slide deck were available in the Investor Relations section of the Mastercard website and had been attached to an 8-K filed with the SEC.
    • Mentioned that a dial-in replay of the call would be available for one week through November 9 and also posted on the website for 30 days.

  3. Forward-Looking Statements Disclaimer:

    • Reminded participants that the call included forward-looking statements about MasterCard's future performance and that actual performance could differ materially.
    • Directed listeners to the end of the press release and recent SEC filings for information about factors that could affect future performance.

  4. Handover to Ajay Banga:

    • Turned the call over to Ajay Banga, President and CEO, to provide commentary on operational drivers and business highlights for the quarter.

  5. Q&A Session Introduction:

    • Briefly introduced Appendix B in the slide deck, which updated the treatment of U.S. versus rest of world revenue, noting that it demonstrated a slightly higher percentage of revenue coming from outside the U.S.
    • Announced the start of the Q&A session and requested that participants limit themselves to a single question initially, with the option to queue back in for additional questions.

  6. Closing Handover:

    • Thanked Martina for her financial update and turned the call back to Ajay Banga for closing remarks.

Barbara Gasper's role during the call was primarily to manage logistics and ensure that the agenda was followed, providing necessary disclaimers and introductions.

Ajaypal S. Banga [Former CEO & Director] 💬

Ajaypal S. Banga, the then-President and Chief Executive Officer of Mastercard, provided insights on the company’s third-quarter 2010 performance and highlighted several key points:

  1. Financial Performance:

    • Net revenue growth of 4.7% on an as-reported basis (7.3% on a constant currency basis).
    • Gross Dollar Volume (GDV) grew 8.45% on a local currency basis.
    • Cross-border volume grew 15.4%.
    • Processed transaction growth was slightly positive, with underlying transaction growth of about 13% excluding the impact of debit portfolio roll-offs.
    • Operating margin of 53.6%.
    • Net income growth of 14.6% (19% on a constant currency basis).

  2. Regional Performance:

    • Volume growth outside the U.S. outpaced growth in the U.S.
    • Asia/Pacific and Latin America experienced strong double-digit growth, driven by domestic and cross-border volumes.
    • While Asian and Latin American economies show good growth, consumption in the U.S. and Europe still accounts for more than half of global personal consumption expenditure.

  3. Europe:

    • Purchase volumes in Europe remained relatively healthy despite macroeconomic concerns.
    • Europeans did not accelerate spending as much as other markets did a few years ago, and their response over the last couple of years has been more muted.
    • During the summer holiday season, Europeans continued to travel, generating new volume.

  4. United States:

    • The U.S. market is healthier than the previous year, but the economy continues to show conflicting signals.
    • U.S. consumer spending appears to be following mixed signals.
    • U.S. credit volume growth trend continued to improve, driven by commercial credit, while consumer credit growth remained flat.
    • U.S. debit volumes, excluding the impact of debit portfolio roll-offs, continued to see mid-teen growth.

  5. Regulatory Developments:

    • Reached a settlement with the U.S. Department of Justice regarding merchant discounting rules.
    • Regarding the financial reform bill, Mastercard is awaiting the Federal Reserve’s ruling. Until then, it's impossible to predict the outcome for the payments industry.
    • Had constructive dialogues with the Federal Reserve as they gather a complete picture of the U.S. payments industry.
    • Expects the first drop of the Federal Reserve's position in December 2010.

  6. Global Strategy:

    • Focus on growing the core Debit, Prepaid, and Processing businesses, both consumer and commercial.
    • Diversify geographies by investing in high-growth markets.
    • Diversify the customer set by building relationships with merchants, telcos, governments, and transit operators.
    • Bring new businesses in emerging areas such as e-Commerce and mobile payments.

  7. Recent Business Wins:

    • Signed a credit agreement with UBS Switzerland Wealth Management to launch World MasterCard.
    • Signed a debit agreement with Morgan Stanley Smith Barney in the U.S.
    • Signed airline co-brand agreements, such as with Royal Jordanian Airline and Kingfisher Airlines in India.
    • Signed agreements with Sovereign Bank, SunTrust, and Chevy Chase (now part of Capital One) for debit programs.
    • Signed an exclusive premium debit agreement with Qatar Islamic Bank.
    • Signed agreements for Smart Data in Germany and with SunTrust and Chase in the U.S. for the commercial sector.
    • Renewed agreement with NetSpend for prepaid services.
    • Piloted a chip-enabled football club prepaid card in Poland.

  8. Processing and Mobile Commerce:

    • Signed an agreement with Itaú Unibanco in Brazil to switch their credit transactions.
    • Made a strategic investment in India-based ElectraCard Services to accelerate Processing businesses in Asia/Pacific, Middle East, and Africa.
    • Announced plans to expand mobile trials with micro-secure data functionality starting in the first quarter of 2011.
    • Signed a Memorandum of Understanding with China Union Pay to explore opportunities in e-Commerce and cross-border payments.
    • Entered into an agreement with SingTel to pursue mobile commerce opportunities in Southeast Asia.
    • Agreed to work with Airtel Africa to explore and pursue business opportunities in mobile commerce in Africa.

  9. Acquisition of DataCash:

    • Completed the acquisition of DataCash, aiming to further penetrate e-Commerce in Europe and leverage combined fraud prevention capabilities.

  10. Future Outlook:

    • Remains focused on executing the growth strategy globally, emphasizing local execution for an enhanced consumer experience.

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

Martina Therese Sophie Hund-Mejean, the Chief Financial Officer at the time, provided detailed financial insights and updates during the Mastercard Incorporated Q3 2010 Earnings Call. Below is a summary of her statements:

Key Financial Results

  • Net Revenue Growth: 4.7% on an as-reported basis and 7.3% on a constant currency basis.
  • Operating Expenses: Decreased by 4.1% versus the previous year, primarily due to lower severance costs and reduced headcount.
  • Operating Income: $766 million, resulting in an operating margin of 53.6%, a 4.2-percentage-point improvement over the prior year.
  • Effective Tax Rate: Declined to 32.3% due to repatriation of foreign earnings and a lower state tax rate.
  • Net Income: $518 million, up 14.6% over the third quarter of 2009 and up 19% on a constant currency basis.
  • Earnings Per Share: $3.94 on a diluted basis.

Dilution Impact

  • DataCash Acquisition: Expected to have a 5% dilutive impact for the full year, with $0.02 of dilution in Q3 and the remaining $0.03 expected in Q4.
  • Hedging Transactions: Potential impact of up to $0.05 from hedging transactions to protect against adverse currency movements on the transaction price. A $0.03 negative impact was seen in Q3, with no further impact expected in Q4.

Operational Metrics

  • Gross Dollar Volume (GDV):
    • Worldwide GDV: Up 8.5% on a local currency basis and 7.8% on a U.S. dollar converted basis to $685 billion.
    • U.S. GDV: Down 1.7%.
    • Rest of the world GDV: Grew 14.9% on a local currency basis.
  • Credit GDV:
    • Worldwide: Grew 6.4% on a local currency basis.
    • U.S.: Slightly down, continuing a trend of quarter-over-quarter improvement.
    • Rest of the world: Grew 9.6% on a local currency basis.
  • Debit GDV:
    • Worldwide: Continued double-digit growth of 12.7% on a local currency basis.
    • U.S.: Declined 3%, but excluding the impact of deconversions, U.S. debit growth was 15.8%.
    • Rest of the world: Over 30% growth, driven by Asia/Pacific, Middle East, Africa, and Europe.
  • Cross-Border Volumes: Grew 15.4% on a local currency basis.
  • Processed Transactions: Up 0.6% compared with the previous year, with over $5.8 billion in processed transactions. Excluding portfolio losses, processed transaction growth was 12.9%.

Revenue Components

  • Domestic Assessments: Increased 11.4% due to increased volumes and the impact of 2009 and 2010 price increases.
  • Cross-Border Volumes Fees: Increased by 40.2%, with about two-thirds of the increase due to October 2009 pricing adjustments.
  • Transaction Processing Fees: Increased 0.6%, affected by the loss of some debit portfolios.
  • Other Revenues: Decreased 2.4% primarily due to lower compliance and research fees.

Rebates and Incentives

  • Increase: $159 million, with approximately $60 million due to rebates associated with the October 2009 cross-border pricing structure.
  • Overall Representation: 26.8% of gross revenue versus 21% in the previous year's third quarter.

Expense Details

  • General and Administrative Expenses: Decreased 6.7% primarily due to lower personnel expenses, driven by reduced severance costs.
  • Advertising and Marketing Expense: Up 4.7% versus the third quarter of 2009, primarily in support of campaigns in developing markets. The third quarter advertising and marketing spend was lower than expected as some programs were pushed out to the fourth quarter.

Outlook

  • Net Revenue Growth: Expected to be somewhat lower in the second half of 2010 compared to the 9.7% seen in the first half.
  • Contra Revenue: Expected to average 26% to 27% for the full year.
  • Total Operating Expenses: Expected to be down slightly versus 2009 levels, including severance charges, as the company reinvests in the business and key strategic initiatives.
  • Tax Rate: Expected to be as low as 34% for the full year.

Full Year Expectations

  • Objective: At least 20% net income growth for the full year on a constant currency basis.

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