萬事達 (MA) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MasterCard second-quarter financial results conference call.

My name is Colby and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Barbara Gasper, group head of investor relations for MasterCard.

Please proceed, ma'am.

Thank you, Colby.

Good morning and thank you all for joining us today either by phone or by webcast for a discussion about our second-quarter financial results.

With me on the call this morning are Bob Selander, MasterCard's President and Chief Executive Officer, who will be participating on our earnings calls from time to time;

Chris McWilton, our Chief Financial Officer; and Tara Maguire, Corporate Controller.

Following comments by both Bob and Chris highlighting some key points about the second quarter, we will open up the call for your questions.

In total, the call will last one hour.

For your reference, this morning's earnings release and slide deck that will be referenced on this call can be found in the investor relations section of our website at www.MasterCard.com.

These documents have also been attached to an 8-K that we filed with the SEC this morning.

A replay of this call will be posted on our website for one week until August 9.

Additionally, later today, we will be filing our second-quarter 10-Q which will provide additional details about our performance.

I also want to point out that our results are presented on a GAAP basis and in some cases on a non-GAAP basis.

We believe that the non-GAAP measures facilitate understanding of our operating performance and provide meaningful comparisons of our results between periods.

Any non-GAAP measures are reconciled to their most directly comparable GAAP measures in the reconciliations attached to our earnings release.

Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about MasterCard's future performance.

Actual performance could differ materially from what is suggested by our comments today.

Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings.

With that, I would now like to turn the call over to Bob Selander.

Bob?

Thank you, Barbara, and good morning, everyone.

During our IPO Roadshow in May, investors heard us describe the strengths of our three-tiered business model as a franchisor, a processor, and an advisor to our financial institution customers.

We highlighted our unified global organization, advanced network, powerful brand, and unique payment solutions as competitive differentiators.

Today, I am pleased to report that our results continue to reflect the strength of our business model.

While Chris McWilton, our CFO, will go through the details of the financial results with you in a minute, I would like to discuss the highlights and make a few comments about the second quarter.

Turning to page 2 of the slide deck, obviously the big event of the quarter was the completion of our IPO in late May.

Apart from being one of the most memorable days in my career, this event marked a turning point for our organization, providing us with a distinct competitive advantage in the marketplace, and positioning us as a driving force at the heart of commerce.

As we pointed out in our prospectus and Roadshow comments, the donation of shares of Class A Common Stock to the MasterCard Foundation in connection with the IPO was expected to result in a net loss for the second quarter.

The net loss was $2.30 per share.

However, without the impact of the share donation and other special items, including legal reserves and interest income on IPO proceeds that we held until redemption, we reported net earnings of $0.74 per share.

Our revenue growth was 9.7%.

That was driven by several things.

First, strong gross dollar volume growth; second, process transaction growth; and finally, a restructuring of cross-border transaction revenues which was implemented in April of 2006.

Including the impact of incentives related to the conversion of a large debit portfolio, and the higher advertising and marketing spending for the 2006 World Cup, we were able to deliver solid financial performance.

Additionally, our already-strong capital position strengthened, and we had $2.1 billion of cash, cash equivalents, and available-for-sale securities at quarter end.

I would now like to address a few topics that aren't covered in the slide deck.

Since litigation has been a topic of interest for many, in fact I think probably for all of you, there are a few items I would like to highlight in this area.

First, two weeks ago, MasterCard entered into agreements to settle certain currency conversion litigation and agreed to pay approximately $86 million related to these litigations.

We had previously established legal reserves of approximately $89 million in connection with these and other currency conversion cases.

We are very pleased to have these currency conversion cases behind us and hope to settle the remaining state cases in the near future, for which we currently believe we are adequately reserved.

Second, based on the progress of negotiations in connection with the settlements of certain other litigations, we added to our litigation reserves during the second quarter.

Finally, with respect to the AmEx, Discover, and Merchant cases, I don't have any new updates to offer at this time beyond what we have already stated in our SEC filings.

We have had several business successes during the second quarter as well.

You may have seen our press release about the growing success of the PayPass program, our contactless payment technology, which offers an alternative to cash.

At the end of the second quarter, there were almost 10 million PayPass cards and devices in the market, and 32,000 merchants that accept PayPass around the world.

We are quite pleased with the initial success of PayPass and view it as a value-added service that our customers and merchants can leverage with cardholders.

Also in the second quarter, the first major national decision in response to the introduction of the Single European Payment Area, or SEPA, was announced.

The Belgian Banking Association confirmed that Maestro, our global PIN-based debit brand, will become the country's new debit brand, replacing the existing national debit brand.

We are pleased with the Belgian Banking Association's decision and look forward to similar successes as future SEPA decisions are made.

Let me now turn things over to Chris McWilton, who will provide more details about the financial highlights for the quarter.

Chris?

Thanks, Bob, and hello, everyone.

Before I get into the specifics of our financial performance for the quarter, I would like to take a minute and explain the impact of three special items on our financials this quarter, which we detail in the middle column on slide 3.

First, based on the progress of negotiations in connection with legal settlements, we reported $23 million in legal reserves during the quarter.

Second, in connection with and simultaneously with our IPO, we donated approximately 13.5 million shares of Class A Common Stock to the MasterCard Foundation, which as you know is an independent private charitable foundation incorporated in Canada.

In connection with the donation, we recorded an expense of $395 million in the quarter, which was determined based upon the IPO price per share plus the marketability discount of 25%.

As previously disclosed, this expense is not deductible for income tax purposes.

Finally, we recorded $7 million in interest income on the IPO proceeds ultimately used for the redemption of Class B stock.

Excluding the impact of the share donation to the foundation as well as the litigation reserves, our operating margin for the quarter was 17%.

Also excluding the impact of these special items, we recorded net income of $101 million or $0.74 per share.

Including the impact of these special items, we reported a net loss of $310 million or $2.30 per share.

Turning to slide 4, in the second quarter we experienced continued growth in both gross dollar volume and process transactions.

Gross dollar volume, which represents the aggregate dollar amount of purchases made and cash disbursements of [payment of] MasterCard-branded cards, and includes the impact of balance transfers and convenience checks, grew 16.4% on a local currency basis and 16.7% on a U.S. dollar converted basis to $485 billion.

I would like to point out that our gross dollar volume now includes PIN point-of-sale volume on MasterCard-branded cards in the United States and certain Asia-Pacific markets.

We have included several tables in Appendix 8 of the slide deck for your reference.

These tables reflect minor adjustments to prior periods to include the comparable PIN point-of-sale volume.

Now, while not shown on the slide, purchase volume was up 17.5% on a local currency basis, and cash volume was up 13.6% on a local currency basis.

While the United States remains our largest region in terms of both volume and revenue, regions outside of the U.S., including Latin America, Southeast Asia, Middle East, and Africa, are growing at a faster rate, which demonstrates the global strength of our business.

Process transactions or the transactions processed by MasterCard's network, including Maestro and Cirrus online debit transactions, increased 17.7% in the quarter.

Overall net revenue for the quarter was $846 million, a 9.7% increase versus 2005.

Currency fluctuations in the quarter were negligible and had negligible impact on the revenue growth.

We are very pleased with this growth, as it is at the high end of our long-term objective of 8% to 10% which we previously communicated.

Revenue growth of approximately 3.2% was attributable to pricing changes which I will discuss in just a moment.

Looking at the revenue growth by category, slide 5 shows that net assessments, which are primarily volume based, decreased by $49 million or 17.3% to $234 million.

This decline versus overall GDV growth of 16.4% on a local currency basis was due to increased pricing pressure, evidenced by a 66.7% increase in rebates and incentives.

Gross assessments increased $35 million or 8.6% over 2005, due to the increased GDV, offset by pricing changes that were implemented in Europe during April to address SEPA requirements.

On the whole, these pricing changes are expected to be only slightly revenue positive.

However, they do impact individual revenue categories, including the currency conversion and cross-border component of operations fees, which I will get to in a moment, as well as the assessments.

As a result of these pricing changes, certain assessment fees totaling $33 million were reclassified to the currency conversion and cross-border component within operations fees.

Unfortunately, we are not in a position to comment further on the specifics of this pricing for competitive reasons.

Based on this reclassification and the expected increase in rebates and incentives, we expect continued negative net assessment growth for 2006.

Net assessments as a percentage of gross assessments declined due to an increase in incentives from the large debit card portfolio conversion in the U.S. that Bob just mentioned, and renewed customer and merchant agreements.

Just a reminder that under our accounting policies card conversion costs are recorded as contra revenue in the period the card is actually converted.

Turning to slide 6, slide 6 shows that net operations fees, which are typically transaction-based, increased $123 million or 25.2%.

Gross operations fees increased $152 million or 29.1%.

Growth is mainly driven by three items.

First, growth in process transactions and gross dollar volume that I previously described on slide 4.

Second, a restructuring of currency conversion and cross-border revenues which took place in April 2006 and resulted in an $86 million increase over the comparable period last year.

We restructured our currency conversion pricing by initiating a charge for issuers and acquirers for all cross-border transactions, regardless of whether we perform the currency conversion or it is performed by a third party at the point-of-sale.

We also generally decreased the price we charge to issuers for currency conversion.

Finally, included in the $86 million increase is the reclassification of $33 million from assessments to operations fees which I just mentioned on slide 5.

Net operations fees as a percentage of gross operations fees declined on a year-over-year basis due to an increase in rebates resulting from customer consolidation and the restructured pricing I just mentioned.

This decline was expected.

As I mentioned in the past, we expect pricing pressure to continue and the spread between gross operations fees and net operations fees to continue to increase.

Turning to expenses on slide 7, total operating expenses increased 93.4% to $1.1 billion during the quarter.

This increase was driven by four factors.

First, a $46 million or 14.4% increase in G&A, general and administrative expenses, primarily due to a $26 million or 12.5% increase in personnel expenses as we roll out and support our strategic initiatives.

Second, a $75 million or 32.6% increase year-over-year in advertising and marketing expenses, primarily driven by our sponsorship of the 2006 FIFA World Cup.

Third, a $400 million expense associated with contributions to the MasterCard Foundation, broken down into $395 million from the donation of shares, a non-cash charge, and a $5.5 million cash contribution to support the foundation's operating expenses.

Last, a $23 million increase in reserves for litigation settlements which I previously mentioned.

Currency fluctuations had a negligible impact on expense growth for the quarter.

Switching over to slide 8 and beginning with the balance sheet, we ended the second quarter of 2006 with $2.1 billion in cash, cash equivalents, and available-for-sale securities, an increase of approximate $800 million from the end of 2005.

We had $2.1 billion in stockholders' equity.

Appendix B to the slide deck provides more detail on the adjustments made to stockholders' equity as a result of the IPO.

Accounts Receivable increased $63 million primarily due to the SEPA related pricing recalibration in Europe as previously mentioned, resulting in quarterly collections of certain revenues compared to weekly, monthly collections, as well as the volume increases when compared to the fourth quarter of 2005.

Accrued expenses decreased $96 million, primarily due to the payment of year-end personnel, advertising, and incentive accruals.

Obligations under legal lawsuits increased $44 million, due to legal settlement accruals and interest accretion on the U.S.

Merchant lawsuit liability.

Turning to the cash-flow statement, we generated $184 million in cash from operations year-to-date.

We realized approximately $650 million in net cash from the IPO.

Turning to slide 9, for those of you who are trying to model our third-quarter performance, I would like to remind you about three items that affected third-quarter performance last year and will not recur this year.

First, a $19 million general and administrative expense related to an accounting methodology change for a cash-based award plan.

Second, a $48 million reserve related to currency conversion litigation.

Third, an $18 million benefit recorded in other income resulting from a customer breach of a business agreement.

While we do not provide earnings guidance, I would like to reaffirm our three to five-year performance objectives that we previously communicated, 8% to 10% revenue growth per year; 1 to 2 point improvement in operating margin per year; 15% to 20% net income growth per year.

And while we strive to achieve maximum return on equity, at least 20% return on equity, excluding the $650 million proceeds from the IPO until we can get that effectively deployed in the business.

In summary, I think Bob and I and the rest of the management team are very pleased with our overall performance in the second quarter and look forward to the remainder of the year.

We're now ready to begin the question-and-answer period.

In order to get as many people as possible in our allotted one-hour total time frame, we ask that you limit yourself to a single question with one follow-up.

If you have more questions you can just requeue into the order.

Operator, could you please go through the queuing process?

(OPERATOR INSTRUCTIONS) Anurag Rana with KeyBanc Capital Markets.

Congratulations on a good quarter.

Just the one question I have is on assessments.

I know there were some larger than expected because of the debit card portfolio conversions.

What should we expect going forward?

Thank you for the kudos on the quarter.

We are very pleased with it.

I think, overall, we continue to strive for that 8% to 10% revenue growth that we have communicated in the past.

You are going to see on a quarter-to-quarter basis fluctuations between assessments and operations fees growth, depending upon what incentives we have in play, whether we have got card conversions in play, etc.

As a management team, we look at the total, the revenue sort of in its entirety.

The management team is not organized or aligned against operations fees or assessments individually.

We look at the totality of the revenue base and the way we are servicing our customers.

So I continue to believe that 8% to 10% guidance is solid.

Obviously, the 9.7% we got for this quarter is at the top end of that range.

Thank you, and just one follow-up.

If I look at the operations fee per transaction, and I think for the first time in many quarters I have seen it has trended up somewhere in the $0.15 range, again, do you think this level of -- this is sustainable?

Well, we put in place, as I mentioned on the call, some pricing restructuring around currency conversion.

That is why you are seeing the operations revenue per transaction bump up this quarter.

We're hopeful that we can sustain that pricing in the marketplace.

That pricing was put in place to protect a very important revenue stream to the Company, the cross-border revenue stream.

At this point in time we are optimistic we can maintain that.

Thanks so much.

Pat Burton with Citigroup.

Congratulations as well.

My question will deal with the macroenvironment.

Certainly would not appear from your numbers, but have you seen any slowdown on the consumer side between rising interest rates and the rising price of gasoline?

Then I have a follow-up.

Thanks.

Bob Selander.

I guess my quick answer to that would be -- no, not yet.

We had very strong purchase volume growth globally in the quarter.

You can see that we were up about I guess 17.5%.

In the U.S., we were up 18.6% on purchase volume growth.

I think what we are seeing is, obviously, every consumer senses it when they pull into a gas pump.

We're seeing very significant increases in the results coming out of that piece of the retail sector.

Generally, of course, the global economy has continued to do quite well.

Given that we are displacing a lot of paper-based mechanisms such as cash and checks still, we have obviously been growing at or above the rates of most economies around the world for quite a while now.

Having said that, you know that as an economy the size of the U.S. or some other economies around the world, if they start to slow down significantly, that will eventually work its way back through to our customers, cardholders, and merchants, which obviously will affect our business.

But so far, the second quarter indicated very strong, continued consumer spending levels.

Thanks.

The follow-up is for Chris on the large debit account conversion.

Is that primarily behind you now?

Will we see the benefits moving forward?

Thanks.

Yes, actually, we saw some benefits in the quarter itself, Pat.

Those cards got out there in the marketplace and we saw some volume uptick from that.

The card conversion costs are behind us.

The conversion was completed and closed down at the end of June.

We will have some ongoing sort of volume-based or marketing-based incentives going forward.

So I can't say all those costs are behind us.

But certainly the ones that sort of are accelerated because of our accounting policies are now behind us.

Thank you and congratulations again.

Craig Maurer with Soleil Securities.

Two questions.

The first, the volume growth in the U.S. was significantly higher than what I was expecting.

To hopefully add to your last answer, can you define how much of that was driven by the card conversion in the quarter?

Two, would it be possible to discuss more specifically the marketing expenses related to the World Cup, to better help us model what 2Q would look like in years to come?

Thanks.

Yes, let me make a couple comments there, Craig.

In terms of the volume growth in the U.S., I mentioned purchased volume growth was up 18.6% in the U.S.

If you peel that back a bit -- and I think this is in either one of the attachments that we gave you, in terms of slides, or it will be part of the press release attachments -- we do break out credit and debit growth rates in the United States.

Credit growth in the U.S. for the quarter, if I remember the number correctly, was something like 45%, 47%.

Did I say credit? (multiple speakers) Debit growth was about 47%.

That, if you were to go back and look at what the first-quarter growth rate was over the prior period, you'll see there is a considerable acceleration in growth in debit in the U.S.

That can give you an idea of the impact of the card conversions that have taken place over the course of the last several months, including the significant one that we have been describing in terms of the impact on the second quarter.

With regards to World Cup marketing, once again, I think if you go back and look at second quarter of 2005, and then look at the marketing for 2006, there is about a $75 million increment.

I am not going to say that all of that was World Cup; but I'm going to tell you that we spent a lot of money.

We had a lot of customers very engaged in doing cobranded cards, doing local promotions with merchants in various countries around the world, in doing promotions with their cardholders to encourage them to use their MasterCards.

So that marketing spend as you can see relative to last year, was up quite significantly.

When we sit down and, I guess, do our budget at the beginning of the year, we think about the opportunities we have and how we're going to take advantage of that budget.

So we obviously saw the World Cup as a major opportunity and allocated a good portion of this year's budget to the second quarter.

Okay, thanks.

Elizabeth Grausam with Goldman Sachs.

First question, on SEPA and the win out in Belgium.

Can you give us a sense kind of where you are on the continent and how many other countries are really taking a good hard look at this?

Because it seems to be a little bit earlier than we had possibly expected some of these decisions to be made.

Yes, Liz, I think what we have got is everybody in Europe, every financial institution and many of the sort of country organizations, which are usually the consolidated processors that have been put in place in many of these markets, is working hard to get themselves in a position to comply with the expectations of the Single European Payments Area.

There are two or three things going on.

First of all, there is obviously the harmonization of pricing, so that within a domestic country the fees that a cardholder would see or a business would see have to be consistent with what they would see when they travel outside of that country within the European Community.

In terms of the impact on us, in addition to having that harmonization that we wanted to put in place, there was also an expectation that we break out brand and processing and not bundle those.

So that we are required to offer brand and processing services.

Now obviously, we're going to be out there trying to sell both of those.

We see a great opportunity in terms of processing in Europe, given that we currently have about, I don't know, probably 70% share of the debit cards in the marketplace with about 250 million Maestro cards across the European Community.

The Belgians are looking at the restructuring of their shared utility; and so I think in their decision-making process, they separated brand from processing and they have committed the brand to us.

They had already had generally our brand on their card, but it did not operate for the domestic marketplace.

Now they're saying they are going to make it operate both in Belgium and cross-border.

So we think that is a good start.

We're working hard with obviously lots of other either country-level organizations or individual financial institutions, and I am looking forward to seeing more successes over the next year or two as these decisions get made.

Great, thanks.

Then a question for Chris, back to the currently conversion and the change in pricing.

From your comments, can we infer that you are now charging a higher price to -- at the acquirer base, at the merchant level point-of-sale, and actually lowering the pricing to issuers?

Is that is how it is working?

When did the pricing change go into effect during the quarter?

It went into effect, Liz, on April 1.

Basically, what we're doing now is we are charging issuers and acquirers a fee for a cross-border transaction.

Again, whether or not we actually convert the currency.

We also charge a fee to the issuer for converting the currency, although we have lowered that actual currency conversion price itself.

Again, that rolled out the 1st of April and we saw some nice revenue growth surrounding that.

Thank you.

Chris Brendler with Stifel Nicolaus.

Can you give us I guess a little bit of the background and rationale for the change in your GDV calculation for now, including PIN debit?

And maybe give us what it would have been without PIN.

Then remind us sort of the revenue stream that you get on PIN.

I assume it is a lot lower and that is why you had excluded it in the past.

Maybe give us a little color there, please.

Yes, we have included now PIN, MasterCard PIN POS debit volume in our calculations.

We had not previously included them in the past.

They were not a significant component of our revenue base.

However, with the rollout of some of the new debit card portfolios and the growth that we have in signature-based debit as well as PIN-based debit, we thought it would be appropriate to include that in our statistics going forward.

I think the overall impact on GDV growth was about 1.2% by including those.

A big part of that was due to the conversion of the -- that U.S. debit conversion we talked about during the call.

Okay.

Then just a follow-up, quickly.

Should we expect basically the inclusion of PIN debit, if we look at revenues, assessments, and operations fees as a percentage of volume, would that be a little bit lower now given the inclusion of PIN debit?

Could you repeat that?

I'm sorry, I didn't (multiple speakers).

I'm just trying to figure out the margin on PIN debit versus your other business.

It would seem to me in the -- before this report that you had excluded PIN debit partially because it was a smaller number, but also because it was a lower margin business.

You are correct that the margins on PIN debit do tend to be lower than the signature debit margins.

Okay, so going forward, see a little bit lower?

Yes.

All right, thank you.

Chris Mammone with Deutsche Bank.

I noticed that second-quarter cash flow was down year-over-year.

I was wondering if you could go over the components there.

Also if you have cash flow and CapEx expectations for the full year?

I'm sorry, Chris, we had a little bit of difficulty with the line there.

You said the --?

Yes, cash flow in the second quarter I noticed was down a bit year-over-year.

I wondered if you could give me the components of that.

CapEx?

Cash.

Cash flow from ops.

Yes, I think the cash flow from operations, we have talked about the fact that we did recalibrate pricing in Europe and went from a mechanism where we were billing daily for some volumes to those which we are -- to a new mechanism where we are billing monthly or weekly.

So that has slowed down the cash flow on the receivables side, I think, fairly significantly.

I think that is a key driver of that.

Okay.

(inaudible) But long-term, I don't think it is indicative of anything fundamentally with the business.

Okay.

The CapEx standpoint, I think what we have communicated in the past was if you look at the past couple years, you're going to get a good indication of where our CapEx expectations are.

Nothing huge in terms of new systems requirement, network buildout, etc., to maintain the volumes on the network.

Okay, thanks.

Ken Posner with Morgan Stanley.

I was looking at the GDV numbers for -- were very strong.

Probably one of your more mature markets is U.S. credit.

In particular there, I noticed in the market a lot of competition for the affluent cardholder.

I am wondering if you can give us an update on the success of the World card program or mention if you have other programs targeting affluent cardholders.

I don't know if you disclosed any numbers on GDV for cards in that program, but that would be helpful if you have.

You are correct, Ken, we do not disclose data on products that are individual within the credit segment, if you will.

We break out debit and credit, and obviously we had very strong debit growth, as I mentioned earlier, in the U.S.

In fact, globally; but the U.S. in particular, where it was up 47% quarter over prior year same quarter.

Credit in the U.S. in terms of purchase volume was up 9.7%, which is, we think, pretty strong, given the relative size and relative maturity of this market.

I can tell you that our customers around the world are asking us to work with them on an increasing basis in terms of a premium and affluent offering, and so I would anticipate that there will be some more things happening over time as long as our customers continue to ask us for that kind of support.

There is a perception, then, that you are behind Visa in this category.

Is that unfair?

I don't know how to answer that one.

I think we are hitting on several cylinders here, and I expect we will continue to do so for the rest of the year.

We don't necessarily look at a particular single area as one that we want to win, lose, or draw on, versus certain other competitors.

Rather, we're really focused on -- what are our customers' priorities?

And the customers' priorities will vary from one market and one customer to another.

The three common themes that we continuously are running into today are they want help with strategy; in other words, help us lay out where we are going and how we can get there with our payments business.

Second, they want innovation; so for example, the response to PayPass has been just spectacular.

Third, they want really capable people.

So we have spent the last 18 months putting teams in place against the top 75 customers that we do business with, and also adding to our MasterCard Advisors' capability, that intellectual capital if you will.

Those are the kinds of things that our customers are asking for, which then manifest themselves, obviously, in actions in the market by our customers.

May I ask a follow-up on the contactless program?

The early results are encouraging; and I can see how the contactless cards could be a strategy that ultimately would compete with PIN debit fairly effectively.

The 35,000 -- I think it is 35,000 merchants that are signed up so far on the contactless programs, are we getting to the point where it would be logical to put serious resources and dramatically push the signup of merchants on these new terminals into the hundreds of thousands and eventually millions?

I think one of the things that we're seeing is, now that we are beyond pilot phase, we are still learning a lot.

Let me put it that way.

We do have about 10 million of these devices out, principally in the United States; although, we have launched in other markets around the world, Taiwan, Thailand, etc.

As you know, we began a pilot in New York City with the Metropolitan Transit Authority just this past month I guess; it launched in July.

So we are still in what I will call a learning, validation of business case.

If you saw that press release we put out back in July, I guess it was, there are a couple of things that are coming through there in terms of the increased numbers of transactions -- i.e., consumers are definitely paying more frequently with their cards when they have the contactless device either in the card or as a complement to their card, in a key ring or some such thing.

Secondly, where the merchants have put in the PayPass terminals, we are seeing significantly enhanced consumer loyalty -- i.e., the frequency of purchases of those merchants has gone up dramatically versus what it was prior to PayPass for a given cohort of customers.

We believe those things are going to start to create some pull.

We are going to start to see merchants and more issuers start to say, hey, let's participate, let's get involved with this.

That is the stage we are at today.

Okay, that is exciting.

Good luck with that and thank you.

Robert Dodd with Morgan Keegan.

Congratulations on the quarter.

Just another question about the marketing, the advertising and marketing.

Obviously a big spike related to the World Cup.

If we look back at Q1, it was up $10 million year-over-year.

Would that have been a more normalized kind of figure?

Then I guess the follow-up is, how should we think about it in terms of just dollar growth, or do you budget it on a percentage of projected revenues?

We don't actually budget it on a percentage of revenue.

We target an operating margin and an operating margin growth, which would encompass both general and administrative costs, as well as advertising and marketing costs.

We look to what our customers are expecting us to do to support the brand, and try to come up with a mix and a budget that supports their needs as well as drives the revenue growth we're looking for.

Then we develop what we feel is an appropriate ad plan for the year, and G&A to support rollout of the strategy with personnel costs, and try to achieve that 1 to 2 point improvement in operating margin per year.

I think as we indicated on the Roadshow, going forward you are probably going to see higher growth rates in advertising and marketing and lower growth rates -- I'm sorry, higher growth rates in G&A, and lower in advertising and marketing going forward.

So that is how we would think about it.

Think about that margin in total; that is how we think about it internally.

And perhaps a little slower growth in A&M and faster growth in G&A.

Bob mentioned people, that our customers want people and talent to help with strategy and growing their card portfolios.

So we're going to be spending more on human capital going forward perhaps than on the brand.

Okay, got it.

Thank you.

(OPERATOR INSTRUCTIONS) David Siino with Gabelli & Company.

Quick question for Chris.

The 3.2% positive delta in pricing, that was a net effect of the various adjustments you made in currency conversion?

Yes, it was.

Okay, thank you.

Tien-Tsin Huang with JPMorgan.

On the advertising front, should we assume that the FIFA World Cup sponsorship will end at fiscal year-end?

What is the latest there?

If so, can we expect that the World Cup spend will get reallocated elsewhere?

Or should we expect, I guess, a downtick in 2007?

We have had some commercial disputes with FIFA regarding the renewal of that sponsorship for the 2010 and 2014 World Cups.

We are optimistic we are going to either retain those rights or, if we can't retain those rights, we have other sponsorships, major sponsorship properties including soccer.

The UEFA Champions League we sponsor in Europe is a very popular event in that region of the world.

And other sponsorship properties which we -- I think we can deploy our resources against.

So I don't think management is going into the next several years saying we are going to lose World Cup and therefore we are going to cut out advertising and marketing line back dramatically.

We would like to keep it.

It's been a great property for us.

If we don't keep it, I think we have adequate alternatives to deploy the capital.

We are going to continue to invest in the brand as our customers require.

So I wouldn't think about, if you were modeling, I would not think about dramatically reducing ad and marketing spend if for some unfortunate reason we don't retain the rights.

Got you.

Then the Belgian banking win, is there a conversion fee that we should consider there?

Just generally how does the margin on that type of business compare to the corporate average?

We obviously can't get into the specifics of a customer deal.

But one of the advantages or benefits we have is that I believe almost every one of those cards in Belgium already had Maestro on it for the purposes of cross-border transactions, as compared with the domestic brand that was utilized within Belgium.

So we have a situation where the banks will in the course of their reissuance cycle be converting these cards to be singularly branded.

From a timing standpoint there's no pressure to get that done.

Keep in mind they still have their domestic processing structure in place.

So I would expect that that will happen over the normal reissuance cycle of these cards, and unlike the other deal that we just discussed in the U.S., where we accelerated the conversion with upfront incentive payments.

But just generally, directionally, the margin -- how does that compare to the corporate average at a high level?

I think we are trying to avoid commenting on specific customer deals.

I don't think we will be able to address that one.

Understood.

Nice job in the quarter.

[Darren Peller] with Lehman Brothers.

Can you comment on the total transactions process right now?

I remember during the Roadshow you had mentioned there is approximately 40% of total transactions that occur with MasterCard-branded cards, are actually processed.

Is that still status quo?

We are growing it moderately.

I don't think we have moved the needle to any meaningful amount this quarter.

I think 4 and 10 is probably still a good estimate if you are doing some modeling.

Okay, then can you also maybe comment a little bit on what is going on, on the regulatory front, in the European market?

Yes, I will take that one.

There are two things I think that were relatively significant events.

The first was the Office of Fair Trading in the UK.

We took the Office of Fair Trading to the Competition Appeals Tribunal, the so-called CAT, in the UK.

What happened was that the Competition Appeals Tribunal set aside the Office of Fair Trading's September -- I think it was September 2005 -- decision that our interchange fees in the UK violated UK and EU competition law.

Now, I view that as a victory.

On the other hand, it occurred after the OFT requested the Tribunal to withdraw its decision.

Now that effectively ends the case against our interchange fees in the UK for the period prior to, I guess, it was November 2004.

I should also add there is something nice about the UK legal system in that the Competition Appeals Tribunal also awarded us about a third of our costs, our legal costs incurred at the appeal.

In terms of the second development there, it would be with the European Commission.

Coincidentally, at about the same time that the Competition Appeals Tribunal set aside the OFT decision in the UK, the European Commission issued a supplemental statement of objections.

This is something we have been going on and on with the European Commission, on the subject of within Europe cross-border interchange fees for several years.

They had advised us and we had fully anticipated receiving this supplemental statement of objections.

We have until I believe it is October 15 to respond; and we will do that.

We think we have facts and experiences that are very different from the ones that were part of the suppositions presented by the European Commission.

After that, we have the opportunity to request a hearing.

We have been informed or the Commission has made it clear that there are no potentials for fines against MasterCard, even if they should determine at some point in time that our cross-border interchange fee violates their competition rules.

That is because of the way we handled our compliance with the filing process from the time that those fees were originally put in place.

I think those were the two sort of big things going on in Europe over the last quarter.

Okay, thank you.

At this time, there are no further questions in queue, so I will now return the call to Mr. Selander for any closing remarks.

Well, thank you all for joining us.

I think just to summarize, our recent business success coupled with our network, our brand, our unique payment solutions, and our customer-focused strategy really make me and make the team very confident that we are positioned for future growth.

I believe that our second-quarter results are a good indicator that we are on the right path.

So thank you all for joining us this morning.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.