萬事達 (MA) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 and full-year 2006 MasterCard earnings conference call.

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

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

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

I would now turn the presentation over to Ms. Barbara Gasper, Head of Investor Relations.

Please proceed, ma'am.

Thank you, Lateisha, and good morning to all of you joining us on the call either by phone or webcast for a discussion about our fourth quarter and full-year financial results.

With me on the call this morning are Bob Selander, our Chief Executive Officer, Chris McWilton, Chief Financial Officer, and Tara Maguire, our Corporate Controller.

Following comments by Bob and Chris highlighting some of the key points about the fourth quarter and full-year, we will open up the call for your questions.

In total the call will last up to one hour.

For your reference, this morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our Web site 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 Web site for one week until February 16th.

I also want to point out that our results are presented in 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 here 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 the turn the call over to Bob Selander.

Bob?

Thank you, Barbara.

I'd like to discuss the financial highlights for the quarter and make a few comments about the full-year.

Turning to Page 2 of the slide deck, I'm happy to report that the strength of our global business model and the momentum of the overall payments industry has resulted in impressive fourth quarter results.

We delivered net income of $41 million and earnings per share of $0.30.

Revenue growth was 17.2%.

This was driven primarily by strong gross dollar volume growth, processed transactions growth and the continued impact of restructuring of cross-border pricing which was implemented in April of 2006.

During the quarter we contributed $14.5 million to the MasterCard Foundation.

Our operating margin was 5.5%.

Additionally, we generated $650 million of cash from operations during 2006, and we further strengthened our already solid capital position ending the year with $2.5 billion of cash, cash equivalents and available for sale securities.

Finally, with respect to competitor and merchant lawsuits, we don't have any new updates to provide at this time.

Turning to Page 3.

While our presentation today is primarily focused on the quarter, I'd like to take a minute to reflect on the truly monumental year we had in 2006.

MasterCard had the largest U.S. listed IPO in 2006 with year-end stock price appreciation of over 150% since our pricing on May 24th.

In conjunction with our IPO, we also transformed our governance structure appointing a new Board of Directors with global representation.

In addition, in 2006 we celebrated our 40th anniversary and successfully launched our new corporate brand, MasterCard Worldwide.

In connection with our IPO we established the MasterCard Foundation to support micro finance initiatives and youth education around the world.

We made great progress with our PayPass initiative which has opened up new acceptance channels for us.

Over 12 million cards and devices have been deployed and can be used at over 46,000 merchants worldwide.

Additionally, the first major national decision in response to SEPA, the Single European Payments Area, our Maestro product became Belgium's national debit brand.

We also continued to develop innovative products and services including the launch of our World Elite with HSBC and Saks Fifth Avenue, a product geared to the affluent cardholder.

On the acceptance front, we strengthened relationships with merchants and were quite pleased when Sam's Club announced their acceptance of MasterCard during the fourth quarter.

We continue to differentiate ourselves with our customer-focused strategy and our advisors capability which has helped us to strengthen existing customer relationships and to forge new ones.

Our business successes in the year have produced strong operational performance for the Company.

For the full-year 2006 we reported almost $2 trillion in gross dollar volume, a 14.9% increase from 2005.

We had full-year purchase volume growth of 16.9%, and card growth of 12.3% to over 800 million MasterCard branded cards globally.

Although legal and regulatory challenges still exist, 2006 was the most significant year in our history.

We believe we are poised to continue to take advantage of secular trends, deliver on our commitment to enhance the profitability of our customer's businesses, and improve shareholder value.

One example of increasing shareholder value was detailed in our press release today where we announced an increase in our quarterly dividend from $0.09 to $0.15 per share to be paid on May 10th to holders of record as of April 9, 2007.

We are pleased that our business successes and the strength of our capital position has allowed us to increase our dividend.

With that, I will now turn the call over to Chris McWilton who will go through the detailed financial results with you.

Thanks, Bob.

Let's turn to Page 4 of the slide deck for more details on the financials.

As you can see, net revenue for the quarter was $839 million, a 17.2% increase over 2005, as Bob just mentioned.

Currency fluctuations contributed 1.9 percentage points of the revenue increase and approximately 5 percentage points was attributable to pricing changes implemented in April of 2006.

Adjusting for litigation settlements of approximately $2 million, our net income was $42 million, or $0.31 per share, and our operating margin was 5.7% compared to a negative 9.9% in 2005.

Turning to Page 5.

In the fourth quarter we experienced continued growth in both GDV and process transactions.

Gross dollar volume grew 13.8% on a local currency basis and 16.8% on a U.S. dollar converted basis to $532 billion.

U.S. dollar converted growth is more indicative of our revenue growth since assessments are made on U.S. dollar volume except in Europe.

Although not shown on Page 5, purchase volume was up 16.7% on a local currency basis, and cash volume was up 6.5% on a local currency basis.

While the U.S. remains our largest region in terms of both volume and revenue, regions outside of the United States such as South Asia, the Middle East, Africa, and Latin America continue to grow at a faster rate, demonstrating the global strength of our business.

Processed transactions, or the transactions processed across MasterCard's network, increased 17.4% to $4.4 billion in the quarter.

For the full-year processed transactions grew 17.5% to $16.1 billion transactions.

Additional details about our operating performance can be found on Page 9 of our earnings press release.

Before we begin a discussion about revenue by category, I'd just like to take a minute for one point of clarification.

Since the functional currency of our European operations is the euro, our revenue is positively impacted by the strengthening of the euro against the U.S. dollar.

Page 6 shows that net assessments which are primarily volume driven, decreased by $12 million, or 6.4% to $177 million.

This decline versus overall GDV growth was due to a 27.8% increase in rebates and incentives to customers and merchants in the quarter.

Gross assessments increased $53 million, or 12.4% over 2005 due to increased GDV, offset by the reclassification we discussed in prior calls implemented in Europe during April 2006 to address SEPA requirements.

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.

Net assessments as a percentage of gross assessments declined due to an increase in incentives primarily from new and renewed customer and merchant agreements.

As I mentioned in the past, based upon the reclassification and the expected increase in rebates and incentives we expect continued negative net assessment growth for 2007 and the spread between gross assessments and net assessments to continue to increase.

Turning to Page 7.

You can see that net operations fees which are primarily transaction-based increased $135 million, or 25.6%.

Gross operations fees increased $159 million, or 27.3%.

This growth was driven by mainly two factors, first, growth in processed transactions and gross dollar volume dollar that I previously described on Slide 5, and secondly, the restructuring of currency conversion and cross-border revenues which took place in April 2006 and resulted in an $86 million increase in the fourth quarter over the comparable period last year.

Included in the $86 million increase is a reclassification of $33 million from assessments to operations fees which I just mentioned on Slide 6.

Net operations fees as a percentage of gross operations fees declined slightly on a year-over-year basis as expected due to an increase in rebates resulting from consolidation of major customers and the impact of the restructured pricing I just discussed.

Turning now to Page 8 for some comments on expenses.

Total operating expenses decreased 2.6% to $793 million during the fourth quarter.

However, as detailed in Appendix A of the slide deck excluding the impact of litigation settlements operating expenses actually increased by .5%.

This increase was primarily driven by the $14.5 million cash contribution to the MasterCard Foundation made during the quarter.

This contribution was consistent with our previously disclosed intention to contribute up to $40 million in cash to the Foundation over four years.

This quarter's contribution combined with the one we made back in the second quarter resulted in a total contribution of $20 million for the full-year 2006.

As you may remember, these contributions are not deductible for income tax purposes.

Also, we had a 6.4% increase in general and administrative expenses primarily due to two factors, first an increase in professional fees primarily related to legal costs to defend outstanding litigation, and second, an increase in personnel costs as we continue to develop our customer focused strategy.

And just as a quick aside we ended 2006 with approximately 4,600 full-time employees.

Offsetting the increase in charitable contributions and G&A expense was an expected 8.5% decrease in advertising and marketing expenses due to a shift in the typical annual pattern of marketing spend to support our sponsorship of the 2006 World Cup soccer event earlier in the year.

Currency fluctuations contributed approximately 1.5 percentage points of the increase in expenses for the quarter.

Moving to Page 9.

We generated $650 million in cash flow from operations during 2006, and we ended the year with $2.5 billion in cash, cash equivalents and available for sale securities, a $1.2 billion increase from the end of 2005. $650 million of this increase was received, as you remember, as part of our IPO proceeds.

We also had $2.4 billion in stockholders equity.

Accounts receivable increased $104 million primarily due to two key factors.

First, the repricing calibration in Europe in April of 2006 resulting in a change in the frequency of revenue collections, and, second, higher volume and assessments on cards.

Obligations under the U.S. merchant lawsuit and other litigation settlements decreased by $128 million due to payments of litigation settlements which were offset by $67 million in accruals and interest accretion.

Turning to Page 10.

As you know, we don't provide quarterly or annual guidance but there are a few 2007 items that I would like to highlight for your consideration as you develop your models.

First, there were no items that we would classify as special in the first quarter of 2006.

Second, the first quarter of 2007 will be the last grow over quarter we will have in terms of the cross-border pricing changes we implemented in April of 2006.

Starting in the second quarter of 2007 we expect that our year-over-year revenue growth rates will represent apples-to-apples comparison.

Last, our A&M spend in 2007 will be more indicative of a non-World Cup year versus a pattern of spend we experienced in 2006.

Just as a reminder, we did not increase our full-year 2006 A&M budget specifically for the World Cup, rather, we reallocated our annual spend so that it more closely parallels the timing of the events primarily in the second quarter of 2006.

Finally turning to Page 11, let's just take a minute and review our progress against our three to five-year performance objectives which are 8 to 10% revenue growth, a 1 to 2 percentage point improvement in operating margin per year, 15 to 20% net income growth, and at least 20% return on equity excluding IPO proceeds of $650 million.

Compare our full-year 2006 results to these long-term performance objectives our revenue growth was 13.2%.

The cross-border pricing changes implemented in April of 2006 contributed approximately 3 percentage points of that growth.

Our full-year operating margin of 19.5% represents a 2.9 percentage point improvement over 2005 when we adjust for special items.

The improvement was mainly due to strong top line and volume growth and our ability to leverage our network and global brand.

Our net income growth was 44.2% adjusted for special items.

Again, improvements here can be attributed to the strong top line and volume growth in the year.

Our return on equity excluding the impact of the IPO proceeds of $650 million was 30.9%.

While we made good progress against these objectives remember that our long-term performance objectives are on average and over a three to five-year time horizon.

On an ongoing basis we evaluate whether changes to any of these long-term performance objectives is required.

In summary, we're obviously really pleased, very pleased with our overall performance in the fourth quarter and the full-year 2006.

We're now ready to begin the question and answer period, and 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 and then requeue back in if you have additional questions.

Operator, could we begin the question-and-answer session, please?

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Moshe Katri with Cowen and Company.

Please proceed.

Hey, thanks.

Good morning and congratulations for a very solid quarter.

Can you comment on your appetite for acquisitions, especially in Europe, and then talk a bit more about your SEPA strategy?

Thanks.

Good morning, Moshe.

A couple of thoughts on acquisitions.

I think we described that we have a strong capital position which we think of as giving flexibility, flexibility to deal with challenges but also to move on opportunities that may come along.

From our perspective we may well encounter some acquisition opportunities.

We would put them through, I guess, a standard process, one, are they strategic, do they fit with what we're trying to get done with our customers, align with our business model.

Secondly, do they make it through the financial hurdles.

Thirdly, do we believe we can integrate that activity into the Company, and to the degree we don't have experience managing that business, will we be acquiring the talent, the management skills we need to succeed.

Obviously, if you take a look at SEPA, what's going on in Europe, 2008 and 2010 are the two principle milestones where banks in Europe will be offering their customers the opportunity to have a similar experience in non-national markets that they currently enjoy in the domestic markets.

And as a result we see the European banks moving to identify brands that will enable their customer to say use a single brand throughout Europe and also moving to have a processing environment where they enjoy economies of scale and obviously the flexibility of dealing, if possible, with a single processor providing better value than they might have today.

We think we're extremely well positioned for that opportunity.

Globally we have over 600 million Maestro cards, approximately half of those are in Europe today.

I mentioned in earlier that the Belgium banks have made a decision to embrace Maestro as their domestic brand and of course we've had prior successes in Austria and the U.K.

So we're feeling pretty good about the opportunity SEPA offers for us and our position in order to take advantage of those.

Thanks.

Your next question comes from the line of Liz Grausam with Goldman Sachs.

Please proceed.

Thanks, guys.

Just to follow-up on Moshe's question on SEPA, you started to win some deals obviously in Belgium.

When does this start to actually impact your revenue growth, and is there, you know, an expense structure, an incentive payment that's going to be associated with conversions of card portfolios in some of these transactions out in Europe?

The impact to revenue growth will vary depending on the nature of the agreements or deals that we reach as SEPA is embraced at different rates, quite candidly, by individual banks or financial institutions across Europe.

While it wasn't necessarily motivated by SEPA, if you think back a few years ago to the switch deal that we've discussed in the past in the U.K., that conversion process took place over, I guess, it a two to three-year period where they migrated over the card reissuance cycle onto the Maestro brand and also where we picked up the processing of those transactions.

The deal in Belgium will be a migration to our brand.

We are not picking up the domestic processing in that case, and then as other banks make their decisions, they have, if you will, the 2008 time frame and then the 2010 are two decision points for them, so we think that we'll begin to see more opportunities as the pressure builds, for lack of a better description, on these banks to act as we move through 2007 and 2008 heading into 2010.

Great.

And then just a follow-up on the pricing environment overall.

You've clearly but in two restructured pricing changes over the last two years.

Is there any expectation of a change in pricing this year again similar to what we've seen in the last two years?

Are we going to revert back to more kind of normalized growth as you said in the second quarter?

Liz, we don't have any significant pricing changes on the table for '07, so I think I mentioned apples-and-apples.

I think we're going to start to see that evolve as we get beyond the first quarter of when we had the lass grow over of the cross-border adjustments we made.

Great.

Thank you.

Your next question comes from the line of Greg Smith with Merrill Lynch.

Please proceed.

Yes, hi.

Just trying to read between the lines, Chris, on what you said about the advertising and marketing budget in '07.

I mean could it be flat with '06 or should we look for sort of a similar increase, flat in '07 versus '06 or should we look for a similar increase like we saw in '06?

I think as we mentioned before, Greg, we're putting our resources in the G&A line probably a little faster rate than we put them in in the past, and we're putting less resources against A&M than we have in the past, so I think you're going to see very modest A&M growth in '07, and you'll see that the G&A growth a little richer than it's been in the past.

Got it.

And then just quickly if I can, can you guys comment on the European Commission report that talked about interchange?

Was there anything that surprised you in there, any thoughts, please?

Just a couple of thoughts on that, Greg.

The European Commission, of course, released a report recently, and it was focused broadly on what was going on with regards to the payments markets.

There really were no definitive things that came out in that particular report.

Separately, we are involved with the Commission in terms of their review of cross-border interchange, MasterCard's cross-border interchange activities in Europe.

This is something that's been ongoing since, I believe, it was 2003.

We did receive a supplemental statement to objections to which we responded in the fourth quarter.

There was an oral hearing that the Commission hosted in November in which we participated.

They've subsequently issued additional requests for information from us, and based on the comments I believe that the Commissioner made, I think that they're looking to reach some form of a decision late this year, so that's just an ongoing process with the Commission.

Thank you.

Your next question comes from the line of Tien-tsin Huang with JPMorgan.

Please proceed.

Can you hear me okay?

Yes, we can hear you, Tien-tsin.

Good.

Sorry, I'm calling from India, so I apologize if the connection is bad.

I just have a question about margins.

As Chris noted, your margins increased nearly 300 basis points in '06, that's well ahead of your longer-term target.

Obviously there's conversion -- currency conversion pricing helped in scale, but can you give us a little more detail on what the over performance in margin in '06 and as a follow-up to that, why can't we assume a similar improvement in 2007?

Well, I think we indicated in the past that we're looking for margin improvement pretty much on leveraging the business, the technology, the network, and the brand.

We're not looking to do it through any major cost reduction initiatives.

We think we've got good business momentum and want to continue that.

And I think, Tien-tsin, you'd probably expect to see the same sort of thing in '07 as you did in '06.

We're looking for top line revenue growth.

We're looking for continuing to make investments in people because they appear to be a differentiating factor when it comes to winning deals and dealing with our customers.

So that's the model we're looking for.

Obviously, we're very happy to have the margin improvement we had this year.

We don't have, as I mentioned in the question from Liz, we don't have any major pricing increases on the horizon for '07, significant pricing increases, so your question as to why we couldn't expect over performance going forward, I think would be couched in those terms.

The pricing impact this year was fairly significant.

And if we don't have that to the same extent next year, there could be some pressure on margins.

Very good.

Nice quarter.

Thank you.

Your next question comes from the line of Craig Maurer with Soleil Securities.

Please proceed.

Good morning.

First question is on the -- just to follow-up with Greg's comment on the A&M spend in '07, in '06 it was roughly 31.5% of net revenues.

Should we expect that ratio to come down or remain consistent?

We don't measure A&M as a percentage of revenue.

We look at what we need to maintain the brand and to work with customers and drive the volume and transactions across the network, but I'll reiterate what I mentioned on the previous question.

You're going to see very modest increase in A&M spend in 2007.

Okay.

In absolute terms.

And if I can just ask a follow-up.

On rebates and incentives, with Visa going public either late in the year or early '08, what's your expectation in terms of the need to ratchet up rebates and incentives now that Visa will have to answer to shareholders in the same way you guys do and will need to win deals to basically keep shareholders happy?

I guess a couple of thoughts.

First of all, I think it's been a very competitive market for years, and I believe that what we did in terms of restructuring was absolutely the right thing.

We got a little bit ahead of the curve.

We're delighted to have that behind us because I have to tell you, it's a lot of work, it can be potentially distracting, and we feel that the Company is very well positioned to effectively compete.

I frankly wouldn't want to be going through what they're probably going to be going through over the next year.

I'll leave it at that.

Okay.

Thank you.

Your next question comes from the line of Booth Harding with Lehman Brothers.

Please proceed.

You recently signed pricing arrangements with B of A and HSBC and I was just wondering if you could expand on these arrangements and how you expect them to impact processing and assessment fees?

And maybe any comments with the B of A debit card if that's, I think that's for the first time with them.

And then, how are you winning, you know, you mentioned quality of people, maybe you can expand on that a little bit on how you're winning some of these mandates.

And then my follow-up question would just be sort of your capital strategy, you're raising the dividend, any other comments on that?

And just a quickie, the charitable trust, what is the use of proceeds on that?

Thanks.

Let me try and sort through those.

I think there were about four questions there.

I believe you started with the announcements about deals with HSBC and B of A. We did announce, I guess, a rearrangement or a restructuring of our deal with HSBC.

HSBC holds more than 5% of our class M voting shares and we have an obligation, I guess based on the size of their share holding, to file or disclose any new or updated agreements, but in this particular instance it was an update to an existing agreement.

With regards to the Bank of America, the 8-K represented an amendment to an agreement that we had with the Bank of America which included a change in the pricing arrangements, as you've observed, related to MasterCard branded debit cards issued by Bank of America.

Having said that, currently, Bank of America does not issue MasterCard branded debit cards, but we're obviously working hard with them to see if we can't make that happen.

Let's see.

Your next question, how are you winning new mandates or something to that effect?

Am I correct on that one?

Quality people.

Quality people issue, yes.

One of the things that we identified several years ago when we embraced the strategy of the Company's currently implementing was the opportunity to really add value to our customers.

And the primary way our customers told us we could do that was by having really good people.

So if a particular customer is focused on debit, having people who are knowledgeable about debit, it's commercial payments, products, somebody who understands that business and can really help them grow and develop their individual strategies or focuses on those particular initiatives.

So we've been bringing in, Chris mentioned the staff count change, the increase of a couple hundred folks from 2005 to 2006.

We've been out focusing on bringing in the right talent to align with the demands and expectations of our customers.

You asked about the capital and charitable foundation.

Let me do the Foundation then I'll throw the capital back to Chris.

The Foundation at the time of the IPO, the shareholders of the Company were, of course, financial institutions around the world, and they decided that they wanted to do two things.

One, they wanted to have a shareholder with a long-term perspective and a long-term commitment to the holding, and so they decided that they were going to contribute.

And that was the second rationale was to give back, if you will, to the world that has helped create such a wonderful payments franchise for all the customers involved with MasterCard over the last 40 years.

They wanted to give something back to the communities around the world in which they do business or look forward to doing business in the future.

As a result, 10% of the stock went into the Foundation.

That is all A stock, voting shares.

Obviously, the value of that has gone up significantly since then.

And in order to make the annual gifting requirements under the Canadian statutes, since the Foundation is in Canada, we indicated that we would be making cash contributions during the initial lock-up period on the Foundation shares, which is a four-year period before they can begin selling those shares if necessary to make their gifting requirements, that we had an intention to contribute up to $40 million dollars in cash, so we did do that, and the Foundation is focused on micro credit, youth and education, and we expect you'll be hearing more about the Foundation as they get up and running in the near future.

Capital?

Talk about that.

Yes, obviously we're very focused on maximizing shareholder return.

We've got a return on equity component built into our executive compensation metrics.

We've highlighted some long-term objectives for that to the street.

We went into the IPO with what we felt at the time was a very solid balance sheet.

As you know, the IPO added an extra $650 million of retained proceeds, and then as I mentioned during my remarks, we generated $650 million of cash from operations during 2006.

And our objective is not to build up piles of cash.

Our objective is to be thoughtful about how we deploy the capital we have and to make sure as that we have opportunities, whether they be dividends or other levers we can pull to work our capital structure, that we will do that.

And I think given the momentum we had in the business this year, the cash we generated from operations, the Board was very supportive of our recommendation to increase the dividend, so that was the thought process behind it, and again, we feel really good about our balance sheet and capital structure right now, but it's something we look at on a regular basis to make sure that we are taking advantage of everything we can to maximize that return.

Thank you.

Great year.

Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Chris Brendler with Stifel Nicolaus.

Please proceed.

Hi.

Thanks.

Good morning.

I have just one clarification and then one longer-term question.

The clarification I think, Chris, you said that the cross-border pricing change added 5 percentage points to your revenue growth this quarter versus 3% of the year.

Can you just give us a little detail on what drove the acceleration revenue growth due to that pricing change this quarter?

And then longer-term, you did sort of highlight the fact that you just had a remarkable year versus your longer-term objectives and you're sort of keeping those in place.

Can you just talk about, like, what do you see as the key, like, what should we be looking for as the years progress and longer-term strategically that would get you more comfortable with a higher revenue growth target or bottom line growth target?

Is it competition?

Is it needed invest in technology and marketing?

Is it legal?

What are the things that we should be looking for that would get you, you know, to sort of progress on similar track that you did in 2006 going forward?

Let me take the first one, the cross-border pricing.

You're right.

It was 5 percentage point contribution to the revenue growth in Q4 and 3 percentage points for the full-year, and part of that is just simple math.

If you have 5 points for the quarter, remember the first quarter of '06 we did not have that pricing increase to take advantage of so you dilute the revenue growth simply by the fact you didn't have a quarter when that was in play.

Wasn't it 3% last quarter, though?

Well, you're going to see a little bit more, you know, some of the cross-border activity as people travel around the holiday season.

Got you.

Coming into play there.

So that was part of it in addition to the quarter, the first quarter of '06.

Okay.

And the second question?

I think on the longer-term objectives, we laid out right up front what we thought would be the sort of midterm, three to five-year average growth rates for revenue margin improvement and income, and I guess if we were to see a future where we feel comfortable with changes and where we have concurrent results that support that, then we'd want to share that with you.

Next question, please, operator?

Your next question comes from the line of Matthew Park with Prudential.

Please proceed.

Yes.

Good morning.

I have one question about the essentially whether this is the right way to think about it.

You talked about advertising expenses relatively moderating here, but you also talked about your value proposition [inaudible] will be more focused on the human resources, so are you thinking about HR and advertising being somewhat of a substitute in terms of improving your value to your issuers?

And generally speaking how does that stack up with your competitor networks in terms of what the issuer perceive as their value versus MasterCard's?

Thanks.

Well, just a couple things.

There is a threshold that we think you need to have in terms of supporting the brand, and we've consistently said it's our intention as our customers expectation that we will continue to support our brand around the world, and the need to do that we don't think it's going to ease in terms of it's just going to go away one of these days.

But we do believe that the mix of resources that we have in aggregate to support our business with that we are better on the margin putting incremental resources in with the talented people who work with our customers day-to-day in solving their problems and capitalizing on the opportunities that they see in their businesses.

So that's an ongoing management dynamic and we tried to lay out for you how we are thinking about it, but at least for 2007.

The second part of your question related, I believe, to the perceived value and the value equation will vary from one customer to another depending on what they're trying to get done with their business and it can vary from one part of the world to another depending on what's going on in those markets obviously.

Our value proposition is premised not on price.

It's premised on going in and working with our customer to help them improve the profitability of their business.

That may mean that we can do processing at a better price than they are paying someone else today or costing them themselves, but many times we'll go in and improve, [inaudible] improvement of accounts, for example, we'll lower the cost to acquire accounts, we'll find ways to increase utilization of product, higher spend levels and so forth which affect all the other lines on their P&L's.

At the end of the day what we're trying to do is ensure our customers make more money doing business with us than they would doing business with a mix of various competitors around the world.

Thank you.

Your next question comes from the line of Sanjay Sakhrani with KBW.

Please proceed.

Thanks for taking my question.

Most of my questions have been answered or asked, but just a question on GDV growth.

Are there any geographic regions where you're seeing particular strength and others that you're a little bit more concerned about?

Well, I think if you were to look at, I believe, it's Page 9 of the press release, there's a pretty good description of what's going on in terms of volume growth in the various regions of the world, and in particular, purchase volume is something that is very important for us along with the processed transactions in terms of driving our results and our revenues, and if you do take a look at purchase volume growth, you'll see there's quite strong levels of growth in the fourth quarter in all regions of the world.

Latin America and South Asia, Middle East, Africa are the two most rapidly growing parts of the world during the fourth quarter, and again, if you look you'll see 25 plus percent growth rates in purchase volume in those two parts of the world.

I mean I guess are you seeing any weakness in the U.K. perhaps or even Taiwan?

There are swings and roundabouts.

One of the things I would observe is we generally see growth that's better than the economic growth in these markets, and that's because, obviously, the secular trend out of paper-based payments into card and electronic-based payments.

So when you see an economic slowdown, obviously, it works its way back into our business, but we do not track in lock step the slowing or acceleration of economic growth or development, so within a given quarter, while we may see one market have a swing or a roundabout, if something happens there, generally we've enjoyed faster than economic growth rates in these markets pretty consistently around the world.

Okay.

Great.

Thank you.

Your next question comes from the line of Robert Dodd with Morgan Keegan.

Please proceed.

Hi, guys.

Could you give us an outline of what your investment strategy is with the cash?

Obviously the interest income accounts for a fair amount of your profitability, particularly in the fourth quarter.

I mean, what's your view on how that's invested tax free versus taxable bonds, et cetera?

Our overall investment strategy is along the preservation of capital.

We're not in this for speculative purposes, and obviously we'll look at all aspects of operations and non-operating activities to sort of maximize return, but preservation of capital is sort of the umbrella, and under that we try to maintain a very liquid investment base, very short-term maturities, so it's a very conservative type of investment approach.

To the extent we can achieve an appropriate return with a tax exempt security versus a taxable one, we will do that as well, but you will generally see more tax exempt securities than taxable ones in our portfolio.

Thanks.

Your next question comes from the line of Peter Monaco with Tudor Investment Corporation.

Please proceed.

Good morning.

Thanks for your time.

If I could just follow-up a little bit on capital.

What is the right capital structure for this company in light of the strong fundamentals from a standpoint of prospective revenue growth and margins in light of the very cash generative nature of the business, in light of the limited capital intensity of the business, and in light of the considerable cash and equivalents that you have on the balance sheet?

How medium-term are you thinking about what the right capital structure for the Company is?

Well it's something we spend, as I mentioned, we spend a lot of time thinking about capital.

I think the dividend increase that we announced today, and you can read about in the press release, is a sign that we are feeling pretty good about the trajectory of the business and the momentum of the business.

We will continue to look at capital on a go-forward basis, and as I said in the road show, and as Bob has mentioned on the road show, there are a number of levers that we can pull to make sure we get the right capital structure in place.

There are opportunities for acquisitions, there are opportunities to continue to invest in the business.

There are dividends, there are other plays that we can make to make sure that we're maximizing the return.

Is there any magic number?

No, there's not a magic number that Bob and I run around with saying we have to get to that target, it's something we look at, again, on a regular basis and when the right time comes we will make the right decisions in terms of maximizing the value.

If I could just follow-up.

Understanding that there's no magic number, is there a point down the road where you would intend to settle on whatever you decide the optimal capital structure is?

Well, I guess, again, we don't have a magic number in mind.

One of the things that is a little bit of a uncertainty is where the litigation is going to shake out.

So I think anything dramatic from a capital structure before that litigation gets behind us would be premature in terms of timing, but again, there's no settled amounted, magic amount that we run with.

ROE is something that we have set out some guidance for of 20% return on equity excluding the IPO proceeds, and that's how we guide the business from a budgetary standpoint.

Do you feel philosophically believe that should a company not have an outlet for the considerable cash on its balance sheet because the right acquisition isn't found at the right price or, you know, because as you hinted, it would tend to depress returns on equity?

Do you feel that that should be returned?

Absolutely.

Thanks a lot.

As I mentioned, we don't have an objective to build up cash in the business.

Thank you.

Your next question comes from the line of Chris Mammone with Deutsche Bank.

Please proceed.

Hi.

Thanks.

Just back to the advertising.

Looking at '07, obviously, no World Cup, but are there any events throughout the year that you plan to sponsor or that more of your budget will be concentrated in?

No, not necessarily.

We have a host of sponsorship assets that takes place at various points in time through the year whether it be Major League baseball or golf or [UASA] on a champions league, so the World Cup is a major event, and it does spike and move our advertising and marketing seasonality around quite significantly, but I wouldn't expect that to occur in '07.

Thank you.

Your next question comes as a follow-up from the line of Greg Smith with Merrill Lynch.

Please proceed.

Hi.

Just regarding the overall advertising and marketing budget again, what are your firm obligations as far as spending?

I mean is there any dollar commitment or percentage of revenue firm commitment that you have or is it still just based on your, you know, your optimizing of the spend for everyone's benefit?

I can't give you specifics on obligations of that level of granularity, but you should understand that the A&M spend is more than just the "Priceless" campaigns which, obviously, we're very proud of that appear on print and media advertising.

There are sponsorship commitments within that line, and those are not insignificant, and those cover things like Universal Studios, as I mentioned, Major League baseball, whatever the case might be.

So, again, I can't give you granularity, but A&M is not all discretionary around the "Priceless" campaigns.

Okay.

And then just one last one.

Regarding PayPass, is there any very significant investment spending going on related to that specifically and as it matures some of that may go away or should we just think about it as just normal course of business in the innovation of payments and we're always going to see something new and heightened spending based on it?

Well from my perspective we're in sort of a rollout regimen right now.

We're more advanced in the U.S. probably than any other single market around the world, but we've got pilots, or initial efforts, going on in various other parts of the world whether it's Taiwan, the U.K., et cetera, so I would say relative to the long-term time frame we're sort of at the early stages of what I would call a growth cycle of this particular opportunity that we see.

So we would expect to continue to resource and support PayPass at or above the levels we've seen in the past for the next year or two I would expect.

Okay.

Operator, I think we have time for one more question, please.

Your final question comes as a follow-up from the line of Craig Maurer with Soleil Securities.

Please proceed.

Good morning.

Not to keep hammering on the same topic, but in terms of the A&M spend again, looking out into 2008 with the Olympics coming in China, I was wondering if we should look at that in the same way we did '06 in terms of timing around marketing spend or will have that an overall increase on your growth rate for the year?

Thanks.

Just, I guess, an observation is that unless something happens that I'm at least currently unfamiliar with, we're not involved in sponsoring the Olympics.

But in terms of building awareness?

To the degree that we see opportunities in certain markets, or we feel that may not be able to break through, if you will, with our message given some things going on in those markets, we obviously would tune and adjust our spending both seasonally and country-by-country to reflect that.

I.e., we pay attention to what our competitors are doing in addition to the opportunities we see for taking advantage of those programs that we actively sponsor or promote.

Great.

I wasn't getting to winning the sponsorship but just using the opportunity the, you know, enhanced media coverage to build awareness.

Yes.

Okay.

Thank you.

Ladies and gentlemen, this now concludes the question-and-answer session.

At this time I will turn the call over to the Chief Executive Officer, Mr. Robert Selander, for closing remarks.

Well thank you, all, for joining us.

Again, we are quite pleased with our financial performance in the fourth quarter and for the full-year of 2006, and we look forward to leveraging the momentum in the industry and taking advantage of our customer focused strategy to generate continued strong performance in 2007.

Thanks again for your time.

Bye.

Thank you for your participation in today's conference.

Ladies and gentlemen, this concludes the presentation.

You may all disconnect and have a good day.