萬事達 (MA) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2007 Mastercard earnings conference call. My name is Latasha, and I will be your coordinator for today. At this time, all participants are in a listen-only mode mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would like to turn the presentation over to Ms. Barbara Gasper, Head of Investor Relations for MasterCard. Please proceed.

Thank you, Latasha. Good morning and thank you all for joining us today, either by phone or webcast, for a discussion about our first quarter 2007 financial results.

With me on the call this morning are Chris McWilton, MasterCard's Chief Financial Officer, and Tara Maguire, our Corporate Controller. Following comments by Chris highlighting some key points about the quarter, 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 website at www.mastercard.com. These documents have also been attached to an 8-K that we filed this morning with the SEC. A replay of this call will be posted on our website for one week until May 9.

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 Chris McWilton. Chris?

Thank you, Barbara. Good morning, everyone. Let me start by saying we are very pleased with this quarter's results as we spelled out in the press release. These are not only record results for a first quarter, but record results for any quarter in the Company's history. Outstanding financials are a testimony to the strength of the customer- focused business model and the secular movement from cash to electronic forms of payment in all corners of the globe. The fundamentals of the business are currently very strong and our first quarter results provide a solid foundation, plus they deliver on our business objectives for 2007.

Turning to page two of the slide deck, we delivered record net income of $215 million, or $1.57 per share, on a diluted basis. Revenue growth was 23.9%, driven primarily by strong GDV growth, processed transaction growth, and the continued impact of restructured cross-border pricing, which was implemented in April 2006. Revenue growth, combined with our ongoing focus on costs, resulted in significant operating margin improvement to 34.3% from 24.7% in 2006.

In addition to the financial results, we had several recent significant business developments. Most recently, we announced an agreement with Lloyd's TSB in the U.K. As a result of this deal, which became effective in March, Lloyd's will issue a majority of their credit card portfolio through MasterCard. The deal enhances our existing strong relationship with Lloyd's. We are pleased that Lloyd's recognized our value proposition, particularly the capabilities and analytical insights provided by our MasterCard Advisors group, often a differentiator for us with our customers.

In April, we announced the launch of a new World Elite program with Sotheby's and G.E. Money. As you may remember, MasterCard's World Elite program allows our customers to target executives and elite affluent customers by delivering significant benefits and rewards, including premium travel services. The Sotheby's World Elite card expands our position with the affluent segment, provides cardholders with exclusive access to our world, partnerships with prestigious museums, and a suite of luxury rewards.

Finally, we continue to make progress with our PayPass initiative. We now have over 14 million cards and devices, which can be used at over 51,000 merchant locations worldwide, including acceptance environments such as vending, taxis, toll booths, and transit. This quarter we expanded our PayPass efforts with Europe and Asia/Pacific. In the U.S. we equipped 6,000 vending machines that offer the nation's leading brands, such as Coca-Cola and Cadbury Schweppes, to accept electronic forms of payment including PayPass. We also have one new update, with regard to litigation, the trial date for our Amex discovery litigation has been set for September 9, 2008.

Now let's turn to Page 3 of the slide deck for more details on the financials. As you can see, net revenue for the quarter was $915 million, a 23.9% increase over 2006. Currency fluctuation of the Euro relative to the U.S. dollar contributed 2.5 percentage points of the revenue increase. Approximately 5 percentage points was attributable to the restructuring of pricing, primarily the cross-border transactions implemented in April 2006. The currency fluctuation of the Euro relative to the U.S. dollar is approximately 1.9 percentage points of the increase in expenses for the quarter.

We experienced a 9.6 percentage point improvement in our operating margin for the quarter, demonstrating our leveragable business model. There were no special items in the first quarter of either 2007 or 2006, making year-over-year comparisons quite simple.

Turning to Page 4, in the first quarter we experienced continued growth in both GDV and processed transactions. GDV grew 16.4% on a local currency basis, and 19.1% on a U.S. dollar converted basis to $509 billion. Not shown on Page 4, purchase volume was up 18.0% on a local currency basis, and cash volume was up 12.1% 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., which include SAMEA and Latin America, continue to grow at faster rates, demonstrating the global strength of our business.

You'll notice in our press release GDV and cash volumes in the Asia/Pacific region are lower than previously reported, as we decided to remove commercial funds transfers in China from these volumes. Commercial funds transfers are generally transactions that facilitate the exchange of funds between bank branches, but they do not involve traditional withdrawals or balance transfers. We believe this is a more accurate reflection of our cash volume in Asia/Pacific, and correlates more directly to the revenues we generate in that region. We have adjusted historical volumes in Asia Pacific to enable you to perform year-over-year comparisons.

As we have discuss in the past, one of the metrics we focus on is revenue yields, or net revenue per $1,000 of GDV. This metric was 18.0 basis points in the quarter, versus 17.3 basis points in the first quarter of last year. The calculation incorporates the adjustment in Asia/Pacific, which I just mentioned. It was driven by pricing changes and strong transaction growth in the quarter. Processed transactions, or those processed across our network, increased 19.4% to 4.2 billion for the quarter. Additional details about our operating performance can be found on Page 7 of our earnings press release, and on the I.R. section of our website.

Page 5 shows net assessment increased $18 million, or 7.4%, to $262 million. Gross assessments increased $49 million, or 11.9%, over 2006 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 changes, certain assessment fees totaling $31 million were reclassified to the currency conversion and cross-border components 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.

Turning to page 6, you can see that net operations fees increased $158 million, or 31.9%, to $653 million. Gross operations fees increased $181 million, or 33.3%. This growth was driven in part by two factors. First, growth in processed transactions and gross dollar volumes that I previously described on Slide 4. Second, an increase in currency conversion and cross-border revenues, driven by the fee restructuring which took place in April 2006. Note that international volume was up 18.3% year-over-year, due to an increase in global travel. Included in the total year-over-year increase in currency conversion and cross-border revenue, is a reclassification of $31 million from assessments to operations fees, which I just mentioned on Slide 5.

Please turn now to page 7 for some details on expenses. Total operating expenses increased 8.2% to $601 million during the first quarter. The increase was primarily driven by a 14.6% increase in general and administrative expenses, primarily due to two factors. First, an increase in personnel costs due to the hiring of additional sales staff, as well as increased performance incentives and contractor fees. Second, an increase in professional fees primarily related to legal costs to defend outstanding litigation, and other strategic initiatives. Offsetting the increase in G&A was a 2.3% decrease in advertising and marketing expenses, reflecting a shift in planned spending to later quarters this year versus last year.

Moving to Page 8, we ended the quarter with $2.5 billion in cash, cash equivalents, and available for sale securities. We also had $2.6 billion in stockholders equity. Prepaid expenses increased $60 million primarily due to the timing of payments related to advertising and amounts paid to customers under incentive agreements. Accrued expenses decreased $134 million, mainly due to payments of 2006 employee performance incentives and advertising. We generated $71 million in cash flow from operations during the quarter. The first quarter is traditionally a period of large cash outflows due to employee performance incentives and advertising expenses, both of which were accrued in the fourth quarter of 2006.

Turning to page 9, there are a few items I would like to highlight for you for your consideration as you refine and update your models for the second quarter 2007. First, as I previously mentioned, we will no longer see the grow-over revenue growth impact resulting from restructuring of the cross-border transaction pricing implemented in April last year. Second in the second quarter of 2006, we incurred certain costs related to a large debit portfolio conversion. In the second quarter of 2007, we will not incur these costs though they will be partially offset by rebates and incentives related to the new volume activity on these cards. Next, as I mentioned in the past, we anticipate very modest growth in A&M in 2007, in response to competitive opportunities and to leverage momentum in the business. We expect second quarter A&M as a percentage of full year A&M spend, to be slightly higher than a traditional non-World Cup year, but lower than 2006.

Finally, there were three special items in the second quarter of 2006. First a $23 million expense for litigation settlement. Second, a $395 million non-cash charge for a contribution of stock to the MasterCard Foundation. Last, $7 million in interest income on IPO proceeds held for redemption.

In summary, we are very pleased with our record performance in the quarter, and pleased with the great momentum, and are well on our way to achieving strong financial results for 2007.

We are now ready to begin the question and answer period. In order to get to as many people as possible in our 1 hour timeframe, we ask that you limit yourself to a single question with one follow-up, and then re-queue if you have additional questions.

Operator?

Thank you. Ladies and gentlemen, (OPERATOR INSTRUCTIONS) Please stand by for your first question. Your first question comes from the line of Craig Maurer. Please proceed, sir.

Good morning. Great quarter. I was hoping you could expand upon the discussion of first quarter marketing. You are in-line with the industry in terms of pulling back on marketing in the quarter. I was just hoping you could add some color as to why you didn't see the same level of opportunity in the quarter that you have seen in the past, despite the exceptionally strong growth in all your volume numbers. Thanks.

Yes. I think what we wanted to do was keep a little bit of our powder dry for the second quarter. We have some competitors who are cutting back on advertising and marketing right now. We have some competitors who appear to be a little bit distracted with some internal organization matters, and we think we can be more effective in deploying some of that advertising and marketing in a really impactful way in Q2. So we took a look at our spend during the quarter and again, wanted to keep some of our powder dry for later in the year.

Okay, thanks.

Operator, next question, please.

Sure. One moment. And your next question comes from the line of Chris Mammone with Deutsche Bank. Please proceed.

Hi, thanks. We are hearing that the Banc of America is going to start issuing MasterCards in August. Can you talk a little bit about that deal? Is that signature and pen signature only, new accounts openings only?

You know we filed an 8-K with respect to that agreement earlier in the year. Obviously, we are very happy to have that arrangement in place with Banc of America. I can't comment specifically on a customer arrangement, other than what is in that filing, obviously for customer confidentiality purposes. I will say that we had a great relationship with MBNA prior to the acquisition by B of A, and we hope to leverage that, including our sponsorship and assets and properties, as B of A expands its debit portfolio.

Okay. Thanks. Just give us an update on SEPA. What is happening in Belgium, did they change their mind on using Maestro?

Belgium is an interesting situation. They had the Belgian Banking Federation basically acting as a collective bargaining agent for all of the banks in Belgium. Under SEPA, interchange was going to for the first time be introduced for domestic transactions in Belgium. The merchants did not like that and in response to merchant pushback, the B.B.F. basically withdrew their collective bargaining position. We don't look at it as a setback.

Basically, we are in a position now to negotiate with each one of those banks individually, and actually we are probably in a better position to customize and tailor a program that meets their needs. Maestro is very strong in Europe. We have over 300 million Maestro cards that have been in place for a long time. They are on the cards today for international acceptance, the Maestro brand. So we still feel very strong about SEPA opportunities, and again don't view Belgium as any sort of setback.

Okay, thanks.

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

Thank you. Your revenue momentum is pretty stunning right now, Chris. If you could help us understand on two parts, one, the process transaction and GDV growth continues to accelerate, and has on a quarter-to-quarter basis for some time. Some perspective on what's driving that.

And secondly, your incentives are not growing as quickly as they have in the last two years. So help us understand, you know, how you are driving all of this international growth yet your incentives seem to have abated a bit, relative to where you have been.

Liz, as I mentioned in my remarks this is global momentum. If you look at the operational statistics that are in the filing, and you look at the growth rates in Latin America, and Asia/Pacific, and in the Middle East, they are just really phenomenal. I think a lot of us who live here in the U.S. sort of get accustomed to the fact that everybody has credit cards, and use them on a regular basis.

But there are large parts of the world where cash is still the dominant form of payment. In India, people go to the ATM machine, pull out cash, and walk into the store and pay the merchant. We are seeing exceptional growth overseas. We continue to see strong international travel, and I have explained in the past, we make a lot of money when people hop on an airplane and cross the border, because we process that transaction. We receive currency conversion revenue from that. The volume goes on the card.

Generally, people are putting high priced airline tickets and meals and entertainment on those cards. The global travel is still doing very well, and we are just seeing momentum across the board in all parts of the world. In terms of the rebates and incentives, I think I have talked about this in the past. Don't get tied up in looking at the rebates and incentives as a percentage of revenue quarter-over-quarter.

What I look at and what we evaluate deals on, are the effective revenue prices. What is the basis point per dollar GDV. And as I mentioned, we had an 18 basis point quarter versus 17.3 last quarter. The full year last year adjusted for the China volumes was at 17.3 as well. We have been able, through selective pricing increases from doing things that aren't volume related such as our advisory business, maintain that effective basis point yield at levels we talked about, that gentle decline over a long period of time. I feel pretty good about our ability to sustain that, and like I said it's very strong right now.

In terms of the global diversification and the ramifications it may have on your added marketing spend, I know there is some shift between geographies. But is there an opportunity, you know, potentially now in the second quarter, you said it might be a little bit more heavy, to really use your advertising budget to increase usage at the consumer level of these products?

We are always looking at our ad and marketing budget. It's dynamic. The amount as I mentioned in the past will be very modest growth for the full year. We are constantly looking at whether we are placing our ad and marketing in the markets that make the most sense.

We can get expanded acceptance. We can get increased customer usage of the product. We can do some things either with issuers or merchants to pick up the use of our card at the point of sale. So that is a dynamic advertising and marketing exercise, and we will constantly look at where the best opportunities are.

Great. Thank you.

Your next question comes from the line of Pat Burton with Citigroup. Please proceed.

Hi. Congratulations as well on the fundamental results. I guess I will ask about the litigation and regulatory environment, two parts in one question. Any update there and any comment on some of the press reports coming out of either Europe, about potentially working something out with the E.U.?

Nothing on the Amex, Discover cases or the interchange cases, other than what I mentioned. We now have a trial date set by Judge Jones.

I did read the press release coming out of Visa Europe, and I think it's consistent with what the Commission had said earlier in the year. They had taken a fairly radical stance on interchange saying, basically saying they wanted to abolish interchange across Europe quite early in their reviews of the industry. And in January, they came out with, I think, a more moderate position. They recognized there was some value to interchange, and abolishing it wasn't necessarily the right answer. I think the Visa statements were consistent with that. I don't know whether Visa is in any sort of discussions with the Commission. With regard to that specific press release.

But certainly, we believe that interchange is a necessary part of a four-party payment system. We believe it's necessary to balance the costs between issuing and acquiring, to get that sort of robust base of both acceptance and issuance that is necessary for card growth, and for consumers to enjoy the benefits of the use of the card.

So we are all looking forward to a day when this is settled and behind us because Europe is a big market. It's very important to us. We can see in our operational statistics we are doing very well in Europe today but I think there's a little trepidation by our customers until they know the platform on which they are going to be playing with respect to interchange.

Thank you. Look forward to the Investor Day.

Thanks, Pat.

Your next question comes from the line of Chris Brendler of Stifel Nicolaus. Please proceed.

If I look at the results this quarter, even if I back out the 5% from currency, 5% from cross-border, and 2.5 for currency, you are looking at very strong 16% or so revenue growth, which is in-line with GDV, but I think your long-term guidance is 8 to 10% revenue growth. What about that operating environment, you know, where I think I can back out is driving such a strong growth? And is it a mix shift towards stronger transactions and debit? Is it international describing the revenue growth? Help me think about why you're able to be so successful on the top line?

I think you hit the nail on the head. It is strong fundamentals in the business, processed transactions, GDV, and even if you back out the Euro currency impact and the cross-border pricing impact, you know, I think you did the math right. You are up to 16%. GDV. People are traveling, they are going across borders. The volume growth is strong in emerging markets and international parts of the world, where they are not seeing perhaps some of the sub-prime fallout that you are seeing in the U.S.

That's a lot of uptake in secular momentum, moving out of cash and in to electronic forms of payment. It is not one thing I can point to. It is just the whole business seems to be firing on all cylinders right now. I think our global presence and unified global structure, we are one company dealing with customers around the world. It is paying off.

I guess one follow-up on the legal front, is there anything you can say in terms of the September 8th, is there a timeline there? Do they need more time for discovery? Where do we stand? What was the reason for the delay? Does it change your, did it impact your decision on the buyback, or does it impact your decision on the buyback?

As far as we are concerned, there was no delay. I think internally, we had always thought that the trial would take place some time in 2008. We imagine a lot of things go into a Judge's decision in when to set a trial date, what the docket looks like, and you seat a jury, and those sort of things. So September of 2008 was sort of a nonevent around here.

Obviously when we talked to the Board about the buyback, their fiduciary duty is that they need to think responsibly about our ability to take care of any litigation matters, and at the same time buy stock back, and return surplus equity to the stockholders. They were certainly aware and briefed on the litigation. They are constantly briefed on the litigation. Every time we meet, we give an update. So it is not going to influence our plans to proceed with the repurchase.

Thanks so much for the color.

You are welcome.

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

Congratulations on the results! A couple of questions. The timing on the Lloyd's conversion, how should we think about that rolling in to the P&L, and are there any conversion fees or payments that we should consider?

I can't comment on specific customer agreement details but it will take place probably towards the second half of the year, by the time the cards actually start taking root. We start rolling out with marketing programs, et cetera. These things aren't light switches. You don't just turn them on and off. It does take time for those to get into circulation and start getting fees off the volumes.

Okay. Got you.

I can't comment on anything with respect to other payments.

It's not a one-shot deal, it will slowly bleed into the P&L?

Yes.

Okay. In terms of I guess trying to get a better sense of what inning we are in, in terms of adding sales staff and international account managers, and not asking a question, more wondering about when we'll see normal or stable growth in personnel costs and G&A in general?

I think in March, I said we were in the top of the seventh inning. I think we have a few outs in the book. I think through at least 2008 you are going to continue to see staff buildup. One of the things I look at, as CFO, my job is to maintain personnel costs and make sure we don't get ahead of ourselves, but when you have got 23.9% revenue growth, people are saying I can do more, if you give me people. I have to think twice. I think Bob has the same view.

Very good, thank you.

Your next question comes from the line of Bruce Harting with Lehman Brothers. Please proceed.

Can you talk a bit, you mentioned, you know, the Latin America growth. Can you talk about the Brazil initiative and the processing you are doing there maybe as a case study for wins in other areas?

Yes. Brazil is a case where we have the interest in Redecard and we do domestic processing in Brazil. As I mentioned previously, today we basically do processing in the Anglo American countries, the U.S., the U.K., Canada, and Australia, and Brazil with respect to the Redecard operation we have there.

There is a large swath of the world where we are not processing cost-bearing and settlements for domestic transactions. As an example of that, we will process a cross-border transaction on our network but in a certain country there are domestic payment schemes operated by the banks or consortiums of banks that do the processing. These Banks are starting to realize these are subscale operations. They need to make investments in technology to make sure that they maintain their reliability and security, and there are opportunities for them to perhaps transition to switching their processing to MasterCard.

We had the same thing with the U.K. with the consortium of the banks doing processing. They realized there is economy of scale to having us do it. We are looking at these opportunities and they are all over the world. They do tend to develop slowly because they are consortium owned by banks. Some we have looked at and walk away from because we thought the price was too high, but we'd love to process transactions. Obviously, we become more relevant to the transaction and total data analytics processed transactions and obviously are considering the revenue on the processed transactions on our international business.

Operator, next question, please.

And your next question comes from the line of Robert Dodd with Morgan Keegan. Please proceed.

Hi. Just going back to the rebate question, if we can. I mean, it's the net yield is not just stable, let's put it that way. You know, the increase year-over-year is pretty substantial. What are your customers asking for in exchange for basically not receiving, you know, larger rebates. Because the last couple years, rebates were growing at a meaningfully greater rate than both net and gross revenue. What are they getting for in exchange now, and what are they asking for in the future?

You look at the basis point yield in the first quarter. It was 18 basis points. Remember we had the impact on the cross-border pricing in there to roll that out.

Yes, but you had that impact in the fourth quarter as well, and the yield was relatively flat.

Remember the fourth quarter was very high for rebates and incentives. The merchants are customers of our customers so the accounting dictates rebates in that period. So be careful with the seasonality of the business. I would emphasize it is really not a meaningful exercise to compare rebates and incentives on a sequential quarterly basis.

Even on a quarter to quarter basis, you will be subject to a situation where you might have a debit card portfolio conversion going on, and curbing costs of running rebates in one period. You have to look at this over time, and as I said before, we expect a gentle downward drift in that basis point yield.

We were fortunate this quarter, we had currency conversion that benefited the yield. I am not suggesting anything different in terms of what I mentioned in the past. Customers are still very aggressive. Look at some of the yield curve pressures our major customers are under. They are trying to squeeze every penny they can out of their business. They sit across the table from us, and they are demanding a lot. With consolidation going on, we don't see this letting up.

Thank you.

And your next question comes from the line of Greg Smith with Merrill Lynch. Please proceed.

Yes, hi. Is it possible to give us just the growth in cross-border transactions?

Yes. I think we have it.

Is it in the release?

I think I mentioned it on the script.

Greg, do you have a follow-up question while we --

Yes, sure. You sort of alluded to this earlier with regards to the marketing spend, but I was just wondering if you are seeing any other kind of change out of Visa, ahead of their restructuring and IPO, or anything that could be a problem or a further opportunity for you over the next year?

Not specifically. I mean, we have tremendous growth in the quarter, and, you know, you pick up anecdotes from the sales staff sometimes, about either acting rationally or irrationally, or increasing pricing or decreasing pricing. No consistent theme that I can see. I think we are going to be at a significant competitive advantage, the fact that we have Europe as part of our global structure. Look at what is going on, maybe with ABN-AMRO right now, with people that are chasing that bank. These are all our customers. They all have operations in all parts of the world so we are looking forward to the chance to deal with these banks, as one company rather than having to deal with MasterCard Europe, and MasterCard Latin America, and MasterCard Asia. One company. We are happy we have got the structure behind it.

Thanks.

The international volume growth was 18.3%, and that was in the script.

Your next question comes from the line of Andrew Jeffrey with Robinson Humphrey. Please proceed.

Thank you. Good morning. You obviously have a lot of levers that you can pull on pricing. Could you talk a little bit about some of your pricing initiatives for the balance of this year as they may pertain to processors, for example, or any other area where you think you have some pricing leverage in the marketplace?

I wouldn't characterize that we have a lot of levers we can pull for pricing, our customers are pretty diligent and thorough in their negotiations with us. We do have a global pricing committee that meets regularly. What we try to do is make sure that we are extracting the appropriate price for the value of providing to the customer in all of the different services we provide. If we find a situation where we are not pricing as effectively as we can, you will put those price increases through and they cross my desk on a regular basis. We have nothing planned for the rest of the year. What you saw was cross border fees. That doesn't mean we sort of take our foot off the gas pedal, and ignore pricing altogether. If there is a strategic surgical way we can go in and extract value out of a relationship we do that. (inaudible)

Okay. And recognizing that there is seasonality in the business, can you talk a little bit about where you think the long-term operating margin for this company can be, 34.3% was meaningfully ahead of a year ago and meaningfully ahead of what most of us on the Street had anticipated. I understand there are some timing issues there, but just broadly as you think about this business over the long term, what kind of profitability do you think you can drive?

We are going to try to maximize the margin. That is our job. We have long term objectives out there. Obviously this quarter was very strong through the margin. There is a lot of scale to this business. If we can keep our costs under control and grow the revenue, even if you take out the currency and cross-border pieces, you can still see the scalability. I caution you against looking at the quarter again, because the first quarter tends to get high margin as we get towards the end of the year, when we are heavily into advertising and promotion, and the revenue comes down.

Certainly don't extrapolate this for the rest of this year. Certainly, you saw in this quarter what the potential is of the company is, and I can't predict long-term objectives, but we are certainly off to a great start. It's not Bob's intention or mine to rest on our laurels. If we can get higher margins than we have, terrific. Thank you very much.

And your next question comes from the line of Sanjay Sakhrani. Please proceed.

Most of my questions have been answered. If you could just remind us what that impact last year was on the payment made to the debit issuer, on the rebates and incentive line? That would be great, thanks.

I can tell what you it was, I can't tell you how much it was. Basically we had a customer that switched a debit portfolio from a competitor to our brand, and we paid for their card conversion costs. Any time you convert a card in advance of the normal expiration, an issuer is going to incur costs for producing the card, mailing the card, putting the hologram on the card, and communication to the customer.

In an effort to encourage them to do that earlier rather than later, we paid those card conversion costs. And our accounting policies dictate that those card conversion costs were up front, rather than spreading them over the anticipated life of the card. That is just something we've done since day one and it's not going to change our accounting policy. It did impact in the first and second quarters in the amount of rebates and incentives, but I cannot disclose because of customer confidentiality how much that was.

Okay. Great, thank you.

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

Thanks. Nice quarter. Maybe you can talk a bit about you mentioned something in the context of scale in the business. Talk about some of the various factors in your view that could actually give you, you know, provide MasterCard with more scale, and obviously some of the, you know, future drivers for margin expansion. That is number one and then two, are you seeing any signs that actually tells you that there is anything different in terms of economic activity out there, and given some of the obviously the results are very upbeat. Is there anything different that you are seeing out there in terms of market activity or economic activity? Thanks.

I'll take your scale question first. I think the thing that can drive more scale in this business is margin expansion and revenues. I think we have said clearly that we are not going to save our way to prosperity here. The business has great fundamentals right now. I think the people that can make a meaningful impact on our customers. And our advertising and marketing as I said, we're going to have very modest growth in there for '07, but we believe our brand is very important to us, and we're going to maintain the strength of the brand around the world.

We are not going to get more scale on operating margins through cost containment. Obviously that's something we think about all the time, but by reducing costs that's not how we plan to increase the margin and revenue gains. Obviously, we can process more transactions, get more in our network. That takes advantage of the scale in the business. We have lots of capacity out and process more transactions and take advantage of the capacity there. So revenue growth and putting more transactions across our network, perhaps picking up some of these domestic processing processors around the world obviously are two areas that we are quite focused on.

With respect to are we seeing anything from an economic standpoint, that's a broad question around the world. The revenue, the volume growths were very strong. And I think it's too early to tell whether any sub-prime fallout is going to impact and ripple through the U.S. economy. Things still appear to be very strong. You have seen the earnings reports coming out in the past few weeks. The markets seem to be thinking that the economy's resilient to a lot of this. We are not seeing anything here that would signal any broad-based economic distress. Thanks.

And your next question comes from the line of Chris Brendler with Stifel Nicolaus.

Can you talk about the difference between margins and revenues on the debit versus credit, and even more importantly national versus U.S.? I heard your commentary on rebates and incentives and how they are stabilizing. Is that partially driven by the success you are having internationally as you have less, you know, you hit the volume targets a little less over there?

You have got to break down debit into two forms of debit. Our signature-based transactions are processed in our credit network, credit rails, and basically carry the same pricing of a credit transaction. PIN-based debit is not as profitable to us as signature-based, but if you do look at our operational statistics in the growth in the U.S. in particular, we are getting a lot of traction there and seeing some of the success of that, with the card portfolio conversions I mentioned in the script and talked about on an earlier question. International volume is great for us. As I mentioned, when somebody crosses the border, it can't be processed in the domestic scheme. It's got to be processed in our network, and therefore we are getting not only the processing charge but getting the currency conversion charge, regardless of whether or not we convert the currency. International volume really drives this business.

And the margins as well? I think at the time of the IPO, you broke out your international domestic revenue mix. Has that increased materially over the last year?

I don't think we have broken than out in the past, not the revenue mix.

I thought it was like 55%. Okay. That would be helpful in the future. Maybe for the Investor Day. Thanks.

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

Good morning. You mentioned that you felt there was opportunity to gain market share from your competitors as some of them may get distracted. Can you tell us how much of your growth at this point may be coming from any market share, versus sort of a market moving to the electronic payments? Thank you.

Let me clarify. I didn't say anything about market share when I was talking about moving our ad marketing spend to later in the year. I was thinking of an impactful way that we can make progress with our customers and have to do some things with merchants with volume and acceptance of our brands. Bob's mentioned a number of times in the past, and I have mentioned we're not focused on share, we're focused on profitable share.

We are not out there trying to buy share. We do things in a way that brings value to our customers in a way that they're willing to pay us appropriate amounts and keep that effective basis point yield as possible. This isn't a share game. There's going to be swings in round about shares one quarter to the next, one sector to the next, general purpose credit cards, debit cards, international or U.S. You can measure it a number of different ways. 23.9% revenue growth if we are focused on the right things.

Great. Then my follow-up question is how far do you think you have gotten in terms of differentiating MasterCard, in terms of what kind of solutions you are providing, and what kind of feedback you are getting from your card issuers?

Our customers seem to be very happy because they're giving us a lot of business. We spent a lot of time on the customer strategy, making sure we have people in place that can be impactful to a customer's business, to understand the brand, they understand processing. They understand how to increase activation rates on a card, advisory capabilities, how to help them make money.

So we are not just walking in with a price sheet to a customer saying we can beat our competitors, we are walking with the approach that says how can we help you make more money, and then I think we made a difference there. And I think you'll see the difference relative to one of our competitors going forward, in the fact that we are a unified global company. One company around the world, and not having to deal with the different members of the federation to get things through.

Great, thank you.

Since there are no further questions, I would now like to turn the call over to Mr. McWilton for closing remarks.

Thank you all for joining in today. Obviously we are delighted with the quarter. We are very optimistic with respect to the 2007, the fundamentals are very good and we seem to be hitting on all cylinders. Thank you.

If anyone has any additional questions, please feel free to reach out to either Investor Relations or Corporate Communications and your contacts there. Thank you. Have a good day.

This concludes the presentation. You may now all disconnect. Good day!