萬事達 (MA) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2007 MasterCard Incorporated earnings conference call.

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

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

We will conduct a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the call over to Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you, Francis.

Good morning, everyone and thank you for joining us today, either by phone or on our webcast, for a discussion about our third quarter financial results.

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

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

In total the call will last up to one hour.

For your reference the morning's earnings release and the slide deck that will be referenced on this call, as well as an updated chart on the classes of stock issued can be found on the Investor Relations section of our website at MasterCard.com.

The earnings release and slide deck 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 November 7th.

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?

Thanks, Barbara.

And good morning, everyone.

We are very pleased with our third quarter financial performance.

These results show that our strategy is working, as we are able to deliver value to both our customers and shareholders as a unified global company.

Turning to Page 2 of the slide deck, we delivered net income of $314 million, or $2.31 per share on a diluted basis.

This includes after-tax gains of $70 million, or $0.51 per share from the sale of 25% of our investment in Redecard.

For the first time in MasterCard's history, we recorded quarterly revenue of over $1 billion.

This was driven primarily by strong growth in dollar volumes and process transactions, including cross-border volumes which grew 20.6%.

Additionally, several pricing adjustments in total contributed approximately 2% of the revenue growth in the quarter.

Finally, we saw our operating margin improve 2.1 percentage points to 32.6%, from 30.5% in the third quarter of 2006.

On a year-to-date basis, our operating margin improved by 7.2 percentage points, excluding the impact of special items.

And this demonstrates the continued leverageability of our business model.

In addition to the financial results, there are a few business developments on Page 3 that I would like to highlight.

We are pleased to report that our Board of Directors has approved an incremental $750 million Class A share repurchase program, bringing our total Class A share repurchase program since the IPO to $1.25 billion.

We plan to complete the incremental $750 million program through open market repurchases by June 30, 2008.

We are also announcing plans for a second Class B share conversion program in 2007, which allows for the conversion of up to 5.8 million shares of Class B into Class A common stock.

This represents the balance of the 13.4 million shares that our Board approved for conversion earlier this year.

Elections for this second conversion program begin November 17th, and will end no later than December 14th, 2007.

Last quarter, we promised to provide you with a status update of our Class A share repurchase program, and accelerated Class B conversion program.

As of September 30th, we had repurchased approximately 2 million shares of Class A common stock in the open market, for an aggregate cost of $277 million.

Subsequent to September 30th, we repurchased an additional 1.4 million shares for an aggregate of $223 million, and completed our initial $500 million Class A share repurchase plan, with a total of 3.4 million shares repurchased.

With respect to the Class B share conversion program, as of September 30th, certain Class B shareholders elected to convert approximately 5 million shares of Class B common stock to Class A common stock.

Subsequent to September 30th, Class B shareholders converted an additional 2.6 million shares, for a total of 7.6 million shares converted in this first program.

Based on the progress from the initial conversion program and the shares that we repurchased, Class A shares now represent 64% of total shares outstanding, 10% of which is held by The MasterCard Foundation.

In the second quarter, we also mentioned that we would disclose the details of any sales of our Redecard shares.

In the third quarter, we recognized after-tax gains of $70 million from the sale of 25% of our investment in Redecard.

The pre-tax gain has been recorded as investment income on our income statement.

The market value of MasterCard's remaining Redecard shares was $381 million as of September 30th, 2007.

Before Chris goes into the specifics about the quarterly results, I would like to spend a few moments commenting about the state of the business around the world.

Starting in the U.S., our volume growth has far exceeded retail sales growth to date in 2007.

While we cannot control or predict the future of the overall U.S.

economy, we expect our results to trend above typical market indicators during difficult economic climates.

Clearly, since MasterCard does not have exposure to consumer credit receivables, we may not benefit from the upside when credit trends are favorable, but we also do not suffer the downside during tough times.

While consumer credit volume growth is slowing in the U.S., we are making progress in the debit arena.

We are very pleased that we are now working with Banc of America on the introduction of a new debit affinity product, tied to Major League Baseball and National Football League sports teams.

Meanwhile, we continue to see markets outside of the U.S.

driving significant growth for the Company.

Latin America, and South Asia/Middle East/Africa regions were particularly strong.

In these markets, the opportunity is about penetrating the emerging middle class and young consumer markets, as well as expanding merchant acceptance.

In Europe, we continue to make progress with securing SEPA-related business through our flexible commercially-driven approach for our customers.

We have already secured Maestro agreements with many banks in countries such as Germany, Belgium, the Netherlands and Austria, assuring the objective of a uniform cardholder experience anywhere in the SEPA region.

Asia-Pacific is a region experiencing strong economic growth.

As the number of affluent consumers here continues to grow, we continue to work with our customers to leverage that trend.

In response, MasterCard is taking a leadership position in the premium space within this region.

Recently, many customers have chosen world MasterCard premium card programs, including customers in Taiwan, Australia, and in India, where the country's first world MasterCard card was issued this quarter.

Finally, while Chris will be going into more details on expenses later in the call, I would like to quickly comment on our broader thinking about expenses going forward.

Similar to our comments on the second quarter earnings call, as we go through our 2008 budget process, we are very focused on ensuring that our expenses support the many global opportunities of our business, while being mindful of our objective to consistently improve our operating results.

We are in the middle of our 2008 budget process, and I fully expect that we will find the right balance between investment in the business and continued long-term margin expansion.

With that, I will now turn the call over to Chris McWilton for more details on the financials.

Chris?

Thanks, Bob.

Let's turn to Page 4 of the slide deck.

As Bob mentioned, net revenue for the quarter was a record, at almost $1.1 billion, a 20.1% increase over 2006.

Currency fluctuation of the Euro relative to the U.S.

dollar contributed approximately 2.3 percentage points of the net revenue increase.

Net income was $314 million, or $2.31 per share, on a diluted basis.

Without the impact of gains from the sale of a portion of our investment in Redecard, third quarter EPS would have been $1.80 per share, on a diluted basis.

Turning to Page 5.

In the third quarter, we experienced continued growth in both GDV and processed transactions across all regions.

GDV grew 12.8% on a local currency basis, and 16.6% on a U.S.

dollar converted basis to $577 billion.

The third quarter was the 14th consecutive quarter of double digit worldwide GDV growth on a local currency basis.

Although not shown on Page 5, purchase volume was up 14.1% on a local currency basis.

And cash volume was up 9.1% on a local currency basis.

Additionally, cross-border volume, or the volume that is generated from cardholders who travel outside of the country where their card is issued was up 20.6%.

In the third quarter, cross-border volume came primarily from Europe, Asia-Pacific, and Latin America.

Processed transactions or the transactions processed across MasterCard's network increased 13.3% to $4.8 billion in the quarter.

As we discussed in the past, one of the metrics we focus on is revenue yield, or the net revenue per $1,000 of GDV.

This metric was 18.8 basis points in the quarter, versus 18.2 basis points in the third quarter of last year.

While we have said in the past that we expect a slight annual downdraft in this metric, the strength of our business, particularly cross-border volume growth, has put us on a trajectory to experience a slight positive lift on this metric for the full year 2007.

While the possibility of a broad slowdown in U.S.

consumer spending associated with sub-prime mortgage issues is yet to be determined, the global diversification of our business results and MasterCard's ability to generate significant volume in revenue from non-U.S.

economies remains very strong.

For example, gross dollar volume in both Latin America and the South Asia/Middle East/Africa regions continue to grow at very healthy rates.

As we have discussed in the past, MasterCard's performance-based pricing serves to moderate the impact on revenue driven by swings in volume.

Because of our tiered pricing arrangements, not meeting volume hurdles can result in lower rebates and incentives.

History demonstrates that we have been very resilient in weathering macro economic events.

The secular shift from paper to electronic forms of payment continues in spite of any local economic downturn.

Note that our U.S.

GDV growth rate of 7.7% is now completely normalized after the anniversary of a large debit portfolio conversion that occurred in the second quarter of 2006.

Additional details about our operating performance can be found on page 10 of our earnings press release, and on the IR section of our website.

On page 6, we show the net assessments increased 20.7%, versus the third quarter of 2006, or $50 million, to $291 million.

In the third quarter, gross assessments increased 15.4%, or $70 million, to $525 million, due to strong GDV growth.

Because our incentives are based on more than just GDV, and include payments for things like new cards or program launches, the relationship between gross and net assessments can vary.

During the last quarter, net assessments as a percentage of gross assessments improved slightly.

Turing to page 7, you can see the net operations fees increased 19.8%, or $131 million, to $792 million, in the third quarter.

Gross operations fees increased 20.6% or $151 million to $879 million.

This growth was driven by several factors.

First, growth in processed transactions, gross dollar volume, and cross-border volumes that I previously described on Page 5.

Second, pricing adjustments and new programs, including growth in authorization settlement and switch revenue, driven by higher utilization of stand-in authorization services, as well as pricing changes for these services, acceptance development fees, driven by increased volumes, and a new fee associated with Rewards programs, that was implemented in June, 2007.

Other operations fees driven by new account enhancement programs that allow our customers to move cardholders to different programs without a change in their account numbers.

Turn to Page 8 for some detail on expenses.

During the third quarter, total operating expenses increased 16.3%, to $730 million.

This increase was driven mainly by advertising and marketing expenses which increased 26.4%, or $55 million, resulting from a change in the timing of 2007 initiatives, compared to the same period last year.

You will recall that in the first half of 2006, we had significant World Cup sponsorship activity versus this year, where we planned to shift more of the spending to the second half of the year.

Additionally, general and administrative expenses increased 10.2% for a couple of reasons.

First, an increase in personnel costs related to the hiring of additional staff and contractors to support our customer-focused strategy.

Planned staff hires were made to support our global sales efforts, as well as our product and advisors initiatives, primarily in our U.S.

and European regions.

Second, an increase in employee performance incentive accruals.

Partially offsetting the growth in G&A was the impact of higher severance in the third quarter of 2006, due to an adjustment in the assumptions of our severance plan.

The increase in total operating expenses was also driven by a $10 million cash contribution to The MasterCard Foundation this quarter.

We have now made $30 million contribution of our planned $40 million contribution to The MasterCard Foundation, which we said would be completed within four years of our IPO in May, 2006.

Currency fluctuation of the Euro relative to the U.S.

dollar increased total operating expenses by approximately 1.6 percentage points in the quarter.

Moving to the cash flow statement, and balance sheet highlights and Page 9, we have generated $718 million in cash flow from operations during the first nine months of 2007, $272 million of which was generated in the third quarter.

We ended the quarter, with $3.3 billion in cash, cash equivalents, and available for sale securities, we also had $3.2 billion of stockholder's equity.

During the third quarter, we repurchased approximately 2 million Class A shares for an aggregate of $277 million.

All of the Class A shares repurchased in our now-completed $500 million share repurchase program are classified as Treasury stock on our balance sheet.

Finally, investment securities available for sale increased $299 million, mainly due to a mark-to-market adjustment of our remaining Redecard investments.

Turning to Page 10, there are a few items that I would like to highlight for your consideration, as you refine and update your models for the fourth quarter of 2007.

First, there was one special item in the fourth quarter of 2006, Litigation settlements of $2 million.

Second, with respect to G&A, due to delays in hiring and shifts in the timing of technology projects, we now expect the second half growth to be slightly lower than the first half growth of 16.4%.

However, the fourth quarter will have the highest sequential and year-over-year growth rate for any quarter in 2007.

Third, we continue to anticipate low single digit full-year growth in A&M in 2007.

Also, consistent with our comments from the second quarter call, we expect that the highest quarter of spend will occur in the fourth quarter, but spend will be more evenly distributed in the third and fourth quarters than in prior years.

Finally, we expect to provide an update from the second phase of our Class B share conversion program, and the incremental $750 million Class A share repurchase program on our fourth quarter and full-year 2007 earnings conference call.

To wrap up, we are pleased, very pleased with our third quarter results, and are encouraged by the global momentum we continue to see in the business.

While the broader U.S.

economy is undergoing some challenges, we are on an excellent trajectory.

We continue to demonstrate global strength and the ability to deliver value to our customers, merchants, and shareholders.

Thank you Chris and Bob.

We are now ready to begin the question and answer period.

In order to get to as many people as possible during our allotted timeframe, we ask that you limit yourself to a single question with one follow-up, and then requeue if you have additional questions.

Operator, I will turn the call over to you.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS)

And your first question comes from the line of Pat Burton with Citi.

Please proceed.

Congratulations on your first billion dollar quarter!

Tremendous numbers.

My question is for Chris and that is Chris, the factors between the 12.8% local currency GDV growth and the 20% net revenue growth, could you again just outline basically what the difference is there, price increase, foreign currency, et cetera?

How sustainable those factors are.

Thanks.

You will see a disconnect as you have over time, Pat, on the growth rates between revenue and GDV on a local basis.

We do assess outside of Europe on a U.S.

dollar basis, so we do get revenue growth because we take a transaction that occurs volume-wise in a foreign currency, we convert that to U.S.

dollars, and then we assess based on that.

So you are going to see uplift from that process, you are going to see the normal currency conversion of the European operations back to U.S.

dollars, you are going to see the impact of pricing, which was about 2% in the quarter.

So all of those things have resulted in us being able to get that spread between revenue growth and GDV up to a pretty healthy level this quarter.

Now the strengthening of different currencies around the world to the U.S.

dollar we don't control.

However, I think we have done a very good job of maintaining our pricing.

I talked about the revenue yield a little bit in my comments, and I think 18.7 basis points on volume is something we are pretty proud of.

And the cross-border number of 20.6, is that on the higher end of where we normally see it?

That is a very healthy number.

And that is another reason we are seeing the revenue growth outpace the GDV, because on those transactions, we are processing the transactions across our network, and we are also getting cross-border fees on that, which have been very healthy for us.

Thank you.

So those are very healthy cross-border numbers.

Thanks.

Your next question comes from the line of Adam Frisch with UBS.

Please proceed.

Thanks, guys.

Pretty impressive quarter you guys just put up again.

Two questions here.

Setting up some pretty tough revenue and margin comps for '08, obviously if there is a slowdown in the U.S., that perpetuates or gets more intense, it is going to create some headwinds for you.

Bob, you mentioned in your opening comments that you are going to find a balance in operating expenses between growth and margin expansion, so with the realization that maybe next year, to Pat's question, some of the things that are really driving top line this year, like cross-border, et cetera, may or may not continue in '08, should we expect a bigger focus on expenses going forward?

Adam, I think we always had a good focus on expenses.

And from my perspective, we are going to continue that going forward.

And as I mentioned in my remarks, as we go through the budget process, I am being presented, we are reviewing opportunities from all over the world, from the various business units, and I am in the fortunate position of having more interesting things to invest in, in order to build this franchise over time, as opposed to people coming in and going, geez, we don't know what to do next.

I recognize that there is a pacing challenge there.

And I also know that we have made commitments both inside and outside this Company to see margin improvements, and so that is the balancing act we are going through now.

And I feel quite confident we are going to get ourselves to a position in terms of our budget, which lets us fund those things that are important for the future of the Company, but still show those operating margin improvements.

If the world gives us a more challenging environment than we may anticipate, then I think we also have an approach which builds flexibility with that budget, because people know those things, if we get wind at our back, those things that we will probably move to next, and if we have wind in our face, those things that will probably have to slow down the pacing of.

Okay.

Well said.

Quick question on interchange, the text and the 10-Q seemed a little bit more guarded on Europe, a ruling from the governing body over there is widely expected in the next few months on cross-border interchange, two aspects of this.

One, obviously reduced interchange, it does impact you directly in your revenues and margins but can you speak to some of the indirect impact?

And two, do you think this could trigger other activities in Europe, whether it be litigation or bank movement or whatever?

Well, the European Commission has said that it is going to issue a decision regarding MasterCard's European cross-border interchange fees.

I believe they have publicly stated they think that would happen by the end of the year.

That is I think how we couched it, and our 2Q event, I am not sure exactly what the wording was in this quarter, and as we said in that filing, we think they could come out with a negative ruling.

And if that is the case, at least based on the material that we have reviewed, and the comments we have reviewed from them, we are likely to appeal that, very similar to the way we handled the OFT decision in the U.K.

a couple of years ago, because we think we have extremely strong legal arguments for doing so.

Having said that, we are examining various scenarios around the possible decisions that might be rendered, and while we can't conclude exactly how they will rule, until we know the final income, it is really difficult to answer the question, other than to say the primary focus is to remain sure our products remain competitive in the European market.

Great.

Thank you.

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

Please proceed.

Great.

Thank you very much.

You commented on a 2% revenue lift this quarter from pricing changes that you have been able to effect.

Can you go into just a little bit more detail of where those pricing changes were put in place geographically, and then also kind of where they are in terms of the services that you're offering?

Liz, I will take that one.

We talked on the second quarter call about some additional pricing, we put in place around stand-in services, which is basically, those of you who are not familiar with that, when a customer's authorization system go down, they obviously don't want their cardholders to be sitting at the cash register, or some place that they can't get their purchase authorized, so we stand in for them in those cases.

They give us parameters with which we can act as a surrogate for them.

So we put some pricing in place around those.

In pretty much all regions around the world.

And we get the full quarter impact of that in Q3.

And we also put an additional acceptance fee in place in the U.S.

around some enhanced Reward platforms, so it was on the stand-in pretty much global, and in the acceptance arena, it was in the U.S.

Okay.

Great.

And then on the cross-border transactions, you can give us a sense of what percentage of your total transactions are actually cross-border, and how that has trended over time?

Well, at the top of my head, I don't have an answer for you, Liz, and that's, you know, we process all of the cross-border, so we have a very good handle on that, we don't necessarily process all of the other transactions, so the rule of thumb I have used is it tends to be less than 5%.

Certain markets have a propensity to travel so it may be higher for a given country, but the rule of thumb I have always used is somewhere in the 3 to 5% range.

Great.

Thank you very much.

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

Please proceed.

Hi, thanks.

It looks like you shifted some in advertising assumptions in the fourth quarter, and I think we talked in the third quarter it would be slightly higher than the second --

Chris, could you speak up closer to the phone.

Sure.

Is that better?

Yes.

Okay.

Sorry.

Just on your ad spending assumptions I think that we had expected that the third quarter will be slightly higher than the second quarter, and it was slightly down.

And it looks like you are shifting that into the fourth quarter.

Can you talk about maybe what has changed there?

Well, I think the seasonality factor this year is what we would call a more normal year than last year.

As you will recall, in 2006 we had a very big second quarter, as a result of the World Cup spending taking place in that year, and I think Chris mentioned in his comments, that we will have a more normalized pattern this year, where traditionally as you will know from prior years, the fourth quarter tends to be the heaviest ad marketing spend in our business.

I would just add that we still expect very modest full-year A&M growth.

Okay.

And then I guess just on a higher level topic, with the dollar continuing to fall, just looking at your U.S.

card base being more than double what it is in Europe, at what point does that start to affect international traveler trends in the U.S.

consumers traveling over to Europe and many --

Chris, are you speaking on speaker phone?

Because you are breaking up and we really cannot hear your question.

Sorry.

No I am on a handset.

Is that better?

A little bit.

But not --

Sorry.

Just on your cross-border, with the weakening dollar, is there a time when it starts to bleed into the numbers, as far as your U.S.

card base being more than double what it is in Europe, at what point does that start to affect international travel trends, the U.S.

consumers traveling over to Europe, and more than offsetting the benefits you are getting from currency and the like?

That is a tough one for I think anybody to ask, to answer.

From our perspective, we continue to enjoy very robust cross-border volumes of business.

Now clearly, the Europeans who are traveling to the U.S.

have one of the strongest currencies they have ever had.

And so for them, this side of the Atlantic looks like a bargain basement, where as of course the U.S., whether it is business or tourist travel going across to Europe, obviously is not spending as much for the very simple reason that they get that cup of coffee, it is now $2 as opposed to maybe $1 a year ago.

We have very strong cross-border volumes, however, coming out of Latin America, coming out of Asia, cross-border, the Middle East region as well, so I guess from my perspective, I am more focused on the domestic activity in the U.S.

market, and what happens with the economy here, we have seen that slow down, we have seen a slow down in consumer spending, and that is the thing that we are more focused on, if you will, from the standpoint of the impact of our business.

I think the other thing to add is we process all of the transactions in the U.S., essentially all of them, outside of the U.S., there are large swaths of geography where we don't really process, really assess based on volume, and where the dollar is weak and people travel across the border, we would get transactions processed that we might not have otherwise processed, but the weak dollar is helping, and as I mentioned earlier, we also assess on a U.S.

dollar converted basis, so that tends to improve the revenue growth.

Okay.

Thanks.

Sorry for the bad connection.

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

Please proceed.

Thanks.

Just a few questions on the revenue yield.

Is the level sustainable going forward here, adjusting for seasonal?

Meaning is this the safety base that we should model from, Chris?

I would just be cautious about the fourth quarter revenue yield.

That tends to be our lowest revenue yield seasonally, because in that period we are doing a lot of intensive arrangements and promotions with the merchants, so if you pattern out or model revenue yield by quarter, you will see that the fourth quarter has historically been our lowest quarter.

So I would not straight line that across a full year.

Because I said in my comments, I think we are pleasantly surprised by the fact we have been able to maintain that revenue yield last year, in Q3 we were 18.2 basis points, 18.7 basis points this quarter, and I think full-year, as I mentioned on the call, we are going to see a slight improvement in that trajectory year-over-year.

Last year we were at 17.3% and now I think we are labeled to do a little bit better than that for the full year 2007.

Next year, we are cautiously optimistic that we can continue to see good cross-border growth, helping to sustain that momentum.

And you know again, we don't see any cliffs or precipice when it comes to that revenue yield on a short term basis.

Two quick follow-ups to that then.

If we strip out the effects of cross-border fees, how would the revenue yield look on a year-over-year basis?

Is it safe to assume that the revenue yield would still be up?

And then I have a follow-up, if you want to address that, first.

I don't have that number off the top of my head.

I assume there is enough disclosure in the Q, or around that, that you might be able to --

Fair enough.

And then longer term, can the revenue yield move higher longer term here, assuming you capture more operations fees internationally?

Yes, that is something that we definitely have the highest yield and we are processing the transactions, generating cross-border or currency conversion fees on that, and ticket sizes tending to higher with cross-border activities and the volume assessment is based on that.

So if those numbers, those international travel numbers and cross-border numbers continue to be healthy, we will do quite well.

Great.

Great results.

Thank you.

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

Please proceed.

Good morning.

This question is for Bob.

You had mentioned during your prepared comments your SEPA achievements, and I was hoping you could just frame that a little bit for us, in terms of what inning you feel are you in, regarding SEPA and that conversion that will continue throughout Europe, and in terms of how the market itself is playing out, in terms of processors, merging, selling, what is going on there, and how you plan to pick up additional business?

Thanks.

Well, Craig, I can't pick an inning here, although I am a baseball fan.

I can't assign one to this process.

There are clear timetables that were established, but I think there is a level of uncertainty for issuers and acquirers, particularly surrounding the Commission's lack of support, and thus far a lack of a decision with regard to interchange.

And as you know, the business models of every player in Europe that issues cards are premised on some form of balancing mechanism, namely interchange.

So at this point, I think the timetable is pretty clear, but whether or not that will actually happen I think remains to be seen.

Having said that, we are making good progress, I believe.

As you know, we have half roughly, of our 600-plus million Maestro cards around the world are in Europe, and we have already had very positive developments in Switzerland and Austria in terms of movement with Maestro, we have had commitments from banks in other countries including Germany, Italy, recently Allied Irish bank in Ireland made a commitment to move their domestically branded and ATM-only cards to Maestro.

So I am feeling good things about the progress.

But I think the real evolution of the market is one that is very hard to predict whether this is the third inning, from a timetable standpoint, or really the bottom of the first inning.

Having said that, I feel really good about how we are positioned.

And from a processing standpoint, as you have observed, there have been various of the previously bank-owned processors that have been acquired.

I think I have mentioned on past calls, or Chris has, that we have looked at virtually every one of those, and for one reason or another, we have decided that they weren't going to be value-adding for our business.

But we have seen processing competitors move into those marketplaces, and we continue to have scale in our processing, and I think a very good offering with our Maestro product in that marketplace, at least on the debit side.

So all in all, I feel that we are in pretty good shape.

I think it is going to be a very competitive marketplace over the next few years.

I believe the regulatory positions are ones that are going to have to be solidified, in order to give all of the businesses there a platform, on which they can then evaluate and judge the investment decisions they have to make.

Okay.

Thank you.

Your next question is from the line of Moshe Katri with Cowen.

Please proceed.

Thanks, good morning.

As a follow-up to the question about pricing, can we expect further pricing adjustments as we go along maybe during the fourth quarter?

That is number one.

And then can you talk a bit about the opportunities for MasterCard and the pre-paid card business, and how well is actually the company positioned in that area?

Thanks.

We are always looking at ways to provide value to our customers, and do it in a way where they think they are growing their business, and becoming more profitable as a result of the services and products we are providing and we're always thinking about not exactly, it doesn't necessarily have to be a strict pricing increase but new service propositions, new value-added propositions, so we are always thinking about that.

We have a global committee that is sitting around trying to figure out on a regular basis whether we have optimized pricing.

We have a very extensive product development group, which is trying to come up with new ways to help customers, and work with customers on their opportunities, so we can't rule out pricing in the fourth quarter, but it is something that we are always thinking about.

And I think we have demonstrated that by maintaining the revenue yield at pretty healthy rates.

On pre-paid, just a couple of observations, obviously it is something that several of our customers use, very important, and we bring the same strengths from the standpoint of the global acceptance of the brand, et cetera, that we bring to other products that our customers are interested in.

We do, through Master Card advisors, do quite a bit of advisory work in support of customer's pre-paid initiatives.

We do have a platform that obviously supports those products for those institutions that may not be running their own platform.

We were able to participate most recently with the fires here in the United States out in California.

We managed to get, I guess it was about $25,000 worth of prepaid cards through one of our customers out to the Red Cross, so that they could fuel their vehicles and so forth, as they responded to those California wildfires.

So it is nice to see some of the functionality being utilized on a real practical day to day basis like that.

Do you think on an ongoing basis, maybe starting in 2008, we are going to see a more significant contribution from that area to MasterCard financially, or this is still too early?

Thanks.

The way we think about that is it is imbedded in the other elements of our business, so we get to do the authorization clearing and settlement, and they get processing fees, depending on where these products are being utilized.

They are either on our platform, or a result of our advisory work, there are other fees to be utilized, and it is similar to the balance of our business model.

There will be some dollar volume related franchise fees and processing fees, and potentially a third category advisory fees.

Thanks.

Good quarter.

And the line is from Chris Brendler with Stifel.

Please proceed.

Can you give us a little more color on your domestic volumes?

I know you lapsed a big conversion, but it came in a little bit below our estimates.

Do you see any slowdown in spending patterns?

And also do you see any progress to report on additional debit conversions?

Let me just take a crack at that.

When you say domestic, I am going to assume you mean U.S.

domestic.

Correct.

Okay.

Well, if you take a look at, I guess it is in the press release, we do have specifics with regards to U.S.

dollar volume, and I happen to look particularly at purchase volume, and you will see that the purchase volume growth for the third quarter was 9.4%.

When you consider that in the context of the rate of retail spending is taking place here, that is obviously several percentage points.

I would say probably about 6 percentage points or so above the rate that you would see for consumer spending or retail sales broadly in the economy.

That in part is I think the success of the electronic and card-based payments, and in part is our success in terms of the way we work with our customers.

As the U.S.

economy has slowed, and we have a service that we call Spending Pulse, which is data that comes out just ahead of the Department of Commerce data monthly, we have seen that Spending Pulse report showing slowing consumer and retail level spending from the first to second quarter, second to third quarter, and not surprisingly, we have seen our spending volumes tracking down, although obviously not as low as those growth rates, for the reasons I have already mentioned.

As we look forward, we have I guess cautious optimism in terms of control of inflation, and the way the Fed is going to behave and ensuring that the economy weathers some of the challenges coming out of the sub-prime market.

The best news I guess is that we don't have the credit exposures that some companies have, either through the fact that they are lending money to cardholders, or in other ways involved.

So I am pretty comfortable that with our very strong growth internationally, we will be able to show good positive overall corporate growth, even if we have a market like the U.S.

that may get a little slower domestically.

Any debit conversion updates?

I am sorry?

Any new debit relationships?

I mentioned a couple of the ones that popped in Europe, Allied Irish Bank recently made a commitment with regards to moving their domestic rebranded and ATM-only cards to Maestro.

I can't recall if we shared with you the Swiss bank movement.

And I think in my commentary, during my remarks at the opening of the call, I mentioned that we are obviously delighted to be working with Banc of America on the Affinity debit programs with Major League Baseball and National League Football teams here in the U.S.

You would say that your U.S.

volumes were in-line with your expectations at the 9% level, the purchase volume?

I'm sorry, I missed the question.

Were they in-line with your expectations in the quarter?

Do you see any signs of a slowdown?

Yes, I would say they were broadly in-line.

When we see our SpendingPulse -data coming out, and we see what is going on overall in the economy, if it is a lower quarter coming up than the one we have just experienced, we adjust our expectations accordingly, if it is an improving quarter, we push them up.

So I was not at all surprised with where we came out in the third quarter, and I guess just delighted with some of the results we are getting in some of the other markets which show very robust growth.

Without a doubt.

On quick question for Chris.

You mentioned in the past not to focus too much in the quarterly improvements on rebates and incentives, throughout most of the year they have tracked below year ago levels, contra the trend in prior years.

Are any of the price increases you mentioned related to rebates and incentives?

Thanks.

I think from a rebate and incentive perspective, you are going to see, particularly in the assessment area, you are going to see the growth moderating a bit.

What is happening there is that as the base moves up, you are going to have to have a bigger rebate and incentive against a program, to move that dial on a percentage basis.

So we are are seeing slowdowns in the assessment rebates and incentives, and the operations fees, they are coming off a very small base, so even a small change in that number is going to have a fairly dramatic impact on the growth rate.

There are cases where based upon the specific customer situation, if we put a pricing increase in place, we might need to accommodate that for a contractual issue we might have, or a customer relationship issue.

It depends upon the facts or circumstances.

So sometimes you do see rebates and incentives move up or down with the pricing change.

Thank you.

Your next question comes from the line of Howard Shapiro with Fox-Pitt Kelton.

Just wondering if you can help us understand when you allocate spending by region or by product, how does your assessment of changing economic growth or spending pattern, i.e., a slowdown in the U.S., influence how you are going to be allocating marketing spend going forward?

Specifically in the area of advertising and marketing we go through a modeling process, which enables us to allocate funds on, basically on a country level during our budget process.

One of the indicators that we use is the underlying assumption in terms of what is going to go on with the economy and the growth in that market.

We tend to make sure we put enough money into a market so we can get the job done in the market, from the standpoint of trying to meet the customers' expectations, where we have agreements with customers to do certain things, but also to the extent that there is a threshold of spending that may be required in order to have adequate impact to achieve brand awareness objective, or whatever it may be.

To the extent there is a dramatic change from what we look at the time we're doing our budget, that would be something that we would make adjustments for during the course of the year.

Obviously, if you get into a situation where there is a catastrophic shutdown, then we would shut down our marketing.

The most recent example I can think of, is when we have the SARS scare I guess it was back in 2003, in several markets, international travel was basically shut down, so that component of our advertising and marketing budget, we put into hibernation until that resumed.

So there is a level of flexibility around it.

But it is something that we just have to stay on top of day to day.

Okay.

Thank you.

Your next question comes from the line of Ken Posner with Morgan Stanley.

Please proceed.

Hi, good morning.

I wondered if you could just compare and contrast the net assessment yields in the U.S.

versus overseas, or net revenue yields?

I don't think we have broken than down in our filings before, Ken.

I will tell you in the U.S., we are going to process the transaction, whether it is cross-border or not.

And as I indicated before, whenever we process the transaction, obviously we are getting fees that we wouldn't if we were just simply assessing based on the volume of the card, which might take place intra-country within Europe, or one of the Asia-Pacific countries.

So yield is much higher generally in the U.S.

than we see in other parts of the world, if you take out the cross-border activity, just based on processing.

We also process in the U.K., Canada, Australia, and Brazil.

So you see yields higher in those geographies as well.

And Chris, without disclosing anything you haven't disclosed, can we say anything about rough ballparks?

I mean would it be safe to presume that in emerging markets and fast-growing markets, that you get a healthier assessment than you do in a mature market like the U.S.?

Let me make an observation on that.

I think we have disclosed the dollar volume that is in the U.S.

versus international.

We have also disclosed the revenue that is U.S.

versus international.

And we are looking at I think in the second quarter, and I don't have the third quarter at my fingertips, about 50% of our revenue is U.S., and 50% is international.

And something around I think 43 or 44% of our volume was U.S.

So you can see that will is more revenue per dollar of volume coming out of the U.S.

But Chris has already hit on the points that drive that.

We process everything that we do in the U.S., all of the transactions essentially, which is not necessarily the case in other markets outside of the U.S.

But you would expect to get both brand and process fees.

And then there is obviously the mix of other revenues in terms of advisory services, and other things that are not necessarily driven off of the actual volume or processing of a transaction.

And so that would also affect that yield calculation, but you can do a gross estimate based on those two data points that I mentioned.

Thank you.

That is helpful.

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

Please proceed.

Thanks for the good news in an otherwise tough year here.

In the context of your commentary on the fourth quarter, should we just expect net assessments and operations fees to be impacted in ratio terms by incentives or rebates, by roughly similar amounts to last year?

And then, you know, very favorably strong growth in GDV outside U.S.

Could you just help us understand that in terms of the proportion of contribution from price increase, versus your share increase in those markets, versus say consumer organic spending within the local economies?

Thanks.

I think I will simplify your question, and I would again encourage you to look at revenue yields, and I think if you go and you model the revenue yield over the past three years, and look at what happens to that yield in the fourth quarter, I think you can make some observations with respect to the decline, the gradual decline that takes place in Q4, and as I mentioned in my remarks, there is a lot of activity going on with merchants and acceptance activities in the fourth quarter, and that is reported as contra revenue.

Volume does increase, but again we are getting into the tail end of our tier-based pricing arrangements with our major customers.

So the pricing on those deals tend to be the lowest in the fourth quarter.

So put the two of those together, and you do see basis points degradation historically in Q4.

Not something unexpected.

So that is how we look at it.

We don't necessarily dissect the rebates and incentives as operations fees or assessments.

We are managing the business in terms of the total picture to our shareholders and customers.

Thanks.

Your next question comes from the line of Anurag Rana with KeyBanc.

Please proceed.

Good morning, gentlemen.

Great quarter.

Chris, just a quick housekeeping item.

What would be the normalized investment income if we were to take out all of the investments, all the gains from already sharp?

And the D&A went down a little bit compared to last quarter, could you help us understand that?

As I mentioned in the call, the investments, the gains on the Redecard sale of the 25% of our holdings was $107 million pre-tax in the quarter.

So you can back that out.

And the D&A, went down, we had some adjustments around some of our estimated useful lives, and residual values on some of our fixed assets in the quarter, but nothing that I would see as something you would have to consider going forward in your modeling.

Thank you.

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

Please proceed.

Yes, hi.

On the modeling issue, regarding sales and marketing, I think you guys had said on the last call, in 2Q that it would be up sequentially, when in fact it was down, so I guess the question is, is it possible that we could see sales and marketing down for the full year, even though you are saying it might be up?

Sometimes we have shifts in timing of our ad and marketing programs that are driven by our customers, that we don't have unilateral control over.

So we might be planning a program to advertise around a Pay Pass launch, or a World Card launch with a specific customer, and they call us up and, you know, two weeks before the program is supposed to kick off, and say, well, we are not ready for that, we are going to do it in Q4 versus Q3, so we did have some slippage from Q3 to Q4, as we forecast our A&M spend, but we are still looking at that very modest full-year growth.

So simply a shift in timing from Q3 to Q4.

Okay.

Okay.

And then it sounds like you guys are suggesting that G&A is going to be up sequentially a fair amount in the fourth quarter.

As we think about the first quarter, is it possible that we could see a sequential decline, just given all of the activity in the fourth quarter that you may not have in the first quarter?

I think we would give some commentary and context around that when we get to the year-end.

We are still right in the middle of our budget process, arm wrestling with all of the business units, and they are working on timing, et cetera, which programs they will calendarize which way, so it is really premature to think about Q1.

Okay.

We will take a guess.

Thank you.

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

Please proceed.

Hi, guys.

Sort of to extend that question, I mean on the G&A side, I was expecting somewhat more substantial growth in Q4, and I think you had given indications of that.

Really, you are not kind of changing your second half, so you know, along those lines, what change during the third quarter to push out some of those technology investments?

It takes a little bit longer planning than two weeks ahead on the advertising spend, calling it up and pushing it out.

Can you give us an idea why some of those expenses have slipped into Q4?

A lot of it has to do around hiring.

And if you look at our G&A component, the biggest piece is the personnel cost.

And in our business units do have plans to bring the folks on board to work on projects and initiatives with customers, et cetera, and I think we saw sort of a delay in hiring, as I mentioned in my remarks, that people did not come on as quickly as we thought they would.

They will come on in the fourth quarter, and that is why we have continued to project both the sequential growth, and the fourth quarter being the absolute highest spend of any quarter.

So it is sort of a push-out and timing issue from 3Q to 4Q, just around delays in hiring, and when hiring is delayed, projects get delayed, so if there is any outside support, vendor support to do that project, if we don't have people internally do to it, it compounds that so we are shifting that out from 3Q to 4Q.

Just expanding on why are you having the delays in hiring?

Is it problems finding the right IT people, or the right sales people?

Are they just not available in the market at this point?

Or, you know, is there another issue?

No, I think you hit the nail on the head there.

I think there is a relative scarcity of resources in the technology area, as well as customer facing people, that have the skill sets that we are looking at to deal with customers at the level we are expecting to.

We're not looking for clerks for back office support.

We are looking for people that can go in and deal with sophisticated customers and a sophisticated business, and it is a longer hiring cycle than I think we had anticipated.

Thank you.

Operator, I think we have time for one last question.

And your last question comes from the line of Mark Sproule of Thomas Weisel Partners.

Please proceed.

Thank you.

Maybe if I can touch on maybe a little bit of a rehash of some of the other questions, but looking at your spending, but also sort of looking at it in the context of what some of your customers are doing with their portfolios, the credit card issuers, domestically especially are having --

Mark, could you speak up a bit.

Sorry.

Can you hear me better now?

Yes.

Just looking at the credit card issuers that are your customers, many of them are sort of looking to re-center their portfolio to protect themselves against increased credit losses, maybe putting incremental fees on their customers, and kind of constricting some of the lending that they are doing out in the marketplace.

Is there any concern that, 1) that could have an impact on your domestic volumes as we go into Q4?

But also, how does that play into what you talked about briefly a few minutes ago about the timing of your advertising, if some of these guys maybe pull back on their own spending?

Well, let's use your hypothesis.

Let's assume that turns out to be the case.

There is a slowdown in the marketing around card-related products here in the U.S.

There are less incentives being placed out there for cardholders to use their products.

Then I would say yes, that we would react to that, one, we would probably see some slowdowns.

But we would also see delays in our marketing spend and support programs that would be used with those customers.

To the extent there is a lessening of domestic volumes versus what we currently anticipate, the vast majority of our customers here in the United States have agreements which involve tiered pricing.

And to the extent they don't get to certain volume levels, they may not qualify for that lower pricing.

I think Chris had made it pretty clear in earlier comments today and other calls, that the fourth quarter is our quarter generally of lowest effective yield, and that in part is because we are getting to those higher tiers on the various lines of business our customers do, and therefore lower pricing tiers.

To the extent they don't get there, there is a little bit of a balancing mechanism, if you will, in terms of the structure of our pricing.

Got you.

That is helpful.

And then on a different side of the equation, when you look at the debit market, obviously nice growth on the signature side, you know, is there any inclination of trying to make maybe make a bigger splash in the debit market to counteract some of the other players that are out there?

Thanks.

Well, the debit market, I think of globally, and I think we are making pretty big splashes in it.

If I look at growth in the U.S., debit continues to be stronger than credit.

And we had nearly 15% growth in purchase volume during the quarter in our domestic signature-based debit.

I mentioned here the relationship with Banc of America, we are delighted to be working with them.

Outside of the U.S., Maestro is a very strong performer.

We have over 600 million Maestro cards.

And I have highlighted some of the things that we have been doing with players, particularly in Europe, but we are doing similar types of things in other region of the world as well.

So I feel good about our position in debit.

It is a rapidly growing market.

It continues to receive focus.

And we look forward to having more successes there.

Thanks.

And I would like to turn the call back over to Mr.

Bob Selander for closing remarks.

I would like to thank everybody for joining us today.

Again, we are just delighted with our results for the quarter.

And we are glad we were able to share them with all of you.

Have a great day!

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

And have a great day!