萬事達 (MA) 2007 Q4 法說會逐字稿

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

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

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

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

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

I would now like to turn the presentation over to your host for today's call, Ms.

Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you, Katina.

Good morning to everyone.

Thank you for joining us, either by phone or by webcast, for discussion about our fourth quarter and full year 2007 financial results.

With me on the call this morning are Bob Selander, our President and Chief Executive Officer, Martina Hund-Mejean, our Chief Financial Officer, and Tara Maguire, our Corporate Controller.

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

In total, the call will last up to one hour.

This morning's earnings release on the slide deck that will be referenced on this call, can be found in the Investor Relations section of our website, 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 February 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 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.

Good morning, everyone.

We are thrilled with our strong financial performance for both the fourth quarter and full year.

These results demonstrate our success in leveraging our assets and global business model, to differentiate MasterCard in the marketplace.

Our diverse offerings and payment insights are clearly resonating with our customer financial institutions and merchants, who continue to appreciate the value we provide to their businesses.

Turning to page two of the slide deck, in the fourth quarter, we delivered net income of $304 million, or $2.26 per share on a diluted basis.

This includes after tax gains of $185 million, or $1.37 per share, from additional sales of our investment in Redecard.

We once again reported quarterly net revenue of over $1 billion, up nearly 28% from the fourth quarter of 2006.

This was driven by strong growth and gross dollar volume, and processed transactions, including cross-border volumes, which grew by over 27%.

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

Finally, we saw our operating margin improve 10.3 percentage points, 16% from 5.7% excluding special items, demonstrating the continued leveragability of our business model.

I am sure you are wondering how the economy will affect our ability to maintain these strong results.

Let me spend a moment on slide three, to make a few observations about the current economic situation in the United States, and what it means for MasterCard.

Although we have not seen the same impact on our business, that the slowdown in the U.S.

economy has had on other financial services companies, continued weakness has the potential to slow the rate of our U.S.

growth in the future.

However, there are four distinct factors about our business that put us in a better position in times of economic uncertainty in the United States.

First, a significant portion of our business is transaction-driven.

We can't predict the future of the U.S.

economy, but regardless of what happens, we expect that consumers will continue to transact.

While consumer spend might be slowing relative to what we have seen in the past, MasterCard U.S.

data from the 2001 recession, indicates that transactions grew the rate that exceeded volume growth.

Additionally, MasterCard advisors' SpendingPulse data, which captures more than card based payments, indicates that a mix shift in consumer spending is occurring.

Over the past several months, consumers have moved away from discretionary items, such as jewelry, full-service restaurants, and home furnishings, for everyday purchases including gasoline, grocery, and personal healthcare items.

This movement to everyday purchases aligns well with where MasterCard is broadly positioned in consumers' wallets.

For us, the shift in spending patterns translated into higher fourth quarter growth rates in U.S.

volumes, when compared to the third quarter of 2007.

Let me repeat that.

The shift in spending pattern translated into higher fourth quarter growth rates in U.S.

volumes, when compared to the third quarter of 2007.

Second, about half of our business is generated outside of the United States, in regions which are currently experiencing better economic conditions.

Our global business model adds diversification to our revenue base, and helps insulate MasterCard from the effects of local economic downturns.

MasterCard's business is much more sensitive to a disruption in cross-border travel, than it is to consumer spending or retail sales in any one region.

Third, the secular shift from paper to electronic forms of payment continues to be strong, despite a challenging economic environment in the United States.

One example of this is the growth of the E-commerce sector, as consumers shift their shopping patterns from in-store to online purchases.

Finally, since we don't issue cards, we don't have the risk of credit write-offs, as we are not directly exposed to consumer debt.

We are closely monitoring the impact that a weaker U.S.

economy could have on our customers' payments businesses, and we will adjust our resource allocation as our customers manage their plans.

Overall, we continue to have confidence in our ability to drive future growth and deliver shareholder value.

Before turning the call over to Martina, there are a few developments on page four that I would like to highlight.

On the legal and regulatory front in December, we received a ruling from the European Commission, with respect to our cross-border interchange rates.

As you know, we are not economic beneficiaries of interchange, so there is no immediate direct impact on MasterCard's financials.

We plan to file an appeal with the European Court of first instance by the beginning of March.

We are carefully analyzing the Commission's position, we hope to meet with the Commission in the near future to discuss their decision.

We intend to comply with the Commission's order during the appeal process, and are prepared to take action to ensure that our payment products remain competitive.

At this time, we are unable to comment furnishing on the decision.

Switching gears for a minute, let me provide you with an update on our progress related to SEPA, Single Euro Payments Area.

Despite some of the uncertainties surrounding SEPA, we have made very good progress, and continue to believe MasterCard has the best product solution for banks in Europe to become SEPA-compliant.

We have completed migration agreements from national use only brands to Maestro, to roughly 20 million cards, in Germany, Italy, Ireland, Portugal, and the Netherlands.

All of these agreements cover brands, and some also include domestic processing.

This is incremental to all Austrian debit cards which have already migrated.

Additionally, domestic transactions on all cards issued with the Maestro logo, can now be routed through our network, if an acquirer or merchant chooses to do so.

As a result, we have now started processing domestic transactions on over 140 million , bearing both the domestic and Maestro brands in Ireland, Portugal, Italy, Austria, the Netherlands, and Germany.

This means that even if a bank does not migrate their national brands to Maestro, MasterCard can still gain incremental domestic processing business.

On our U.S.

litigation, we have no significant updates to report at this time.

As I just mentioned on slide two, in 2007 we recognized gains from sales of a significant portion of our investments in Redecard, in fourth quarter and for the full year.

We recognized after-tax gains of $185 million, and 254 million respectively.

These gains have been recorded as investment income on our income statement.

In October of 2007, our Board approved a $750 million Class A Common stock repurchase program.

It was incremental to the $500 million program announced last April.

Th aggregate repurchase program totals 1.25 billion.

As of December 31, 2007, approximately 4 million shares of Class A Common stock have been repurchased, at a cost of $601 million, where the aggregate program was about halfway complete at that time.

Also during 2007, we implemented and completed two separate conversion programs, in which 11.4 million shares out of an eligible 13.4 million shares of Class B Common stock were converted into Class A Common stock, and subsequently sold to public investors.

As a reminder, our Class B shares are held by our customer financial institutions.

As a result of these repurchase and conversion programs as of year end 2007, Class A shares represented 67% of total shares outstanding, 10% of which was held by The MasterCard Foundation.

With that, I will now turn the call over to Martina, for a more detailed update on the financial

Thanks Bob, and good morning everyone.

I am pleased to be part of the MasterCard team, and I look forward to meeting you all soon.

Let me begin on page five of the slide deck.

As Bob mentioned, net revenue for the quarter was almost $1.1 billion, an increase of 27.8% versus the year ago quarter.

Currency fluctuations of the Euro and the Brazilian Real relative to the U.S.

dollar, contributed 4.7% percentage points of the net revenue increase, resulting in organic growth of 23.1%.

Approximately 2 percentage points of this was due to pricing adjustments.

Our operating income of $172 million resulted in an operating margin of 16%, a 10.3 percentage point improvement over last year excluding the impact of special items.

As we have mentioned in the past, our strong revenue growth enabled us to leverage our operating margin.

The margin contribution from revenue growth was more than twice as much as the impact from expenses.

The contribution from foreign exchange was less than 1 percentage point.

Net income was $304 million, or $2.26 per share, on a diluted basis.

Without the impact of gains from the sale of a portion of our investment in Redecard, fourth quarter EPS was $0.89 per share on a diluted basis.

Turning to page six, in the fourth quarter we saw double-digit growth in both gross dollar volume and processed transactions across all regions.

GDV grew 15.2% on a local currency basis, and 20.9% on a U.S.

dollar converted basis, $634 billion.

The fourth quarter was the 15th consecutive quarter of double-digit worldwide gross dollar volume growth on a local currency basis.

And despite the economic downturn in the U.S., our U.S.

GDV growth was 10% and U.S.

purchase volume growth was even stronger at 11.1%.

Both of these growth rates were higher on a sequential basis than the third quarter of 2007.

As they are not shown on page 6, worldwide purchase volume was up 16.1%, and cash volume was up 12.3%, both on a local currency basis.

Additionally, cross border volume, or the volume generated from cardholders who travel outside of the country where the card is issued, was up 27.7%.

Processed transactions, or the transactions processed across MasterCard's network, increased 17.2% to $5.2 billion in the fourth quarter.

While the full impact of the economic downturn in the U.S.

remains to be seen, the global diversification of our business, and MasterCard's ability to generate significant volume transactions and revenue from economies outside of the U.S.

remains strong.

Additionally, MasterCard's performance-based pricing continues to moderate the impact on revenue driven by swings in volume.

In other words, because of our tiered pricing arrangements, lower issue volumes can result in lower rebates and incentives.

And as Bob mentioned in his opening remarks, historical data indicates that the secular shift from paper to electronic forms of payment, continues even during times of economic slowdown.

As you know, one of the metrics we focus on is revenue yield.

Net revenue per thousand dollars of GDV.

This metric was 16.9 basis points in the quarter, versus 16 basis points in the fourth quarter of 2006.

The improvement in revenue yield can be primarily attributed to foreign exchange pricing adjustments and new services.

Let's turn to page seven.

You can see that net operations fees increased 25.2% or $167 million, to $829 million in the fourth quarter.

Gross operation fees increased 25.2%, or $186 million, to $925 million.

This growth was driven by several factors.

First, growth in processed transactions, cross-border volumes, and gross dollar volumes that I previously described on page six.

Second, the continued impact of pricing adjustments and new programs, such as higher utilization and pricing changes for standard authorization services, acceptance development fees, and a new fee associated with rewards programs, to further enhance acceptance that was implemented back in June 2007, and other operation fees driven by new account enhancements, that allow our customers to move cardholders to different programs without a change in account numbers.

In the fourth quarter, net operation fees as a percentage of growth operation fees remained unchanged.

Since we won't be filing our 10-K until later in February, we have included the quarterly operation fees details for your reference in Appendix B to the slide deck.

Let's turn to page eight.

There we show that net assessments increased $37.9%, versus the fourth quarter of 2006, or $67 million, to $244 million.

In the fourth quarter, gross assessments increased 18.5%, or $89 million, to $569 million due to strong GDV growth.

Net assessments as a percentage of gross assessments also improved.

Primarily due to lower growth and incentives tired to issue volume, as well as the timing and lower growth of merchant incentives.

In 2007, merchant incentives were more evenly distributed throughout the year versus 2006., when a higher percentage of merchant incentives were recorded as revenue in the fourth quarter.

Please turn to page 9 for some detail on expenses.

During the fourth quarter, total operating expenses increased 13.5%, of which 3.3 percentage points were related to currency fluctuations.

This increase was mainly driven by three factors.

First, an increase in personnel costs for for additional staff to support customer facing technologies and product areas.

Personnel costs were also driven by an increase in performance incentive accruals, as well as severance expenses, resulting from a corporate resource alignment, which occurred later in the quarter.

This resource realignment was undertaken to cut costs in certain areas, and provide us with the flexibility to invest in others, and to ensure that resources were appropriately allocated to support the Company's strategic priorities.

This initiative resulted in the reduction of about 100 positions.

As of year end 2007, MasterCard had approximately 5,000 full-time employees.

The second driver of the increase in total operating expense was higher professional fees related to legal costs to defend outstanding litigation.

The third driver was a 4.5% increase in advertising and marketing expenses versus the year-ago period, primarily due to foreign exchange.

Also, the Company made an additional 10 million cash contribution to The MasterCard Foundation in the fourth quarter.

This contribution completed our previously disclosed intention contribute up to 40 million in cash to the Foundation over four years following our IPO.

On our last earnings call, we said we expected G&A growth in the second half to be slightly lower than it was in the first half.

In actuality, second half G&A growth came in at 17.3%, slightly higher than the 16.4% we experienced in the first half.

The difference can be more than attributed to the severance expense related to the corporate resource realignment later in the quarter.

We have included the quarterly G&A detail for your reference in Appendix C.

Turning to page 10, let's take a quick look at our full-year performance, which was also very impressive.

We delivered net income of $1.1 billion, or $8.00 per share on a diluted basis.

This includes after-tax gains of $254 million, or $1.87 per share, from gains on the sale of a significant portion of our investment in Redecard.

We achieved full year net revenues of $4.1 billion, representing growth of 22.3%, excluding the impact of currency fluctuations, organic net revenue growth was 19.2%, which includes approximately 2 percentage points of pricing adjustments.

Net revenue growth was driven primarily by strong growth in GDV and processed transactions, including cross-border volumes which grew 21.1%.

Finally, we saw our full year operating margins improve 7.8 percentage points, to 27.3%, from 19.5% excluding special items in both 2006 and 2007.

Similar to the fourth quarter, the margin contribution from revenue growth, was more than twice as much as the impact from expenses.

The contribution from foreign exchange was less than 1 percentage point.

Moving to the cash flow statement and balance sheet highlights on page 11, we generated $770 million in cash flow from operations during 2007, $52 million of which was generated in the fourth quarter.

We ended the year with $3 billion in cash, cash equivalents, and available-for sale securities.

Capital expenditures increased to $156 million in 2007, to accommodate our increased workforce, as well as to develop new services and increased capabilities.

In 2008, we expect both CapEx and D&A to be slightly higher than they were in 2007.

As of year end, we repurchased approximately 4 million Class A shares, for an aggregate amount of $601 million.

About half of the shares were repurchased in the fourth quarter, and in January, we repurchased an additional 657,000 shares at a cost of $124 million.

Finally, for the full-year, accrued expenses increased $135 million, due to customer and merchant incentives and higher personnel costs.

I will now turn the call back over to Bob for some comments on our 2008 outlook.

Thanks, Martina.

Before moving to the Q&A, I would like to address a few items on page 12.

Given the uncertain U.S.

economic environment, I would like to provide you with some additional thoughts about our outlook for 2008, keeping in mind some of the points Martina and I have made already about the global balance of our business, our lack of consumer credit exposure, and our commitment to adjust our initiatives at the opportunities presented by our customers in different markets evolve.

First, we are currently evaluating whether it is appropriate to update our existing three to five-year long-term performance objectives.

This involves multiple factors, including the evaluation of current economic and competitive conditions, as well as our ongoing planning efforts.

We expect to address our objectives at our Annual Investment Community Meeting this spring.

When thinking about 2008, there are three items I would like to highlight.

First, we expect slower net revenue growth than 2007, but still at double-digit rates.

Second, our G&A expenses should grow at a rate that is both slower than net revenue growth, and below the 2007 G&A growth rate, as we moderate our hiring as compared to last year.

Finally, with respect to advertising and marketing expenses, we anticipate continued modest growth, particularly to support our efforts in international markets.

These guidelines assume current foreign exchange rates, no global recession, no events which significantly disrupts cross-border travel.

To wrap up, we are thrilled with our fourth quarter and full-year results, and continue to be encouraged by the transaction growth and cross-border trends we are experiencing.

We are committed to growing the business and adding value for our customers, merchants, and shareholders.

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

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

Katina, can we start the Q&A please?

Thank you.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS) Questions will be taken in the order received.

Your first question comes from the line of Charlie Murphy representing Morgan Stanley.

Please proceed.

Thanks very much.

We have heard about a price increase which MasterCard implemented in January '08 to its merchant acquirer customers.

Could you size for us what percent of the currency conversion and cross-border fees are cross-border, and then what percent of those fees to merchant acquirers, to help us potentially size that price increase?

Hi, Charlie.

Let me take that one.

First of all, we obviously don't comment on specific price increases, until such time where you actually see it showing up in our financial statements.

We don't comment on those obviously due to competitive reasons, it is very sensitive from a competitive point of view.

You know, as we said already in the prepared remarks, both the fourth quarter and the full-year is actually impacted by, positively impacted by 2 percentage points of price adjustments.

I think we would call it price adjustments, because it is not just a price increase, it is typically wrapped around a value proposition that we have for a customer.

I think we are really not prepared to break it into its parts.

Okay, thanks.

Our next question comes from the line of Adam Frisch representing UBS.

Please proceed.

Thanks.

Good morning guys, nice quarter!

I think you are the only green stock on my screen so far today, so nice job there.

On the expense items that you spoke about, the A&M and G&A, lots of questions we get from investors speaking about '08, obviously the growth isn't going to be as strong in '08 as '07.

A lot of focus is going to be on your cost structure.

Slower growth is one thing.

If you could just provide maybe a better order of magnitude or areas of leverage, to give us a better feel for how much leverage you can get out of those two line items on the P&L in '08?

I am the one who made a couple of observations, Adam, I think about 2008.

I did observe that we have a great year revenue growth-wise in '07.

I do see things slowing.

We do expect that we will still be able to achieve double digit gross rates in revenue.

On the G&A side, obviously in order for us to improve operating margins we need to have that growing less rapidly than revenues.

Clearly that has been the case, and we plan to manage it so that continues to be the case.

Given that we did add a significant amount of resources, Martina described our staff count is about 5,000, from I think it was 4,600 the year before, we would anticipate slower growth, additional resources this year, clearly to the extent that there is some rapid turnaround in the U.S.

or other developments.

We want to be in a position to respond to that.

Suffice it to say, we are sensitive to that G&A line, managing growth in the quarter, we took out about 100 positions.

Gave us additional flexibility in that line, as a result of that one-time severance charge we took in the quarter.

Back to A&M, we have flexibility in that line.

We have commitments with customers, and agree those customers expectations change, when the market environment changes.

I think we have the ability again to respond to that, and expect modest growth in that line.

Okay.

Turning to Europe as my follow-up question.

Lots of noise obviously in that region around regulatory reform, and you spoke to it a little bit in your prepared comments.

What are your near-term expectations for this region, and can you maintain your growth and margin in that part of the world?

Well, I keep telling our guy Javier Perez, the President of our business in Europe, that he has got a tiger by the tail.

I think we have great opportunities in that marketplace.

We are beginning to see some of the things that financial institutions and MasterCard have been working on for years come to fruition, with some of these debit deals I mentioned in my remarks, as the branded cards also take on Maestro as a cross-border brand.

That is enabling us not only to capture some additional business more completely to Maestro, but also to capture what otherwise would have been domestic-only types of processed transactions.

One of the other things we announced earlier in the quarter, this was early in January is that we have also got a deal, or to bring together our activities with those of [Euro pay] France.

According to the due diligence process on that.

We expect that is going to sharpen our ability to deliver to customers in that marketplace.

That is something we would make a deal closing late this quarter, or early in the second quarter.

Okay.

Thank you.

Our next question comes from the line of Anurag Rana representing KeyBanc.

Please proceed.

Good morning, everyone.

Congratulations on a strong quarter!

For the past few quarters, we have observed a divergence between GDV growth rates and the overall revenue growth rates.

As we look ahead, how should we model this relationship between the two, and then I have a follow-up?

I will make a couple comments on that, and Martina, you may want to jump in as well.

Clearly, one of our strategies has been to broaden our offerings to our customers, Anurag.

That means that we may go in and provide services which don't necessarily generate incremental dollar volume.

They may not issue any more MasterCards as a result, but it may be we are doing advisory services.

It may be we are providing information that enables them to better manage their business.

It may be we are providing a stand in processing, which enables them to stand down in some way some of their own processing capabilities.

At the end of the day, those things drive revenue that don't necessarily drive GDV.

The second observation I would make is the mix business taking place.

Tina mentioned our very robust cross-border transaction growth, which is over 27%.

That type of transaction, those cross-border transactions tend to carry more revenue relative to the dollar value than our average transaction.

There are a couple of factors that I would identify that are working their way through there.

Over time, we may have to come back to you with some other things other than revenue relative to GDV, but I think those are two of the factors that are significantly affecting that as we see.

Let me add to this a little bit.

If I look at 2007 over 2006 and I am looking now at, Anuran, over the whole year, our net revenue growth was 22.3%, if you take foreign exchange out, and if you take pricing out, the revenue growth was really just a little bit over 17%, 17.2%.

You might want to compare that to three other factors.

Local GDV growth which was 14.4%, processed transactions, which increased 16.2%.

You can see that those two components are starting to inch toward that 17% that you saw in net revenue growth excluding foreign exchange and pricing, and then really what makes the difference up is our cross-border, as Bob said, our cross-border volume for the year was 21%.

So that just really bridges you between the 14 and 16% up to the 17%.

So when you look at year-over-year 2006 to 2007, you can put it all together, that the underpinning is the local GDV growth, the processed transactions, but the increased rate was really driven mostly by cross-border volume, and there was a little bit, but for year-over-year it was a little bit of a lower incentive growth in there, when you look at our numbers.

Thank you.

That was really helpful.

Also, could you please give us some more details regarding the number of transactions that you processed on your own network in Europe this quarter, versus last year, or a couple of years ago?

Thank you.

Sure.

As you know, we processed, I think it was 5.8 billion for the quarter globally.

I am sorry, 5.2 billion globally, and over $18 billion globally for the year.

We don't break those down, in terms of one part of the world or the other, but we think that the underlying growth rate parallels the GDV growth in many markets.

Those are markets where we don't do as much domestic processing.

So for example, that would mean a lot of Europe, we think we have opportunities for faster growth rates there.

We remind everybody that we do a lot domestic of processing in the U.S., Canada, Brazil, Australia, and most of the other markets around the world, a very small proportion of our own branded transactions that we process.

I would look to see more rapid growth in processed transactions outside of those five markets I highlighted in the foreseeable future.

Thank you.

Our next question comes from the line of Moshe Katri representing Cowen and Company.

Please proceed.

Thanks, good morning.

Was there any major change in gross dollar volume growth during the month of December, given the apparent slowdown in consumer spending.

And then if we are looking at modeling our net revenue growth by '08, how much can a decline in GDV growth be offset by declining [CATRA] revenues from payment incentives?

Thanks.

Let me take the first part of that.

In regard to how the months look, for the quarter we report quarterly gross dollar volume.

As we mentioned, we had a strong fourth quarter, and in particular in the U.S., we saw a higher gross rate fourth quarter versus the prior year, than we had seen third quarter.

Now, if you take a look within the quarter, we don't track or report the monthly GDV numbers, but we do have true MasterCard advisors, our SpendingPulse data which we do record out.

That tracks retail sales.

If you take a look at that data for the months of October, November, and December, and you look at total retail excluding automobiles, then you will see in the month of October, we had about a 7.5% year-over-year growth rate.

November about 8.2, and December was about 6.4% versus the prior year.

So those were all actually pretty good numbers.

There was a downturn from November to December.

Now, my colleagues at MasterCard Advisors have advised me to be sensitive to the fact that in the U.S.

marketplace had an early Thanksgiving, which brought an earlier Black Friday shopping day, so that the November data probably got a little bit inflated, because you had a little more shopping, holiday shopping activity in the month of November than you might have had the prior year.

So that is what we have seen happening.

Obviously from our perspective, balance that we have outside of the U.S.

is very important to us, as half or more of our dollar volume is being generated outside the United States.

I think the second part of your question is related to how to model GDV.

One of the things that we traditionally talked about is the yield relative to gross dollar volume.

I think, you know, Martina, has got a couple of data points on that.

I would just observe that our lower than what might have been anticipated contra revenue, or incentives this quarter, we believe that we would rather have our customers meeting or exceeding the expectations and objectives we have set, and be incurring those costs.

So while it does act as a bit of a shock absorber when things don't turn out as well as we had hoped, because there are performance-based requirements, at the end of the day, we think that seeing a robust growth and paying out those incentives, is probably in our best interest.

In regard to the actual revenue yield, Martina?

As Bob already said, there are a number of factors that I hear being in play GDV versus our net revenue, you know?

Obviously, the growth of the GDV incentives rebates, pricing actions that we do, and we really try to capture this overall in the concept of the revenue yield.

If I can give a little bit of perspective.

Again, I am going to just talk about the full year 2006 versus 2007.

In 2006, our revenue yield was 17.3 basis points.

In 2007, our revenue yield was 17.9 basis points.

So it actually did go up.

I think 0.6 basis points.

Really when you pull the piece parts apart, it was really driven by two major factors.

One was foreign exchange, and the other was really cross-border volume.

Each of the factors contributed roughly 50/50 to that increase.

Thank you very much.

Our next question comes from the line of Liz Grausam representing Goldman Sachs.

Please proceed.

I would like to dig a little more on the trends that you are seeing in the U.S.

We noted that the card growth is pretty healthy, about 6.5% this quarter, contributing a lot to the GDV growth, and the GDV per card growth is actually fairly small.

Could you talk a little about what you are seeing on a per-card level, versus particularly your market share, and growing your card base in the U.S., as that may pertain to a difference in your consumer level spending exposure, versus your overall market growth?

Hi, Liz.

How are you today?

Good, how are you?

Thanks.

Couple things.

I have said this on numerous occasions over the last couple of years, that you aren't necessarily focusing at any given point in time, or on any given market on share, whether that is share of cards, or share of gross dollar volume, et cetera.

We have always talked about trying to get profitable share.

If you look at what happened last year with regard to MasterCard cards issued, we added over 100, or our financial institution customers added more than 100 million cards to the global marketplace.

We went up from 800 million to just over 900 million MasterCards globally.

We continue to see that double-digit type of growth rate now for several quarters.

Clearly, the mix varies from one market to another, and the case of the U.S., we are seeing more rapid growth on the debit side of the ledger, than we are in the credit.

You can see that in the attachments of our earnings press release.

With regard to explicitly saying wow, we think we really did a good job in share or whatever, there are swings around about both card and dollar volume share.

That is not something we are particularly focused on.

Okay.

I guess what I was getting at, is even if the GDV per card is not growing that rapidly, and the consumer is a little bit pressured, do you still feel that the underlying card growth in your business, particularly on the credit side where we are seeing more pressure in the U.S.

is going to support positive total volume growth on your network, even in an instance where the consumer might retrench?

Yes.

If we go back, the answer to that is yes, I think we are going to see positives on both.

Because at the end of the day, and I observe this and I think Martina did as well, you have that secular movement, in which we are sort of riding that wave.

Then from a transaction standpoint, we went back and did look at the data back in the 2001-2002 period.

Although we did see some slowdown in what was then still very robust gross dollar volume growth.

Transaction growth actually accelerated beyond.

It was faster than the volume growth.

That was obviously driving at that time lower ticket values as we indicated.

We nevertheless continued to see transactions, and obviously a good portion of our revenues are transaction based, as opposed to I think dollar volume assessment base.

Great.

Thank you.

Our next question comes from the line of Tien-tsin Huang representing JPMorgan, please proceed.

Hi.

Good morning.

I had a follow-up question on the cards in force number as well, that Liz just asked.

What is driving the growth in number of cards outside the U.S.?

We actually saw a nice acceleration in growth sequentially in a bunch of the regions.

Is this sustainable, and how does the pipeline look?

I guess I can make just a couple of comments on that.

We continue to see very positive business momentum I think globally.

I look at our results in the U.S.

in the fourth quarter.

I think they are very good.

If you look outside the U.S., clearly we had more rapid growth in dollar volume, as well as the cards being issued into the marketplace.

I tend to think of the cards as one of the leading indicators of future business potential.

It takes a while once the card is issued to get it fully utilized by the new cardholder.

The other dimension obviously is what we are doing, in terms of broadening acceptance.

That is the new acceptance channels or better penetration as cash and checks within a given merchant category.

Thus far at least, in fact, we are getting despite the concerns obviously here domestically with the U.S.

economy.

Certainly Asia is feeling very strong.

Middle East/Africa and Latin America are very strong.

I think Europe is slowing a little bit there, of course everybody is sort of waiting to see does some of the slowdown in the U.S., amplify into more slowdown in these other markets?

Thus far, we are not experiencing that.

We are pretty optimistic that we will see in these international markets continue to contribute more of a share of growth than they contributed in the past.

Very good.

The question about the rebates and the incentives, recognizing that this can serve as a buffer against any kind of weakness we might see in the U.S.

I just want to better understand what triggers these rebates and incentives, is it typically based on nominal dollar value thresholds, or is it based on growth targets?

Trying to better see how that ratchets down as things change.

Let me just make a couple of points on that.

And I think this is something that is discussed on a couple of occasions.

If you take a look at our typical year-end or fourth quarter back for 2005-2006, that has tended to be the period of lowest revenue yield, and most challenging, sometimes, revenue growth comparables quarter over quarter.

That is because many of our customers were reaching the lowest priced volume tier, based on cumulative volume and cumulative transactions done for the year.

To the extent that they don't get there, and may not get to as low a pricing tier as we have forecast or imagined, we won't necessarily be either lowering the prices for that volume of transactions, or providing them with incentives or rebates.

It tends to be driven off of the volume of transactions.

Then the third area is also in terms of marketing programs.

To the extent our customers slowdown, or to decide not to proceed for certain programs, that may cause us also to not spend money that we might have otherwise anticipated might be spent.

So all three of those factors work their way in.

Customers volumes, transactions, and marketing plans paid out.

Quick follow-up.

The severance charge, could you quantify that number in the quarter?

Thanks again.

I think we were trying to give you a point of it really when you look at the first half of the G&A growth of 16.4% versus, you know, the 17.3 in the second half.

You know, more is offset by the severance charge.

Hopefully you can get to a close enough estimate.

We also gave you the number of a 100 positions.

We are really not prepared to give you the specific number.

Our next question comes from the line of Craig Maurer representing Calyon Securities.

Please proceed.

Thank you.

In terms of Europe, I am just trying to gauge the growth potential there, of the 300 plus million Maestro cards you have in the region, you had talked about now doing processing for over 100 million.

Does that show the difference from the 300 to the 100, does that properly represent the opportunity you have there, as my assumption is that 200 million cards right now, are not generating what you would call significant revenue for you now, it is really the processed cards that are generating that revenue?

Hi, Craig.

How are you doing?

Good.

I guess I sort of cut it into three traunches of using that 300 million, and it is over 300 million Maestro cards in Europe.

You have a large number of those cards that also have domestic brands on them.

To the extent those cards cross borders, we would be involved in doing the cross-border transaction processing.

Additionally not being involved in terms of the domestic processing or domestic brand.

Frankly where Maestro has been embraced is the domestic brand.

That might not be something that is processed.

So we take the 300, all 300 generate cross-border for us.

The 140 are the number where we also have the activity and capability, and are beginning to see in addition to cross-border domestic transactions being processed on those cards.

And it may not be every bank in a given market.

It may be certain specific issuers continue to have a domestic logo on it.

That says to us that we still have significant upside potential, not only to get more domestic processing out of those 140, or could get some, but also from the balance, where we essentially only get cross-border at this point.

Thank you.

Looking at what has been going on with GDV, you talked about your growth in a slowdown.

I was wondering if you were specifically seeing, if you look at the programs out there that you have, have you seen a slowdown or, I guess, a more conservative spending stance by the affluent segment, because American Express did discuss seeing a slowdown that you guys and Visa haven't really talked about.

Have the affluent been pulling back on some of their discretionary spending?

Since you guys are on the nondiscretionary side you are not really seeing that?

I was wondering if that was something you are seeing in your numbers?

We have two sources of data.

Obviously, we have the actual transactions that we process.

Then we also have the SpendingPulse data that MasterCard Advisors have, a broader retail spending than MasterCard captures for competitive products, including cash and checks.

With regard to that SpendingPulse data, I have already commented on the more rapid growth that SpendingPulse data has demonstrated, but would be considered sort of non-discretionary.

Gasoline, food.

Let's face it, commodities prices underlying oil and food prices have been contributing significantly to what we are all paying, when we pull into a gas station or go to a grocery store.

Consumers clearly, because they are spending more to fill up their cars, or put food on their table, are not participating in certain other areas, not making other investments, home furnishings consistently throughout 2007.

Obviously there are some other areas consumers can cut back in order to support their spending.

We have seen a similar thing going on, prior to the spend, our mix of business on our cards.

If you go in and analyze, and I don't have this data available, so I can only speculate.

I would assume that we are seeing a movement on most every consumer spending on day-to-day things.

It doesn't matter how wealthy you are, or how high up you are, you are still going to pay more for gas.

I think that mix is happening across the board.

Thank you.

Our next question comes from the line of Chris Mammone representing Deutsche Banc.

Please proceed.

I think we repeated several times super robust cross-border volume growth in the fourth quarter.

I think it was like 20.6% in the third quarter, about 7, a good acceleration there.

Do you happen to have the 4Q '06 number for cross-border volumes?

Chris, off the top of my head, I don't.

What I will do is I'll just make sure that Barb or one of our colleagues follows up with you on that.

I appreciate that.

Then as a follow-up, just on the pricing adjustments, were there any new pricing measures undertaken in the fourth quarter, or is that all explained by sort of by the same measures that we had known about the stand-in and rewards program?

For the fourth quarter specifically there were really no new pricing adjustments that we did.

So you know, everything we had described on prior calls during 2007 really you know, took effect in the fourth quarter.

By the way it took already effect earlier in 2007, Chris.

Okay.

Thanks for the color.

Our next question comes from the line of David Hochstim representing Bear Stearns.

Please proceed.

Can you tell me how much you have left in Redecard stock?

When we file our 10-K, what you will see is that we have about $99 million left on Redecard.

However, David, obviously this is a publicly traded company, so the stock price moves, and it is in Brazilian Real, and the Brazilian Real move, so you will see the number as of 12/31, but just keep in mind it will move as whatever the market is doing.

Thanks.

Can you give a sense of what you expect in the way of advertising marketing spending on a quarterly basis, what kind of unusual fluctuations could there be this year, around the Olympics or anything else?

As you know, 2006 was the last year, where we had sort of atypical pattern.

That was because of our heavy up in the second quarter surrounding the World Cup event that took place in Germany that year.

So 2007 became a more normalized year, where we didn't have the bringing forward of spend, or concentration of spend in the second quarter.

And I think we fit back into a more typical pattern, where you send to see higher spending in the fourth quarter, tends to also be the part of the year where we have our highest volumes of business, and the most promotional and other activities taking place, for our various customer programs.

So we could look for that kind of low single-digit rate evenly over the year?

You know if deals come along or specific promotions or programs come along, it can cause some choppiness, but I think it will be a more typical seasonality, and yes we do think we are going to have modest growth year-over-year.

Okay, thanks.

Operator, I think we are about out of time so let's take one more question.

Our final question comes from the line of Darrin Peller representing Lehman Brothers.

Please proceed.

Thanks guys.

Just a quick one on SEPA, any updates, I know you commented before on some traction, in early '08 there was supposed to be some decisions on some plans that the bank in Europe would have.

Can you just comment what you are seeing there with that, and how the progression has been going, any type of opportunities that could happen this year regarding that?

I made a few observations, Darrin about some of those successes that we have had in getting some customer commitments to Maestro.

We believe that with our brand on their cards, with virtually every financial institution in Europe, will be SEPA compliant, in terms of being able to offer their customers access to payments throughout Europe, not uniquely in their home.

With regard to the decision I commented on, one of the things that I think a lot of financial institutions were waiting for, was some commentary out of the European Convention, particularly the decision they made with regards to our cross-border interchange fee.

An important part of an issuers business model and their financial model is the interchange fee.

That is a cost reimbursement mechanism.

I think what has happened now as a result of the decision, it is now clear that there is less certainty around the level of interchange fees that may have been present leading up to that, but at least we will be able to work our way through this, with the Commission and with our customers.

That should, I hope, by the end of this year, provide a more stable platform for financial institutions.

I think their investment decisions about how aggressive they are going to be in trying to market for both, benefits cardholders and merchant alike.

We saw with over 20 million additional commitments made across a handful of countries, additional processing coming, I remain very optimistic about our position and prospects in that market.

Great.

Thanks.

Real quickly, there doesn't seem to be any real traction on the verbiage around another network forming in the EU.

Anything you have seen around that as well?

Well, I read about the same papers that you do.

I can't add a lot of commentary.

I would just say that we began in 1992, I believe it was, a little over 15 years ago.

Gold debit product, and Maestro was that product, has been epi-centered in Europe over that 15 years, and it represents over 50% of the cards that we have globally, over 600 million cards globally, over 300 million in Europe.

So we think that the European Banks, and a lot of them are now confirming it by the way with us, they feel that they have what they need in hand that are now getting on with life.

Obviously, we are doing our best to encourage them to do that.

All right.

Thanks.

Great quarter, guys.

Thanks very much, Darrin.

Ladies and gentlemen, this concludes the time we have for questions today.

Would I now like to turn the call back to Mr.

Bob Selander for closing remarks.

I don't have a lot to say.

We are just extremely pleased with our results for the quarter and the full year 2007, and we appreciate all of you joining us for this call today.

Have a great day!

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day!