萬事達 (MA) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2008 MasterCard Incorporated earnings conference call.

My name is Frances and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS) This conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you, Frances.

Good morning and thanks to everyone for joining us today either by phone or webcast for a discussion about our first quarter 2008 financial results.

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

Following comments by Bob and Martina highlighting some key points about the quarter, we will open up the call for your questions and in total, the call will last up to one hour.

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

The earnings release and slide deck have been attached to an 8-K that we filed with the SEC earlier this morning.

A replay of this call will be posted on our website for one week until May 6.

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'd now like to turn the call over to Bob Selander.

Bob ...

Thanks, Barbara, and good morning everyone.

We're very pleased that we started the year with a strong financial and operating performance in the first quarter.

We continue to be encouraged by the transaction growth and cross border trends we are experiencing in the midst of a challenging economic environment in the United States.

The fundamentals of the business are still very strong, and our first quarter results provide a solid foundation for us to deliver on our business objectives for 2008.

Turning to page 2 of the slide deck.

In the first quarter we delivered net income of $398 million or $3.01 per share on a diluted basis excluding a special item.

The item was a $49 million after tax gain from the termination of a customer business agreement which represents $0.37 per share.

Net income also includes after tax gains of $56 million or $0.42 per share from sales of our investment in Redecard.

We have now sold all of our Redecard shares.

We recorded quarterly net revenue of $1.2 billion, up over 29% from the first quarter of 2007.

This was driven primarily by strong growth in gross dollar volume and processed transactions including cross border volumes which grew 23.6%.

Additionally, pricing changes contributed approximately 6 percentage points of the revenue growth in the quarter.

Finally, we saw our operating margin improve 9.3 percentage points to 43.6% from 34.3% in the first quarter of 2007, demonstrating the continued leveragability of our business model.

Before turning the call over to Martina, there are a few economic and business developments on page 3 that I would like to highlight.

The slowdown in the U.S.

economy has had some effect on our U.S.

growth.

However, the trends that we saw over the past few quarters have continued and have led to strong global growth for MasterCard.

These trends include, first, in the U.S.

a consumer shift away from discretionary purchases such as luxury retail and home furnishings to nondiscretionary purchases including food and gasoline which have also been affected by commodity price increases.

Second, we continue to see double-digit growth in markets outside the United States where we generate about half of our revenue.

Third, cross border volume trends are still quite healthy.

And, last, the secular shift from paper to electronic payments.

All this said, we recognize that our customers are experiencing extraordinarily challenging conditions, and we are working with them to help maximize the value of their payments businesses.

Switching now to our business updates.

Earlier this month, we announced the launch of our integrated processing solution or IPS debit processing platform.

IPS provides banks with a suite of branded debit network and card issuer processing services including PIN, signature, ATM driving and expanded rewards capabilities.

Security Service Federal Credit Union will be the first customer to implement IPS.

We believe this new platform will offer a compelling solution for banks that are currently struggling with disparate legacy platforms and seek an integrated solution for PIN, signature, point of sale, and ATM debility processing.

With respect to U.S.

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

In the case of the European Commission ruling, we continue to communicate with the Commission regarding specifics related to our compliance with their order.

We asked for and were denied an extension beyond the June 21 compliance deadline.

In any event, we will take steps that we believe comply with the Commission's order and we expect to have more specifics in the near future.

As we've said before, we are prepared to take action to ensure that our payments products remain competitive in Europe.

As I just mentioned on page 2, during the quarter we sold our remaining shares of Redecard and realized pre-tax gains of approximately $86 million during the period.

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

During the quarter, we repurchased approximately 1.5 million shares of Class A common stock for an aggregate of $294 million or approximately $196 per share.

Through April 29, the company repurchased 557,000 additional shares of its Class A common stock at a cost of $129 million.

In total, $1.02 billion of the approved $1.25 billion repurchase program has been completed.

Additionally, this past February our board of directors authorized the conversion of up to 13.1 million shares of Class B stock into Class A stock during 2008.

Although no conversions have taken place thus far this year, the first 2008 conversion program for up to 13.1 million shares is expected to begin on May 17 and may continue through June 13.

With that, I'll now turn the call over to Martina for a more detailed update on the financial results.

Thanks, Bob, and good morning to everyone.

Let me begin on page 4 of the slide deck.

As Bob mentioned, net revenue was almost $1.2 billion, an increase of 29.2% versus the year-ago quarter.

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

dollar contributed 5.1 percentage points of the net revenue increase resulting in underlying business growth of 24.1%.

Approximately six percentage points of this was due to pricing changes.

Our operating income of $516 million resulted in an operating margin of 43.6% for quarter, a 9.3 percentage point improvement over the first quarter last year.

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

The margin contribution from revenue growth was three times as much as the offsetting impact from expense growth.

The contribution from foreign exchange was about one percentage point.

Net income was $398 million or $3.01 per share on a diluted basis, excluding the special item.

Additionally, without the impact of gains from the sale of our remaining investment in Redecard, first quarter EPS was $2.59 per share on a diluted basis.

Turning to page 5, you see our first quarter gross dollar volume, or GDV numbers, which are reported for the same period as our revenues.

GDV grew 14.1% on a local currency basis and 20% on a U.S.

dollar converted basis to $611 billion.

The first quarter was the 16th consecutive quarter of double-digit worldwide GDV growth on a local currency basis.

Despite the economic downturn in the U.S., our U.S.

GDV growth was 8.9% and U.S.

purchase volume growth was even stronger at 10.3%.

Although not shown on page 5, worldwide purchase volume was up 15% and cash volume was up 11.6%, both on a local currency basis.

Additionally, cross border volume, or the volume that is generated from card holders who travel outside of the country where the card is issued, was up 23.6%.

Process transactions or the transactions processed across MasterCard's network, increased 15.7% to 4.9 billion in the first quarter.

We continue to benefit from the global diversification of our business and our ability to generate significant volume, transactions, and revenue from economies outside of the U.S.

where economic conditions are generally more favorable than in the U.S.

Net revenue yield was 19.4 basis points in the quarter versus 18 basis points in the first quarter of 2007.

Improvement in revenue yield can be primarily attributed to pricing changes and underlying business growth.

Let's turn to page 6.

Here you can see that net operations fees increased 31.4% or $205 million to $858 million in the first quarter.

Gross operation fees increased 30.2% or $219 million to $944 million.

This growth was driven by several factors.

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

Second, the continued impact of pricing changes in new programs implemented in the second quarter 2007 including changes related to stand and authorization pricing, pricing for acceptance development fees, and a new fee associated with rewards programs.

Additionally, we implemented a new account enhancement service that allows our customers to move card holders to different programs without a change in account numbers.

Third, new pricing changes in January of 2008 on cross border acquiring volumes and on retail purchases in the U.S.

by non-U.S.

card holders.

In the first quarter, net operations fees as a percentage of gross operations fees improved slightly.

Our operations fees rebate were tempered by an adjustment due to a customer who did not achieve performance included in their business agreement.

On page 8 we show that net assessments increased 23.7% of $62 million to $324 million versus first quarter of 2007.

Gross assessment increased 20.4% or $94 million to $554 million due to strong GDV growth.

Net assessments as a percentage of growth assessment improved slightly compared to the first quarter of 2007.

MasterCard's performance-based pricing continues to moderate the impact of relatively lower U.S.

volumes on our revenue.

Additionally, as was the case with the operations fees rebate this quarter, assessment fee rebates were tempered by the same adjustment related to a customer who did not achieve performance hurdles included in the business agreement.

Please turn to page 8 for some detail on expenses.

During the first quarter, total operating expenses increased 10.9%, of which 3.3 percentage points were related to currency fluctuations.

This increase was mainly driven by two factors.

First, a 10.9% increase in general and administrative expense, of which 2.9 percentage points were related to currency fluctuations.

The growth in G&A was driven by higher personnel costs partially offset by foreign exchange settlement gains.

Excluding the impact of FX, the personnel costs increased 16.1% primarily associated with the hiring of additional staff and contractors over the past year mainly in technology, customer-facing, and product positions.

Second, an 11.6% increase in advertising and marketing expenses; currency fluctuations represented 4.4 percentage points of this increase.

A&M growth was primarily due to the timing of expenses for European sponsorship activities as well as investment in high growth markets.

Moving to the cash flow statement and balance sheet highlights on page 9, we generated $224 million in cash flow from operations during the quarter.

The end of the quarter was $2.9 billion in cash, cash equivalents, and available for sale securities.

Both short and long-term available for sale securities decreased by $281 million primarily due to the sale of the remaining shares of our Redecard investment, the sale of short-term bond funds and auction rate securities and investment losses.

We also reclassified $237 million of auction rate securities to non-current assets due to the current lack of liquidity on those securities given market conditions.

As of quarter end, we had repurchased approximately 1.5 million Class A shares in the open market for $294 million.

Stock repurchases resulted in a $0.02 per share increase to basic EPS for the quarter.

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

Before moving to the Q&A, join me on page 10 and I'd like to highlight a few items for your consideration as you refine and update your models for the second quarter of 2008.

First, there were two special items in the second quarter of 2007: a $3 million litigation settlement and other income of $90 million related to the World Cup settlement agreement.

Second, our outlook for full year 2008 remains unchanged from January.

We expect slower net revenue growth than 2007, but still at double digit rates.

G&A expenses should grow at a rate that is both slower than net revenue growth and below the 2007 G&A growth rate.

With respect to advertising and marketing expenditures, we expect continued modest growth, particularly to support our efforts in international markets.

These guidelines assume current FX rates, no global recession and no event which significantly disrupts cross border travel.

Finally, as I mentioned last quarter, we are currently evaluating whether it's appropriate to update our existing three to five-year long-term performance objectives and we expect to address these at our annual investment community meeting in May.

To wrap up, we are very happy with our first quarter results.

We remain committed to growing our business while managing costs and investments to add value to 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 time frame, we ask that you limit yourself to a single question with one follow-up and then queue back in for additional questions.

Operator ...

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Patrick Burton with Citigroup.

Please proceed.

Hi.

Congratulations on the fantastic numbers.

My question deals with the settlement gains in G&A.

Where does that number show up on the income statement?

Thanks.

It shows really up in Other G&A.

And as a followup, is that a hedge then on your foreign denominated G&A expenses?

Exactly.

We do exposure hedging, transactional hedging activities and any gains or losses that happen as a result of hedging, those underlying exposures are reflected in that line item.

Thank you.

And congratulations again on the numbers.

Thank you.

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

Please proceed.

Hey, thanks.

Congratulations again on a very strong quarter.

Can you quantify your portion of the revenues that are considered nondiscretionary in terms of consumer spending?

And then on top of that, can you also talk a bit about the U.S.

business, if there's anything unusual that took place during the March quarter on a month-by-month basis that will get you a bit more cautious looking at the June quarter and maybe September quarter as well?

Most with regard to the first one, we really don't break out, across the world, discretionary versus nondiscretionary volumes.

As you know, we do have our SpendingPulse information that we put out monthly both in the U.S.

and U.K.

which tracks retail sales; and that is the broad retail sales and figures, not just the MasterCard figures, so we capture competing payments, products and that.

And the trends that we've talked about in previous quarters seem to continue in the U.S.

with regard to the growth rate of retail sales versus the same period prior year as continuing on a down trend.

If you look at the specifics from March, you had I guess it was, let me try and remember this ...

ex-Auto, I think it was 5.3% increase in retail sales.

If you take out gasoline as well, the retail sales were only up 3.6%.

If you were to go back to the first quarter of 2007, you would have seen growth rates that were well above that.

And so the comment I made about the mix change occurring has continued and the rate of growth relative to prior years seems to be continuing to slow in the U.S.

March had some anomalies around it because of the relatively early Easter which occurred at the end of March.

And we'll see how those anomalies roll out as the April data comes together.

Thanks.

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

Please proceed.

Thanks.

Another quarter of phenomenal results.

Going into a specific quarter, how much of your expense base is fixed and how much can be determined during the quarter, as you see how your top line is progressing?

Well, I think that probably Martina and I will both take a crack at that.

Generally at the beginning of a quarter, pretty much everything is fixed for that quarter.

If you take a look at those items that you would think about being discretionary over the course of the next year or so, marketing expenses are one of the first things that come to mind.

But a large proportion of our advertising and marketing involve multi-year, in many cases, sponsorship commitments.

When you put together a program, those commitments are made months if not quarters in advance in terms of media buys and other activities.

With regard to the G&A, there is discretion obviously in terms of the short-term pace of bringing on contractors for certain of the projects that we might need, for example development resources for our systems area.

Generally, there's not a lot we can do one month to the next within a given quarter.

I don't know if you wanted to add any highlights to that.

Just on G&A.

As you know, our personnel cost is roughly 70-75% of the G&A.

That is not just only full-time employees but also contractors.

It depends on what kind of customer implementations we actually do in a particular quarter or in the future.

We obviously can throttle the number up and down from a contractor point of view.

We have a number of other line items in G&A, such as professional fees which could be throttled up and down from time to time.

In G&A, you have to note that a lot of those costs are dedicated to, really, investments we are doing for future growth.

So I do agree with Bob that while we have probably on the margin some room to throttle up and down, as we're going into the year and every quarter, there's probably more of a fixed component than a variable component.

Okay.

Thanks for that color.

And then, just one point of clarification.

The customer termination agreement, the gain of $0.37, was that the World Cup or was that something different?

That was something different that occurred this year.

The settlement we had last year in the second quarter for $90 million went through our income in 2007.

Right, 2007.

So what was the customer termination agreement this quarter?

This was with relationship to a customer who terminated their agreement and as a result of our not having the benefit of that agreement, we received a one-time settlement which worked its way through our income statement this quarter.

Did that have any material affect on volumes or transactions at all?

Well, for the quarter it did not, no.

Will it from the future quarters?

Well, to the extent that we don't retain this business as the customer has sold the business, it could, yes.

Okay.

Okay.

Thank you.

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

Please proceed.

Thanks.

Just like to touch a little bit more on the pricing environment as the price, the growth you achieved from pricing changes this quarter certainly outperformed our expectations.

Could you give us some outlook as to how much you expect pricing changing to contribute to your full year outlook?

And also other opportunities you may see in your portfolio of businesses to affect pricing changes over the course of the year.

Hi, Liz.

First of all, it's fair to say that the pricing impact on the quarter was extraordinary.

And I think we were benefited by a couple of things.

One, the line items where we did have some price increases and, as you know, we always wrap value propositions around that to really have a value to the customer.

In those line items, we actually enjoyed particularly nice growth, which obviously contributed to the percentage point increase on the pricing.

Secondly, we have been more effective, I believe, in implementing the pricing changes in January of 2008.

When you look at the number, that 6 percentage point increase, you do have a lapping effect in there from the price increases that we did in the second quarter of 2007.

So certainly, that impact will not continue into the second quarter, it will basically fall off.

I would expect that you are going to see some lower number in the future quarters.

Great.

And just kind of a discussion of where you think in your business you have the most pricing leverage.

It certainly seems that the cross border market, cross border volume growth is supporting increased pricing changes in that particular line item of your business yet that also seems to be a fairly volatile portion of the business, depending on travel.

Can you help us understand where you see, in your business mix, the most pricing leverage going forward and where you bring competitive advantage to affect those pricing changes?

Yes, Liz, one of the things that we've been working on is broadening our offerings to our customers.

If we enhance an existing service that provides more value, then we may have a pricing opportunity there.

To the extent we can bring new services where we now are competing for money they are spending elsewhere, that gives us the most flexibility and that's a significant portion of our focus.

You probably will recall earlier in this month we announced, and I mentioned this morning, our IPS system which will give us an opportunity to provide additional debit related services, processing services, fraud services to our U.S.

customers initially.

And so that's where I think we see the greatest opportunity.

Great, thank you.

Your next question comes from the line of David Hochstim, Bear Stearns.

Please proceed.

Hi.

Wondering could your just talk about the rebate adjustment and how significant that was on rebates and incentives and the net revenue yield, and is the net revenue yield stable at these levels then?

David, let me take that.

It's not a significant impact on either of the numbers.

It had a slight impact.

But when you really look at the rebate line for up fees, it's still right around 10% of growth.

And when you look at [the] rebates and incentive line on the assessment side, you are not really seeing a big change.

As we said before, you really have to be careful not to look at this on a quarter-by-quarter basis.

You need to look at it on a year-over-year basis.

Because you saw some slight improvements in the net, that really is coming down to a flat development when you pull out this particular item.

Okay.

So the net revenue yield could continue at about this level?

Let me just talk a little bit about net revenue yield.

The 19.4 basis points that you see for this quarter contrasts to about 18 basis points in the year-ago quarter; and really of that 1.4 basis points difference, 0.9 is about due to the pricing changes and 0.5 is about due to the underlying business growth.

So in terms of looking at it in the future and I think we're going to probably have a more robust discussion at our May investor meeting, but one thing you need to take into account on the 0.9 movement for the pricing again, as I have said before, we have the lapping effect there from the second quarter of 2007 that will obviously not continue in the next few quarters.

Therefore, you at least are going to have to take that one out.

But we're still holding firm with our view that you're going to see a gently downward trend.

And then we're going to have a more robust discussion about it at our investor meeting in May.

Just to clarify on the termination of the contract, how should we think about the payment relative to the net revenues that were generated by the contract?

Could you give us some sense of what that relationship was?

Just an observation.

The volume related with this particular deal was less than 1% of our global MasterCard volume.

That's GDV or --

for the past year, so that puts a frame work on it.

Less than 1% of GDV?

Yes.

Purchase volume.

Okay, thanks.

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

Please proceed.

Thanks, good morning.

I had a question about the cross border fee increase which was higher than we expected and the volumes are still looking strong there.

Can you give us some high-level details on the mix of cards that are driving the volume growth?

How much is from the U.S versus Latin America, Asia-Pac?

Tien-Tsin, it's Martina.

Really from when we looked at, and we did study that as you know in Q4, very much in detail because we wanted to be sure that we do understand the trends in terms of how many foreigners are coming to the United States versus Americans traveling overseas and really the effect we talked about in Q4 have really not changed much in Q1.

What we came down to is it's really Europeans traveling outside of Europe, not just into the United States but also in other regions of the world.

It's really Latin Americans traveling to a significant extent outside their country.

Some of them also come to the United States.

And then we have some movement, I think that was a smaller part of it, of residents in any countries in the Asia Pacific region traveling again outside of their country.

We really have not seen a change in pattern from what we saw in Q4.

Got it.

So the contribution from U.S.

traveling outside of their own borders, sounds like that trend has not changed.

It has not really changed.

Okay.

And then just in terms on the outlook on the portfolio conversions going forward.

[Are there] any others that we should be aware of here as we go through the balance of the year?

I notice there was a sequential decline, small in debit cards in the U.S.

Anything to read in to there and is that linked to the contract termination fee?

We had -- that's not really linked to that.

When you look our, just in the United States, when you look at the GDV and you look at the purchase volume and you look at the transaction volume and in particular when you look at the debit line, you have to recognize that in the first quarter of '07 we still had the effect of a large debit conversion of one customer in there which once you do that, it's kind of with you for two years.

So you still had it and you have the effect in Q1 '08 versus Q1 '07.

When you pull that out and factor growth rates are slightly higher than what you the saw in Q1 '07.

Did you say which region the lost contract came from?

Was it in the U.S.

or outside the U.S?

The lost contract?

I'm sorry, the contract termination.

The portfolio of cards that you lost.

Did you give us the details on the region that was from?

We did not.

Got it.

If I could sneak in a last quick question for Bob.

Your high level thoughts regarding what is going on up on the Hill regarding interchange and credit card fee act, what are the implications there for MasterCard?

Thanks.

There's two sets of activities, as you know.

There have been some hearings taking place, frankly focused on issuer practices.

And various customers of ours have been involved in conversations or testimony around those practices.

Clearly, those issuers have been paying attention and where there were practices that needed adjustment or amendment I think they've been stepping up to that.

So I think the industry has been responsive in that regard.

As you probably also know, Congressman Conyers put through a proposal on interchange legislation.

We believe that a free market approach towards how that rate gets set and determined is much more appropriate than having Congress come in and legislate how that gets done.

We will continue to work with others in the industry to ensure that the interests of merchants and card holders are looked out for and not legislated by our Congress.

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

Please proceed.

Good morning.

Thanks for taking my call.

First question is around the rebates outlook.

You discussed clearly a weakening U.S.

economy.

What's your thoughts currently now on getting some of that rebate effect back to your benefit later in the year?

Craig, it's Martina.

Let me just start with that.

We have already given our thoughts for 2008 in terms of what we believe from a net revenue growth point of view, meaning that we believe it's slower than 2007 but will still be double digit.

I think that does comprehend what we're thinking about rebates and incentives.

If we have anything else to add to that, I think the appropriate time would be at the end of May at the investor meeting.

Okay.

When looking at my model, I'm trying to put the trends around the marketing line.

Should we assume you might have an increase around the Olympics?

So perhaps a little bit more marketing would be weighted to the third quarter of this year?

I think it's probably more appropriate to look at the second quarter as a place that will get more weighting this year.

We have significant football events, (that's soccer in the case of the European champions league, as well as the quadrennial European championship) that will be played over the course of the second quarter.

The finals, of course, for the European championship will be, I guess, in Vienna at the end of June.

This will be a year that's more analogous to the one we had in 2006 where we had a similar second quarter, at that time the World Cup event, which resulted in significant promotional and marketing support.

Okay.

And if I could just get some clarification on something Martina had said regarding the revenue yield and the 9 points of increase versus last year due to pricing changes.

How much of that is related to the recent pricing changes that we'll see repeat?

And how much of that are you growing over?

Thanks.

Craig, I would say that the lesser amount is related to 2007 and a larger amount is related to 2008, but I would like to leave it at that.

Thank you.

Your next question comes from the line of Anurag Rana, KeyBanc Capital Markets.

Please proceed.

Good morning, everyone.

Congratulations on a good quarter.

If you look back, GDV growth in Europe was averaging around 14% in local currency from 2004 to 2006.

And we saw this growth rate increase to 18.4% in fourth quarter and a gain of 17% in the current quarter.

Could you please help us understand the key reasons for the increase in these growth rates, and then I have a follow-up.

The only thing I can observe is we've obviously had rapid growth in our business over there as you will have noted.

We've seen an increase in the number of MasterCard cards there consistently over the last several years.

We had a couple of significant deals which began converting last year.

And we've seen continued converting which we've shared with you previously with regards to, for example, Lloyds TSB as well as HBOS, the Halifax Bank of Scotland, in the U.K.

So while I can't point to a specific card base or market, it's those types of events coupled with relatively healthy economies, although they are showing in both the U.K.

and a couple of continental European markets, a bit of a slowdown, those economies are generally remaining quite healthy for us.

Thanks.

And are you seeing any trends regarding the greater use of debit in the U.S.

at this point as compared to historical trends?

I think that we continue to see debit as a major opportunity not just in the United States but globally.

If you do look at the growth rates that were reported specifically for the U.S., you can see that charge and credit growth was, in terms of purchase volume, about 6% in the first quarter whereas debit growth was something over 18%.

So what we see is the increased acceptance by consumers of not just using their debit cards to get cash at ATMs but also going to the point of sale coupled with a broadening of the issuance of those products in the United States.

Thank you.

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

Please proceed.

Hi.

Thanks.

Good morning.

I was wondering if you could talk a little bit more, to beat a dead horse a little bit here, about the price increase in January '08.

My understanding from the conversation this morning is it's a cross border related fee for non-U.S.

customers traveling to the U.S.

Is that correct?

Chris, there are a number of components in the pricing adjustments that we did.

We typically don't put out any specific component.

I think we talked generally about it.

The ones that are more significantly impacting our financial statements and there were two things that we really talked about.

The new pricing changes on cross border acquiring volumes, that's one change.

And the other change is for any retail purchases done in the U.S.

by non-U.S.

card holders.

There was a pricing change.

So those are the most significant ones that we can point to.

Let me tell you, there were a number of changes that we had in the menu.

That's helpful.

What I was going to hope to do as a follow-up is if you could address some of those pricing changes in any level of detail relative to the comment that you are sensitive to your customers and the fact that they're struggling financially or many of them are struggling financial given what's going on in the world economy, especially here in the U.S.

And also the discussion of the cross border interchange ruling in Europe.

Do any of these things have any impact in terms of being sensitive to your customers?

And also the cross border regulatory ruling, does that have any impact on what you decided to do in January in the price increases?

You have value-added services that you're adding that you feel like you are pricing appropriately for.

I think you're remaining sensitive to those issues and it's not a concern going forward?

I think you summarized it very well just then.

When we produce additional value, we feel we can price for that.

And it's a win-win situation.

And obviously to the extent we offer a new service that may bring scale to a customer where they don't have scale, that saves them money and it gives us new revenues that we otherwise would not have had.

We are working with our customers in all parts of the world.

And these are challenging times for many of them.

Clearly the customers in the U.S., with where we're going in terms of the credit cycle and so forth, are feeling pressures in their payments business if they have not felt pressures in some other part of their company due to mortgage or other issues.

We do work with them on things as portfolio optimization.

We work to improve their marketing effectiveness.

We work with them on how they broaden and expand the usage of existing products.

We have efforts underway, for example, to get into the utilities and rental categories which are other nondiscretionary spend areas to see if we can help our customers capture those on our products.

And then we are also working on helping them to explore and grow into other areas such as health care.

Specifically, with regard to the cross border interchange in Europe, we are not direct economic participants in interchange.

That's a flow from the acquirer financial institution that goes back to the issuing institution.

And what we're trying to do is ensure that we do not have a situation where MasterCard is not viewed as a good product to be issued by issuers or, for that matter, a product that wouldn't be appropriate to continue to be acquired by our acquirers.

So while it doesn't impact us directly, we are working to find a way both to comply from our perspective with the order and to also maintain the competitiveness and attractiveness of our products.

Over time, if there's an undermining of the capabilities of issuers or acquirers, because of regulatory intervention, to have acceptable business cases, they're going to [e1]slow down their investments in their payments business and clearly that will have an impact on us because there will be less robust growth, less support for the activities we're involved with.

That's the longer term implication if we don't manage through this in the short term in a positive way.

Absolutely.

Quick follow-up if I could.

The fee for the non-U.S.

customers traveling to the U.S., is that primarily passed on to the consumer?

It's an acquiring fee so it is paid by the acquirer at this point in time.

That's all I can say.

Thank you very much.

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

Please proceed.

I appreciate the regional color on the cross border volume.

I was wondering, in your analysis have you attempted to decipher how much is driven by fundamental change in the way consumers are traveling versus what's cyclically driven?

Then I have one followup.

The answer is we haven't been able to parse it the way you've described.

Clearly we have fairly robust data on how transaction patterns occur and that's something that we work with our customers to better position ourselves and them to both support their card holders, to capitalize on promotions and other things that we might do with merchants.

We haven't got that kind of data to share with you today.

Okay.

Great.

And then just on the M&A environment, I was wondering if you have any thoughts on it or any color at all.

Well, I guess two observations.

The first is that we've indicated that any time we would look at and we do look at various opportunities, we go through a criteria that does this align with our strategy?

Will it make financial sense for the company and shareholders over time?

Can we integrate this?

And if we're not capable from an experienced management standpoint within MasterCard, are we going to be getting talent as a result of the deal?

The only transaction I'd point to that closed on April 1, was our deal with Europay France.

That is a business that we have now.

I won't say we fully integrated it, but we certainly made it part of the MasterCard family in Europe.

That will enable us to provide additional services to banks in France and over time we hope to take advantage of some of the things they were doing there, possibly in other parts of Europe.

Pricing was a big issue.

Have you seen any noticeable shift in terms of pricing?

No, not really.

I mean all that we had to say we really said.

Okay, great.

Thank you.

Your next question comes from the line of Charlie Murphy, Morgan Stanley.

Please proceed.

Thanks.

I thought it was interesting how strong purchased GDV growth in Europe was.

Is it possible to isolate how much of European purchased GDV comes from cross border GDV?

I'm sure somewhere we have that data.

I don't have it handy.

And it's not something I believe we've shared at this point in time.

Obviously, within Europe we have about 50 countries in our Europe region.

So it is much more than the EU.

It goes right through what would be considered Eastern Europe and includes Russia and Turkey.

So we do have, as you know, a situation where it's pretty easy to jump in your car and drive across two or three borders in the course of a couple of hours in much of Europe.

There's a reasonably strong mix of cross border activity that takes place in that market.

Okay.

And as a quick follow-up, I think you've hinted in the past that most processed transactions come from the U.S., U.K., Canada, Brazil, and Australia.

Could you describe the key hurdle to winning new process transaction business in Asia Pacific and Latin America?

Well, the hurdles are pretty much the same everywhere in the world.

Generally, you have banks or bank-owned consortiums operating in many of these markets.

As the banks look at whether or not those are economically attractive things for them to continue to do or in some cases when they decide they want to heighten the competition so that as an individual financial institution, they can differentiate themselves either with merchants when it comes to dealing with merchants on the acquiring side or with the card holders on the issuing side.

You tend to see an evolution where they begin to think okay, I want to take on my own issuing or my own acquiring.

And these shared companies that they've established are either sold or in some other way -- I'm hesitant to say, disposed of, but take the case of the acquiring business in Brazil.

You saw a group of banks there spin off Redecard or a portion of Redecard through an IPO.

We were a participant in that, as you know, and have completed the sale of our Redecard shares.

We see analogous situations in many of the other markets around Latin America, Asia that is playing out the way the U.S., or we think it will play out similar to the way the U.S.

is playing out in the way the game is afoot in Europe today.

Thanks very much.

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

And your next question will come from the line of Bruce Harting with Lehman Brothers.

Please proceed.

Thanks.

Just following up on the last question.

It does look like your purchase volume in Europe, if I go back three years or so, continues to pick up.

If I am reading this correctly, it was your strongest quarter in quite a while.

And it seems like you and Javier have said that SEPA is not going to be like a big bang where you go from one quarter to the next and announce you've made some big wins in processing and other things.

So how much of the steady growth are we seeing as Europe creeps up and contributes a larger portion of your overall GDV and revenue?

SEPA wins or the Lufthansa wins or Auchon win or will this be just a very subtle but very promising trend that we see develop each quarter?

And your economies of scale just continue to amaze.

And Asia continues to creep up quietly as well as a percentage of GDV.

And I know you don't break out expense or marketing by region, is that getting a disproportionate amount of that spend?

Thanks.

Bruce, let me try and take a crack at that.

I guess there were a couple of questions embedded there.

With regard to Europe, and the point that Javier and others of my colleagues have made, I would agree that we don't see this as one day our business is going to double or whatever.

Rather it is through blocking and tackling as domestic players look at whether or not they're going to continue to run their domestic processors or maintain their domestic brands.

And we're very well positioned with Maestro over 300 million cards in Europe to offer, in fact we built it over the banks in Europe the last 15 years, the leading cross border debit alternative in Europe.

And that migration from national-use only brands to Maestro has begun.

I believe we referred to this, I'm not sure we did it in the last quarter's call, but we have about 20 million cards in Germany, Ireland, Portugal and the Netherlands where there are agreements and we're beginning to see those cards as they're reissued as Maestro cards begin to function and operate as Maestro cards.

If you look across Europe we're now in a position where we can process a larger number because of the connectivity of transactions that might otherwise have gone through as domestic transactions.

So for example in Italy, over 14% of all debit card transactions are processed by MasterCard under our Maestro brand and we see that continuing to grow, both the number of transactions as well as the penetration of that.

So we're very optimistic about what that means in Europe.

With regards to your sort of embedded second question, we're very optimistic about our growth in many markets around the world.

Asia Pacific has demonstrated very strong growth this quarter as compared with some of the past quarters; and so that is in part a reflection of the healthy economies out there and also the degree to which there is a lot of cross border activity taking place within that region as well.

And of course we process all the cross border transactions.

And let me add to Bob's remarks from what he said before.

For the deals that we have struck in Europe, we do see some increased volume.

And we basically attribute that to two factors.

One, obviously the value proposition that we have in our platform in Europe but, two, also the increased or the continuing trend from paper to electronic payments in Europe which we believe is a very promising trend going forward.

Thank you.

And at this time we'd like to turn the call over to Mr.

Bob Selander, Chief Executive Officer, for the closing remarks.

I really don't have a lot to add.

I appreciate all of you joining us today.

We are very pleased with our results for the first quarter, and we look forward to speaking with all of you again when we talk about the second quarter.

Thanks very much.

Thank you all for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great today.

[e1]This section was very poorly transcribed with large sections of text not included.