萬事達 (MA) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third quarter 2008 MasterCard earnings conference call.

My name is Stacy, and I will be your conference moderator for today.

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

We will be facilitating a question-and-answer session towards the end of this conference.

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

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

Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you, Stacy.

Good afternoon, and thank you for joining us today either by phone or webcast for a discussion about our third quarter 2008 financial results.

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

Following comments by Bob and Martina highlighting key points about the business environment and our third quarter results, we'll open up the call for your questions.

Today'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.

These materials have also been attached on an 8-K that we filed with the SEC earlier today.

A replay of this call will be posted on our website for one week until November 10th.

Finally, as set forth in more detail in today's earnings release, I need to remind everyone today's call may include 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 will now turn the call over to Bob Selander.

Bob?

Thanks, Barbara, and good afternoon, everyone.

I would like to start out by saying how proud we are that in the current economic situation, we have been able to deliver another strong quarter of earnings results.

We saw net revenue growth of over 23% and I am particularly pleased we were able to post a 41% operating margin for the quarter, an 8.4 percentage point increase over last year, excluding our litigation settlement.

However, it is the economic situation that everyone is interested in.

I am going to leave the discussion of our third quarter results to Martina and begin by focusing on what we're seeing in our business.

The current economic crisis is like no other that we've seen.

When we faced the last economic downturn in the United States, we saw employment begin to rise, housing was driving the recovery, the financial institutions were in good shape, the financial markets were functioning, and there was very limited commodity inflation.

In some ways, this time around there are fewer economic and financial levers to be pulled.

Over the last month, we have seen unprecedented coordinated and structured responses from governments and central banks around the world, resulting in a large scale intervention into the financial markets and institutions.

As credit markets have tightened and fears of recession spread, the last several weeks have been challenging for everyone -- for customers, you as investors, and for us.

The concerns about a global economic slowdown have had an impact on spending around the world, primarily by the consumer.

We recently saw the US Conference Board's Index of Consumer Confidence fell to an all-time low since the measurement began 40 years ago.

US GDP fell by 0.3% in the third quarter and consumer spending fell by the same 0.3% in the month of September.

Housing prices continue to fall in the US, UK, and Spain, and all of this has led to sharply declining equity markets.

We've also seen unbelievable banking industry consolidation and nationalization of others, and we're seeing trends in our US business that until now we have not seen.

You have heard us say in previous public forums that our business was holding at levels roughly equal to our second quarter gross dollar volume growth through July and August.

This continued through early September, but turned downward in mid-September following announcements such as Lehman's bankruptcy, Merrill Lynch's buyout, and several bank mergers or bailouts both here in the United States and abroad.

For the third quarter, our total global gross dollar volume grew 12.3%.

During the month of September, worldwide processed volume growth, our intra-quarter proxy for gross dollar volume, was high single digits on a local currency basis.

US growth was in the low single-digit range.

In the month of October we have seen a pronounced weakness in the US where our process volumes were slightly negative versus last year.

On a global basis, our process volume growth was in the mid-single digits on a local currency basis.

Cross border volume growth has also been slowing globally.

For the third quarter we saw growth of 18%.

Through the first four weeks of October, cross border growth was in the high single digits.

The decline has been primarily driven by a marked slowdown in cross border volumes from US card holders as Americans are cutting back on travel and cautiously spending if they do travel.

From our perspective we're seeing thoughtful and significantly reduced spending among our financial institution customers.

They're shifting their focus away from marketing, account acquisition, and system enhancements towards retention and credit-loss management activities.

We're supporting their efficiency and optimization efforts.

We're leveraging the strengths of our brands, technology, product innovation and people, while emphasizing the balance of intelligence and insights, risk management, and cost management best practices.

For example, customers are particularly interested in our data analytics and benchmarking capabilities.

We anticipate these challenges continuing for the remainder of 2008 and into 2009.

While we are fortunate to be part of an industry that offers tremendous opportunities for growth with the secular trends away from cash and checks, we are not immune from the world economic problems, our customers' challenges and the increased competition we face.

As are most companies, we continue looking for ways to control expenses as we navigate through these difficult economic times.

We're using resources in a more thoughtful and efficient manner while trying to ensure that we remain well-positioned for future growth.

We have significantly ratcheted up our focus on our cost structure while making the investments necessary for future growth.

For instance, we've established a hiring cap, essentially eliminating all open positions.

We are also tightening up on contractor expenses, reducing travel expenses, and spending with suppliers and consultants.

I would like to stress that our global structure, the diversification of our business, and our solid business model are resilient.

We're not directly exposed to consumer debt, so we don't have the risk of consumer credit write-offs.

Also it is important to consider that we do business in 210 countries and territories and over 50% of our revenue is generated outside of the United States.

As we move forward, we continue to focus on supporting our customers as they address the needs of their businesses while we develop our pipeline of new business opportunities.

We are already on the ground in emerging markets with the local capabilities to deliver our global product and service propositions.

Payment trends are working in our favor--people all over the world continue to migrate toward electronic payments.

The biggest opportunity still lies in cash and checks.

On the legal front, we recently reported that we reached a settlement in the Discover litigation.

I am pleased that this settlement has closed another chapter with respect to our legacy litigation cases.

Under the terms of the settlement, we will pay Discover a total of $862.5 million later this month.

In the third quarter, we recorded a pre-tax charge of $827.5 million.

This includes receiving a payment of $35 million from Morgan Stanley, and the total after-tax charge was $515.5 million.

Before turning the call over to Martina, I would like to provide you with some initial thoughts about our outlook for 2009 which are summarized on slide 3.

We are still completing the work on our 2009 budget.

However, when thinking about next year, there are two items I would like to highlight for you now.

First, we expect that our net revenue growth will fall below the average annual range of 12% to 15% that is in our longer-term objectives.

Second, we are planning to hold operating expenses essentially flat over 2008 levels.

We still need to invest wisely for long-term growth while managing our expenses aggressively.

I already mentioned some of the cost containment and reduction initiatives.

In summary, for 2009 we would expect that high single-digit revenue growth would be necessary in order to meet our margin expansion objective of 3 to 5 percentage points per year and average annual net income growth of 20% to 30%.

Based on the recent strengthening of the US dollar, we expect that foreign exchange will be a headwind for us on the revenue and net income lines, keeping in mind the same phenomenon results in a tailwind for us on the expense line.

This is the reverse of what we've seen over the past several years.

We are holding to our longer-term performance objectives.

Currently, visibility beyond 2009 is difficult, but we will continue to work towards those objectives over the longer term; and we are pulling all the levers we can as we drive the organization to achieve them.

Remember that our longer-term objectives are based on constant foreign exchange rates.

Also, while we feel very fortunate and comfortable with the growth prospects of our business model, the changes that are taking place in the financial markets globally are unprecedented and have certainly not been expected by anyone.

As we gain more clarity about these forces, we will continue to evaluate our objectives and adjust them if appropriate.

With that, I will now turn the call over to Martina for a detailed update on our third quarter financial results.

Thanks, Bob, and good afternoon, everyone.

As Bob mentioned, we are pleased with our overall third quarter results.

Turning to page 4 of the slide deck, in the third quarter we delivered net revenue of $1.3 billion, up 23.6% over the comparable period last year.

This was driven primarily by strong growth in worldwide gross dollar volume and process transactions, as well as gross cross border volumes.

Currency fluctuations of the Euro and the Brazilian real relative to the US dollar contributed 3.5 percentage points of the net revenue increase, resulting in underlying business growth of 20.1%.

Pricing changes contributed approximately 5 percentage points of the revenue growth in the quarter.

As Bob discussed, we have taken a one-time, tax-effected charge of $515.5 million for the Discover litigation settlement in the third quarter, which we are treating as a special item.

Because the settlement will be paid as a lump sum later this month, there is no interest accretion that needs to be considered for modeling purposes.

With respect to the American Express settlement that was reached in the prior quarter, we have already told you about the $23 million in interest accretion which is not considered a special item.

This represents about $0.11 per diluted share in the third quarter.

Excluding the Discover settlement, total operating expenses grew at 8.3% or $60 million to $790 million.

We continue to demonstrate the leveragability of our business model by delivering operating income of $548 million excluding the litigation settlement.

In 2008 we have consistently and significantly increased our operating margins, delivering 41% in the third quarter, an 8.4 percentage point improvement on a year-over-year basis, while strong revenue growth has enabled us to leverage our operating margin combined with some efficiencies related to an accelerated companywide cost containment and reduction program.

We delivered net income of $322 million or $2.47 per diluted share, excluding the special item, in the third quarter.

Including the litigation settlement, we recorded a net loss of $194 million or a loss of $1.49 per diluted share.

Turning to page 5, we continue to benefit from the global diversification of our business with our ability to generate significant volume, transactions and revenue from economies outside of the US.

Worldwide gross dollar volume grew 12.3% on a local currency basis in the third quarter and 14.8% on a US dollar converted basis to $662 billion.

While the local currency growth rate is very similar to the GDV growth rate in the same quarter a year ago, the US experienced slower growth, offset in Asia Pacific, Canada, and Europe.

Although not shown on page 4, on a local currency basis, worldwide purchase volume was up 13.3% also slightly lower than the growth rate in the comparative quarter last year.

Cash volume growth was 9.5%.

Total US gross dollar volume growth was 4.7% and US purchase volume was higher at 6.6%.

US debit, the GDV continues to grow at a healthy 15.3% versus third quarter growth last year of 12.1%.

Total US credit GDV growth declined by 1.3%, but credit purchase volumes grew at 1.5% for the quarter.

Therefore the decline in overall US credit GDV was driven by negative cash volume growth as US issuers significantly reduced balance transfer acquisition campaigns.

This is the second consecutive quarter of negative cash volume growth due to reduced convenience check usage and balanced transfer activities which do not generate significant revenues for us.

Cross-border volume, which is generated from card holders who travel outside of the country where the card is issued, was up 18% over the comparable quarter last year.

This rate of growth was slightly lower than the growth rate of 19.2% for the third quarter last year.

On the whole, travel patterns remained fairly consistent on a year-over-year basis and we saw no significant change, with the exception that there was less US travel to Europe, but US card holders increased their travel to other markets.

Overall strong European cross border volume growth did offset slower growth in the US and a majority of the Europe cross border volume was generated on an intra-Europe basis.

This pattern is consistent with the same quarter last year as Europeans traveled closer to home during the summer.

While we're still seeing healthy double-digit growth rates of both, consumer cross-border volume grew at a somewhat slower pace than a year ago and commercial cross-border growth accelerated.

Processed transactions, or the transactions processed across MasterCard's network, increased 13% to $5.4 billion in the third quarter compared with the year-ago quarter.

Net revenue yield, which was 20.2 basis points in the quarter versus 18.8 basis points in the third quarter of 2007, was driven primarily by pricing.

On a sequential basis, the increase was primarily due to higher revenue for authorization, settlement and switch revenues and cross border revenue.

Let's turn to page 6.

Here you can see that net operations fees increased 25.8% or $204 million to $996 million in the third quarter.

Gross operations fees increased 24.8% to about $1.1 billion.

This growth was driven by two factors.

First, the growth in processed transactions, gross dollar volume, and cross border volumes that I previously described on page 4.

Second, new pricing changes implemented in January of this year on cross-border acquiring volumes and on retail purchases in the US by non-US card holders.

In the third quarter, net operations fees were 90.8% of gross operations fees, slightly higher than the same quarter in 2007 due to the slower growth in rebates than gross revenue growth as a result of customer performance.

On page 7, we show that net assessments increased 17.5% to $342 million versus the third quarter of 2007.

Gross assessment increased 15% to $604 million due to strong GDV growth of 14.8% on a US dollar basis.

Assessments as a percentage of gross assessments improved slightly to 56.6% due to the timing and terms of non-gross dollar volume based incentives.

Finally, when looking at full-year 2008 total net revenue growth, we expect to exceed the 15% upper limit of our longer term revenue growth target, assuming minimal changes in current exchange rates.

Please turn to page 8 for some detail on expenses.

During the third quarter, excluding the special item, total operating expenses increased 8.3% of which 2.4 percentage points were related to currency fluctuations.

This increase was mainly driven by the following - General and administrative expenses increased 14.1%, of which 2 percentage points were related to currency fluctuations.

The increase was the following -- higher personnel costs accounted for 8 percentage points of the G&A growth and were primarily driven by the hiring of new personnel over the last twelve months and increased contractor costs; 3 percentage points of the G&A increase was due to foreign currency transaction losses mostly due to the strengthening of the US dollar; and higher professional fees primarily consisted of legal costs to defend outstanding litigation accounted for 1 further percentage point of the G&A increase.

For the full-year 2008, we expect G&A growth to approximate the third quarter year-to-date growth rate of 13.6%.

As Bob mentioned earlier, we are making significant changes in order to maintain an essentially flat expense structure going forward.

In response to the current economic climate, we have continued implementing a number of expense management measures, such as eliminating open job reqs, reducing contractor spend and reducing travel and consulting expenses.

In fact, we saw a 20% savings in T&E expenses over the third quarter last year.

While we had a slight increase in advertising and marketing expenses of 1.1%, approximately 3 percentage points of this increase was due to foreign exchange, so excluding the impact of foreign exchange; advertising and marketing expenses declined on a year-over-year basis.

For the full year of 2008, we expect that our total advertising and marketing spend will be down versus what we spend in 2007.

Previously, we said that we expected 2008 spend to be flat, relative to last year.

Moving to the cash flow statement and balance sheet highlights on page 9, we generated $388 million in cash flow from operations during the quarter and $931 million during the nine months through September 30, 2008.

Even after our first payment of $150 million to American Express in the third quarter, we ended the quarter with $2.8 billion in cash, cash equivalents and current available for sale securities.

We have a number of balance sheet accounts that are impacted by the settlement with Discover, such as our accounts receivable for the $35 million payment for Morgan Stanley and an increase in tax receivables and prepaid expenses.

The lease on our St.

Louis facility and related off balance sheet arrangements will change in 2009 by MasterCard repaying $149 million in debt.

This item has been reclassed from long-term to short-term in the quarter.

In conjunction with this payment during the first quarter of 2009, we will record the building as an asset on our books.

I will now hand back to Bob to discuss some recent business highlights.

Bob?

Before moving to the Q&A session, I would like to share with you some of our recent business successes from around the world.

In addition to our strong top-line performance, we remain focused on delivering best-in-class products and services to our customers.

We continue global expansion of our credit and debit products and our acceptance channels, including mobile phones and public transportation systems.

We are happy to announce a new partnership with BarclayCard launching the first BarclayCard-MasterCard commercial proposition targeted at UK small businesses.

We are very pleased to continue building our relationship with BarclayCard.

Likewise, we continue to expand our relationship with Chase in the United States with the recent launch of the Chicago Bears Debit MasterCard.

All new and existing Chase personal checking customers in Illinois are now eligible for this program.

We continue our tradition of innovation with mobile payments, which goes back five years when we first piloted the use of contactless payments on mobile phones.

Earlier this year we announced our Mobile MoneySend capability, delivering person to person mobile payment service to MasterCard card holders.

Just last week we announced another competitive first, our "over-the-air Provisioning Service".

This service allows over-the-air personalization of cardholders' mobile devices in an easy, one-step process.

This will enable mobile devices to perform payment transactions at merchant locations with PayPass enabled terminals.

In Italy, we announced a strategic partnership with Telecom Italia to develop PayPass enabled mobile phones.

We signed a deal with HSBC for a co-branding partnership with Woolworth's, Australia's leading supermarket retailer, to provide PayPass enabled cards to the retailer's customers.

In Europe we continue to see slow but steady progress on the SEPA front.

Over the past two years, we have concluded business agreements with approximately 30 banks across the SEPA area for their debit card business, adding to our already strong European debit position.

As a result, the majority of European debit cards are now branded with either Maestro or MasterCard.

With banks taking a more gradual approach towards SEPA by maintaining local schemes longer than the end of 2010, co-branded cards will be in the market longer than originally foreseen.

We're making progress in unlocking the domestic debit business with acquirers and merchants now able to route domestic transactions across our network.

We continue to see an increase in domestic processing of Maestro transactions.

For example, earlier this year I told you that we were processing roughly 14% of all domestic transactions in Italy.

That figure is now approaching 17%.

While other countries are less mature in processing domestic transactions, we are beginning to see domestic Maestro volumes over our network in Belgium, the Netherlands, Luxembourg, France, Portugal, Germany, and Ireland where before we only saw cross-border transactions.

In summary, I would just like to reiterate how pleased we are with being able to deliver a great third quarter with over 23% revenue growth and a 41% operating margin.

We are seeing slowdowns that are affecting our customers and we expect some challenges over the next few quarters as we work through this unprecedented economic environment.

However, we are still confident in our business model, and we'll continue to make the necessary investments to fund future initiatives while being mindful of making our cost structure even more efficient.

It is this combination that will position the company to continue to deliver growth over the longer term.

I will now turn the call back over to Barbara so we can begin taking your questions.

Thank you, Bob.

We're 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 for additional questions.

Stacy, can you please start the Q&A?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Julio Quinteros with Goldman Sachs.

Please proceed.

Great.

Hi.

Thanks.

Real quickly, on two things -- both on pricing opportunities and headwinds as you guys think about longer term trajectory.

Can you spell those out in terms of what you're expecting on both fronts -- pricing on the one side and FX on the other?

Thanks.

Hi, Julio, it is Martina.

Let me take that.

In terms of the pricing opportunities, as you know this year we were fortunate enough to have about 5 percentage points of impact on our top line from additional pricing that we were able to take in the market due to the value propositions that we are actually delivering to customers.

We did say in the past that we believe that pricing opportunities exist in the future, albeit as said it's completely connected to what kind of value we are delivering to customers.

And as you can appreciate in this economic environment, we're certainly going to be very carefully evaluating what kind of pricing actions we will take.

However, from what we said in the past, our views on pricing remains to be the same.

At this point in time, we're really not having any change in thought on that.

Okay.

From a foreign exchange point of view, foreign exchange is obviously a moving parameter.

You can see that in terms of our top-line growth we are always calling out what kind of foreign exchange impact you have for this quarter.

It was 3.5%.

Maybe it is helpful if I can give everybody a guideline in terms of how to look at our foreign exchange impact and maybe what I'd really do is hint you towards the Euro/dollar relationship, so let me lay this out for you.

For every $0.01 move in the US dollar-to-Euro relationship -- so, for instance, if and these are always numbers of course, but for instance if the US dollar instead of taking $1.50 to purchase a Euro, it is only $1.49 to purchase a Euro; so for every $0.01, the impact on our top line for the whole year would roughly be $8 million to $9 million.

With that, you have about 80% of our foreign exchange exposure captured.

We're also exposed to the Brazilian real and a number of other currencies, but you pretty much have 80%.

Now, in addition to that I would like to add to the guideline that obviously we also have a impact on our operating expenses, and that would be an offsetting impact, so with the appreciating dollar you have headwinds on the revenue line, but you would have tailwinds on the operating expenses, and that the guideline I would say is about $4 million to $5 million.

So in operating income you roughly can see for that $0.01 change for the whole year would be about $3 million to $4 million.

So with that hopefully you can make your assumptions where you think foreign exchange rates will go.

That's great.

That's very helpful.

Just to clarify, the low -- sorry the mid single-digit growth for 2009 to get to the 20%, that was just what it would require to get to 20%, that wasn't the actual number you were targeting to for 2009, is that correct?

In fact, what we said is that we needed high single-digit growth for 2009 in order to continue to have our operating margin performance objective of 3 to 5 percentage points as well as producing net income growth of 20 to 30%.

Great.

Thank you very much.

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

Please proceed.

Thanks.

I wanted to return to pricing.

For '09, do you consider the amount of revenue growth you've gotten from pricing this year to be an anomaly?

Do you expect to get a similar type of revenue growth from pricing or how should we think about that over the next year?

Charlie, the comments we're going to make are going to be very consistent with what we had said before.

We actually did say, I think, on every earnings call we had this year that the 500 basis points you're seeing in every one of the quarters is actually quite extraordinary.

It is predominantly fueled by what we're seeing on cross-border volume.

I think what we laid out is that at any point in time, we feel comfortable that we might be able to do pricing according to the value proposition that we delivered to our customers of a minimum of 200 basis points per year, and we are not stepping back from that kind of view.

Great.

As a quick follow-up could you help us understand what your -- what a legitimate downside case is for local currency cross-border GDV growth?

Charlie, I don't know that there is anyone who can possibly give you downside on that.

If you go back and explore some of things that happened in Asia Pacific during the SARS crisis in 2003, as I recall, they closed the Hong Kong airport for about six weeks, so cross border completely went away for all intents and purposes in that part of the world.

If you can give me the exact amount of plane embarkation and some of the other things, I will give you a shot what the impact will be in cross border.

What I did share with you was some of the things that we track other than the gross dollar volume which we report out to you quarterly; and I did mention that we've seen cross-border transactions during the month of October fell relative to the 18% growth that we had in the third quarter.

We had continued growth, but it was high single digits growth rates during the month of October, so we're already seeing slow down in that growth rate.

I just can't tell you how low it may go or how long it might last.

Okay.

Great.

Thanks very much.

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

Please proceed.

Thanks.

Good afternoon.

Just a quick point of clarification before my question --are you saying you think '09 revs will be in the high single-digits and you're therefore not changing your margin or EPS growth objectives for '09?

What we've said is we don't think we're going to be able to reach the 12% to 15% longer-term performance objectives we've established, and at this point in time we're looking at needing high single digits in terms of top-line growth in order to make the 3% to 5% on our operating margin and the 20% to 30% on net income growth, again excluding the adverse or positive impacts foreign exchange might have in comparing it with prior years.

Okay.

So it is a point of technicality, but I know I will get asked and I think it is the key item for '09, but does that mean you do think you will be able to hit your margin and EPS growth targets in '09?

We're still working our way through the budget process, and at this point in time I believe we can still achieve those objectives.

Okay.

Great.

I do not know where we're going to come out, and I certainly can't tell you how the global economies is going to fare.

I can only give a set of assumptions, or the ranges we're dealing with.

But for now they still hold.

Thank you for that clarification.

My question is about the quality of your credit card user base.

Can you quantify for us just in terms of assessing the quality, what percentage would qualify as challenged from a credit perspective?

I don't know if you want to use metrics like FICO scores or percentage of revolvers or percentage credit lines being used or anything like that, but is there anything you can help us qualify what your credit card user base is like?

Adam, let me try and help you with that.

First of all, given that we are not an issuer of cards, as you know, we would not be seeing individual card holders' FICO scores.

However, what we do from time to time is we actually do an independent third party survey of MasterCard and its major competitors, major payment card competitors.

And from this data we can absolutely not see any appreciable difference in the terms of the percentage of card holders in each category.

And the categories are obviously subprime, prime, and superprime with the exception of one company, and that would be American Express, which certainly has a lower percentage in the subprime category, which is understandable given their business model.

Okay.

Thanks.

If I could just ask one follow-up?

If revenue growth is lower than the high single digits, is there more room to cut costs?

Could we actually see operating costs go negative if you needed to in order to preserve the margins or some margins and EPS growth?

Adam, there is a point in time where you decide you're not going to chase something which will short change our investments in the future.

So we're trying to position ourselves with as much flexibility as possible as we did last year, as we completed our budget with a set of fixed assumptions, we'll go back and build contingency plans in the event we're wrong.

I would like to be able to assure you that regardless of circumstances we can do something, but I can't assure you of that.

I can only say we're quite focused on flexibility, and to the degree revenues come along less rapidly, we'll be doing things in terms of working those expense levers to try and ensure we produce better results than might otherwise have been anticipated.

Okay.

Thank you very much.

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

Please proceed.

Hi.

Just wanted to go back to the 20% to 30% of net income guidance.

I think you said that is at constant currency, so if we do think currency is going to be a headwind which looks pretty obvious at this point, can you fall below that on a reported basis which obviously is what the numbers in First Call reflect?

I just want to be sure I understand that.

Greg, it is Martina.

Absolutely.

If we are going to get these kinds of currency headwinds, and I gave you a little bit of a guideline in terms of where we would be coming in from an operating income over how foreign exchange would be impacting operating income then have you to take the tax effect.

But on a reported basis, it could fall below that 20% to 30%.

That's why we made it so absolutely sure that everybody heard when we put out the long-term objectives back in May, at the end of May, that they are is on a constant FX basis because we can not call foreign exchange.

Perfect.

Okay.

That's clear.

Greg, this is Barbara.

We've had a lot of questions about what constant FX means, and one of the things we did was we put together an illustrative example which we're going to be posting on our website under the -- where you go to get the third quarter call information with the press release and the slide deck, and the supplemental operations table.

There will be an additional table there that we've worked through with an example.

So if people pull that off and you need help walking through that, Jason Lane and I would be happy to spend time with anybody who wants to talk about this further.

Okay.

Then just one last question.

You've obviously gotten a couple of big lawsuits behind you which is great, but we still have that merchant interchange lawsuit lingering out there.

Any update on timing of that lawsuit at this point?

Hold on just a second.

I am trying to reflect on the timing of that one.

To your point, we had three sets of legacy litigation, the foreign exchange cases, which are substantially behind us, the competitor cases, AmEx and Discover, which we have obviously taken settlement on, and also the merchant case.

At this point in time, that merchant case is going to play out over the next couple of years.

We're in the midst of completing the discovery process as we speak, and there are some dates that I think are relevant.

Let me see if I can pull those up for you.

I mentioned discovery should be completed in November, in the next few weeks.

The class certification is currently scheduled for January of next year.

Expert reports are mid-year next year, the June timeframe.

There will be further briefings and other motions that we expect would only be filed sometime very late in the year, assume December of 2009.

So there is no formal date set for trial yet, but I think we're imagining this thing is going to take a couple more years to play out.

Okay.

Thank you.

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

Please proceed.

Going back to cross-border transactions, there a way to break down the mix by US and non-US destinations, destinations within Europe and then anything that has to do with Latin America and travel?

And then can you help us understand the relations between cross-border transactions and revenue growth?

Thanks.

Well, we have shared with you that we've seen 18% growth in the third quarter and that it slowed in October to high single digits.

I can't give you more texture than that in terms of the geography.

We did mention that US travelers in the third quarter were less active than European travelers and that the European travelers tended to be traveling within Europe.

I really can't get any more granular than that.

In terms of cross-border volume growth and the impact on net revenue, first of all when you look at our net revenue growth of 23.6%, how I look at it take out the 3.5 percentage points of foreign exchange to business growth down to 20% and then you take the 5% pricing out, so you're down to 15%.

Well, then you look at our GDV costs of 12.3%, our purchase volume growth of 13.3%, transaction growth of 13%, and that doesn't get you quite there to the 15%, so it is really the 18% in terms of cross border volume growth that bridges the gap.

Thanks.

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

Please proceed.

Good morning, Bob.

Could you -- good morning, everyone.

Good evening, everyone.

Sorry.

It is nice that you guys gave some guidance about operating expenses growth in '09.

I think that was, in our view, one of the most important features of today's results.

But could you also give us a little more color about volume growth in Europe, especially given that it seems that Europe is lagging US in terms of just general economy?

Thanks.

If you take a look at the detailed attachments to the earnings press release, you will see some breakdowns in terms of third quarter growth rates within the various regions of the world, and we continue to have strong gross dollar volume, and this case I guess gross Euro and Sterling volume growth in Europe.

For the quarter on a local currency basis we grew 16.8% in Europe, and purchase volume grew 17.1%.

So it was quite strong growth in the third quarter.

Given the amount of processed transactions that we have in Europe, interim reporting in terms of our own monthly data is a little less meaningful in Europe that than it is when we look on a global basis.

But I can just say we're seeing generally a slowdown versus what we've seen in the third quarter around the world, and that was the basis in which I shared that data point that suggested in the total GDV on a local currency basis we're seeing in the month of October mid-single digits growth globally.

Thank you.

You're welcome.

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

I was hoping to get clarification on comments with SEPA, and in terms of local banks holding onto the networking a bit longer.

One, I was wondering if that's any -- is that being driven by the current economic situation?

And, two, in our discussions with local banks, it seems a point of consternation for the large banks [in Dover?] is the franchise fees currently being paid to MasterCard for local debit transactions to carry the bug that MasterCard isn't processing, and that's a big point of contention.

I was wondering if you can comment if there is any give and take in that subject that might accelerate conversion to local processing?

Thanks.

From my perspective, what we have going on in the single European payments area are a couple of things.

First of all, the reality of the economic environment that we're in.

Most of our financial institution customers in Europe and western Europe have gotten their fair share or more of the issue that is we've seen working its way through US financial institutions.

Just take a look at the landscape in terms of what's going on with the partial nationalization of several banks, with the mergers of several banks in the UK, with the Fortis situation.

So the economic impact there is very real, very serious.

Consumer was already in recession -- I am sorry, there was already negative growth in terms of GDP in the second quarter in Europe.

So Europe is a very trying environment for our customers, and the investments that they're willing to make in order to get things done on multiple year periods, not surprisingly, are being cut back in favor of restoring their balance sheets, their capital accounts and other shorter term priorities they may have that they think will give them more immediate impacts.

So I think that's the first thing that's going on, just the reality of the economic environment.

The second thing has to do with the business case, and what I will call regulatory uncertainty.

And as you know, we had a decision from the European Commission a year ago December which resulted in our suspension of our intra-European cross border interchange fee.

And as banks are looking at the business case for various things related to a single European payments area, clearly their models are in the state of flux as they look at the realities of what that might imply if that decision stands, despite our having appealed it and taken it to the Court of First Instance, or to the degree it might domino into the domestic marketplaces.

So I think all of those variables are at work here.

Thanks.

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

Please proceed.

Hi.

Thanks.

Good quarter.

I jumped on a little bit late, so I wanted to confirm with Bob the process volume growth information that you gave for October.

Is that inclusive of cash transactions?

Yes, it would be anything that we process, so if we happen to process a cash transaction, we would.

Those tend to be more cross-border, as you would imagine, because there are some domestic cash transactions, in fact, the vast majority [of domestic cash transactions] are done on/off ATM, so we would not necessarily see those or process those.

Right.

I was just curious if there was a way to get a better sense what the purchased volume growth looked like?

I think you should just take them at face value, which is the best that we can share with you at this point in time; and that's that where we had a third quarter total growth dollar volume growth of 12.3% globally in local currency, we're looking at mid-single digits in the month of October.

Got it.

We'll just use that as --

And cross border which was 18%, we're looking at high single digits during the month of October, so quite dramatic reductions relative to what we were seeing for the average of the third quarter.

Got it.

That's not too surprising, so in terms of -- I guess my question is this.

What are you seeing in terms of processed transaction growth, ignoring volume here?

Just trying to get a better sense how much of the slowdown is really weaker average tickets versus fewer swipes.

Do you have a view on that?

We're going to be releasing SpendingPulse data in the next few days, and one of the things we've seen over the last several months has been a reduction in ticket size; i.e.

dollar volume is growing less than the transactions.

And if you think about it, if you filled your car with gas in the last few weeks, gas prices have fallen about 33% over the last several weeks.

But you still wind up going in and buying just about as much gas assuming your driving is the same, so you keep the transactions, but you lose the dollar volume in that environment.

We've seen that across several categories in prior months.

We've seen that in airlines and hotels where we've seen, if you will, inflation-driven related price increases, but slowing transactions.

Got it.

Lastly, I guess last follow-up, can you remind us of how much of your revenue is per swipe versus average ticket oriented?

Thank you.

What was that, please?

Just how much of the your total revenue is really based per swipe or just the transactional click fee versus spread based or average ticket based?

We don't really give any percentages out, but in terms of how we charge a lot of our revenue is volume based, and a smaller part is transaction based.

Got it.

Thank you.

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

Please proceed.

Hi.

Thanks.

Good evening.

On the litigation settlements, AmEx and Discover now behind you, the interchange case a couple years away -- any updated thoughts on uses of excess capital -- buyback or anything else?

Yes, just a couple of observations.

Obviously, we will be reviewing our capital position regularly with our Board.

As we've indicated in the past, and I think it is even more true today than perhaps it was over the last several quarters, we want to maintain flexibility; and at this point in time we believe there is an extra premium to be placed on that flexibility and having a strong balance sheet given the nature of the credit markets and the environments we're in.

Having said that, assuming we feel comfortable that we have more than enough flexibility, then we would look at buybacks if we don't have other opportunities or deals that would require us to use that capital.

Okay.

Thank you.

And then in Europe, it is reported you lost a couple of major Maestro issues in the UK.

Is that impacting your guidance at all and is it a material change [in RBS] and what are you planning on doing about your Maestro strategy?

Those transactions or those deals were already reflected upon when we came out and gave you our longer-term performance objectives back in May, and so from that perspective they've been built into our thinking.

Okay.

One quick follow-up.

Did you say that -- I think you said in the last quarter's call that you expect process transactions to outpace GDV as average ticket goes down.

Are you seeing that in October?

Chris, we don't have the data for transaction for October -- we really have only process volume.

Thank you.

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

Please proceed.

Most of my questions have been asked, but I was just wondering if I could drill down on cross-border a little bit more.

And I asked this question before, and I appreciate the commentary on the consumer and commercial kind of accelerating a bit, but have we ever -- have you guys ever drilled down on what part of cross-border volume growth has come from cyclical impacts versus secular impacts?

My assumption is that both are slowing, but cyclical more so, but it would seem your analysis would seem to indicate the opposite.

I don't have any real insights to share with you.

I don't know if Martina you have anything?

That is a very hard thing to divvy apart.

Sorry, Sanjay.

Okay.

All right.

Maybe one follow-up.

Obviously we saw a lot of consolidation occur across the financial space.

Have you guys had any discussions with some of the consolidatees or consolidators in your customer base and to discuss the opportunity or their appetites for dual issuance on debit?

Well, obviously we're talking with our customers whichever side of the table they may be sitting on as consolidators or consolidatees.

Generally at the end of the day, it is the consolidators that are making the decision, so that's where our focus is.

With regard to debit in the United States, we've already seen banks sign up for debit duality, and I gave you an example today of Chase's.

They were already dual in debit, but Chase's Chicago Bears card that they've launched.

Obviously we also have previously referred to the various NFL and I guess Major League Baseball debit programs that the Bank of America is involved with.

So we continue to work with our customers to try and find ways to give them obviously more attractive products for their card holders and merchants alike.

Okay.

Great.

Thank you.

Operator, I believe we have time for one more question.

Your final question comes from the line of Pat Burton with Citi.

Please proceed.

Hi.

Thank you.

I'd like to follow up on the earlier comments about how far is too far to potentially cut back.

On the advertising side, how far could you trim that back without getting significant pushback from clients?

Thanks.

I don't know that we can giver you a definitive point on that.

I think the process is one where we pay attention to several variables.

First of all, our customers and the degree to which they count on our brands and the related marketing support, that's a result of our budgeting process where we sit with customers.

We're obviously in the midst of that right now and look at what they want to get done, and that will vary from one customer and one market to another.

Secondly, we believe we should be investing in our brand, and that helps us drive utilization of our products, so that's a second dimension.

Obviously the health of the domestic economy and what's going on with consumers to the degree it hasn't impacted our customers plans will then work its way into our thinking with regard to our marketing activities to drive the usage.

I think probably the third dimension on that is what are competitors doing?

Do we keep ourselves at a level of awareness, of advertising, recognition, and likeability and some of those other measures that is we use in various parts of the world to ensure a vibrant, vital healthy brand.

So all of those things would go in.

If everybody in the world stops advertising and marketing and all of our customers say we don't need any, then the combination of the competitors and the customers telling us that, if we haven't already gotten the message from what's going on with the consumer in the marketplace, that would clearly cause us to pull that lever and ratchet back further than we would otherwise have done.

Thank you.

Bob, I think you have a few closing comments you would like to make before we say good night?

I want to thank you all for joining us today.

These are clearly challenging times, and despite the economic environment, we are very excited with our results in the third quarter.

We believe our business fundamentals continue to provide a solid foundation, and we remain committed to growing our business while we aggressively manage costs in order to drive shareholder value.

Once again, thanks for joining us today.

Thank you for your participation in today's conference.

This does conclude your presentation.

You may now disconnect and have a great day.