萬事達 (MA) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2009 MasterCard earnings conference call.

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

(Operator Instructions) I would now like to turn the call over to Miss Barbara Gasper, Group Executive, Investor Relations.

Please proceed.

Thank you Letasha and good morning to everyone.

Thank you for joining us today, either by phone or webcast, for a discussion of our third quarter 2009 financial results.

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

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

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 also been attached to an 8-K that we filed with the SEC this morning.

A replay of this call will be posted on our website for one week, until November 11.

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 will now turn the call over to Bob Selander.

Thanks, Barbara and good morning everyone.

Despite the ongoing economic challenges, I'm very pleased with our ability to deliver another quarter of strong financial performance.

We saw net revenue growth of 2% on an as reported basis; and on a constant currency basis, net revenue growth was 3.9%.

We've continued to follow an aggressive and thoughtful approach to cost management, along with a somewhat slower-than-anticipated redeployment of marketing funds, resulting in total operating expenses declining approximately 13% this quarter, excluding the impact of litigation settlements.

This has allowed us to deliver an 8.8 percentage point operating margin improvement over the same quarter last year, despite slower top-line growth.

I am equally pleased that net income grew 41.6% on the same adjusted basis.

The economic downturn has continued to affect consumer and business spending during the quarter.

In addition to this weak spending, our volumes over the past few quarters have been impacted by several headwinds versus last year, such as foreign exchange rates, gas prices and slower cross border travel.

Like many other companies, we've had our fair share of challenges in the current business climate and we've continued to cut back where we can.

However, our priority remains on utilizing our people and resources to develop our best opportunities, making sure we are appropriately investing for the future growth of our franchise.

We continue to benefit from the secular shift from cash and check, as evidenced by our process transactions, which grew at a high single-digit rate during the quarter on a worldwide basis.

We've also seen double-digit processed transaction growth coming from our Asia Pacific/Middle East/Africa and Latin American regions during the quarter.

Overall, our results once again underscore the global trend toward electronic payments and the strength our business model affords us even in this environment.

MasterCard continues to make life easier for consumers, businesses and governments alike, all of whom are seeking safer, more controllable and more efficient payment alternatives for everyday commerce.

Turning now to our thoughts on the economy and the state of business around the world ...our assumptions remain unchanged and we don't expect any global economic improvement until sometime in 2010.

However, in a report published in October, the International Monetary Fund believes there are some early positive signs.

The IMF report said that following the deep global recession, economic growth has turned positive, largely as a result of wide-ranging public intervention activities that have supported demand and lowered uncertainty and systemic risk across the financial markets.

While the recovery is expected to be slow, as support from public policies gradually unwinds, the IMF believes that the shape of the recovery will vary.

Economies that suffered financial crises are likely to experience weaker recovery than those affected mainly by the collapse in global demand.

Advanced economies like the US, UK and Western Europe are projected to expand sluggishly through much of 2010, with unemployment continuing to rise until later in the year.

The IMF projects that advanced economies will grow 1.3% in 2010, better than the decline of 3.4% they're forecasting for this year.

Emerging and developing economies are generally further ahead on the road to recovery, led by a resurgence in Asia, primarily in China and India.

Overall, economies in this category are projected to grow from a rate of 1.7% in 2009 to 5.1% in 2010.

Other emerging economies are staging modest recoveries supported by policy stimulus and improving global trade and financial conditions.

We continue to have concerns about the health of the consumer as reflected in spending trends.

There are several indicators we monitor to keep track of this, namely the rate of unemployment, the stabilization of housing prices, the rate of savings and various indices of consumer confidence across our key markets.

In summary, I believe the worst is behind us and there are certainly some encouraging signs in the recent economic data.

Turning to the latest MasterCard SpendingPulse data for the US retail sector for the month of September, the results indicate an improvement over August, signaling the potential for a stabilizing environment for the remainder of the year.

Retail sales, excluding autos, declined 2.1% versus September last year.

When excluding both autos and gas, retail sales actually rebounded, growing 2.1%.

This is a positive sign, considering the average of the prior three months, June through August, declined 2.4% on a year-over-year basis.

This is the strongest pace of growth for retail sales, excluding autos and gas, since July of last year.

The trend is generally improving with more sectors showing year-over-year growth in the month of September than are showing declines.

Some of these growing sectors include eCommerce, Luxury, Electronics and Airlines.

While the year-over-year US growth statistics are improving, the country is still in a stable spending environment, rather than rebounding into a strong expansion.

In fact, despite September's growth in many of the sectors, some are still well below the highs of 2006 and 2007 from an overall dollar perspective.

For example, sales in Luxury Goods showed signs of improvement this September as the sector comparables begin to reflect the spending freeze that began in the last two weeks of September 2008, but this sector has been one of the hardest hit during the downturn as consumers stopped making discretionary purchases.

When we look at our MasterCard processed volumes and transactions through October 28, it shows the following -

Our cross-border volumes continued to stabilize across all regions.

The rate of growth on a worldwide basis turned positive in low single-digits, which was better than the decline of 0.3% we saw for the third quarter.

The Asia-Pacific region continues to demonstrate significant growth on a sequential basis and the US rate of decline has decreased to low single-digits.

While not a perfect proxy for gross dollar volume, US processed volume growth has turned slightly positive through the first four weeks of October relative to the low single-digit decline we saw in the third quarter, which also signals potential signs of stabilization.

Process volumes for the rest of the world also improved relative to the third quarter.

Process transactions continue to grow in the 8% range, similar to the second and third quarters of 2009.

I'll now turn the call over to Martina for a detailed update on our financial results and operational metrics.

Martina?

Thanks Bob and good morning everyone.

Let me begin on page three of the deck where we will focus on the non-GAAP columns, which exclude all special items.

As Bob said, we are pleased to have delivered another strong quarter of financial results.

Third quarter net revenue grew 2% to $1.4 billion over the comparable period last year.

Net revenue grew 3.9% for the quarter on a constant currency basis.

This revenue increase was primarily driven by pricing changes of approximately six percentage points and a 7.6% increase in the number of processed transactions.

These factors were partially offset by the impact of slightly lower cross-border volumes in local currency terms, which translated to a 6.4% decline on a US dollar basis.

We have continued to effectively manage our total operating expenses, which decreased 13.3% for the quarter.

Foreign exchange contributed 1.3 percentage points to the decline.

As a result, our operating income was $680 million for the quarter and we delivered a quarterly operating margin of 49.8%.

This represents an 8.8 percentage point improvement over last year's third quarter.

MasterCard's effective tax rate was 32.9% in the third quarter of 2009, both excluding and including special items, primarily reflecting adjustments to our effective tax rate as a result of a settlement with the IRS over prior tax years.

On the bottom line, we delivered net income of $456 million or $3.48 per diluted share.

Turning to page four.

During the third quarter, our business continues to generate healthy transactions and good volumes on a local currency basis.

Clearly the secular shift from cash to electronic payment forms continues to provide significant growth opportunities.

Worldwide Gross Dollar Volume or GDV was relatively flat at 0.3% on a local currency basis in the third quarter, and declined 4.7% on a US dollar-converted basis to $633 billion.

As with the last few quarters, the deceleration in the overall local currency growth rate can be attributed to the US, where GDV growth declined 8% due to a double-digit decline in credit volumes.

Across the rest of the world, GDV continued to grow by 6.3% on a local currency basis, or a decline of 2.4% on a US dollar basis.

This spread between local currency growth and US dollar growth is smaller than the last three quarters, primarily due to the weakening US dollar against other currencies during the third quarter.

Worldwide debit GDV grew 15.2% for the quarter on a local currency basis.

This compares to about 19.2% growth in the third quarter of last year and it is the highest quarterly growth rate this year.

In the US, debit GDV volume grew 7.2%.

Debit growth for the rest of the world was almost 26.5%, primarily driven once again by several countries in our Asia Pacific/Middle East/Africa region due to market growth and customer wins.

On a local currency basis, worldwide purchase volume was also relatively flat, at 0.4%.

Similar to the GDV trend, US purchase volume declined 6.5% for the quarter driven by a decline in credit volumes.

The decline in gas prices on a year-over-year basis accounted for approximately 30% of the decline in US purchase volume.

For the quarter, cross-border volume growth on a local currency basis was about flat, down 0.3% and declined 6.4% on a US dollar converted basis.

We have seen positive signs of stabilization in the third quarter versus the second quarter, partially from an increase in Americans traveling abroad as well as from cross border spending from Asia.

When we look at processed transactions in the third quarter, they increased 7.6% compared with a year-ago quarter to $5.8 billion.

In Asia Pacific/Middle East/Africa and the Latin American and Caribbean regions, processed transactions grew at double-digit rates while all other regions grew at a mid to high single-digit rate on a year-over-year basis.

We have also begun to see some impact on our process transactions in the UK due to a Maestro portfolio lost that we discussed last year.

The number of MasterCard-branded cards worldwide remained flat at 964 million in the quarter and excluding the US, the rest of the world card issuance grew 8.5%.

As of September 30, 2009 there were approximately 1.6 billion MasterCard and Maestro-branded cards issued.

Now, let's turn to page five.

As I mentioned earlier, net revenue growth grew 2% on an as-reported basis and on a constant currency basis, net revenue grew 3.9% for the third quarter.

Domestic Assessments decreased 1.3% from the prior year, primarily due to the impact of converting local currency volumes to their strengthening functional currencies, which are then used to calculate revenues.

While GDV growth was slightly positive on a local currency basis, it declined 4.7% on a US dollar basis compared to the prior year's period.

The remainder of the European pricing introduced in October 2008 that was not repealed in July of this year contributed to offsetting the decrease.

Cross Border Volume Fees decreased by 9.6% versus Q3 of 2008, primarily due to lower cross border volumes and the translation effect of local currency volumes to US dollars.

Cross border volumes decreased slightly on a local currency basis; they declined 6.4% on a US dollar basis.

Transaction Processing Fees increased 16.4% compared to the prior period, primarily due to pricing changes introduced in the US in April this year which accounted for 11 percentage points of the increase.

Growth in processed transactions accounted for most of the remaining increase.

Other Revenues decreased 1% on an as reported basis, but grew 0.4% on a constant currency basis.

Rebates and incentives were largely flat versus the same period last year.

The impact of lower volumes and rebates was offset by incremental rebates and incentives for new and renewed agreements.

Now we'll turn to page six for some detail on expenses.

As part of our cost containment efforts and reallocation of investments, we continued to execute on a number of expense management initiatives.

Excluding special items, total operating expenses decreased 13.3% during the third quarter.

Currency fluctuations of 1.3 percentage points contributed to the decline.

Without the impact of severance in both this quarter and the year-ago quarter, total operating expenses declined 17.1%.

The decrease was mainly driven by the following -

General and Administrative expenses decreased 7.9% with currency fluctuations essentially accounting for 1.1 percentage points of the decline.

Looking at the categories within General and Administrative expenses, professional fees declined by 37.3% or $22 million during the quarter, primarily due to a reduction in legal costs and consulting expenses.

Travel expenses decreased approximately 50% or $10 million on a year-over-year basis as a result of continuing cost reduction initiatives.

The decrease in G&A was partially offset by personnel costs for the quarter, which increased 4.9% due to the $31 million severance charge.

This charge reflects the $0.15 impact on our reported diluted EPS for the third quarter of 2009.

Excluding severance charges, personnel costs declined 4.3% versus the same period in 2008.

Advertising and Marketing spend decreased by 29.4% versus the year-ago period.

The total amount spent was lower than what we had expected, primarily due to the slower redeployment of funds to growth markets and certain other initiatives in support of fourth quarter campaigns.

Foreign currency fluctuations accounted for 1.5 percentage points of the decline.

Moving to the cash flow statement and balance sheet highlights on page five.

We generated $316 million in cash from operations and ended the quarter with cash, cash equivalents and current investments of $2.9 billion.

At the end of the quarter, we made a prepayment at a discounted amount of $335 million for our remaining obligation under the 2003 US merchant lawsuit settlement.

This completes our financial obligations under this settlement.

As a result, we saw a $0.07 positive impact to EPS in the third quarter due to the gain realized on the obligation.

We anticipate there will be an additional $0.03 positive impact to our fourth quarter EPS, as we will no longer have to record interest accretion for this settlement.

As we have shared with you before, we believe this prepayment is an effective use of our cash.

For flexibility and capital structure planning purposes, we intend to file a universal shelf registration statement in the next few days.

Having the universal shelf will facilitate an additional avenue for the Company to have access to capital, if necessary.

We are doing this to ensure we are adequately prepared at any given time, but we have no present intention to issue securities using the shelf.

Now, let me share some thoughts with you for our fourth quarter.

As we have mentioned before, we expect to fall below our long-term minimum average annual net revenue growth objective of 12%, on a constant currency basis, for 2009.

With respect to contra revenue, keep in mind that it is generally higher in the fourth quarter due to seasonality.

Specifically, for the fourth quarter of 2009, we expect our rebates and incentives line to be significantly higher versus the fourth quarter of last year due to new and renewed customer agreements, as well as rebates relating to recently-implemented pricing initiatives.

Because of our heightened focus on managing expenses, we continue to expect full-year 2009 total operating expenses to be down on a year-over-year basis, including the impact of our severance charges.

With respect to severance, based on new actions that were recently identified, we now expect to incur additional severance charges in the fourth quarter.

It is too early to size these charges now, as it is partially dependent on the take-up rate for a voluntary program, which we just announced internally to our US-based employees.

For advertising and marketing spending, our thoughts remain unchanged -- that fiscal year 2009 will be lower than fiscal year 2008 on both an as-reported and constant currency basis and that spending in the second half of 2009 will be significantly higher than the first half of the year.

As I said earlier, the lower-than-expected third quarter advertising and marketing spend was primarily due to the slower redeployment of funds to growth markets and certain other initiatives, which have been shifted to support fourth quarter campaigns.

As a result, we now expect the fourth quarter advertising and marketing spend to be about 20% higher than our fourth quarter spend last year.

We now expect our full-year 2009 tax rate to be approximately 34%.

Since our year-to-date tax rate at 33.6% is lower than this, keep in mind that our fourth quarter rate would have to be higher than the previous quarters.

Based on these assumptions, we anticipate that we would be able to achieve at least 20% net income growth for 2009, excluding any impact of severance charges.

Let me now turn the call back to Bob to cover some recent business highlights.

Bob?

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

We are very pleased to report that last month we renewed and extended our agreement for all of our issuing business with one of our largest customers, Banc of America.

We look forward to working with Banc of America to grow our mutual businesses and to reinforce our already strong relationship.

In the UK, we launched a co-brand card program with Banc of America and Amazon.

This innovative new card, which targets the eCommerce space, allows customers to apply and make purchases online immediately after their application has been approved.

In the US, we signed a long-term extension of our agreement with Continental Airlines related to the US issuance of both credit and debit co-brand cards, offered primarily by Chase.

We are excited to continue this program, which strongly appeals to affluent card holders as they can leverage our global acceptance for international travel.

I'm also pleased to announce that USAA will be implementing our MasterCard Integrated Processing Solutions [platform], our world-class debit and prepaid processing platform.

USAA will employ the full capabilities of the platform's network and issuer processing services to support signature debit, PIN debit and ATM transactions.

Turning to some other results within our core debit and prepaid areas in the United States, we have renewed and extended our agreement with one of our largest debit issuers, Peoples United Bank.

Both our consumer and small business debit is included within the scope of this agreement.

We look forward to a continued strong relationship with Peoples United.

Fifth Third Bank is now issuing World Debit MasterCard cards, which is the only premium debit card product in the United States that gives mass affluent consumers access to enhanced rewards, unique offers and savings opportunities.

Fifth Third is the second issuer to launch World Debit MasterCard since we launched this platform in the spring.

Underscoring our strength in Prepaid, in September, MasterCard, Wal-Mart and First Data launched a new payroll card program for Wal-Mart and Sam's Club employees in the United States.

The Electronic Payroll Program will include the deployment of the Money Network MasterCard pay card and electronic pay stubs which will cut down on paper consumption and provide associates easier access to their wages.

According to a Mercator Group, this represents the largest US payroll card implementation.

Additionally, I'm pleased to announce an agreement with Univision Communications, the nation's leading Spanish language and media company, to introduce prepaid programs that are being developed to provide US Hispanic consumers with access to valuable financial tools.

The prepaid programs will be available nationally in 2010.

Finally, I'd like to recognize some key developments related to our inControl platform and our latest activities in the mobile space.

Citi has become the first customer to implement the inControl purchase control application globally with local currency issuance and settlement in nearly 50 countries.

Citi is leveraging the inControl purchase control capabilities to deliver limited use account numbers with enhanced controls and increased transaction security.

In India, we launched one of the world's largest near-field communications pilots with MasterCard PayPass embedded in the mobile hand set.

The mobile payment's pilot was launched in Bangalore in collaboration with Citibank, Nokia and Vodafone.

Overall, we had a solid quarter of business momentum and results and look forward to continue working with our customer financial institutions and merchant partners around the world on many other exciting opportunities that will make everyday commerce easier and more efficient for everyone involved.

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

Thank you Bob.

We are now ready to begin the Question & 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.

Letasha, can we start the Q&A please?

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

Please proceed.

Great.

I guess let me start off real quickly with the severance charges, some new severance charges into the fourth quarter.

Any thoughts, Martina, around severance into 2010?

Julio, we -- obviously as you know, we've been now taking severance charges every quarter and we're really trying to make sure that we get all of the actions that we need to take into this year and that's why we are finishing off in the fourth quarter.

With this kind of environment, you never know what could happen in the future, but we are really trying to take the opportunity at this point in time to do the right decisions from an efficiency point of view, as well as from a reallocation of investments point of view.

So, it should be substantially done.

Okay.

Great.

Thank you.

Your next question comes from the line of Don Fandetti with Citigroup.

Please proceed.

Hi.

Good morning.

Just a quick question.

I was wondering if you could comment on your expectation for price increases?

I know Visa is expecting to be a little higher than normal in 2010, just want to get your thoughts there.

Don, we've been stating this pretty steady for the entire year, as well as from our long-term performance objective point of view, that we do believe every year we'll be targeting price increases in the neighborhood of 200 basis points.

I don't think at this point in time we're prepared to say anything differently.

Okay.

Thank you.

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

Please proceed.

Yes, good morning.

Bob, I was hoping you could provide some commentary on what you see in the advertising environment as the spend was quite a bit lower than what I was looking for in the quarter?

Thanks.

Well, I don't think there's anything startling here.

We had indicated that we would be spending a lot more in the second half of the year during our second quarter conference call.

From the standpoint of the allocation and timing of the spending, what caught us a little bit by surprise was the rate in the third quarter and we fully expect to spend what we'd anticipated would happen in the third and fourth in combination, of course, the two -- across the two quarters, which is why Martina, in order to help provide you with a little more specificity, indicated that we're anticipating the fourth quarter will be approximately 20% above what we saw last year.

As economies around the world are beginning to show some positive signs, we're trying to step in and take advantage of some of those opportunities and it clearly varies from one part of the world to another.

But as we move into what is a larger seasonally spending season, we're trying to make sure we're well positioned in working with our customers and in supporting our brand and in various promotions built around various sponsorship and other activities to lever what we see is a beginning-to-improve global economy.

When you say you were surprised by the rate, do you mean the rate of MasterCard spending or the rates that you were seeing to -- on a spot basis?

Well, let me put it this way.

Spot advertising rates are varying.

Again, some are up in some markets, others are down in other markets, from one part of the world.

What we are seeing is that is beginning to recover as others also begin to step up, but my reference, I think, was specific to MasterCard in the context to your question, Craig.

Okay.

Thanks, Bob.

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

Please proceed.

Thanks, it's Moshe Katri.

How should we think about top-line growth for 2010, kind of factoring some of the recent trends related to credit and debit?

And then assuming that we're headed to a very gradual recovery in consumer spending in 2010, will MasterCard have to increase sales and marketing expenses and in this context maybe you can comment on your current priorities in sales and marketing and will these priorities have to actually get modified next year?

Thanks.

Well, Moshe, we're in the midst of working our way through the budget process at this point in time.

From a good news perspective, when we were working our way through this last year, every week we were realigning our assumptions to the down side, as we saw the fourth quarter deteriorate quite rapidly, in fact, late third quarter of last year.

So, it's a little bit premature to begin to comment.

Clearly, we feel better about the environment now.

We're beginning to see some of those positive trends that we've already mentioned to you.

To the extent that we're underestimating the rate of economic recovery, I would view that as wonderful news, but as I indicated in my earlier comments, we're still expecting it to be a less robust recovery than we might like and we're managing our business that way.

And how should we think about top-line growth?

That's my first question about top line growth for 2010 kind of factoring some of the recent trends that we've seen in credit and debit?

Yes, at this point in time, the best we can say to you is that over the three-year period, we've already indicated that there's not an ability to deliver that 12% in 2009 and we don't believe we'll be able to get to an average of 12% over the three-year period of 2009, 2010 and 2011.

You can do the math as well as I can.

Getting to that level would require quite significant growth rates in 2010 and 2011, which we don't envision at this point in time.

Thanks for the color.

Your next question comes from the line of Tim Willi with Wells Fargo.

Please proceed.

Thank you and good morning.

My first question was around US debit.

If I've got my numbers correctly, transaction volume there showed nice pickup relative to the prior third quarters and year-over-year was still going up a pretty -- against a pretty decent comp.

I was just curious, was there anything within particular customers, your larger ones or something you saw that really resulted in that pickup in the purchase transactions to about a 15% growth rate whereas before it had been sort of in that 9% to 10%?

No.

I think what we are seeing is really across the board in terms of the pickup on the US debit growth rates, so I don't think that we can point to any specific customer or issuance.

Okay.

And then my second question and last one was around just on the topic of marketing.

To what degree have -- you've talked about redeployment of dollars and I'm just trying to get a feel for to what degree that redeployment in spending is driven by customers and how they're communicating to you their intent to do marketing and programming and the support that you give them.

And as you think about even into 2010, to what degree might your marketing dollars be dictated by larger customers trying to get more aggressive with their growth programs versus 2009?

Just any color you would have around that dynamic?

Generally, only a small slice of our total advertising and marketing spend is -- is specifically done in connection with customer programs.

Albeit, having said that, obviously we do know what our customers are planning to do from a program point of view and from a country point of view going forward and we try to line up our spend, especially our media spend, in order to be focused on those kind of areas.

So, I'm not going to tell you that there is a specific tie to it.

I think, a lot of our spend can be spent the way that MasterCard believes that it can encourage our customers to have really good business going forward.

The one thing that we are very focused on, not only here for the second half of 2009, but also for as we're walking through the budget process of 2010, in terms of what we're really doing for our growth markets and how we are changing some of the makeup in terms of where we're spending our marketing between the more mature markets and the more growth markets and we obviously hear a lot of -- from our customers in order to make sure that we align appropriately.

Okay.

Thank you.

Your next question comes from the line of David Parker with Lazard Capital Markets.

Please proceed.

Good morning.

Thank you.

Can you just provide a little bit more color around that previous question?

Just specifically on the marketing split between the mature markets, as well as the high growth markets?

You mentioned that going forward, you're going to be spending more in those high growth areas, but for the first three quarters, have you been spending less in the emerging markets or is it more on the developed markets that you've been spending less on?

As you can see, David, in the first three quarters of the year, our global advertising and marketing spend is down approximately 30% over the 2008 or below the 2008 levels.

We've clearly reallocated funds into areas that are opportunities for us.

That could happen with a particular customer or program in a given market that may not be doing as well economically as another market.

So, it's hard to parse these things and obviously since we don't share geographic-specific advertising and marketing spending, although you can get measured media reports in various parts of the world, you can, I think, assume that over time more of our marketing spend will go to growth opportunities than to those areas that are struggling.

And that can be true with any market, which doesn't look like it has underlying robust economic growth, or more logically in those areas where we see more rapid growth, emerging and developing markets specifically.

Okay.

Thank you.

And then just on the USAA win, can you talk about when you expect them to migrate over to your platform and how many cards do you expect them to represent?

Thank you.

David, it's Martina.

Typically we do not give out those kind of details.

When we have some impact on the financial statements, that's typically when we say what is happening from a customer implementation point of view.

As you can appreciate, that is a big roll out, it's a big migration onto our world class debit platform, so you can appreciate that it will take a little bit of time to accomplish this.

Great, thank you.

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

Please proceed.

Hi.

Good morning.

You noted in the discussion that the rebates were a little higher as some volume benefit was offset by some contract renewals.

Can you just give us a little bit of color on where you see that line going in 2010?

Obviously, it's going to depend on volume, but I guess my question is do you expect the rebates to increase next year as you see the slow economic recovery?

Chris, I think you need to let us finish out our year here as well as get us through the budget season.

The only comment that we are really prepared to make is for the fourth quarter where we do believe and you heard Bob talk about all the new and renewed agreements, where we do believe that there will be a significant increase from a contra point of view, but it's too early for us to be talking about 2010.

Maybe ask it a different way.

If you do see spending rebound, does that line necessarily need to come back up?

Chris, typically, yes, because as volume increases, our customers will be able to get into different tiers from a rebate point of view; and, of course, you should be seeing that line going up and that's good news.

If you have the growth revenues go up, you want the contra to go up and obviously your bottom net revenues will go up, too.

Okay.

Different question.

On the October trends you cited, particularly cross border, are we seeing any real improvement in the October trends or [is it] just the easy comparisons from the year ago in your opinion?

We've seen -- every month that we can look at in the third quarter you have seen an improvement in the cross border side, as well as it has really gone into every quarter -- every week of October, so we're seeing, I would say, a stabilization.

We have to acknowledge it was a pretty easy compare versus the fourth quarter of last year, but we're seeing a pretty good stabilization and an improvement in the numbers pretty much every week for the last little while.

Thank you.

Your next question comes from the line of Moshe Orenbach with Credit Suisse.

Please proceed.

Actually, my questions have been asked and answered.

Thank you.

Thanks, Moshe.

Thanks, Moshe.

Your next question comes from the line of Dan Perlin with RBC Capital Markets.

Please proceed.

Thanks.

I was wondering if you could comment on how you think about the inter-relationship between your incentive fees and your marketing spend?

With marketing being down 33% year-to-date and incentives being basically flat, I'm wondering if you're shifting some of those dollars out of marketing and better utilizing them in tying up some of these contracts in the incentive line?

Dan, no, I cannot report that we had a significant shift there at all.

As you know, in a number of our large customer business agreements, we have a number of different incentive line items.

And one of them could be that we're supporting a certain marketing program for our customers and that has been with the new agreements and with the renewed agreements, the same way -- that has been done the same way as we have done it in the past.

We don't have a significant shift from one line item to the other.

So, you don't have a lot of control over, really, that incentive line incrementally when you don't need to -- when you can kind of throttle back on your advertising?

I know a lot of it is precontractual, but I thought that you might have more control over that now.

Dan, even -- for all of the customer business agreements where we have these kind of incentives negotiated, there are certain programs that the customers are doing where we are fully aligned between MasterCard and the customer.

I would say that there is quite a bit of control over how those programs are being done and how they're being spent and when they're being spent.

A good alignment between our customers and our results.

Okay.

And then my last question is acquisition opportunities.

As you guys look around the world, what markets do you think you see out there that you need to be in that you maybe aren't and if you did an acquisition, would it help you drive the category more broadly?

Thanks and I'll jump off.

Hi, Dan.

I wouldn't want to pick a specific geography.

Let me just make a couple of observations, though.

First of all, as you know, we've been looking at ways to enhance our presence in the processing arena, bringing up our platform, for example, that I mentioned, our IPS platform to support debit, as well as prepaid with a broader array of functionality, is one of the things that we've been investing in now for a couple of years.

And obviously in the case of the USAA transaction, that's an important process that we're going through in terms of getting them on that platform.

When I think about other places where we don't have the processing presence, we do virtually all the domestic processing in the US, Canada, the UK, Australia and Brazil, although there are clearly additional opportunities to broaden our offering in those markets.

In most of the rest of the world, we don't have that significant a presence.

So, you've seen some of our activities over the last several years.

In 2008, we purchased what was called at that time EuroPay France.

Earlier this year we increased our ownership in SPS, a processing company down in Australia where we're now -- I believe it's about a 70% owner of that company.

So, we continue to opportunistically look at these types of areas.

I'd also indicate that in the innovation area, we're increasingly seeing companies that have come up with great ideas that we're working with day-to-day and we may take a small position with them from an equity standpoint, in order to help support their development.

One company that we thought was particularly attractive was Orbiscom that we acquired, I guess it was in December of last year -- the Irish company which has the inControl platform that we're actively marketing around the world now.

All of these opportunities go through the basic screening of - do they fit with our strategy; do they make sense financially; do they have the management if we don't have the knowledge and capabilities of running them; and can we integrate them.

And that's sort of the pattern we've been using and clearly with our balance sheet and capital position, we think we have the flexibility when we see opportunities to move on them.

Okay.

Thank you very much.

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

Morgan.

Please proceed.

Hi, good morning.

Tien-Tsin.

Just wanted to ask about the timing and the intentions of the shelf.

I guess the question is if it's signaling something on the litigation front or acquisitions or perhaps on providing liquidity from some of your bank owners?

Maybe if you could elaborate on that, that would be helpful?

Tien-Tsin, thank you for asking that, but I want to allay any fears here.

There is no particular motive to having this timed at this point in time We have actually worked on this for the better part of this year and we just wanted to be sure that both S&P and Moody's came out with a credit rating, which they did recently; one reaffirmed our rating and one had a new rating.

And so now when we are closing off the quarter and filing our 10-Q, we are obviously able to file for this universal shelf.

But, be rest assured at this point in time, we have no intentions to be using the shelf and we're not trying to signal anything with respect to litigation or acquisition or anything else.

Great.

Good to know.

My follow-on, I'll ask Bob, just maybe if we can get some update on the regulatory situation as well as the merchant litigation case.

Any new developments or milestones we should be watching for?

Are we talking US regulatory?

Where would you like me to start in the world, Tien-Tsin?

Lots of stuff out there.

The US is my primary focus.

Well, as you read in the papers, as I do every day, we continue to have work being done in both the regulatory regime, as well as the legislative regime as a follow-up to how financial services will be regulated in this country prospectively and that's an ongoing -- it's even a debate within the administration and we'll see how that plays out.

My sense is it's going to be a challenge to get everything that everyone might want to get done in terms of any legislative changes done this year, whether it's the debate on do we need a new systemic regulator or should we vest the authority in the Fed and let them continue to do what they've been doing over the last year or two with some additional authorities.

From the standpoint of the Consumer Financial Protection Agency, that continues, also, I think to get a reasonable amount of debate.

I suspect there will be something that comes on that front, again, depending on the timing, probably not until very late this year or early in the new year.

My perspective on that is for our customers, insuring that there is a level playing field on a national basis, so that we don't line up with just a whole array of separate state level regulations that I think can undermine the efficiency and the effectiveness of the delivery of good financial services to consumers.

I think that's an important thing.

I'm trying to remember, Tien-Tsin, the other thing you had, other than the --

That's helpful.

Just the merchant litigation case, if there's any new developments there worth noting?

I don't think there's a lot that's going on there.

From the standpoint of some of the timing, there's been a briefing on the class certification and the court has scheduled oral argument on the class motion, I believe it's later in this month.

The parties have been reviewing various proposals, various motions that they've each made and those motions will also be argued during November.

From the standpoint of the defendant's expert reports, those are due in December.

The various motions that will be filed in the middle of next year.

I think those are scheduled, the dispositive motions, in the summer of next year with briefing on those motions only to be completed in the fall of 2010.

There is confidential mediation taking place.

The mediation is at early stages and there's no way to predict what the outcome is going to be and, of course, no ultimate trial date has been scheduled.

So, we're expecting this will play out over the next -- continue to play out over the next couple of years.

Okay.

Great.

Very good.

Thanks for the details Bob, Martina and Barbara.

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

Please proceed.

Hi.

Thank you.

I was wondering if you guys were able to detect a kind of volume trend across segments within (inaudible)?

I guess what I was trying to get is get a sense of is whether the transactor-oriented card volumes have held up better than others and where the weakness continues to persist?

Sanjay, can you repeat your question, please?

You were very hard to hear.

I'm sorry, I'm on a speakerphone.

I guess I was just wondering if there was a way to disaggregate segments for volume trends across US cards.

What I was trying to see is kind of which segments are performing better than others?

Do you guys have that kind of data?

Yes, what Bob said this morning as he quoted from our SpendingPulse and that probably gives you as good of a sense on where are the sectors that are actually doing a little bit better and what he had quoted is that we're really seeing growth, albeit from a fairly anemic last part of the year last year.

We've seen growth in eCommerce, we've seen growth in Luxury and Electronics and in Airlines.

I think, where we're still seeing not as much growth is predominantly in the Apparel Sector; that's having really a very tough year still.

Yes.

No, I guess I meant like credit card product types, so transactor-based cards versus maybe subprime cards or private label cards?

Sanjay, I don't think at this point in time we are really prepared to share any thoughts on that.

Okay.

And just one follow-up, just to clarify a question on the discussion with the revenue growth guidance, just to be clear on Bob's comments, you meant that even if you posted 12% revenue growth for the next couple of years, it's hard to get an average of 12% over the three years, given where revenue growth is going to be for this year, right?

Absolutely.

That's correct and if I said something differently, I misspoke.

That may have been a misunderstanding.

Just want to make sure.

Thanks.

Your next --

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

Sure.

Your final question comes from the line of Christopher Mammone with Deutsche Bank.

Please proceed.

Thanks.

Thanks for squeezing me in.

I guess just back to the severance charges and plans, maybe some more elaboration there.

How many positions did the third quarter plan relate to, how many positions does the fourth quarter plan relate to and maybe what to expect for savings under each of those plans?

And then I think you mentioned that you have a voluntary program that you just put in place.

If results under that program don't meet your expectations, could you turn that into an involuntary program?

Chris, let me just reflect on this.

First of all, for the third quarter, we recorded charges of $31 million that was for roughly 150 people; and our payback on this, we estimate that it will be a little longer than about two years, okay?

That is not the whole story yet.

The severance action, the involuntary severance action reached into the fourth quarter, so the third quarter actually had only a partial recording of the charges, so that will be related to additional charges for involuntary actions in the fourth quarter that we're not prepared to talk about yet.

And then in addition to that, just this week we notified US employees, as we said, of the voluntary program.

It's voluntary program and, typically with voluntary programs, it's tough to size how this voluntary program will be taken up.

So, I think it's a little early for us to be making any remarks on that.

And I guess should we assume that this -- these latest severance actions target all levels, all areas of organization, or is it targeted within certain departments and functionalities?

The voluntary program is really for the United States, so our US-based employees and we are not putting these programs out just because we want to blindly do some cost reductions.

What we are really looking at is two things.

One, of course, is efficiency and how our operations are working; but two, really, is reallocation of investments, be it what we are doing from a product business unit point of view within the United States or how we are supporting outside of the United States our various activities.

As you know, more than 50% of our revenues are outside of the United States and, by the way, they grow more than the revenues in the United States.

So, there is a big reallocation theme of resources included in this.

Okay.

Thanks Martina.

For my follow-up, I know we're all waiting the GAO report later this month.

I'm just wondering, has the GAO approached you directly for input in the research process?

Can you maybe put some -- provide some color there?

Yes, we're all looking forward to the GAO report as well.

I cannot tell you exactly what our involvement has been.

I do know that we've provided commentary and beyond that, in terms of the follow-up, I'm not sitting here knowing about that, Chris.

My sense, as I had indicated in the call a couple of quarters ago when this was first announced, is that the good news is this is going to sort of shed light on this area and I think will be good in terms of educating legislators and others on interchange.

All right.

Thanks, Bob.

I would now like to turn the call over to Bob Selander for any closing remarks.

Thank you.

In summary, we are very pleased with our strong third quarter performance and the progress we have demonstrated for all of our stakeholders.

We remain focused on those things within our control, as a way to mitigate those that we can't, particularly in light of the challenging economic environment.

We believe the worst of the global economic downturn is behind us and there are certainly some encouraging signs from the latest statistics.

With that in mind, we are ensuring that we are well positioned for long-term growth, especially as the economic tide continues to turn.

As I've said many times before, we remain committed to delivering long-term value for our shareholders.

We operate a global and flexible business that will continue to benefit from the ongoing shift toward electronic payments, which consumers, businesses and governments find more efficient, secure and easier to manage.

Thanks for your time today.

This concludes the presentation and you may all now disconnect.

Good day.