萬事達 (MA) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth quarter and full-year 2009 MasterCard earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would like to now turn the presentation over to Barbara Gasper, Group Executive of Investor Relations.

Please proceed.

Thank you, operator.

Good morning, everyone, and thank you for joining us today, either by phone or webcast, for a discussion about our fourth quarter and full-year 2009 financial results.

With me on the call this morning are Bob Selander, our Chief Executive Officer; Martina Hund-Mejean, our Chief Financial Officer; as well as Ajay Banga, our President and Chief Operating Officer.

Following comments by Bob and Martina highlighting some of the key points about the business environment and our fourth quarter and full-year results, we will open up the call for your questions.

This morning's earnings release and a 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 the 8-K we filed with the SEC earlier this morning.

A replay of this call will be posted on our website for one week until February 12.

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 filing.

With that, I would like to now turn the call over to Bob Selander.

Bob?

Thanks, Barbara, and good morning, everyone.

I would like to start out by saying I am very pleased that we have been able to deliver another strong quarter of earnings results.

This is indicative of the underlying momentum of our business, including several new and renewed deals that we have signed over the past several months.

I will have more to say about some of these deals a little later.

In the fourth quarter, we saw net revenue growth of 6% on an as-reported basis, and 2.2% on a constant currency basis.

While the weakening US dollar has created a tailwind for us this quarter, we also saw encouraging signs with regards to key aspects of our business.

Gross dollar volumes, or GDV, grew 5.3% on a local currency basis.

We experienced continued growth in process transactions and cross border volumes have returned to positive growth.

We also began to see the impact of some of our deals in our Rebate and Incentive line.

Total operating expenses increased for the quarter, primarily driven by higher marketing investments and severance charges that we spoke to on our last call.

And, I am pleased net income grew 21% for the quarter, excluding any special items.

We delivered strong financial results for the full year, with net revenue growth of 2.1% on an as-reported basis, or almost 4% on a constant currency basis.

Excluding one-time items, we delivered an operating margin improvement of 5.5 percentage points over 2008.

Adjusting for special items, as well a gain from the sale of our remaining interest in Redecard in 2008, net income grew approximately 27% for the year on a constant currency basis.

Throughout 2009, we took important steps to improve our expense management and resource alignment, to ensure that the Company is well-positioned for growth as the global economy continues to improve.

With the exception of the United States, gross dollar volume grew double-digits during the fourth quarter.

We also saw growth of 6.7% in processed transactions around the world.

Overall, these results continue to underscore the strength that our global business model affords us, even in the current environment.

Turning now to some recent trends in the economy, and the state of the business in the US and Europe.

As we saw last week, US GDP increased at an annual rate of 5.7% for the fourth quarter, primarily driven by exports and inventory building.

While the overall trend is reassuring, personal consumption expenditures grew at only 2% for the same period, and there is no change to our outlook regarding the US consumer.

We continue to be cautious about the health of the consumer as reflected in recent spending trends, as well as the slow pace of real improvement for peoples' financial security, specifically in housing and unemployment.

January's Conference Board Consumer Confidence Index improved 2.3 points, signaling that overall general consumer confidence is stable to slightly improving in the US.

The short-term outlook was somewhat mixed.

The percentage of consumers expecting an improvement in business conditions over the next six months decreased, while those anticipating conditions will worsen increased.

While home prices were up for several months through November, they are still much below 2007, and home sales for the year dropped sharply by 23%.

Although the rate of unemployment has leveled off and most economists do expect an improvement in the second half of 2010, it remains very high at 10%.

Our own research indicates a "wavering optimism," where consumers have grown weary of the slowdown and are preparing for it to last longer than they initially thought.

A new mindset seems to be emerging which suggests that people are looking for opportunities to spend, while trying to balance the temptation to consume with a need for restraint due to the realities of the environment.

In Europe, the EU Consumer Sentiment Indicator improved somewhat in December, although it remains slightly negative, reflecting a continuing overall pessimistic outlook by Euro-zone consumers on the financial position of their households, the general economic situation and towards unemployment and the rate of savings.

On a more positive note, European business sentiment improved in December, reflecting an expected improvement in general economic activity.

In summary, there are some encouraging signs in the recent economic data and consumer sentiment findings.

We remain cautiously optimistic in our outlook, although our assumptions remain unchanged from those I shared with you last quarter, and we don't expect any meaningful global economic improvement until the second half of 2010.

Turning to the MasterCard SpendingPulse data for the US retail sector.

Retail sales, excluding automobiles, increased 2.3% in the fourth quarter, with easier year-over-year comparison supported by higher gasoline prices and a generally healthier holiday shopping season.

When you exclude both autos and gas, retail sales grew about 1.6%.

The 2009 holiday shopping season returned to a more traditional pattern, with sales beginning on Black Friday and then holding momentum through December.

This was different from the 2008 season, where steep discounting ahead of the Thanksgiving holiday pulled a portion of the holiday sales into early November 2008.

The net result of this difference in the 2008 versus the 2009 periods shows a difficult comparison in November and an easier comparison in December of 2009.

E-Commerce sales benefited from disruptive weather events in the central region of the US earlier in the month and the storms on the East Coast the weekend before Christmas.

This weather prevented consumers from traveling to brick-and-mortar locations and helped drive online sales to a 17.7% growth rate in December.

E-Commerce spending was up over 16% for the fourth quarter.

Our analysis shows that retailers did not have to employ broad discounting this holiday season.

Inventories appeared to be more in line with demand, which in turn may be resulting in better financials for retailers and a generally healthier retail environment as we head into 2010.

When we look at our MasterCard processed volumes and transactions for the first four weeks of January, we see the following.

Our cross-border volumes continued to improve across all regions, and were better than the fourth quarter, which was low single-digits.

Once again, our Asia Pacific region continues to demonstrate significant growth on a sequential basis, and US cross-border volumes have improved from low single-digit declines and are now trending slightly positive.

While not a perfect proxy for gross dollar volume, US processed volume growth continues in the low single-digit range.

Processed volumes for the rest of the world also continued to improve relative to the fourth quarter.

Finally, processed transactions continued to grow in the mid-single-digit range, tempered by Maestro losses in the U K.

versus last year.

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

Thanks, Bob, and good morning everyone.

Let me begin on page three of the deck, where we focus on the 2009 actuals versus the 2008 non-GAAP column, which excludes a special item.

As Bob said, we are pleased to cap off 2009 with strong fourth quarter financial results.

Fourth quarter net revenue grew 6% to $1.3 billion over the comparable period last year.

On a constant currency basis, net revenues grew 2.2%.

The revenue increase was primarily driven by pricing changes of approximately five percentage points, a 3.9% increase in cross-border volumes, and a 6.7% increase in the number of processed transactions.

This was tempered by an increase in rebates and incentives.

While we have continued our focus on expense management, the 9.8% increase we saw in total operating expense for the quarter was driven by our plans for higher Advertising and Marketing spending and additional severance charges.

Foreign exchange also contributed 3.2 percentage points to the increase.

As a result, our operating income was $468 million for the quarter, and the quarterly operating margin was 36.1%.

MasterCard's effective tax rate was 35.8% in the fourth quarter of 2009.

The decrease was primarily due to a more favorable mix of earnings, a lower state tax rate and a lower provision for tax reserve in the fourth quarter of 2009.

We delivered net income of $294 million, or $2.24 per diluted share.

Please keep in mind that this includes $0.19 worth of severance-related charges.

Turning to page four, the global diversification of our business continues to underscore our ability to generate significant volume, transactions and revenue from regions outside the United States, and has thus cushioned our business from some of the declines that we experienced in our US business.

Worldwide, gross dollar volume, or GDV, was up 5.3% on a local currency basis in the fourth quarter, and grew 11% on a US dollar converted basis to $674 billion.

We have seen good improvement in US GDV, which is down 3.4%, actually a great improvement from the high single-digit declines in the third quarter.

Across the rest of the world, GDV continued to grow a healthy 11% on a local currency basis, or an increase of 21.6% on a US dollar basis.

Worldwide credit GDV growth was essentially flat on a local currency basis, improving from the mid-single-digit declines in the third quarter.

US credit GDV growth continues to improve on a sequential basis, but is still down in the low-teens range.

Credit GDV for the rest of the world continued to grow at 5.4% on a local currency basis, or 16.1% on a US dollar basis.

Worldwide debit GDV grew 19.7% on a local currency basis.

This compares to about 11.5% growth in the fourth quarter of last year, and is actually the highest quarterly rate of growth this year.

In the US, debit GDV volume grew at 10.5%, and debit growth for the rest of the world was 31.3%, primarily driven, once again, by growth in our Asia Pacific, Middle East, Africa region.

On a local currency basis, worldwide purchase volume grew 5.7% and US purchase volume declined 1.3% for the quarter, driven by a decline in credit volumes.

Let's turn to cross-border volumes.

Cross-border volume growth on a local currency basis was up 3.9%.

We saw double-digit growth in our Asia Pacific, Middle East, Africa region, as well as strong cross-border growth across our European businesses.

In the US, cross-border volume growth was just slightly negative, a vast improvement from over the last four quarters, when we experienced double-digit declines in each quarter.

We did see a decrease in our Latin American region due to a sharp drop-off in Venezuelan cross-border activity.

Our cross-border transaction growth in the fourth quarter also returned to double-digit growth for the first time since the fourth quarter of 2008.

When we look at processed transactions, they increased 6.7% compared with a year ago quarter, to $5.9 billion.

In Asia Pacific, Middle East, Africa and the Latin American region, processed transactions grew at double-digit rates.

With the exception of Europe, all other regions grew at mid-to-high single-digit rates.

Excluding the impact of the loss of two Maestro portfolios in the UK and one US debit portfolio, processed transaction growth would have been in the low double-digit range.

The secular shift from cash and electronic payment forms continues to provide significant growth opportunities.

The number of MasterCard-branded cards worldwide declined 1.3% to 966 million for the quarter, primarily as a result of US issuers purging accounts.

Excluding the US, the rest of the world card issuance grew 7.3%.

As of December 31, 2009, there were approximately 1.6 billion MasterCard and Maestro-branded cards issued globally.

Now, let's turn to page five.

As I mentioned earlier, our net revenue for the fourth quarter grew 6% on an as-reported basis, or 2.2% on a constant currency basis.

Domestic assessments increased 4.9% from the fourth quarter of 2008, primarily due to increased volumes, partially offset by the repeal of some European pricing.

As you know, we agreed to repeal some of our October 2008 pricing actions as part of an interim arrangement with the European Commission effective July 2009.

Cross-border volume fees increased by 21.4% versus the fourth quarter of 2008, primarily due to new pricing implemented during the quarter, most of which was rebated to customers.

Cross-border volume growth of 12.1% on a US dollar basis also contributed to the growth in this revenue line item.

Transaction processing fees increased 20.3% compared to the prior period.

Pricing changes introduced in the US in April 2009 accounted for approximately half of the increase.

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

Other revenues increased 8.8% versus the fourth quarter of 2008, primarily driven by a number of items such as compliance and penalty fees.

All of these factors that I just mentioned resulted in a 13.5% increase in gross revenue.

As Bob mentioned earlier, we began to see the impact of some deals that closed in the quarter on the rebates and incentive line.

Of the 35.1% increase, approximately two-thirds was due to new and renewed customer agreements, and the other third was due to rebates associated with the new cross-border pricing.

For the quarter, rebates and incentives represented 30.7% of gross revenues, versus the 25.7% in the fourth quarter a year ago.

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

During the fourth quarter, total operating expenses increased 9.8%, excluding special items.

This includes severance-related charges of $38 million for the quarter.

Without the impact of severance in both this quarter and the year-ago quarter, total operating expenses increased 7.4%.

Including special items, total operating expenses increased 6.6% on a constant currency basis.

The increase was mainly driven by the following.

General and Administrative expenses increased 1.6%, with currency fluctuations accounting for 2.3 percentage points of the increase.

G&A included the severance-related charges.

Excluding those charges for both periods, General and Administrative expenses decreased, actually, 2.3% versus the same period in 2008.

Advertising and Marketing spend increased by 25.1% versus a year ago period.

This increase represents incremental investment in priority countries, including funds originally anticipated to be deployed in the third quarter, and increased investments in media, customer marketing and promotions.

Currency fluctuations accounted for 5.4 percentage points off the increase.

Now, let's turn to page seven, and take a quick look at our strong 2009 full-year performance, which we are very proud of when you consider the environment that we were facing at this time last year.

We delivered net income of $1.5 billion, excluding special items, or $11.19 per diluted share.

Also, excluding the gains from the sale of our Redecard investments in 2008, net income grew approximately 27% for 2009.

And excluding severance charges in both years, net income grew approximately 32%.

We achieved full-year net revenue of $5.1 billion, representing growth of 2.1%, and on a constant currency basis, net revenue grew 3.9%.

Pricing adjustments contributed approximately six percentage points of the growth, and net revenue growth for 2009 was also driven by processed transaction growth of 3.9% -- 6.9%.

Sorry.

These positive factors were partially offset by the impact of lower cross-border volumes on a US dollar basis and higher rebates and incentives.

Total operating expenses for the year declined 6.9%, excluding special items, and declined 10.5% when you also exclude severance-related charges in both periods.

Finally, we saw our 2009 full-year operating margin improve 5.5 percentage points to 44.5% from 39% in 2008, excluding special items in both years.

Moving to the cash flow statement and balance sheet highlighted on page eight, we generated $284 million in cash from operations in the fourth quarter, and ended the year with cash, cash equivalent and current investments of $2.9 billion.

Before moving onto our 2010 outlook, I would just like to spend a minute on one other capital structure item.

Many of you have asked about what happens to our Class B stock upon the fourth anniversary of our IPO in May.

As you will recall, following the conversion programs that we have run over the last three years, shares of Class B common stock represents just over 15%, or approximately 20 million of our outstanding shares.

Once Class B ownership drops below 15% as a result of holders' voluntary election to convert, the Class M shares and associated voting rights will be automatically redeemed.

Earlier this week, our Board of Directors approved plans for further Class B conversion programs that will begin after May 31.

We included a summary of these programs in our Form 8-K filed earlier this morning.

Turning to 2010, we believe the road ahead is a positive one, though there will undoubtedly be some challenges as we navigate through the first half of the year.

We are carefully balancing our risks and opportunities when looking at the realities of what is happening across the world.

While most economic and consumer indicators are slowly improving, we expect challenges during the first half will be concentrated in the US and in Europe.

In the US, there is still uncertainty in our industry around the implications of the Credit Card Act.

How this plays out will, of course, determine our customers' actions with respect to their cards' businesses.

And in Europe, we are making nice progress across the SEPA and Eastern European regions, although as I mentioned earlier, this is being tempered by Maestro losses in the UK and the repeal of some 2008 pricing.

We are seeing encouraging signs in other parts of the world.

For instance, in Asia Pacific and some countries in Latin America, we continue to expect double-digit volume growth.

Additionally, cross-border activity levels are picking up around the world, which, as you know, is an attractive revenue driver for us.

As outlined on slide nine, the following represents our current view of 2010 on a constant currency basis.

We expect that net revenue growth will be better than the 3.9% growth we saw in 2009.

Based on what we expect, for the first few months of the year, it is unlikely that in 2010, we can get back to our old 12% to 15% average annual net revenue objective.

We expect some contribution from pricing, though at a lower level than what we saw last year.

Rebates and Incentives, as a percentage of growth revenue, will continue to grow in a trajectory a bit steeper than what we have experienced over the past two years, with some variation between the quarters, depending on our deal activity.

As Bob mentioned earlier, we are very pleased with the number of new and renewed deals that we have signed in 2009, and we look for this momentum to continue into 2010.

As a result, the Rebate and Incentive line will include the impact of both the 2009 deals, as well as new agreements that we sign in 2010.

Also included will be the impact of the new cross-border pricing that has a rebate component to it.

So, if you think about it, Rebates and Incentives are just another form of reinvestment in our business.

So it should not be surprising to see this line increase as we work to drive volume and new business opportunities.

Over the last year or so, we have made significant progress in realigning the expense base of our Company in response to the realities of the market.

We anticipate our total operating expenses will be flat to slightly down.

At this point in time, we believe that our expense realignment efforts are essentially behind us.

We will continue to invest for future growth; therefore you should be careful about factoring the entire benefit of the 2009 severance actions into your models.

Turning to Advertising and Marketing, we currently expect to be up mid-single-digits from our full-year 2009 spend.

If the market environment recovers faster than we currently expect, we will then need to reassess and potentially increase our marketing support.

In terms of quarterly cadence, similar to past years, spending in the first quarter will be the lowest of the year.

We are currently planning for the spend in the remaining three quarters to be relatively equal, although this is something we will be evaluating on a quarter-by-quarter basis as the year progresses.

Finally, we will remain committed to our longer-term objectives of annual margin expansion of three to five percentage points and average annual net income growth of 20% to 30%.

Remember, while all of our objectives are on a constant currency basis, our as-reported numbers will include any impact of foreign exchange.

We are also assuming an effective tax rate of 34.5% for 2010.

Overall, as we look at our performance expectations for 2010, we believe that we will be able to steer through the challenges in order to deliver another solid year.

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

Before moving into the question-and-answer session, I would like to share with you some of our recent business successes and developments from around the world.

Beginning with some recent deal wins starting with some debit and prepaid examples.

A few weeks ago we announced that SunTrust has chosen MasterCard to be its payments partner in debit.

SunTrust will convert all of its debit card programs to MasterCard.

After the conversion, which is expected to begin later this year, SunTrust will issue approximately five million MasterCard debit cards.

This is a significant win for our US debit business, and we are very pleased to start off the year with this new partnership.

Additionally, SunTrust will be expanding its current commercial offering in the future to include MasterCard commercial credit cards.

We look forward to working with SunTrust to enhance the value of their payments business.

In January we renewed and extended our agreement with Woodforest Bank, one of our large debit issuers based in Texas.

This includes both our consumer and small business debit portfolios.

We also renewed and extended our agreement with Comerica bank in December.

Both our commercial card and public sector prepaid business with Comerica is included within the scope of this agreement.

We are pleased to continue to work with both Comerica and Woodforest to grow our mutual businesses and to reinforce our already strong partnerships.

In a deal that represents both our prepaid expertise and our best-in-class processing capability, ABN AMRO in the Netherlands has selected our IPS processing platform for their prepaid business.

IPS was implemented in 2009 and has enabled ABN AMRO to achieve back-office efficiencies, which has led to increased productivity and competitiveness in winning new business.

In Germany WestLB started issuance of the first PAYBACK Maestro debit cards with the initial conversion of their private label portfolio.

The new issuance has enabled cardholders to immediately benefit from value-adding Maestro functions, including worldwide acceptance, secure online shopping through SecureCode and contactless payments with PayPass.

PAYBACK is a one of Europe's leading loyalty programs.

We are happy to be working with WestLB and PAYBACK.

Turning to some recent developments within our Innovative Platforms group, we are pleased with recent announcements about our MasterCard inControl offering.

As many of you know, this is our innovative product that offers financial institutions an array of advanced authorization, routing and alert controls that they can use to create products for their cardholders.

In the UK, Barclay Card will now offer the option of MasterCard inControl functionality.

This is the first consumer use of our service that enables cardholders to set spending controls and receive real time information about their accounts.

Features include automated SMS alerts to keep tabs on spending, alerts and blocks for online card spending or high-value transactions and weekly or monthly budgets with alerts when that budget is reached.

In mobile, there are two developments I would like to highlight.

In Canada, we announced a mobile trial with Bank of Montreal and Research in Motion to bring mobile payments to BlackBerry smartphones through our MasterCard PayPass Tap & Go contactless technology.

In Brazil, Itau Unibanco and Redecard, along with the mobile operator Vivo, will be the first to use the MasterCard Mobile Payments Gateway to deliver mobile payment solutions to the bank's customers in Brazil.

This will allow customers to use their phone as a mobile wallet and link existing credit, debit or prepaid MasterCard or Maestro accounts to their phone to fund mobile-initiated payments.

In the transit space, when you couple our leading contactless PayPass technology with the unparalleled speed of our network, it results in great value and efficiencies for both transit systems and cardholders, and we've had several new developments including -- in Turkey, where we expanded the number of cities that accept PayPass for transit payments; In the UK, contactless payments went live in Liverpool with Stagecoach's 200 strong bus network, and Transport for London is also planning to except PayPass; In France the second phase of the public transportation trial of PayPass went live with RATP and La Banque Postal; And in Brazil's Rio de Janeiro, we launched the first contactless payment application for public transportation in Latin America.

Overall, we are very pleased with the business momentum we have as we head into the new year.

We look forward to working with our customers and merchant partners on these and future 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.

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

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

Operator?

(Operator Instructions).

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

And your line is open.

Okay, thank you.

I was wondering if I could get a little bit more color on the rebates line.

My math shows about 24% rebates to gross revenues.

I was wondering what we should expect specifically for 2010.

Will it be higher than this, and could you just help with the seasonality in that line throughout the quarters?

Yes Sanjay, what I referenced when I talked a little bit about 2010, was what you saw in 2008 from a rebates point of view and what you saw from 2009 a rebates point of view as a percentage of growth.

So when you look at 2008, the percentage of growth in Rebates and Incentives was almost 23%, like 22.7%.

And in 2009, it now goes up to 24%.

What we are, at this point in time, expecting for 2010 is that the rates will be a little bit of a steeper increase than the differential between those two years.

Now please keep in mind we have a number of things going on.

We already told you, the pricing changes that we made in October of 2009 has a rebate component to it, and we pretty much gave you the numbers, which allow to you calculate how much in that particular quarter rebates related to pricing impacted the Rebates and Incentives line, and that will be pretty much going on for all of 2010.

Then, the other part will be due to the agreements we already signed and some new agreements we are expecting to sign in 2010.

Okay.

Then just a follow-up on the pricing changes you mentioned, Martina.

Could you provide a little more color as far as scope and timing?

Pricing changes?

What do you mean?

In this year.

This year.

Well, as you know, the only real pricing changes that we have announced is an April pricing change.

But other than that, I don't think we have anything else to say at this point.

Okay.

Great.

Thank you.

Your next question comes from the line of Julio Quinteros of Goldman Sachs.

Great, thanks.

Martina, just to sort of bracket your comments around the revenue growth.

So obviously your average target for revenue growth, it sounded like you're saying you're going to be below that, but better than the 3.9%, so do we walk away with this with a range of 3.9% to 11%?

Can you help us think a little better about the revenue growth there?

Yes, Julio, that is a tough one because we do not give annual revenue guidance, as you know, and so we were just trying to be helpful to bracket it for you between what we saw last year.

Certainly we are going to see a better trajectory this year based on our assumptions, economic assumptions.

You can try to do some calculations given the 12% to 15% that we had on the table some time ago, but we are not really giving annual revenue guidance.

Okay.

Just one quick follow-up.

Your target is a constant currency number in 2010.

You are expecting currency to be -- is it a benefit or drag in your --

Julio, it depends.

You are seeing what the euro is doing at this point in time.

I know, I know.

Apparently yesterday it broke $1.39 barrier.

For Q1 and Q2 of last year, we had a $1.30, $1.33 euro on average, I think, in the quarters.

Unless we have the euro cratering here, we have still some benefit ahead of us, but that could turn in the latter part of the year.

Thank you, guys.

Good luck.

Your next question comes from the line of Robert Napoli with Piper Jaffray.

Thank you.

I would like to get a little more color on the two Maestro losses in Europe, and also the processing loss in the US.

I think probably that is one that I referred to in my comments.

You will probably recall, and I think this was about two years ago, we lost some Maestro business in the UK.

Those conversions are working their way through our card numbers in terms of Maestro cards, as well as processed transactions in the UK.

That will continue, I believe that will continue throughout 2010 and we should be at what I would call the new steady state starting in 2011.

Yes, just to add to that, Bob, we have one customer in the UK which will pretty much roll off by the middle of the year, one other, which is going to go for the whole year and one US customer where we are not really sure when it will start, but we do think that our, at least processed transaction numbers will be tempered for the whole year for that customer, too.

Okay.

My follow-up question, to try to dig a little bit more into rebates, because your big competitor doesn't seem to be having is same issue in rebates.

I am a little bit confused about why you are having that issue.

When you talk about revenue growth, you're talking about net revenue growth after rebates, and you're still forecasting very big margin increases.

If you could dig a little -- why are you having the -- why are the rebates raising so much for you guys, versus Visa?

I am not sure you can really make the statements in terms of how our rebates are increasing a lot more than our competitors, but when you do have to realize is that when you look at the gross revenues versus the net revenues, a number of us have different list prices and different tiers that we're giving to our customers, so the numbers are not actually comparable in a very easy manner.

The second thing that you have to factor in, which is little different, I have to say, than what we had in the past, is what we did in the cross-border pricing increase which we had in October of 2009, which really has two components to it.

One component is where it goes through the Gross Revenue line and the other component, which goes through the Rebates and Incentive line.

And you typically don't have that, Bob, so that is a new factor.

But we designed that price increase in a particular way in order to encourage our customers for a certain behavior, and the financials came out to be that way.

So that is a big component of the increase that you will see in 2010.

Thank you.

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

Thanks.

Good morning.

I have a couple questions.

First one on, I guess the Rebates and Incentives.

I was curious about -- let me ask you this way.

Is this level a new normal for the Company?

Meaning, should we expect this kind of growth trajectory beyond 2010, given your ambition to grow the business, and similarly should we change our thinking for longer-term revenue yield given when we're seeing in rebates?

Tien-Tsin, it's Martina, again.

I guess I am not doing such a great job on Rebates and Incentives.

When you look back, look all the way back to the 2006 financials, you actually have ups and downs in the Rebates and Incentives as a percentage of growth quite a bit.

The real difference between 2009 and prior years and 2010, again, is what we did on the cross-border pricing.

In addition to that, as we are now growing and expecting to grow again, you would expect Rebates and Incentives to also grow in sync with gross revenue growth.

And, as we are going after a number of new agreements, as well as some renewed agreements, that has a factor in it, too.

Got it.

That makes sense.

I was thinking of it beyond 2010.

Sounds like you will see a similar affect on that revenue.

Yes, what I would urge you to really look overall at the net revenue line.

One thing that I just want to remind everybody on is that Rebates and Incentives are very lumpy.

Quarter-over-quarter-over quarter, it's probably the hardest line for us to forecast as well as for you to forecast because it completely depends on when we sign a particular customer agreement.

Okay.

So maybe I will ask then, in general, when you sign a new deal, what drives the accounting for the up-front rebates versus ongoing rebates?

I believe it is different from Visa.

I thought it might make sense to understand it a little bit better, here.

If you do -- every deal is a little bit different.

But if you do, for instance, sign-on bonuses, what we do is we amortize the sign-on bonus equally over the years of the agreement.

Got it.

I will move off Rebates and end with a quick one.

Processed transaction growth, which came in a touch below our estimate, but the revenues there were actually in-line.

So it looks like the revenue per transaction picked up a bit sequentially.

So my question is, is this level sustainable, and is it indicative of the lower revenue yield of some of the lost business?

Now Tien-Tsin, there are a number of other things that are going around.

When we actually look at the average ticket price per transaction, it has not picked up at this point in time, but we had a number of other things in the transaction line that drives that growth, and it is just the other normal items we have, [settlements], etc.

Okay.

Thank you.

Your next question comes from the line of Bruce Harting with Barclays Capital.

You said to be careful of how we treat severance in terms of thinking about the growth and your guidance on flat expenses.

Can you expand on that a little?

Should we basing our 20% EPS growth off the number as reported, or add back the severance cost, and also how we you think about the progression in terms of the flat expense, with regard to severance?

Thanks.

Good question, Bruce.

What the 20% to 30% net income growth, annual average net income growth, should be calculated on the as-reported numbers.

In terms of severance, for the whole year of 2009, we had almost $140 million of severance, $139 million of severance in the numbers.

Every year we have usually some small, very small, amount of severance.

We think the small amount of severance will continue, but at this point in time we believe we are, by and large, done with any employee-related actions.

So we're not going to foresee a large severance charge at this point in time.

Just in terms of to be helpful in terms of what could drop to the bottom line.

It is about a 2.2 year payback of the program.

So, of that $140 million or so that we spent, you can assume that in 2010, you can assume about $70 to $80 million will drop to the bottom line on the G&A side.

But as you heard in my comments, we are reinvesting some of that money, specifically in Advertising and Marketing, and as we said, that would go up in the mid-single-digit range.

Hopefully that gives you a little bit of help on your model.

Thanks.

A quick follow-up.

My memory is you said something about 200 basis points in 2010 prior guidance for pricing increase.

Is that still -- I didn't hear that mentioned today.

What I actually said here is part of our 2010 assumptions, is we still expect some benefit from pricing, albeit at a lower rate than what we have in 2009.

Thank you.

Your next question comes from the line of Rod Bourgeois with Bernstein.

I was wondering if you could give us some updated trends, maybe for the month of January.

We know at Visa, US credit volume growth turned positive in the month of December and in January, and I was wondering if you could comment on whether MasterCard is experiencing similar trends on the US credit front, and possibly even on the cross-border front, as things seem to be improving into the month of January.

I think I made a couple of observations on in that in my overview, Rod.

In terms of our cross-border volumes, they continued to improve across all regions during the month of January.

They were better than what we saw in the fourth quarter, which was low single-digit growth.

Once again, I think regionally, there are going to be some variations on that.

Asia Pacific is very strong.

They continue to grow on a sequential basis.

From the standpoint of the U S, cross-border volumes have improved from what were low single-digit declines, they're now trending slightly positive.

If you look at processed volumes, which are a pretty good indicator, but they're not a perfect indicator, of what the eventual gross dollar volume numbers will be that we report.

Processed volume growth has continued in the US in the low single-digit rates.

That is a blend of both credit and debit.

I don't have the credit breakout.

I don't know, Martina, do you have a sense of what credit-debit is?

Yes, the credit is still in the low single-digit decline at this point in time, and credit is still as healthy as it was before.

Guys, just as a follow-up, when you look at your major priorities for investment in 2010, should we be expecting your disproportion investment priorities in the areas of new customer wins?

Maybe following on the SunTrust deal, or possibly some priority investments in the area of new product categories?

I think you're going to find a little of all of the above.

If you think about it, we have a great global presence that we are operating with.

There are clearly some of our customers and consumers in various markets in the world who are more healthy and more aggressive in terms of investing in their payments business, and so we are trying to be there with them as that happens.

What we did this past year in realigning resources, and that manifested itself in terms of some of the severance and other charges we took, that realignment process was to position ourselves to take advantage of what our customers were going to start doing, or had begun doing in the course of last year.

That varies by geography and product.

We have a reasonable amount of energy going into Asia Pacific and Latin America.

From a product sense, the affluent, the prepaid and the debit, I've already shared some of the highlights and some of the things we're seeing happening in the prepaid and debit marketplace in the early months -- in the first month of 2010.

So we think there are plenty of opportunities out there.

At the end of the day, globally, with the size and importance of both the US and Western Europe, we need those economies and those consumers to start getting better.

While we see early positive signs, we think we still have a ways to go.

That is helpful.

Thanks, guys.

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

Thanks.

You've had a decent acceleration in year-over-year growth rates, and all of your metrics with the GDV, purchase volume, cross-border, etc.

Do you see anything out there that will slow down these trends as we go along throughout the year, and then, as a follow-up, can you comment on some of the trends you are seeing in credit, specifically in North America?

Thanks.

Boy, let your imagination run wild in terms of those things that could adversely impact us.

I think it's been, for most businesses, a very challenging 18 months.

While I think we have come through this one in a stronger position to capitalize on opportunities as they present themselves with our customers and in markets around the world, it also has made us acutely aware of how flexible and adaptable we have to be as the environmental conditions throw potential challenges our way.

I would like to, as I said, think that we are viewing the first half of the year as challenging.

That makes us a little conservative, I hope, or a little cautious, versus what the reality will be.

Then, as I expect the world, and at least the consensus of the economists I follow, expect the world in the US and Europe to get healthier in second half.

That will, for me, mean improving employment statistics, improving consumer confidence statistics, and those are necessary for us to start to see the consumer re-engage actively in the economy.

That is really what we are all looking forward to.

And then your comments -- any color on credit trend in North America?

The color commentary you just heard from Martina when we looked at January's performance and compare it with the fourth quarter, we continue to see year-over-year declines in credit and charge volume, in the low single-digit range.

Now, that is significantly improved.

If you go back to the second quarter, say, of last year, we were seeing 15% order of magnitude year-over-year declines in our credit volumes.

Now, through this whole time, debit has performed well.

We see that continuing in January as well.

Thanks.

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

Thanks.

Good morning.

Hi, Adam.

Let me get my handset here, so you don't get any feedback.

Real fast, on Rebates and Incentives, I think we have gone through that a lot, but just to clarify what is going on here.

Are you prepared to offset the increase in Rebates and Incentives with cost management to preserve the 3%-plus margin increase objective in the year?

Adam, obviously there are a lot of things that go into the P&L of a company, but net-net, what we said, in the end, we will be expecting, at least for 2010, the three to five percentage points improvement on operating margin.

Great.

Great.

Just wanted to clarify that.

Then you and Bob spoke to a bunch of different initiatives, whether it be in emerging markets around the globe, or prepaid and debit, and all that kind of stuff.

There were a lot of things thrown out here.

If you could you clarify for us in terms of what are your top priorities right now, in terms of spend.

Maybe rank the top three or four or five to give us an idea of where your head is at in terms of how you are allocating resources, that would be helpful?

As we went through our budget process, we really went down to a local market level, to an extent that we hadn't in several years.

That is because of the fairly significant divergence among various markets around the world, both from the standpoint of the health of the financial institution and the health of the consumer and economy, but also from the perspective of different challenges in those markets with regard to the evolution of the structure of their payment system.

Let me be specific.

You still have a lot of ATM transactions in a market like Japan, relative to the POS number of transactions that you would expect to see in a more developed market.

And as we went through our planning process, we became very market-focused in those initiatives that we felt would produce the best value for the Company.

You will have to go market-by-market to answer that question.

That is not something I am in a position to do today.

The three or four themes that emerged are the ones that I have already mentioned.

We have a lot of focus on the debit and prepaid space around the world.

The more affluent consumer has performed better, has gotten through this difficult time better.

And is an increasing focus of the financial institutions we do business with, and as I already mentioned, our focus in making investments in some of the emerging markets, Asia Pacific, Latin America and so forth, continues to have a high priority for the Company, as those are the places we see greater growth opportunity for the near- to mid-term future.

Any clarity in terms of the emerging markets and obviously the Asia Pac and Latin America have a lot of different sub-markets.

But are there specific countries or regions that you are focused on in those areas?

Well I gave you a couple of examples of some programs we've announced.

Brazil is a very exciting market for us; we have a great presence there.

We think we have great growth opportunities, that's one of the ones in Latin America.

We believe several in Asia are significant opportunities for us.

India would be an example.

Clearly Japan is a great growth opportunity.

Australia, we are doing very well there.

The economies tend to be better in that part of the world, so there is a greater mix of opportunities right now, probably in Asia than any other place in the world.

Okay.

Thank you.

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

Excellent.

Your last question comes from the line of James Kissane with Bank of America.

Great, thanks, Barbara.

Martina, can you clarify, when you say that pricing added 5%, is that a gross number or is that on a net basis.

And has the definition changed as a result of the --

Now just to remind everybody, what we do when we announce our pricing changes, is that the change we have in list prices, less any particular related waivers or rebates, so it's a net number from that point of view.

And what we have done for that 5% in this particular quarter, in particular on the cross-border pricing, is that we took the gross revenues and we deducted from it what we gave back in rebates, which I said is pretty much most of it.

Okay?

So, you can count on that this is still the same kind of sensitivity as -- the same kind of calculation as we have done before.

Okay.

So if you look at the pricing on a gross basis, where do you think it would be?

Jim, we don't give out those kinds of numbers.

I don't think it is even relevant at this point in time.

Well then I guess, just philosophically, how you think about Rebates and Incentives.

I think Bob called it investment.

Should we not think of it more as pricing actions?

Other than -- let me just tell you, as I said before, on the cross-border pricing, that was a very particularly designed pricing to encourage customers for certain behaviors.

If the customers do the certain behaviors we encourage them to do, they will get a rebate.

We have not designed pricing increases like this before.

This an extraordinary way we of how we've designed it, and that is what you are seeing, in addition to the normal developments on the Rebates and Incentives line.

We have not changed our thinking on the rest of the Rebate and Incentives.

It truly goes where the business goes; i.e., when you have increased gross revenues, you typically see an in-line increase of rebates and incentives, and then in addition to that, when we sign new or renewed agreements, you might see some variation in the line.

Got you.

Thank you very much.

This concludes the Q&A portion of the call.

I will turn the call back over to Bob Selander for closing remarks.

Thanks again for joining us again today.

We are very pleased with our strong fourth quarter and full-year results, particularly since we delivered those results in what has been the most challenging business and economic environment we have faced, certainly since I have been at MasterCard and perhaps in the Company's 44-year history.

Fortunately, when we headed into the economic crisis at the end of 2008, we did so as a strong Company.

Our business model, good capital structure, sound management practices allow us to remain flexible and adaptable as we weather the storm.

Now, some 18 months later, I believe we've emerged even stronger.

We've made investments that laid the groundwork for future growth.

We sharpened our focus on local market opportunities, and we've achieved efficiencies that have allowed us to benefit from a higher operating margin.

As the global economy rebounds, we remain optimistic that our efforts for the last year-and-a-half will pay dividends and improve their value in the future.

So thanks again for your time today.

Have a good one.

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

This concludes the presentation, and you may now disconnect.

Have a wonderful day.