萬事達 (MA) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to MasterCard's first quarter 2010 earnings conference call.

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

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

(Operator Instructions).

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

Barbara Gasper, Head of Investor Relations.

Ma'am, you may proceed.

Thank you, Jeremy.

Good morning and thank you all for joining us today, either by phone or by webcast, for a discussion about our first quarter 2010 financial results.

With me on the call this morning are Bob Selander, our Chief Executive Officer; Ajay Banga, President and Chief Operating Officer who, as you know, will succeed Bob as MasterCard's CEO on July 1st; as well as Martina Hund-Mejean, our Chief Financial Officer.

Following some comments by Bob, Ajay and Martina highlighting some key points about the business environment and our first quarter results, 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 the slide deck have also been attached to an 8-K that we filed with the SEC earlier this morning.

A replay of this call will be posted on our website for one week through May 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 other to Bob Selander.

Bob?

Thanks, Barbara, and good morning, everyone.

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

This is indicative of both the underlying momentum of our business as well as some encouraging signs of economic recovery in pockets around the world.

In the first quarter we saw net revenue growth of 13.1% on an as-reported basis, and 10.2% on a constant currency basis.

Gross dollar volume, or GDV, grew 8.3% on a local currency basis.

We continue to see growth in process transactions, and cross border volumes have returned to double digit growth.

We maintained solid expense control which allowed us to expand our operating margin nearly 5 percentage points from last year's first quarter.

All of this helped fuel net income growth of almost 24% for the quarter or approximately 19% on a constant currency basis.

We believe that some of the improvements we saw in the quarter can be attributed to recent positive macroeconomic data points.

For example, the stabilization of unemployment rates in the United States, as well as increased consumer confidence, although still at low levels, were likely contributors to increased spending in discretionary categories and to the improvement we saw in US credit volume.

While credit growth in the US was still negative for the quarter, we have moved beyond the double-digit declines of 2009.

During the month of March we saw positive growth in processed US credit volume for the first time in approximately 18 months.

This trend continued through the first four weeks of April.

Given the challenges we have all faced other the last 18 months or so, it is encouraging to see signs that the global recovery is continuing across a number of countries, specifically in Russia, India, China and Brazil.

As many of you are aware, many economists now observe that the global economy has reached a self-sustaining momentum.

This is particularly evident across emerging market environments.

I recently returned from a series of business meetings across Asia and I was struck by the overwhelming sentiment of optimism that many of our customers have about their future business opportunities.

This is in contrast to some of my recent interactions with bankers in the US and Western Europe who have been more cautious.

Nonetheless, we continue to see improvements across a number of economic indicators, which bode well for our business.

Excluding the US region, we saw strong GDV growth of approximately 15% on a local currency basis for the quarter.

I would now like to introduce Ajay Banga, MasterCard's next Chief Executive Officer, and the newest member of the Company's Board of Directors.

Over the course of the succession planning process, our Board focused on identifying someone who possesses both leadership skills and proven results.

Ajay has a career that is rich in both.

His industry knowledge, his deep background in financial services, his experience working in numerous geographies, have all prepared him well for this role and make him the perfect CEO to lead MasterCard into the future.

As we've worked together over the past eight months, I have been very impressed by his thoughtful and energetic approach to business.

For me, it has been challenging and exciting to have led the Company for the past 13 years.

I am proud of how our Company has demonstrated strong, consistent performance.

Importantly, we built an incredible set of asset that offer a true competitive advantage, including a world renowned brand and our iconic priceless advertising platform; a global technology network that is second to none, offering incredible flexibility and customization opportunities for customers; and employees who are deeply experienced, knowledgeable and passionate about the payments business.

I look forward to continuing in my current role and then transitioning to the Executive Vice Chairman role in July.

Now I would like to turn it over to Ajay to provide some comments on our business.

Thank you, Bob.

Let me start off by saying that Bob has just done a tremendous job of positioning MasterCard for continued success.

The strong first quarter results that we announced this morning are just one more indication of that positioning.

Martina is going to get into the details of the results shortly, so I thought I would spend a few minutes sharing some of our thoughts and business highlights with you.

The payments industry is still very much a growth industry-- not just in the emerging markets where there is an obvious potential for growth all around, but also in the developed world, where there is continued opportunity for growth by market segment and in new innovative platforms like contact list, mobile, e-commerce and remittances.

We are very fortunate to be part of an industry where the secular shift from paper to electronic forms of payments will drive growth through different economic cycles.

Our industry and our business have been built on the widespread adoption of credit and debit products globally and we remain very optimistic about the growth potential of these businesses.

We are going to invest our resource in initiatives designed to accelerate our business in key markets around the world, and to drive growth beyond that secular momentum.

To do this, you will find us sharpening our focus on supporting the needs of constituents across the payments industry, and diversifying our revenue streams by geography, by customer and by product, including capturing the large opportunity we believe prepaid products represent.

Innovation will be key to our future success, so you should expect to see us putting an even higher level of effort in these areas while we continue to innovate in more of the traditional spaces of debt, credit and prepaid.

I am sure you will hear a lot more from us about this when we host our annual investment community meeting in September.

Let's do a quick review of some of our recent announcements in this area and that will give you a sense of where we are focusing our efforts.

Last month we launched MasterCard Labs, our new global research and development organization, focused on payment innovations aimed at differentiating MasterCard among customers and consumers.

MasterCard has contributed significant innovations in the past, as well, including PayPass, MoneySend and inControl.

The creation of this organization along with some of the recent announcements underscores our commitment to build solutions of our own but also with partners to most efficiently and effectively meet the emerging needs of the payment space.

Another example is our launch of MasterCard Marketplace in the United States, powered by a new alliance with Next Jump.

MasterCard Marketplace allows cardholders access to merchant-funded offers from thousands of merchants.

What's new and different about it is that shoppers can set what types of offers they want to see, and the Marketplace can tailor the discounts to shoppers' stated preferences, as well as their interactions, and the behavior of shoppers just like them.

Importantly, merchants are then able to customize offers to groups of people and monitor the results real time, which in the past have proven to produce industry-leading conversion rates.

So this is not just an enhanced check out experience, but an enhanced shopping experience for consumers and a targeted promotions engine for merchants.

Think of it more as a match.com for shopping.

And with some of the largest online retailers among the over 28,000 participating merchants, we are very excited about what this platform can do for us and our customers.

I hope you have had a chance to sign up and check out the daily overwhelming offers and VIP invitations to exclusive shopping events.

Our inControl solution continues to gain momentum with recent US commercial wins including JPMorgan, Fifth Third and the First National Bank of Omaha.

We are very optimistic we will be able to bring you further news on this in the near future.

We are also making progress in the US debit front, but not, as we've heard from some cynics, with deals at any price just to gain market share.

In addition to the SunTrust deal which we announced back in January, we have signed debit deals with a number of other banks in this past quarter, including Ohio-based First Mrit Bank who will be converting their debit and credit portfolios to MasterCard.

Additionally, Ally Bank, the online banking unit of GMAC Financial Services will begin issuing Platinum Debit MasterCard cards later this year to their US online, checking and money market account holders.

On the credit front, HSBC renewed their global mass affluent Premier credit relationship with MasterCard.

And as part of a long term contract renewal, MasterCard is now the exclusive brand of choice for HSBC's premier card program which is aimed and targeted at affluent customers around the world.

Prepaid continues to be a high growth area as we further build our market leadership.

On Earth Day, the US Treasury announced a green initiative to reduce paper checks.

Treasury will leverage the existing Direct Express program with Comerica Bank that already has more than one million MasterCard branded prepaid cards.

Direct Express will be expanded beyond Social Security benefits to now include all Veterans Affairs, Railroad Retirement and Office of Personnel Management benefit recipients that currently receive paper checks.

This conversion process will begin this year, with requirements that all new recipients receive payments electronically starting in March 2011 and all existing recipients receive payments electronically starting in March 2013.

Being part of this tremendous growth opportunity just validates the efficiency that payment cards deliver over the traditional forms of payment.

These are just some to our efforts that have made it to the point of public announcement.

Stay tuned.

We expect to have more to say on a number of fronts as we move through the year and continue to build and bring even more new products and services to the market.

I will now turn it over to Martina to discuss the first quarter financial results in details.

Martina?

Thanks, Ajay, and good morning, everyone.

Let me begin on page two of the deck which shows our reported results.

As Bob said, we are very pleased to start off 2010 with strong first quarter financial results.

Revenue grew 13.1% to $1.3 billion over the comparable period last year.

On a constant currency basis, net revenue grew 10.2%.

This revenue increase was primarily driven by a 10.9% increase in cross border volume, an 8.3% increase in gross dollar volume on a local currency basis, and a 4.6% increase in the number of processed transactions.

Pricing contributed approximately 5 percentage points to net revenue growth.

This growth was somewhat tempered by an increase in rebates and incentives due to the impact of our cross border pricing structure, customer agreement activity and volume increases.

Operating expenses increased 2.2%, primarily due to foreign exchange fluctuations.

Excluding the impact of foreign exchange, operating expenses were up slightly as we continued to manage our expenses prudently.

Our operating income was $700 million for the quarter and resulted in a quarterly operating margin of 53.5%, a 4.9 percentage point improvement over the year ago quarter.

We delivered net income of $455 million, or $3.46 per diluted share, up roughly 24% over the first quarter of 2009.

Turning to page three, we are seeing stronger performance across a number of business drivers, including the strongest volume growth since the third quarter of 2008.

And cross border volumes were back to pretty healthy double digit growth levels as well.

Worldwide gross dollar volume, or GDV, was up 8.3% on a local currency basis in the first quarter, and grew 14.8% on a US dollar converted basis, to $631 billion.

We've continued to see stabilizing trends in US GDV with good sequential improvement in the first quarter, which was down 1.1% as compared to a decline of 3.4% in the fourth quarter last year.

Across the rest of the world, GDV continued to grow a healthy 14.7% on a local currency basis.

Worldwide credit GDV grew 3.5% on a local currency basis, versus the slight decline in the fourth quarter.

This is the first quarter since the fourth quarter of 2008 where worldwide credit GDV was positive.

US credit GDV growth continues to improve on a sequential basis, but was still down in the high single digit range.

Credit GDV for the rest of the world grew 9.1% on a local currency basis.

Let's turn to debit.

Worldwide debit GDV grew 18.1% on a local currency basis.

This compares to about 12% growth in the first quarter of last year.

In the US, debit GDV volume grew 7%.

Debit growth for the rest of the world was approximately 33%, primarily driven once again by growth in our Asia Pacific, Middle East, Africa region.

On a local currency basis, worldwide purchase volume grew 8.7%.

US purchase volume was also slightly positive for the quarter.

Cross border volume growth on a local currency basis was up 10.9%.

We saw double-digit growth in the Asia Pacific, Middle East, Africa and European regions, while our cross border business in Latin America was good, largely due to the strength of our Brazilian cross border volume.

We continue to see good growth in our US cross border volumes with strong cross border acquiring from travel into the United States.

When we look at process transactions, they increased 4.6%, compared with the year-ago quarter to $5.4 billion.

In Asia Pacific, Middle East, Africa and the Latin American regions, processed transactions continued to grow at double-digit rates.

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

The number of MasterCard-branded cards worldwide was essentially flat on a year-over-year basis at 957 million cards for the quarter.

Excluding the US, the rest of the world card issuance grew approximately 7%, demonstrating the continuing growth opportunities for MasterCard from the secular shift of cash to electronic payment forms.

As of March 31, 2010, there were approximately 1.6 billion MasterCard and Maestro branded cards issued globally.

Now, let's turn to page four to discuss the components of revenue.

Domestic Assessments increased 6.1% from the first quarter of 2009, due to increased volumes and the impact of the April 2009 pricing change, partially offset by the repeal of some European pricing beginning in July of 2009.

Foreign exchange contributed roughly 3 percentage points of growth.

Cross Border Volume Fees increased 39% versus Q1 of 2009.

A little more than half of the $125 million increase was due to pricing actions during 2009.

The remainder was primarily due to cross border volume growth, which was up 10.9% on a local currency basis.

Foreign exchange contributed approximately 3 percentage points of growth.

Transaction Processing Fees increased 16.7%, compared to the year-ago period.

We continue to benefit from April 2009 US pricing changes which accounted for approximately 11 percentage points of the increase.

The impact of foreign exchange contributed roughly 3 percentage points of growth.

Process transactions grew 4.6% in the quarter and continue to be affected by the loss of certain debit portfolios in the UK and the US.

Excluding the loss of these portfolios, processed transactions grew approximately 10%.

Other Revenues increased 12.6%, versus the first quarter of 2009, primarily driven by compliance and penalty fees.

All of this resulted in an increase of $255 million, or 17.1% in gross revenue.

For the quarter, rebates and incentives grew $103 million.

Approximately $55 million of this increase was due to rebates associated with our new cross border pricing structure.

The remainder was attributed to new and renewed agreements and volume growth.

Overall, rebates and incentives represented 25.2% of gross revenues, versus the 22.6% in the first quarter a year ago.

Now, let's turn to page five for some detail on expenses.

During the first quarter, total operating expenses increased 2.2%, and were up only 0.5% excluding the impact of currency fluctuation.

Within total operating expenses, general and administrative expenses increased 2.1%, with currency fluctuations accounting for 1.4 percentage points of the increase.

The remaining change in G&A was primarily driven by a 2.9% increase in personnel cost, mainly due to increased payroll taxes related to the vesting of equity compensation awards.

Travel and Entertainment costs were also up somewhat versus extremely low levels in last year's first quarter.

These increases were partially offset by lower severance costs and reduced payroll.

Advertising and Marketing spend was down 0.7% versus the year ago period.

Excluding the impact of foreign exchange, A&M declined about 4% versus the first quarter of 2009, primarily due to lower spend in the US.

Depreciation and Amortization was up as a result of continued investment in data center equipment and capitalized software.

Moving to the cash flow statement and balance sheet highlights on page six, we generated $95 million in cash from operations in the first quarter, primarily driven by operating income partially offset by payments of year end payables, litigation settlement payments and the payroll tax liability associated with the vesting of equity compensation awards.

We ended the quarter with cash, cash equivalents and other liquid investments of $3.3 billion.

Before getting into some thoughts for full year 2010, let me give you an update of what we have seen recently.

When looking at our MasterCard processed volumes through April 28, we see the following.

Our cross border volumes continue to improve across all regions, with the rate of growth a bit higher than the first quarter.

We see continued strong growth in our Asia Pacific, Middle East, Africa region and Europe region, and some good increases in the US and acquired cross border volumes as more consumers and business people travel to the US.

As Bob said earlier, growth in US credit processed volume was more positive in April than it was in March.

However, when we look at total US processed volume growth in April, it is very similar to the first quarter growth rate due to the tempering effect of the two US debit portfolio losses.

Total processed volume growth for the rest of the world in April was also similar to what we saw in the first quarter.

Now, let's turn to our thoughts for 2010.

Please look to slide seven.

In order for our full year 2010 net revenue growth to be as strong as the double-digit growth we saw in the first quarter, we would have to see further improvements in some of the macroeconomic indicators, stronger volume growth and cross border activity beyond what we are currently forecasting.

Remember, as the year progresses, we will see some tempering in top line growth due to the following factors.

First, we begin to experience tougher comps, given that signs of economic recovery began to show in the second half of 2009.

Second, the roll-off of a few portfolios will continue to dampen our process transaction growth.

Right now we expect this to bottom out in the fourth quarter of the year, but we expect process transaction growth to remain in the single digit range.

We will continue to give you an indication of the adjusted transaction growth rate each quarter in order to demonstrate how the underlying business is performing.

And we continue to expect contra as a percentage of growth revenue to average 26% to 27% for the full year, given our current expectations of volume growth and cross border volume growth in particular.

Therefore, as a percentage of growth revenue, contra will be a bit higher in the remaining quarters for the year than the 25% level we saw in Q1.

Let me remind you that we always look at rebates and incentives in the context of longer term net revenue growth.

Overall, we continue to anticipate our total operating expenses for 2010 will be flat to slightly down over 2009 levels, including severance charges.

Some of the savings obtained from our 2009 severance actions will be reinvested back into the business areas, such as e-Commerce and prepaid, as well as some additional marketing efforts.

Turning to the components of operating expense.

General and Administrative expense is expected to be down from 2009 levels, including severance.

We still expect advertising and marketing to be up mid single digits from our full year 2009 spend.

While our current full year view for Advertising and Marketing expense has not changed, our expectations for the quarterly cadence of bank have changed from our initial thoughts.

Rather than the absolute level of spend being relatively equal in the remaining three quarters, we now expect the quarterly spend to increase sequentially as we move through the year.

And Depreciation and Amortization will trend upward over the balance of the year due to the impact of increased investment in our business.

We continue to assume an effective tax rate of 34.5% for 2010.

And finally, we remain focused on our objectives for the 2009 to 2011 period of annual margin expansion of 3 to 5 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 exclude any impact of foreign exchange.

Assuming yesterday's exchange rates hold for the balance of the year, we would expect the current tailwind to revenue we saw in the quarter to be roughly neutral in the second quarter, turning into a headwind for the back half of the year.

As we look at underlying economic indicators, customer relationships and business momentum, we believe we will be able to deliver another solid year.

Let me now turn the call back to Barbara to begin the Q&A session.

Babara?

Thank you, Martina.

We're now ready to begin the question and answer period, and in order to get to as many people as possible in our allotted time frame, we ask that you limit yourselves to a single question with one very brief follow-up, and then queue back in for additional questions.

Operator?

(Operator Instructions).

And ladies and gentlemen, the first question comes from the line of Tien-Tsin Huang with JPMorgan.

You may proceed.

Thank you.

I wanted to ask about Europe.

The purchase volume there was a little better than we expected.

Can you comment on recent trends in Europe both on cross border and also on the purchased GDV side, anything we should consider as we look to the next three quarters?

It's Martina.

There is nothing specific really to call out.

We are seeing better momentum in Europe, but we can't point to any specific factor at this point.

Okay, so in terms of recent trends there, just to clarify, anything there worth noting from a macro perspective?

If you are talking about over the recent issues that Europe has regarding Greece, and some of the other countries, we really have not seen any impact on our numbers related to those kinds of issues.

Okay, good to know.

My follow-up is probably another brief one.

Any thoughts on Visa's acquisition of a CyberSource and does this increase your desire at all to do a deal in e-Commerce?

It's Ajay.

We are already present in the gateway business for quite some time.

We've have MIGS, MasterCard Internet Gateway System, in Asia for quite a while that is a relatively large gateway system.

It is one of the biggest in Asia Pacific.

We have plans to expand our gateway footprint.

Gateways have been a part of our mobile strategy as well as we've talked about launching in tandem with Itau in Brazil.

So gateways, as such, are interesting.

But I think the whole e-Commerce strategy goes past gateways to looking at how you offer card holders a more rewarding and more finely-tuned, unique and personalized offers of online shopping which is what the MasterCard Marketplace is about.

It also is about giving merchants access to new customers and getting incremental sales from existing customers and reducing the amount of abandoned shopping carts which is, again, what the better conversion ratio of things like the Marketplace is about.

And of course, it is about enabling issuers to have a much stronger link with their card holders.

So, between Marketplace, gateways, R&D, and our e-Commerce business, MasterCard Labs, the mobile strategies, you will find us focusing on this space in many different ways over the next couple of years.

Got it.

Congratulations, Ajay, by the way.

And the next question will be from the line of Julio Quinteros, of Goldman Sachs.

You may proceed.

On the puts and takes and the rebates, it sounds like there's two parts.

I just want to make sure we have this straight.

One is the cross border component and the other is the component for some of the new contracts plus volumes.

The way they ramp up as we go forward, can you walk us through how to think about this on a quarterly basis?

Obviously it will be higher for the rest of the year.

I want to make sure we understand when you think about the changes, especially on the contracts, when to expect to see those things ramp up.

Julio, as you know, it's always very difficult to predict what happens on a quarter-by-quarter basis, because it depends on when we really sign a contract and, at that point in time, we have to consider what the accounting implications are.

But for the whole year, we said that contra at this point in time is forecast to be, as a percent of gross revenue, between 26% and 27%.

That is really based on the kind of volumes we are forecasting, as well.

In particular, cross border volumes, because, obviously as you know, as part of the rebates and incentives, we have the cross border pricing structure in there.

So, this particular quarter, rebates and incentives grew by $103 million.

Roughly half of that, or $55 million, was related to the cross border pricing structure.

The other half, you can pretty much divvy up between new and renewed agreements, as well as volume growth.

We could expect for the next few quarters we are seeing something very similar.

The one thing I want to highlight a little bit, we do expect SunTrust starting to convert in the fourth quarter, and that would be an impact on our financials right then and there, because we have a conversion going on.

As you know, as part of the conversion, you typically have to take some of the cost of that into the P&L in that period.

And the revenue growth expectations as you go forward, you have to think about the portfolio losses as an offset, but it looks like you are coming in much stronger on the cross border and US credit volumes also appears to be a little bit better.

Is that a good way of characterizing the puts and takes here?

Yes, puts and takes is obviously, both on the overall volume as well as on transaction growth.

We do have some head winds, so we would like you to take those into account because we will not be finished with the head winds until the fourth quarter has rolled around, including the fourth quarter.

We are seeing better numbers in cross border volume than we otherwise saw before, but we will have to see how that's going to go forward.

Great.

Thanks, guys.

Good luck.

Our next question comes from the line of Adam Frisch, of Morgan Stanley.

You may proceed.

Good morning.

Ajay, first of all, congratulations.

You are inheriting a phenomenal franchise there.

I wanted to get color from you on three fronts.

One, what will be the most noticeable difference in MasterCard in 12 to 24 month from now?

Two, some additional thoughts on innovation.

It is great to hear that's a big focus of yours, that's good music to our ears.

What are your thoughts on building versus buying, and whether MasterCard will get more active in the M&A space?

And finally, your split in resource allocation between the US and non US regions.

Don't worry, Barbara, I don't have any follow-ups after that.

That is actually four questions.

Thanks for the good wishes.

What difference will you see?

Well, you will see a guy who wears a different hat from Bob running the Company.

Literally.

So, let's take it at face value, as I would say.

Look, I believe this company has been built off an outstanding foundation.

I've said this publicly, I've said it in employee meetings.

You are not the first person to ask me this question, as you can imagine.

I don't have any plans to dramatically change things because the company is working the right way.

People change things when they feel things are broken.

This is not in that kind of forum.

It's a company with an outstanding track record of revenue growth and profit growth.

There are things to do, which we are working on, we have been working on not just since I joined but from earlier.

One of those is to focus on innovation as a way of differentiating our Company and our products, both for our clients but also for their customers, the ultimate card holders, and the ultimate payment originators and receivers.

That's where you'll find us very focused.

We have a series of talks around innovation.

You will hear more when we meet in September.

But a little about them can be talked about today...

be it the launch of MasterCard Labs, which is really an attempt to focus on innovation efforts by bringing technology and business people together in one organization with an effort to fast track ideas and bring them out the door.

The second part has to do with ideas in e-Commerce and mobile banking and mobile e-Commerce.

I think it starts, as I said, not just with gateways.

Gateways are oriented more towards how merchant experiences the event.

There are wallets that are oriented more to how the customer experiences the event.

But then there are all these other things you can do with things like the MasterCard Marketplace to make that customer have a more enriching experience and the merchant have a more successful outcome.

You will see us focusing on e-Commerce, you'll see us focusing on prepaid, and you'll see us focusing on reward schemes.

There are some articles that have come out recently about things we are trying to do with reward schemes.

These are all WIP, work in process.

And then the build versus buy.

There's no straight answer to these things.

It depends a little bit on what you see in the marketplace when it fits with your strategic priorities.

First, it must bring something to you that you do not possess, either in the form of distribution of products or people.

Secondly, it must fit with your hurdles in terms of what you expect to make back from the money we invest on behalf of our shareholders.

If it doesn't fit those two primary criteria, we will build it.

It depends on issue by issue, item by item, circumstance by circumstance.

This Company invested money a while ago in buying Orbiscom to get inControl, which is IP protected.

We are beginning to see a lot of interest.

A lot of my travels the last three months have been to different markets.

I've been to Russia, Turkey, India, the UK, Brazil, Columbia, Mexico and Canada, in addition to the US.

And I'm telling you, clients everywhere, senior managers and those clients really understand what inControl is about.

Bob has been all over Asia in the last month.

He's been to Australia, Hong Kong, Singapore, China and back and he has had the same experience we've been having on this topic.

Would that have been a good buy?

Yes, because we couldn't have built it ourselves, compared to having an intellectual property protected item we could have picked up when we bought Orbiscom.

So there's no real answer, it is an answer of what is right for that strategic priority.

Resources between US and international.

I don't know that yet.

I don't know the answer to that.

I think you will find that the way I look at this business, and the way Bob has been looking at it, is that while we believe that the international markets, not just the developing markets -- by the way, we believe even developed Europe has opportunities for a company like ours that is relatively well positioned in that marketplace, and with more opportunities coming through it -- I believe that the world outside the United States is an attractive place for our growth.

We already get 55% of our revenue from outside the United States roughly, and that is already higher than a number of other companies in our space.

That doesn't mean we believe we should invest less in the United States.

I think the United States is still the bedrock of our business.

We need to grow there and demonstrate revenue growth in that marketplace, but I think you will find us thoughtfully investing in both spaces as the opportunities come along.

Those are great comments.

Look forward to seeing you tomorrow at the Payments Summit.

Appreciate it.

Our next question comes from the line of Andrew Jeffrey, of SunTrust.

You may proceed.

Good morning.

Thanks for taking the question.

Good to hear that US credit trends are headed in the right direction.

Can you drill down in that a little bit, maybe Martina, to talk about categories of US credit spending.

I think Visa said a couple weeks ago or last week that it saw still greater strength in non-discretionary items within their credit book of business.

Can you comment on that a little bit and give us a little color on what we are seeing in the United States?

Hi, Andrew.

We are seeing some trends that people are willing to do a bit more discretionary purchases versus the non-discretionary purchases.

As you know, most of our cards are everyday cards, so you are using them everyday.

So we definitely see the non discretionary purchases continuing and topping up a little bit with the discretionary side.

The only real data that we have published in the past is from the MasterCard SpendingPulse.

When you look at some of the data out there, you can see that some of the discretionary items, such as what is happening from a furniture industry point of view, from an electronics industry point of view, when you look at the jewelry kind of areas, that things are picking up, albeit still back to fairly low levels compared to 2006 and 2007.

So hopefully we will see a lot more to come, but we are starting to see it coming back into the market.

That is helpful.

Thanks.

As a follow-up, prepaid is an area that is gaining a lot of attention these days.

Is there anything specific you can talk about in prepaid that you think starts to move the needle for MasterCard over the next several quarters?

I can start.

Ajay may want to jump in.

Obviously one of our flagship programs really is the Comerica program.

As you know, we had won some months ago, 18 months or 20 months ago -- we had won the Social Security issuance all on MasterCard.

The announcement was made very recently that we are actually winning more of the government programs.

Those are significant programs.

Given that the US Treasury really wants to move off the paper checks into the electronic payment forms, this will be a good, significant amount of momentum that we will eventually see.

By the way, we are not only seeing that in the United States.

We are seeing that also in other countries, and we had featured with you at some point in time, for instance, Italy.

That is in the public sector arena.

A couple of other things that might be of interest to you are the H&R prepaid card which we've got going with us.

We've also got the Wal-Mart payroll cards recently which allows us to issue payroll cards to Wal-mart employees who otherwise would have taken a check and had to go to a check casher to get out that cash.

There are a series of these events.

The US Government piece Martina just talked about.

She mentioned Italy and the Italian Post Office.

We also have a deal with Univision for a prepaid card, and that appeals directly, as you can imagine, to the kind of community that looks at Univision as a source of news and entertainment port.

So we are trying to focus our prepaid efforts, you will find, in many different directions.

One being the government space, two being the consumer general purpose reloadable space.

Those two are very interesting because of the profitability and reuse dynamics of those.

If you think about a gift card, a gift card is a one-time acquisition with an average of $70 to $80 loaded on it.

Whereas a general purpose reloadable or a Social Security card tends to create $800 a month on average and people last there for a year or two years.

You can imagine the profitability dynamics of that are more interesting than a gift card.

If doesn't mean a gift card isn't interesting, it just means this is somewhat more attractive.

The whole prepaid space, be it corporate payroll and benefits, medical reimbursement cards, there is a series of spaces, with Accor services, a JV in Europe that we are working on.

So, I don't know how to exactly tell you there will be something specific that will come in the next 18 months.

You will just see us working very hard at each and every one of these opportunities to get into the opportunity as it grows, but also to tap into more pieces of the value chain as we go along.

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

Please proceed.

Thank you.

I was wondering if you could elaborate on the timing of the customer losses this year and the impact on process volumes.

I was just wondering if there were phases.

As a follow-up, I wanted a clarification on the rebates and incentives line.

If SunTrust, the conversion happens in the fourth quarter as planned, does that take up that run rate of rebates and incentives you addressed, Martina?

Thank you.

First of all, on the timing of the customer losses, we are pretty much I think done in terms of having seen the impact in the first quarter completed on one significant customer in the US, and we still have one other customer standing out there which is Wamu for the rest of the year.

That is going to come off in fits and spurts over the rest of the year.

In the UK, we are through one of the portfolios, probably like 50%, 60%, and the other portfolio will still run through the rest of the year.

So, Sanjay, you really will see for the rest of the year, head winds both from a volume as well as a transaction point of view.

On the rebates and incentive line, I think I really can't add anything more than what I already said.

In Q4 we will probably see the impact from SunTrust, but we're not ready to establish any new baseline going forward.

Great.

Thank you.

Our next question comes from the line of Jason Kupferberg with UBS, please proceed.

My first question is, I think in the past you've indicated your next sizeable contract renewals are scheduled for 2011.

Can you assess the probability of those becoming early renewal situations that could possibly get renegotiated before the end of this year.

And in situations where the customer does ask for the early renewal, what types of concessions can you as the network typically secure in return?

Jason, when we look at 2011, there is no really sizable, sizable renewable of a MasterCard portfolio.

There is another sizeable renewal of a competitor portfolio in 2011.

What we have is one sizable renewal in 2012, one is 2013 and one in 2014.

That is still way out, but obviously what we will be doing is from a competitor's point of view, trying to make sure we expand where MasterCard is being issued, so that will be our focus for 2011.

To switch gears, with United and Continental looking like they will merge here, any thoughts on the opportunities or risks that could be associated with United Visa portfolio being combined with Continental's MasterCard portfolio?

Maybe you can frame best or worst scenarios for MasterCard.

I think you recently renewed the Continental portfolio, but any thoughts there?

Let me take that.

We are in the process of evaluating all those terms.

It is my understanding, and our understanding, that the existing MasterCard-branded Continental cards will remain MasterCard-branded for the life of the account.

So I don't know what other opportunities or issues may come along as this merger goes through.

It is very early days.

So that's where we are right now.

Okay.

Thanks, guys.

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

Go ahead.

Thank you.

Ajay, it seems MasterCard needs a bigger US debit market share.

I'm wondering if this will be a key goal of MasterCard under your new leadership.

Being present in the debit market in the United States, which is certainly a growth category, is without doubt something we want to play in.

We are already a reasonable player.

Some of the transactions that have happened in the last few years have not worked in the favor of this Company in terms of being able to hold on to some of that business.

But we're making progress.

We made progress with SunTrust, we've made progress with a number of different sized banks, as well.

Yes, you will find us focused on growing our debit book, but focused on growing it with transactions that make sense for our Company.

There are many other opportunities, as well.

I believe prepaid is another opportunity at getting at a similar pay now, in fact, pay funded card.

There are many way to grow our presence in the non-credit space.

You will find us making efforts on all those fronts.

Great.

And then the follow-up, in a similar vein of asking about key strategic initiatives, do you have any plans to move more into acquiring processing activities?

We see some of that going around in the space and I am wondering if that is an area where MasterCard will increasingly focus?

I think the concept of being in processing both in some ways issue of processing and acquire processing is not a bad thing for a company in our space.

Some of our competition talks about it, as well.

We have a process and a technology called IPS, Integrated Processing Solution, that we have signed up for a few customers and we are very focused on rolling it out for the issuer processing side.

There are a series of things we've been doing on the acquirer processing side in a number of countries.

In some countries, we may actually have to do that to establish a certain presence on the ground as part of the terms of doing business in those countries.

So, you will find us thoughtfully looking at all of these opportunities to grow our presence.

Hopefully you will hear a little more about this when we meet in September.

Is that an area where you would be aggressive or just incremental with your strategy on the acquirer processing side?

September is not that far away.

Okay.

I will hold my horses, thank you.

And the next question is from the line of Chris Mammone of Deutsche Bank.

Can you go into some of the recent pricing changes you made with the Cirrus ATM network.

We always thought of the ATM business as being less lucrative than the POS side.

Is the take away there that perhaps you are running out of areas in the POS side to extract pricing and are now moving to ATM?

Chris, I have to draw you back on in terms of what we are talking about pricing initiatives is we are obviously looking at what kind of value we provide to the customer and what kind of pricing changes we might have to do in order to be competitive.

That is really in the vein of how we are looking at it.

In the past, we've been saying that for the 2009 to 2011 period our run rates for pricing was in the 200 basis points or so.

So, we are not looking at this any differently.

Obviously we will be reassessing as we are coming closer to September and our investor community day in terms of where we are going to go from here.

But at this point in time, this is a pretty good viewpoint and fairly consistent with what we said in the past.

Okay.

As a follow-up, could you just give us the underlying same store transaction growth rates excluding the deconverting portfolios on a monthly basis through the first quarter and into April?

For the first quarter?

Yes, if you can give us what January to March to April look like?

What I can tell you only is really from a volume point of view.

Transactions is a fairly difficult in terms of drawing any conclusions because of the loss of the portfolio.

But from a volume point of view, what we have seen is that January was an okay month.

It was a little bit lighter in February, and in March it really snapped back.

And when we look at the average of the quarter that we just said, both for the US and for the rest of the world, we are seeing in April exactly the same average at this point in time.

That is for domestic volumes.

Then for the cross border side, the 10.9% that we said for the first quarter on average, that is a little bit higher when we look at the April numbers.

Okay.

That is helpful.

Thanks.

Our next question comes from the line of Bob Napoli with Piper Jaffray.

Go ahead.

Thank you.

I was hoping you could give some update on your thoughts around regulation and interchange.

I guess the Conyers bill popped up again last week.

I was wondering if you can give some color around your thoughts about what could happen and when in that regard?

I will jump in on this one.

As you probably know, Conyers and Durbin have been making various proposals in the US Congress.

And there are some amendments that have been put forward in terms of the financial regulatory reform bills that are currently being looked at and debated in the Senate.

From our perspective, we believe that these continue to be pushed by the Merchant Payments Coalition and the motivation behind these is really to put merchants in a position where they don't pay their fair share.

At the end of the day, someone is going to have to pay this, and to the degree these amendments, as some of them seem to be getting structured, were to move through, then consumers will wind up being penalized.

We're paying attention to these things.

We think Congress understands you can't give anybody a free lunch.

We hope that's the way they think about it as they work their way through financial regulatory reform.

You didn't mention anything on the call yet about the focus on the money transfer segment or remittance of card to card.

I don't know if that has moved down the scale somewhat given the other opportunities you have, down the list of material opportunities over the next few years, but I was hoping you might give some updated thoughts on your activities there, as well.

I did talk about remittances in passing, that is true.

But that is not because of the fact it is not playing a role.

We have a series of pilots around the world, in different corridors of money transfer remittances between the certain countries.

We are in the process of looking at a pilot between the United States and Mexico.

So we have a series of pilots around the world.

That is actually part of the whole space, mostly in mobile banking and mobile customers will be looking at it as a process.

It is also possible to look at remittances cross border in the prepaid space.

We have payroll cards on the one side and recipients on the other.

There is some work going on in that space, as well.

Our next question comes from the line of David Parker.

Go ahead.

Thank you and good morning.

Visa Europe recently changed some of their interchange fees.

Has this changed the competitive landscape in Europe?

And can you just give us an update on the SEPA initiative?

David, I think you are referring to the press coverage over an agreement reached by Visa with the European Commission.

I think it was limited to debit cross border within Europe and potentially in a couple of individual markets in terms of the debit interchange fees.

As you probably recall, it was over a year ago that we reached an agreement with the European Commission on both debit, as well as consumer credit cross border interchange fees within Europe.

The way that I have described this in the past is it gave some stability in terms of our issuers and acquirers understanding the nature of what was happening with regard to interchange fees.

It supported the principle of interchange fees that we thought was very important, but it was also done at levels that were lower than what we think is appropriate and necessary to support continued investment in the business by issuers in Europe.

That is why we also indicated we are continuing our appeal of the European Commission decision in the Court of First Instance.

We expect that will probably make its way through the court system later this year or early next year.

Great.

Thank you.

Then just as a follow-up, you recently talked about upgrading the processing network.

Can you provide some of the highlights that you implemented or changed, and are there any more changes going forward that could take up some capital expenditures?

Thanks.

We make updates to our processing network on a fairly frequent basis, in fact, twice a year is what we are doing right now.

It is a structured process that assures that acquirers are very much a part of the whole process, because they have to do work at their end depending on what elements of the upgrade they wish to take into their systems.

It just so happens the ones we have done in the recent past had a couple of interesting features in there, one being the rewards points redemption methodology, which has yet to be rolled out commercially.

So it is a little premature to talk about it.

And another one being the whole fraud detection methodology as there's some bill pay capabilities in Asia Pacific and in Latin America.

There's a series of these.

So, each of the upgrades have been built into the system with a few new features.

I don't know if you should read more into it in terms of any kind of incremental investment costs because of that.

This is something we've been doing for years.

It doesn't mean there won't be incremental investments in strategic business ideas.

I just wouldn't read too much into it based on the fact there is an upgrade.

Just to add to this, we have pretty steady state capital expenditures.

We don't expect anything different for the rest of the year from a capital expenditure point of view.

But what you're also seeing is as we are adding to our capital our depreciation and amortization expense does go up, and it will go up again this year.

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

Yes, the next and last question will come from the line of Craig Maurer of CLSA.

Go right ahead.

Good morning.

A quick question.

I wanted to get your opinion on the launch of Elo down in Brazil, the competing network that was launched in the JV that will focus on the low income households.

It will be a direct competitor to Visa and MasterCard, so I wanted to get your opinion on why you think they felt the need to launch that.

Whether it was just a land grab on fees, or was there something that the existing card business wasn't bringing to that sub-segment?

I was in Brazil just last week actually when this announcement was happening.

I had the opportunity to meet both Bradesco and Bank of Brazil.

By the way, they are actually really more aligned with our competitor than with us.

So, this question is probably better answered by them in some ways.

But, my general sense of where they are trying to go, and where the government of Brazil is trying to go, is to help find a way to increase the level of bankerization.

It is a bad word, but it's what it means.

It's the bankerization, the extend of banking provided to individuals in their country.

They have made a series of attempts over the last seven or eight years, including the expansion of the ability of merchants, drugstores and convenience stores to even do basic cash availability and transactions of that type on behalf of banks.

They're trying to provide access to people to come into the banking system.

I think what they are trying to do with the Bank of Brazil and Bradesco, which are very large banks, in addition to Banco Itau which is also a very large bank, but these two have attempted to go out and create this new bank in which they are looking for a local debit scheme, but also for local use, but also attach some processing assets into it.

In all honestly, I don't expect major changes over the short or medium term, as both these clients were very clear that they intend to keep issuing other brands.

In fact, I have specifically understood from them that their commitment and intentions with MasterCard remain exactly the same.

So, having said that, when somebody launches a local debit scheme in the marketplace, it does impact the market.

It'll take some business or percentage away from the global payment schemes.

But the global payment schemes bring different things to the table and the total market should grow as a result of this effort.

So I think the opportunity in Brazil is much bigger than this issue would either pull down or up.

I think there are so many other opportunities in Brazil to grow the business for us and our competitors that I think there is a much better position there that we all need to occupy and invest in.

And with no further questions, I would like to turn the call back over to Bob Selander for any closing comments.

Thanks.

As evidenced through our great performance and accomplishments in the first quarter, we are committed to leveraging the strength of our global network, processing capabilities, our strong relationships with customers and our product development platform to drive payments innovation and business results for our issuers, acquirers and other partners around the world.

We remain very optimistic about our future growth prospects.

MasterCard is well positioned to take advantage of the recovery.

We are fortunate to be part of an industry that offers tremendous opportunity for growth, and the payment trends are working in our favor.

Consumers, merchants, businesses and governments all over the world continue to migrate toward electronic payments.

Thanks for joining us, and have a great day, everybody.

Ladies and gentlemen.

Thank you for your participation in today's conference.

This does conclude the presentation and you may now disconnect.

Have a wonderful day, evening, night or morning.