萬事達 (MA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to MasterCard's second quarter earnings conference call.

I will be your coordinator for today.

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

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

(Operator Instructions) As a reminder this, conference is being recorded for replay purposes.

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 webcast for a discussion about our second quarter 2010 financial results.

With me on the call today are Ajay Banga, our President and Chief Executive Officer, as well as Martina Hund-Mejean, our Chief Financial Officer.

Following comments from Ajay and Martina highlighting key points about the business environment and our second 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 at MasterCard.com.

The earnings release and 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 August 10th.

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 statement about Mastercard's future performance.

Actual performance could differ materially from what is suggested by our comments today.

Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings.

With that, I will now turn the call over to our CEO, Ajay Banga.

Ajay?

Thank you, Barbara.

Good morning, everybody.

I'm pleased that we've got yet another good quarter to report this morning that highlights the solid fundamentals of our business.

Before Martina gets into the details of the results, I thought I would current on some of the contributing drivers of the quarter as well as some recent business highlights.

So the second quarter, we saw net revenue growth of 6.7% as reported, and 7.9% on a constant currency basis.

Gross dollar volume grew 8.5% on a local currency basis, and cross-border volume grew 15.2%.

Both actually continuing the momentum from the first quarter.

Processed transaction growth was basically essentially flat for the quarter due to the continued roll-off of several US and UK beverage portfolios that we have spoken of on past earnings calls with you.

But if you exclude those deconversions, underlying transaction growth was around 10%.

Our expense control efforts over the past year have allowed us to deliver an operating margin of 52.6% this quarter, a nine percentage point expansion over last year's second quarter.

We put all this together, and it helped fuel our net income growth of roughly 31%, or 34% on a constant currency basis.

Some of the progress we saw in the quarter can obviously be attributed to global macroeconomic improvements.

And as a global Company, we continue to see the non-US markets becoming a bigger contributor to our businesses.

Today, in fact, the international markets -- the markets outside of the United States, account for 55% of our total revenue, up from about 50% just two or three years ago.

As in the recent quarters, our volume growth outside the United States outpaced growth in the United States.

The Asia Pacific and Latin America regions delivered another quarter of strong double digit growth spurred on by, I think, the continued buoyancy in most economies in those regions.

And of course despite challenges in the European macroeconomic scenario, our volume growth in Europe continues to remain healthy.

Both domestic and cross-border volumes are driving the growth in these regions.

In the US, however, conflicting signals make it difficult to determine if we have moved into a period of real economic recovery.

You have all seen the recent economic data around unemployment, retail sales, consumer confidence, and the consensus seems to be that perhaps there will be some ups and downs with respect to economic recovery.

This was reflected in our own consumer research and our spending [pass] data as well.

On the one hand, fine dining, luxury, retail, furniture spend has been down in recent month.

On the other hand, hotel and airline spend is up.

So there are mixed signals here, and consumers are likely to remain cautious until employment and housing in the US show signs of sustainable improvement.

I guess they will just continue to look for ways to spend and budget smarter.

You can see evidence of this in our own US data.

MasterCard's processed credit volume growth was up slightly in the second quarter, an improvement over the first quarter, but the pace of growth declined as we moved from April to June, driven by consumer credit.

However, processed debit volume growth remained consistent at about 20% over the first two quarters of the year, excluding those portfolio deconversions we have talked about.

While on the subject of the US market, let me just briefly touch on a piece of the recently signed financial reformat, specifically the Durbin amendment.

I know that everybody is eager to fully understand the impact on our business, but the truth is we just have to wait for the Fed to develop the regulations and for our customers to react before we will know the full implications both for the industry and for our Company, MasterCard.

We have spoken to the Fed.

We will be working constructively with them as they move into the implementation phase to ensure that they have the necessary inputs to make an informed decision.

Regardless of the outcome, we still believe the secular shift to electronic forms of payments will continue, and that fundamentally US consumers are not going to go back to cash and check as a result of the Durbin amendment.

Going forward, issuers will need to decide how to meet their customers -- their consumers' needs for payment products, and we will be there to support their effort whether it be with credit, charge, or prepaid products in addition, of course, to debit.

This new situation will present challenges, but I also believe it will present opportunities.

And in the past, we as a Company have certainly proven our ability to work through them with flexibility and with innovation.

And as such, even now we are exploring various strategies to address the different scenarios that could come about as the Fed goes through its decisionmaking.

In the meanwhile, we are focused on executing our strategies around the globe.

As I said earlier, the markets outside of the US -- the global markets outside of the US account for more than half of our net revenue, and that percentage is growing.

We are continuing to pursue many opportunities to grow electronic payments, pushing hard to deliver more convenience, more security for our customers, and value for all the other stakeholders.

I thought I'd take a few moments to highlight a few recent news items.

Just yesterday, we announced an expansion of our existing relationship with Telefonica, a leading telecom company in Latin America, to include a co-brand deal with Mobile Star, their leading mobile brand.

MasterCard will be the exclusive brand on Mobile Star's co-branded credit cards, issued in 11 countries, adding to the two in place in Chile and Brazil already.

In addition, we will also process the transactions in the majority of these issuing markets.

We have also recently announced a joint venture with Smart Communications to build a mobile payment infrastructure, kind of like a mobile gateway, starting in Brazil for our customers that will give consumers access to mobile payments.

In China, we launched MoneySend to the Bank of China so now consumers in China can receive money transfers from friends and family outside of the country.

China, by the way, marks the 19th market where MasterCard MoneySend is now enabled.

[Schver] Bank, the largest retail bank in Russia, is actually upgrading its passbook savings accounts to include a Maestro debit card which will act as the primary tool for consumers to access online and mobile banking.

Since this program was started in mid-2009, it has yielded 1.3 million upgrades last year and continues to generate similar results this year.

They've also just launched a MasterCard branded credit card, co-branded with MTS, a leading Russian telco on the MasterCard platform and of course carrying on the rollout of the Maestro Momentum cards.

In the US, I'm pleased that Citi will be leveraging our inControl platform to bring Citi's consumer cardholders increased control, security, and budgeting capabilities.

In fact, this is the first consumer application of inControl in the US market.

We also expanded our PayPass transit pilot in New York City beyond the original Lexington Avenue subway line in collaboration with the MTA, the Port Authority, and the New Jersey Transit, to basically make commuting faster and easier.

This expanded six-month pilot now includes [BART] trains as well as some New York City and NJ Transit bus routes.

It's the first payment system to link all three transit agencies, replacing the need for riders to carry specific fare cards for each transit system.

And of course, also enables the rider to transfer between systems.

Our development of a differentiated solution that allows authorization at the turnstile to take place faster was a critical factor in winning this trial.

With that, I'm going to turn the call over to Martina for a detailed update on our financial results and operational metrics.

Martina?

Thanks, Ajay.

Good morning, everyone.

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

As Ajay said, we are very pleased to deliver another good quarter of solid financials.

Net revenue grew 6.7% over last year's second quarter to $1.4 billion.

On a constant currency basis, net revenue grew 7.9%.

This revenue growth was primarily driven by a 15.2% increase in cross-border volume, and an 8.5% increase in gross dollar volume on a local currency basis.

Additionally, pricing contributed approximately four percentage points to net revenue growth, including the effect of cross-border rebates.

All of these positive factors on net revenue were somewhat offset by additional rebates and incentives, primarily due to new and renewed customer agreements as well as rebates related to higher volume.

Operating expenses declined 10.4% versus last year's second quarter, primarily as a result of lower severance, as well as savings due to reduced headcount.

Our operating income was $717 million for the quarter and resulted in an operating margin of 52.6%, a 9.1 percentage point improvement over the year-ago quarter.

We delivered net income of $458 million, or $3.49 per diluted share, up roughly 31% over the second quarter of 2009, and 34% on an FX-adjusted basis.

Turning to page four, we're seeing stronger performance across a number of business drivers, including continued strong volume growth similar to what we saw in the first quarter.

Cross-border volume growth year-over-year was the strongest it had been since the third quarter of 2008.

Worldwide cost dollar volume, or GDV, was up 8.5% on a local currency basis in the second quarter, and grew 9.8% on a US dollar converted basis to $656 billion.

US GDV was down 0.5%.

While not yet a return to positive growth, this is another quarter of sequential improvement compared to a decline of 1.1% in the first quarter of this year.

Across the rest of the world, GDV continued to grow a healthy 14.5% on a local currency basis.

Worldwide credit GDV grew 6.1% on a local currency basis.

This was also the strongest growth rate we've seen since mid-2008.

It was helped by US credit GDV growth which was down only low single digits.

Its best performance in two years.

Credit GDV for the rest of the world grew 9.8% on a local currency basis.

Worldwide debit GDV grew 13.2% on a local currency basis.

This was against a strong comparison of 13.1% growth in the second quarter of last year.

In the US, debit GDV volume grew 0.8%, and debit growth for the rest of the world was 29%, primarily driven once again by growth in our Asia-Pacific, Middle East Africa region.

On a local currency basis, worldwide purchase volume grew 7.9%.

Cross-border volume growth on a local currency basis was up 15.2%.

We saw double digit growth in Asia-Pacific, Middle East Africa, primarily driven by activity in Australia, China, and Korea.

As a matter of interest to some of you, we saw a noticeable increase in travel into South Africa for the World Cup, and volumes were up 79% in June year-over-year on a local currency basis.

We also saw double digit cross-border volume growth in Europe and in Latin America.

Looking at processed transaction, they were roughly flat.

About 0.1% compared to the year-ago quarter to $5.6 billion.

In Asia-Pacific, Middle East Africa, and Latin America, processed transactions continued to grow at double digit rates, offset by deconversions of portfolios in the US and UK.

The number of MasterCard branded cards worldwide was essentially flat on a year-over-year basis at 944 million cards at the end of the quarter.

Excluding the US, card issuance grew 7% versus the second quarter of 2009, demonstrating the continued growth opportunities for MasterCard from the secular shift from cash to electronic payment forms.

As of June 30, 2010, there were approximately 1.6 billion MasterCard and Maestro-branded cards issued globally.

Now let's turn to page five to discuss the components of revenue and their performance relative to last year's second quarter.

Domestic assessments increased 11% due to increased volumes and the impact of 2009 and 2010 price increases, partially offset by the repeal of some European pricing beginning in July, 2009.

Cross-border volume fees increased by 34.5%.

More than half of the $120 million increase was due to our October, 2009, pricing adjustment.

The remainder was primarily due to cross-border volume growth which was up 15.2% on a local currency basis.

Transaction processing fees increased 6%.

Pricing contributed approximately two percentage points of growth primarily due to US pricing changes which were implemented in mid-April, 2009.

Additionally, we had a one-time benefit from the implementation of new authorization parameters.

As I said before, process transactions were essentially flat in the quarter and continue to be affected by the loss of certain debit portfolios.

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

However, revenue growth for these line items was impacted less due to the pricing of the portfolios that are rolling off.

Other revenues decreased 5.2%, primarily driven by lower compliance and research fees.

All of this resulted in an increase of $204 million, or 12.6% in gross revenue.

For the quarter, rebates and incentives grew $119 million.

Approximately $55 million of this increase was due to rebates associated with last October's revised cross-border pricing structure.

The remainder was attributed to new and renewed customer agreements, as well as rebates related to higher volumes.

Overall, rebates and incentives represent 25.3% of gross revenue versus 21.2% in last year's second quarter.

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

During the second quarter, total operating expenses decreased 10.4%, and within total operating expenses, general and administrative expenses decreased 14.5%.

The decrease was primarily due to a lower personnel expense which was down $83 million, and lower severance drove roughly half of this decrease.

The remainder was primarily due to reduced headcounts, following personnel actions taken in 2009 although we are adding talent in growth areas such as e-Commerce, mobile, and prepaid.

Both advertising and marketing spend and depreciation amortization were roughly flat for the quarter.

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

We generated $343 million in cash from operations in the second quarter, primarily driven by operating income partially offset by litigation settlement payments.

And we ended the quarter with cash, cash equivalent, and other liquid investment of $3.5 billion.

Now let's turn to our thoughts for 2010.

But before I get into that, let me just give you an update of what we have seen for MasterCard processed volumes for the third quarter through July 28.

Our cross-border volumes grew approximately 15% globally, which is pretty much the same as the growth rate in the second quarter.

The Asia-Pacific region continues to demonstrate the strongest growth, while the US saw a little bit of softening, although it still remains positive.

Although not a perfect proxy for GDV, total US processed volume growth, which was about 1% positive in the second quarter, was down about 2% in July.

Slightly lower than the month of June due to the continued roll-off of the two debit portfolios.

If you were to exclude the impact of those debit portfolios, total US process volume growth was almost 7% in both June and July.

US credit processed volume is trending flat in July versus the growth of about 1% in the second quarter.

And US debit process volume growth, which was about flat for the second quarter, is now trending down 5% in July, but was up 21% when you exclude the tempering effect of the debit roll-off.

And in July, total processed volume growth for the rest of the world continued at a similar pace to what we saw in the first and second quarters, or about 13%.

Globally, process transaction growth was just slightly negative including the impact of the four debit portfolio roll-offs and almost 12% growth excluding that impact.

Now let's get into the thoughts for 2010, and the following represents our current view, obviously on a constant currency basis.

We continue to believe that we could see some tempering and top line growth in the second half of 2010 relative to the 9.7% growth we've seen in the first half due to the following factors.

So first, we begin to experience tougher comps given that signs of the economic recovery began to show in the second half of 2009, in particular in the fourth quarter.

Also, the pace of recovery at least in the US remains uncertain.

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

It now appears that the WaMu deconversion would be more concentrated in the second and third quarters than initially thought.

As a result, we now expect that this revenue will roll off faster than originally anticipated, and our as-reported process transaction growth will bottom out in the third quarter, not in the fourth quarter.

And we continue to expect Contra as a percentage of gross revenue to average 26% to 27% for the full-year, likely at the high end of the range given the deal volume we have seen and our current expectations for cross-border volume growth.

Additionally, we now expect to see some impact of our new SunTrust deal in the Contra line in Q3.

However, Contra as a percentage of gross revenue would still be highest in Q4 due to the normal seasonality of rebates and incentives.

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

As I said before, some of the savings obtained from our 2009 severance actions are being reinvested back into the business areas such as e-Commerce, mobile, and prepaid, as well as some additional marketing efforts in the second half.

Turning to the components of our operating expenses.

We continue to expect G&A to be down from 2009 levels, including severance.

And while we are currently forecasting advertising and marketing to be up, at most by mid-single digits from our full-year 2009 spend, we will continue to re-evaluate our plans depending on how we see the economic recovery taking hold.

We also expect the quarterly spend to increase sequentially over the third and the fourth quarters.

And as we said before, we continue to assume an effective tax rate of 34.5% for 2010.

Now finally, we remain committed to our objectives for the 2009 to 2011 period 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 include the impact of foreign exchange.

This represented about a 1% headwind to net revenue in the second quarter as we expect that headwind to increase to three to four percentage points if current exchange rates, particularly the Euro, hold for the balance of the year.

Recall that the Euro averaged about $1.45 for the second half of 2009 versus its current level of about $1.30.

Despite some mixed signals around the US economic recovery, economic growth for the rest of the world is improving.

Additionally, the underlying fundamentals of our business remain strong.

This enabled us to deliver a good quarter.

And as we worked through the challenges of some debit roll-offs, we also have new business wins such as SunTrust and others that we have yet to announce that will begin to contribute later this year.

Remember that some contract incentives for new business are recognized early on, and only over time you will see the full contribution to net revenue.

In total, we believe we can deliver a solid year for 2010 in line with our overall longer term objectives.

Now, let me turn the call back to Barbara to begin the Q&A session.

Thank you, Martina.

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

In order to get to more people in our allotted time frame, we are asking that this morning, you limit yourself to a single question, and then queue back in for additional questions.

Operator?

Thank you very much, ma'am.

(Operator Instructions) And ladies and gentlemen, your first question comes from the line of Adam Frisch with Morgan Stanley.

You may process.

Thanks, Barbara.

One question is going to be tough for me.

A lot of ways we can go here.

The one place I'd like to go just given it's the most topical is the mobile opportunity.

Yesterday, reaction in the stocks from the Bloomberg article suggested a pretty negative outcome for you and your largest competitor.

So it's hard not to imagine you working with the largest wireless networks at some point.

But can you talk about maybe, Ajay, what you're doing here?

Why maybe we should feel a little less concerned that you're not going to be successful in the mobile opportunity?

And then maybe expand on a couple of other growth opportunities that you're excited about that we might see impacting the P&L in the next 12 months or so.

Hello, Adam.

Well, the first part -- the mobile part.

I'm not going to comment on whether that pilot is actually happening or not because none of the actual players in the pilot are confirming what they're doing.

So that's all I'm going to go down the path of.

But I will tell you this, MasterCard has been partnering with mobile carriers, with handset manufactures, and with banks for many years now globally to launch a [NFC] These contact with payment trials.

With PayPass, mobile payment tax, person-to-person money transfer services, iPhone, Smart Phone apps.

They're kind of all helping to get this mobile commerce opportunity to come through.

In fact, I counted up -- we've got close to 20 pilot and commercial rollouts around the globe as we speak.

I'll give you a few examples for you to understand where I am coming from.

In the UK, Barclays in orange and MasterCard are the ones working on a similar contact with mobile payments, NFC-based technology to pay for goods and services at retailers.

That is the PayPass terminal that has been used.

In Tokyo on the other hand, we partnered with Guarantee Bank and with Avia, which is a leading local mobile operator to pioneer these mobile NFC payments.

And in that case it was using an antenna attached to the Sim card.

In June in the US, Citi has announced the launch of MasterCard PayPass tags available for the majority of their credit cards.

You can stick that sticker on the back of your mobile device and use it at any of the PayPass-enabled merchants that exist.

We have also announced a partnership with Bank of Montreal and RIM, Research In Motion, to bring mobile payments to Blackberry Smart Phones though a similar MasterCard PayPass technology.

We've got programs in Brazil.

We've got programs in India.

We've got programs in Korea.

We've got programs in Singapore.

We've got mobile MasterCard money-send service, which is an easy way to transfer money from person to person using the mobile phone or an Internet browser.

We can also use this to pay for purchases.

It also allows small, nontraditional merchants to accept electronic payments.

We've got money-send apps for the iPhone and the Blackberry.

We've even got an app through the iPhone app store where we offer mobile commerce apps, including the new MasterCard marketplace overwhelming offers app.

So, I have a degree of confidence that these companies are playing -- we and others -- are playing actively in the mobile payment space.

I have no doubt that while the business model for mobile payments has yet to be proven in a tangible way across the world -- I have no doubt that it will get proven in some form through these various experiment and trials.

That I have no doubt on.

You will find us putting a lot of energy and effort -- including these ones I just gave you an example of, including what we just did as simply as a co-brand card with Telefonica which could open up all kinds of opportunities for prepaid cards and other things we could do with similar phone companies around the world.

I just think that that one announcement of an unconfirmed pilot in the United States makes me somewhat cautious about jumping to conclusions about the role that different companies will play in the space.

I also believe that finally the phone partners, the mobile carriers, the handset manufactures, banks, people like us -- what we need is an open payment system.

What you do not need is a payment system that is built off one brand.

Even our MTA trial that I spoke about in New York -- while right now it's a trial using us, eventually we actually expect in the short period of time for that if it works out to become a brand-agnostic trial where we may have the advantage of processing more of the transactions because our technology approves those transactions at the turnstile faster.

But it will be brand-agnostic.

So to me, I think the real development of growth in mobile commerce requires that kind of way of approaching the opportunity.

And I have full confidence and faith that we will be very much a part at the center of that developing those new generational mobile payment.

So that's where I am with it.

Okay, great.

Thanks, Ajay.

Appreciate it.

And your next question will be from the line of Bryan Keane with Credit Suisse.

You may proceed.

Hello.

Good morning.

I just would be interested in getting a little color on some of your conversations with the Fed.

We have heard BofA come out with some thoughts.

There were some pretty significant cuts in interchange.

So would be interested in just what you've been hearing from the Fed?

Secondly, on timing, when do you think we'll get some idea on what the Fed's thinking for sure?

Well, look, we've been talking to the Fed, as I said.

So have the others.

And our talks with them, meetings with them are very constructive.

We are trying to make sure that they get all the information they need.

All the facts they need to be able to actually assess what they've been asked to do nine months from the date of the signing of the bill, which is the actual setting of what should be these new debit interchange levels.

And they have 12 months to actually come out with clarity around the exclusivity angle of the debit card branding.

I have every expectation that they're going to meet the dates.

And frankly, what we're discussing with them is not something I'm going to discuss openly on a conference call because that would be an inappropriate thing to do.

But it's a very practical, open conversation with full data and full information that we plan to give them.

Okay.

Thanks a lot.

And your next question will be from the line of Sanjay Sakhrani with KBW.

Go ahead.

Thank you, good morning.

I was just wondering if you could give us a sense of where we are in the process for the roll-off of account losses for each of the customers?

And just looking ahead for the next few years, do you have any major contract renewals?

Thank you.

Sanjay, in terms of the roll-off, we are fairly far through a number of the roll-offs, in particular, of the UK portfolios.

And as we just said on the earnings call, we are also relatively far through the WaMu roll-off.

We have some more cards left to roll off in the third quarter, and that's why we're saying that we're actually going to bottom out from a transaction point of view.

And from a transaction growth point of view -- a degradation point of view in the third quarter, and then we're going to go into a bit more of a normalized fashion into the fourth quarter.

So by the end of the year, we will be pretty much done.

We don't expect that our results will be impacted in 2011.

And in terms of major contracts that are coming on board, really the one that we've been talking about now for a while is the SunTrust contract.

And they are -- we said earlier in the year, that we wouldn't think that we have in fourth quarter the roll-on accelerating that.

The roll-on will be coming on in the third quarter now.

And so hopefully, we will be up and running in the latter part of the fourth quarter with some contribution to our net revenues.

In terms of major renewals for the near future, we don't really have any major renewals for the next couple of years.

We do know there is an opportunity in 2011 for another customer which we will be going after.

But besides that, I think we feel fairly comfortable on where we are.

Great.

Thank you.

Next question, please.

Your next question is from the line of Andrew Jeffrey with SunTrust.

Hello.

Good morning.

Could you talk a little bit about the cross-border contra revenue?

The rebates and incentives, Martina?

Are we going to effectively lap those pricing adjustments at the end of 2010, and then normalize in '11?

Yes.

As you know, we have the cross-border pricing showing up in our growth revenues as well as in our contra revenues.

And we did implement, Andrew, as you know, October one of last year, those kinds of changes.

So in the fourth quarter, we will be lapping those price movements, albeit what I would just like to make sure that you understand in 2011 and going forward, it really depends on how cross-border volume growth is going to behave.

So you might, depending on how much it will grow, you might see some impact still year-over-year on the growth line, as well as on the contra line.

And net-net as we said before, we expect that there will be only a slight contribution to overall net revenue -- positive contribution to overall net revenue.

All right.

Thank you.

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

Go ahead.

Yes, good morning.

I just wanted to ask for -- a bit off-topic -- an update on SEPA with all the turmoil in Europe.

If there's been any movement on that, or if that's been pushed to the back burner for now?

Thanks.

Hello.

No, actually, SEPA is exactly where it was, and it's still on line, and we're making steady progress.

In fact in a number of countries -- in Germany, we've now got the fourth bank to become a Maestro exclusive which is Dresdner [Settlem].

They are actually migrating close to three quarters of a million cards from their local debit cards [human] processor.

We have got in France -- we've begun processing domestic MasterCard transactions for the first time with the launch of what I talked about in the last phone call, the Carrefour Retailer card as well as [Arcon].

So there's a bunch of these happening.

We've got debit MasterCards now in all four Nordic countries.

We're launching the product in Ireland, Turkey, Greece, UK, Poland.

And in April, we actually have mandated e-Commerce support for all 300 million-plus Maestro cards in Europe, which I think will enormously help with the utilization of these cards for e-Commerce.

And on the competitive acquiring front, domestic transactions on these cards issued with the Maestro logo are actually starting to be routed through our network.

If an acquirer or merchant chooses to do so, they're seeing an incremental volume from that.

It's still small numbers, but it's early days in the game.

Whole on whole, I don't think the so-called macroeconomic scenario in Europe has changed any of the underground desire and reality to go forward with the thinking behind SEPA.

Thank you.

And your next question will be from the line of James Friedman with Susquehanna.

Go ahead.

Hello, thank you for taking my question.

Martina, I appreciated the more detailed color about the impact of foreign exchange.

If you could revisit what you said again, and also the band that you had described for the Euro -- $1.30 to $1.45, I think.

If you could repeat that again, I'd appreciate it.

Certainly.

So basically what we said in the second quarter, we had about a 1% headwind on foreign exchange.

This is really isolating the euro and the real and the movement of that.

And if we were to stay at the euro at around $1.30, and you compare that to the year-ago second half euro rate, which was around $1.45, we do believe that we are going to have a bit of an increased headwind of about three to four percentage points.

Again, it depends on which quarter you're going to be.

But for the second half in total, it is about three to four percentage points.

I just also would like to reiterate the rule of thumb that we really give to everybody in terms of looking at our euro exposure.

We really say for every one cent move that the euro moves versus the dollar, that net revenue is impacted by $9 million to $11 million.

And then on the operation -- operating expense line, the move impacts about $4 million to $5 million.

So on the operating income line, you have about a move of $5 million to $6 million.

And that should allow you to extrapolate depending on what kind of exchange rates you assume for the rest of the year, where our results could be coming in from an as-reported basis.

That's really helpful.

If I could follow up with a related international question.

One of your competitors on their conference call had referenced long-term targets of generating 50% of their revenue internationally.

Since you are already disproportionately international, could you describe your long-term objectives?

What percentage and acceleration of your exposure will come from your international portfolio?

Thank you.

So first of all, I'm not sure the right word would be disproportionately exposed because I think that's just the reality of the world, and what's going on with the economic growth around the world.

We have 55% of our revenue comes from markets outside of the United States.

And I'm not sure that's an unfortunate or disproportionate part of it.

I think the second part -- the question of where we are going.

We've got Investor Day coming up in September.

Why don't we wait to have a conversation that day.

I'm not sure yet whether I want to necessarily set up a target to go there.

I would much rather go where markets are growing.

And if markets happen to grow faster over the next five years overseas, I would love to see faster growth there.

If the US, on the other hand, comes out of its current cycle into a good economic recovery, I'll celebrate that as well.

So I'm not sure that setting up a target for where I want to get my business from is as useful as setting up a target to make sure that I'm present at the forefront of trying to bring business where it grows.

I would rather talk about that.

Thanks, Ajay.

Next question, please.

Your next question comes will come from the line of Bob Napoli with Piper Jaffray.

Thank you, good morning.

And I understand that it's going to take some time to get a handle on any effect from the Durbin amendment.

But it might be helpful to provide us with a little bit of color of the revenue -- the revenue yield of the US debit business so we can get a feel for the economics, a little better feel for the economics.

I don't want to expect something exact, but maybe some kind of a ballpark feel for that would be helpful.

Thank you.

Bob, it's Martina.

First of all, as we all know, it's far too early to be really drawing any type of conclusions in terms of what the Durbin amendment does given all the interpretation that the Fed has to do.

But in a very predominant way, what was featured in the Durbin amendment was really related to interchange fees.

And as you know, while we interchange a transaction, that is not our revenues.

So we are basically handling the interchange fee from the acquirer to the issuing community.

And again, I can only tell you it's very difficult for us without the interpretations to understand how the environment -- the payment environment in total will really be impacted.

How the banks would specifically be impacted.

Of course, we are all seeing the announcements and expecting that there will be some decrease to their interchange revenues.

But then to extrapolate what that means for the individual payment networks would be too premature to do at this point.

But you could give a feel for like what your net revenue yield is off of your debit volume?

No.

Bob, we are not giving that.

We don't have those kind of detailed numbers out there in the market.

Thank you.

Your next question will be from the line of Julio Quinteros with Goldman Sachs.

Great.

Good morning.

Real quickly, we talk a lot about the numbers that could be at risk related to Durbin and whatnot.

Can just maybe frame, Ajay, for us the mitigation efforts and some of the strategy that you are going through right now as you think about what the Fed could do.

What are the levers to potentially offset any moves by the Fed that could impact volumes, or your overall business?

And just related to that, as well, as we look at the credit card accounts on file declining still, how are you thinking about that in terms of also mitigating the future lack of growth on the credit card side?

Well, I'm not sure you can conclude that there will be a future lack of growth on the credit card side, first of all given all the change that will happen.

One of the things that could well happen is that the pattern of spend changes from one kind of card used to another kind, depending on what kind of consumer incentives get developed over time by issuers or by merchant as they respond to where the Fed comes out on its thinking around these rules.

So I'm not sure I could conclude that credit card spend will necessarily decline over time.

I'm not even sure that I could conclude that debit card spend would decline because it will depend on where the interchange number settles down.

How the debit card plays a critical or non-critical role in the strategy of retail banks to get DDAs through the door with the need for relatively low-cost funding.

So, you're asking a question -- asking me to conjecture on 100 different permutations and combinations.

And we're working our way through those.

I'm not going to do that conjecturing.

But I would tell you this, if you go by what happened in Australia, then you know that what will happen here is that banks will relook at their economic model.

They will look at pricing.

You're already seeing motion on the so-called -- let's say, the soon-to-happen demise of free checking is how people are speculating.

I don't know if that's true.

But I can see some movement on that.

You're going to see efforts by the issuers to drop off costs.

They'll go for electronic servicing.

They will probably look at their rewards programs.

They're going to see efforts to cross-sell to the DDA even stronger -- more enhanced because that's the only way you can afford that DDA account.

You're going find every bank and us and Visa and everybody else working with regulators to make sure that the pricing costing of a transaction includes the fair compensation for technology, for frauds, for security, for privacy, plus a margin for the capital invested.

I think those are the kind of conversations you're going to see.

Beyond that conjecturing, how the market will shake out, and how we'll respond.

We just have to be sensible over the next few months.

I firmly believe what I said earlier.

There will be challenges, but there will be opportunities.

And I have said this in a less than somewhat more joking way, this is one time when I am probably grateful for not having had the highest market share in debit in the United States.

Great.

Thank you.

Your next question will be from the line of James Kissane with Bank of America Merrill Lynch.

You may proceed.

Thanks.

Ajay, just following up on your last comment there, what is MasterCard's view on non-exclusivity?

Thanks.

I don't know yet because I'm going to see and watch what the Fed does.

As you know, that's one of the topics that's -- that's the one year away decision that they have to explain.

So I don't have a clear view yet.

I am developing different scenarios for different ways in which they may respond.

But that's kind of where I am.

Just given your market share, it seems like it presents opportunity to the extent that it relate to off-line, not just pen.

Is that right?

That's really your conclusion to draw.

I am still waiting to see how the Fed comes to an understanding of what constitutes the amendment they'd like to put in.

If you looked at the language in the Durbin amendment, the plain language requires that an issuer's debit card must access at least two unaffiliated debit networks.

The Fed is going to interpret whether one of those is signature, pin.

Whether they've got one of one, one of the other, two of each, two of the other.

I have no idea.

I don't know how to put that out there yet.

So we're going to see how that goes, and then I'll have a more considered view for you.

Thanks, Ajay.

And your next question will be from the line of Jason Kupferberg with UBS.

Good morning.

Appreciate it.

So Ajay, you've inherited a great balance sheet here, and your stock is down along with some others.

Obviously because of all the regulatory uncertainty that has popped up here over the last few months.

How do you think about balance sheet deployment options?

Do you think more seriously about possibly doing a new share buyback program?

Or are we going to have to wait until the September analysts' meeting to perhaps get some more from you on that?

Yes.

I answered my own question?

Yes, you did, Jason.

I'm very grateful to you for that.

Do I get another -- let me ask you another -- let me ask you another quick one then on prepaid.

If you can give us a sense -- I don't know if it can be quantitative at this point.

What growth are you seeing in prepaid?

Maybe parse out US and non-US at least qualitatively to give investors a sense?

Great question.

I think prepaid is a huge opportunity.

And, the market size is the largest today in the United States.

Largest by far, not just by a small amount.

The fact is it has many things built into it.

Everything from what the Social Security Administration is planning to do.

I think we talked about this in the last earnings call.

But what they're planning to do is that by 2013, every single payment from the Social Security Administration will either go by direct deposit to a bank account that the receiver has or by a direct load on to a prepaid card that the receiver must then have.

It so happens that we've got a great program in place to be the supplier of those prepaid cards through Direct Express and Comerica.

And so that's kind of driving -- one of the thing that's driving prepaid as a space.

The prepaid card space has got a large component of consumer reloadable, general purpose cards.

A large component of what the government would provide, which is kind of the example I just gave you.

A fairly large component dedicated to payroll and corporate payroll and the like.

And then a much smaller component dedicated to gift cards.

In fact, gift cards are what everybody talks about.

But in fact, the economics of a gift card are very different from the other three because a gift card is a one-time load of an average of $70 to $80 each time in the US.

Whereas a Social Security card, a million of which are already in circulation by the way, have a load of somewhere between $700 to $800 a month.

If a person stays on that payment for a year, you're talking about $9,600 of load compared to $70 or $80 of load on a gift card.

So the economics are very different.

And we are very focused on the government payroll and consumer general purpose reloadable.

There's obviously a lot of growth to happen outside of the US.

I think the Telefonica deal is an example -- is a great way to think about consumers who may possess phones but may not possess formalized bank accounts and formalized credit cards as a way of entering into a whole new space.

Similar opportunities would be the Accor JV that we signed in Europe where we look at meal vouchers and company benefit payments that come on to prepaid cards.

There's opportunities of [noble] payments in Latin America that we're exploring and doing a lot of work with.

There's similar things in Asia from India to other locations.

So I'm very interested -- intrigued by what prepaid could do, and how it could be a way of getting so many underbanked, not just unbanked, people to participate in the payment system.

And that's where our effort and energy is going, Jason.

All right.

Good luck with that.

We'll see you at the analysts' meeting.

Thank you.

And next you have from the line of Don Fandetti with Citigroup.

Good morning.

Ajay, Visa had mentioned that they had had some recent discussions with the DOJ and were comfortable with where they were going.

I was curious if you had any comments?

And does that tie into anything on the merchant litigation?

If you could frame that issue from MasterCard's perspective.

Sure.

Don, the DOJ has been in contact with us for quite a while on this CID.

It goes back to October, 2008.

In fact, if you go back to our Qs from that time onwards, you'll find us talking about it consistently including in the latest Q.

The fact is that we are working with them and cooperating with them for all the information they're looking for.

As you heard on a different call, this is not directed exclusively at one payments network.

It's part of an overall investigation of the merchant rules -- not the interchange, the merchant rules.

The POS rules of several US payment card network players.

It's got to do with all the POS acceptance rules.

I'm not going to comment on communications with the government regulator.

As I said that for the Fed, that's kind of not what I do.

What I can comment on is in my public filings.

All I can tell you is we actually are having a very constructive dialogue with them.

And that's where we are today.

So is there -- as an investor, is there any risk around that business practices?

Or would it be the type of thing where it's pretty marginal no matter what comes out?

Tough for me to conclude until I know what the DOJ is thinking, but I have no reason to believe that the DOJ investigation has anything of any magnitude that I would be so seriously concerned about today.

That's today.

It's got rules.

It's got POS acceptance rules.

Tomorrow, if they change the POS acceptance rules in a way that makes it a different business model, yes, then over a period of time, it will have an impact.

I don't have any more information to you than where that is today.

Okay.

Thanks for the clarity.

And your next question will be from the line of Rod Bourgeois with Bernstein.

Go ahead.

Yes.

Ajay, I like your joke about being glad about your low debit market share.

Don't take it seriously, it's the only one.

On that note, do you view the Durbin amendment as opening certain doors to share gain opportunities in the US debit business?

And I guess more specifically on that, could you give us any examples of new strategies that you're entertaining in order to respond to whatever your expected case scenario is related to the Durbin amendment?

So, as I said, there's not one expected case scenario for the Durbin amendment.

There's actually a series of multiple options that could settle down depending on how the Fed, which has been tasked with studying this, actually comes to conclusions over the next nine months in the case of the interchange numbers, and 12 months in the case of the other provisions around exclusivity.

So I -- there's no way for me to give you one versus the other.

And I doubt that even on Investor Day in September, we're going to know much more by then about which way the Fed is leaning or thinking.

But I would say this to you, does it open up opportunities?

I think it opens up both opportunities and challenges, depending on which side of the table the Fed comes out on.

And, my perspective is that when you have a lower market share, us as well as other players, whatever changes in the game will give us an opportunity to be nimble and respond to it.

Having said that, the larger market share players will fight as hard as they can to hold on to their market share.

So this is going to be one of those market-changing movements that I don't yet know how to predict.

But I'm very confident that I will find opportunities through this for us to keep doing well.

One scenario is that you have an opportunity to get your brand on Visa-branded exclusive cards.

And I guess my question is, why would that not be a big opportunity from a share gain perspective?

An opportunity that you've not seen in a long time?

Sure, if that scenario were to come true, if the Fed were to interpret it exactly as you said I would completely agree with you.

And would you be willing to lower price to attract merchant routing decisions your way in order to gain that share?

A hypothetical question.

I don't answer hypothetical questions.

We'll talk at Analyst Day.

Thanks.

You got it.

Your next question will be from the line of Tom [McGrowen].

You may proceed.

Ajay, do you have any thoughts about chip and pin technology coming to the United States?

And any thoughts about what you view to be the total fraud cost in the system including issuers, merchants, and consumers?

Thanks.

That's a great question.

I'm not sure that chip and pin technology in the United States is a definite in the next foreseeable period of time unless it gets legislated.

That's a different thing.

But where it is today, the cost of actually rolling out the acceptance network, as well as reissuing all those cards is so many multiples of any fraud cost-benefit that I think the economic rationale for doing that will become very challenging.

And in this current environment where so many other revenue lines for a bank are under pressure, given the moving target of the financial reform bill, from what's going on with capital to what's going on with revenue streams in that trading book, in their investment banking book, in their consumer banking book.

I don't know that a lot of our client would consider that to be priority number one today.

That's just the reality of where it is.

So that's kind of where it is today, I'm not sure that you'll see a great deal of movement on that in the foreseeable future of the US.

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

Absolutely.

Your final question will be from the line of Tien-Tsin Huang with JPMorgan.

Go ahead.

Good morning, thanks.

Sorry if I missed this, but did you give an update on the merchant litigation case?

And Ajay, I heard you mention charge cards in your prepared remarks on Durbin as an option for issuers.

I'm curious if you see a revival in growth for charge cards in the US?

Thanks.

Hello, Tien-Tsin.

Not sure yet that I can comment definitively about charge cards revival.

That's just one of the options that I think that if I were an issuer today, which I'm not, but I was a little while ago.

I would be thinking very carefully through different ways of finding relatively low-risk methodologies of making sure that I can help give my consumers the right kind of tool and yet protect my revenue stream.

So that's one of the ways that people would look at it.

But I don't know for sure that I can tell you that a lot of people are going to come and jump at it tomorrow.

As far as the merchant interchange litigation is concerned.

Nothing new.

The court heard oral arguments on the plaintiff's motion for certification and the defendant's motions to dismiss in November, '09.

That decision is still awaited.

The parties are participating in a confidential mediation.

I have no idea if it will be successful or not.

And no trial date has been set up.

So there's nothing new that merchant litigation from what we discussed the last time we spoke.

Okay, great.

Thanks for the update.

And at this time I would like to hand the call back to Ajay Banga for his closing comments.

Thank you for all the questions.

And let me leave you with just a few closing thoughts.

Over the shorter term, both the economy as we discussed in the US in particular and the regulatory front represents some challenges.

However, MasterCard I think has demonstrated over the years that it can find its way through these challenges.

And on the business front, Martina and I both talked about the fact that we have lost a few debit contracts over the last couple of years.

There are only now beginning to work their way through our financials.

We've also won a few great deals in debit and the emerging payment space that I think will begin to contribute later this year.

But will contribute much more over the next couple of years.

We have also worked very hard to control expenses, to manage through the impact of the recent global economic slowdown.

And still trying to put money into investing in future growth.

Again, as Martina mentioned, we're putting some of the savings into e-Commerce, mobile, prepaid, that kind of space.

I'm kind of still very optimistic about our future growth prospects.

We do business in 210 countries today.

And the majority of our revenues come from outside of the United States, which as of now, are showing faster growth.

At any given time, I'm going to have challenges in some markets, and opportunities in many more.

Our global structure, our global construct, I think contributes to our resilience through cycles, and frankly to my expectation for long-term growth of our business.

I firmly believe that payments is and will remain a growth industry due to the continued secular trend to electronic payments.

The underlying fundamentals of our business remain intact, and we are also innovating in order to be best positioned to take advantage of these growth opportunities.

That's why I'm very excited to be here.

I'm very excited to be leading this Company and this team.

And once again, thank you for your time today.

I look forward to seeing many of you at our Investor Day on September the 15.

And we'll continue the discussion about our business and the strategy for our future.

Thank again.

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

This does conclude the presentation.

And you may now disconnect.

Have yourselves a wonderful day.