萬事達 (MA) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter MasterCard Inc.

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.

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

(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 everyone, and thank you for joining us today, either by phone or webcast, for a discussion about our third quarter 2010 financial results.

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

Following some comments from Ajay and Martina highlighting some key points about the business and our third 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 today.

A dial-in replay of this call will be available for one week through November 9, as well as posted on our website for 30 days.

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 here 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 Ajay Banga.

Ajay?

Thanks, Barbara, and good morning, everyone.

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

So in the third quarter we saw net revenue growth of 4.7% on an as-reported basis, or 7.3% on a constant currency basis.

GDV, gross dollar volume, grew 8.5% on a local currency basis and cross-border volume grew 15.4%, continuing the momentum from the first half of the year.

Processed transaction growth was slightly positive for the quarter and they were tempered by the continued roll-off of several US and UK debit portfolios.

But excluding those deconversions, underlying transaction growth was about 13%.

These factors and cost savings put together what allowed us to deliver an operating margin of 53.6% this quarter, a 4-percentage-point expansion over last year's third quarter.

And all of this helped fuel net income growth of 14.6%, or about 19% on a constant currency basis.

Reflecting relative economic growth trends, our volume growth outside the US outpaced growth in the US.

The Asia Pacific and Latin America regions just continue to deliver strong double-digit growth, driven by both domestic and cross-border volumes, as economic expansion is persisting in these markets.

And while it's true, there are a number of the Asian and Latin American economies are showing good growth in domestic demand, the fact is that consumption in the US and Europe still accounts for more than half of global PCE.

And so for Asia and Latin America to keep growing at these rates for an extended period, we really need to see consumption pick up again in the US and in Europe.

Having said that, purchase volumes in Europe remain relatively healthy, despite what we all read about the continued macroeconomic situation on the continent.

In general, Europeans did not accelerate their spending to the same extent as other markets did a few years ago and their response the last couple of years is also, therefore, more muted.

And during the summer holiday season, we continued to see them traveling, as many of these countries continue to move away from a relatively high percentage of cash transactions, the shift to electronic forms of payments just continues to generate new volume for us.

In the US, while the market is looking healthier than it did this time last year, the economy continues to show conflicting signals with the Fed predicting modest improvements until the second half of next year, of 2011.

The US consumer spending appears to be following those very mixed signals, even in looking at our own data.

And while our US credit volume growth trend continued to improve, it is being driven by commercial credit.

Consumer credit growth remained about flat with the second quarter.

This is also consistent with our US Spending Pulse data, where September retail sales showed discretionary spend remained largely in check, as in contrast to US debit volumes, which, excluding the debit portfolio roll-offs, continued to see growth in the mid-teens.

So now let me touch briefly on two regulatory developments here in the US.

First, we are pleased to have reached a settlement with the US Department of Justice late in the third quarter.

After two years of investigation, the DOJ required us to simply clarify the rules that we already had in practice every day, which allow merchants to discount.

Second, turning to the financial reform bill, we have little more to report beyond what we communicated at our Investor Community Meeting day on September 15.

We are awaiting the Fed's ruling and until we see it, it's impossible to predict the outcome to either MasterCard or the entire payments industry.

At our recent meetings with the Fed, we have continued to have a constructive dialogue, as they work to gather a complete picture of the US payments industry.

Consistent with what we believe you are hearing, we expect the first draft of the Fed's position sometime in December, and we are planning for the range of outcomes that we talked about earlier.

Given our US debit share, and that some level of exclusivity will go away, we see upside potential for MasterCard.

However, we will have to wait for the Fed's decision to determine the true nature of the impact on our business.

Meanwhile, we remain focused on executing our growth strategy around the globe, and that is; to grow our core debit prepaid and processing businesses-- credit debit prepaid and processing-- both consumer and commercial; to diversify our geographies by investing in high growth markets; to diversify our customer set by building relationships with merchants, telcos, governments, transit operators; and to build new businesses in emerging areas such as e-Commerce and mobile payments.

So that's the grow, diversify, build strategy we talked about on the 15th of September.

We will continue to drive growth at a local level with a focus on an enhanced consumer experience.

So let me take a moment to highlight a few recent news items.

You probably heard about some of these at Investor Day, but I wanted to make sure that we fully reflected the news of the quarter as we speak today.

So in the affluent segment, you heard us say in September that we were going to focus on wealth managers and airlines to reach this important segment and I'm pleased to say that we have signed a credit agreement with UBS Switzerland Wealth Management to launch World MasterCard.

We also signed a debit agreement with Morgan Stanley Smith Barney here in the US.

We've also recently signed a number of airline co-brands, such as Royal Jordanian Airlines and Kingfisher Airlines in India.

These add to the momentum in this sector, including some of the previously announced deals with Turkish Airlines and Aeroflot in Russia, and there are others in the pipeline.

And building on the success of the Ferrari credit card launched in Spain a few months ago Santander is now launching a similar co-branded MasterCard in Mexico.

And all of these are just examples of exciting portfolios given their potential to capture affluent cross-border spend.

Moving to debit -- In the US, I am delighted to announce that Sovereign Bank will upgrade its nearly two million card consumer and commercial debit programs to MasterCard next year, in 2011, as well as implement the debit processing capabilities of our IPS platform.

This Sovereign win combined with our SunTrust and Chevy Chase, now part of Capital One,win, continues to reinforce our debit position in the eastern part of the United States.

These are in addition to the Delta Air Lines and Morgan Stanley Smith Barney deals that we also recently announced.

Overseas we've signed an exclusive Premium Debit agreement with Qatar Islamic Bank to convert their portfolio to MasterCard.

Qatar Islamic Bank is one of the top five Islamic banks in the world and has a long history with one of our largest competitors.

And in Germany, Barclaycard will be converting all of its co-branded local scheme-plus-Maestro cards to Maestro-only by year end.

And as a result, Maestro will become the domestic brand for these cards.

In prepaid, we are working with Bank of China and Travelex to sell the Travelex Cash Passport Prepaid MasterCard, which is processed on our IPS platform.

We are also working with Korean issuers [Koleyinituals] to introduce similar Travelex Cash Passport MasterCard cards in Korea.

We've just concluded an enhanced renewal of our agreement with NetSpend, which as you know is one of the leading providers of reloadable prepaid debit cards in the United States.

And as an example overseas in Poland, we are piloting a chip-enabled Football Club prepaid card that provides an integrated solution for their fans.

The card can be used for transit to the stadium, entrance into the stadium and concessions once inside the stadium.

In the commercial sector, we have signed two new issuer agreements for SmartData in Germany, and these are in addition to other recent deals that we have talked about with SunTrust and Chase here in the US.

And given the pickup in business travel spend globally commercial is just a very attractive segment for us.

Commercial cross-border volumes are growing at twice the rate of consumer cross-border volumes, although both are up double digits.

On the processing front, we signed an agreement with Itau Unibanco in Brazil to switch their credit transactions and as a result, we now switch 100% of our issuers debit and credit transactions in that market of Brazil.

In Asia, we made a strategic investment in India-based ElectraCard Services that we believe will accelerate the success of both ElectraCard's and MasterCard's processing businesses in Asia Pacific, Middle East and Africa.

In the mobile and e-Commerce space, we are pleased to announce that starting in the first quarter of 2011, MasterCard will be expanding our mobile trials by adding on a large US issuer with Micro SecureData functionality.

Micro SD, Micro SecureData , basically provides functionality which enables smartphones to be used as payment devices in stores.

It's kind of a big step forward towards creating a digital wallet with a host of financial capabilities baked into the latest, most sophisticated mobile phones.

So this is a SIM card-based event, unlike some of the mobile tag events which we're already doing.

And we're trying to do a number of these to test the market.

Also in the quarter, we signed a Memorandum of Understanding with China UnionPay to jointly explore opportunities, starting with e-Commerce and cross-border payments.

We entered into an agreement with SingTel from Singapore, which has a position in eight markets in [RCN] , one of the larger mobile operators in Asia to pursue mobile commerce opportunities.

We have also recently agreed to work together with Airtel Africa to explore and pursue business opportunities in mobile commerce in Africa.

And finally, I am, of course, pleased to announce that we just recently completed our acquisition of DataCash.

We are going to hit the ground running in our efforts to further penetrate e-Commerce in Europe and, of course, leverage our combined fraud prevention capabilities across the entire marketplace, including what we do with MiGS in Asia Pacific.

So we look forward to continuing to report on our progress, not just with DataCash, but also all the other areas I just discussed.

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

Thanks, Ajay, and good morning, everyone.

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

Net revenue grew 4.7% over last year's third quarter to $1.4 billion.

On a constant currency basis, net revenue grew 7.3%, driven by volume increases.

This includes growth of 15.4% in cross-border volumes, and 8.5% in gross dollar volumes, or GDV, on a local currency basis.

Approximately 7 percentage points of revenue growth came from pricing, including the effect of cross-border rebates, and this was essentially offset by a net increase in rebates and incentives related to new and renewed customer agreements.

The 4.1% decline in operating expenses versus last year's third quarter was primarily due to lower severance, as well as savings due to reduced headcount .

Our operating income was $766 million for the quarter, and resulted in a quarterly operating margin of 53.6%, a 4.2percentagepoint improvement over the year-ago quarter.

Our effective tax rate declined to 32.3%, primarily due to the repatriation of some foreign earnings and a lower state tax rate, offset by some other discrete adjustments.

We delivered net income of $518 million, up 14.6% over the third quarter of 2009, and up 19% on a constant currency basis.

Earnings per share were $3.94 on a diluted basis.

We previously mentioned that the acquisition of DataCash would have a $0.05 dilutive impact for the full year, split across the third and the fourth quarter.

We saw $0.02 of this dilution come through in the third quarter and expect the remaining $0.03 to impact the fourth quarter.

Also, we separately said that there could be a potential impact of up to $0.05 from hedging transactions we entered into to protect against adverse currency movements on the transaction price.

We saw a $0.03 negative impact from this FX hedging in the third quarter.

We do not expect to see any further impact from this in the fourth quarter.

Over the next couple of slides, we have updated our presentation of operational metrics to make it a bit easier for you to follow.

The regional breakdown of gross dollar volume and purchase volume that you are used to seeing here can still be found in the tables of our earnings release and on our website.

So on page four, you can see that worldwide gross dollar volume, or GDV, was up 8.5% on a local currency basis in the third quarter, and grew 7.8% on a US dollar converted basis to $685 billion.

US GDV was down 1.7%, and this is in line with what we have seen over the last couple of quarters.

Across the rest of the world, GDV continued to grow a healthy 14.9% on a local currency basis.

Worldwide credit GDV grew 6.4% on a local currency basis, similar to the second quarter.

It was helped by US credit GDV growth, which was just slightly down, continuing its trend of quarter-over-quarter improvement.

And credit GDV for the rest of the world grew 9.6% on a local currency basis.

Worldwide debit GDV continued double-digit growth of 12.7% on a local currency basis.

In the US, we saw debit GDV decline 3%, but excluding the impact of deconversion US debit growth was 15.8%.

Debit growth for the rest of the world was just over 30%, driven by Asia Pacific, Middle East Africa, and Europe.

Cross-border volume growth on a local currency basis was up 15.4%.

We saw double-digit growth in Asia Pacific, Middle East Africa, Latin America, and Europe, with low single-digit growth in the United States.

Now, turning to slide five, here you see process transactions were up 0.6% compared with the year-ago quarter and a little over $5.8 billion.

Processed transactions continued to grow at double-digit rates in Latin America and Asia Pacific, Middle East Africa offset by the debit conversions in the US and the UK.

Excluding those portfolio losses, processed transaction growth was 12.9%.

We believe the bulk of the deconversions are now behind us and that the third quarter was the bottom in terms of process transaction growth.

Global card growth was about 1% to just over 1.9 billion [misspoken --should have said 1.6 billion] MasterCard and Maestro-branded cards.

So now let's turn to page six to discuss the components of revenue and the performance relative to last year's third quarter.

Domestic assessments increased 11.4% due to increased volumes and the impact of 2009 and 2010 price increases.

Cross-border volume fees increased by 40.2%.

About two-thirds of the $155 million increase was due to our October 2009 pricing adjustment.

The remainder was due to cross-border volume growth, which was up, as I said before, by 15.4% on a local currency basis.

Transaction processing fees increased 0.6%.

Processed transactions, which, as I said, were up slightly, continued to be affected by the loss of some debit portfolios.

And other revenues decreased 2.4%, primarily driven by lower compliance and research fees.

So in total, our gross revenue increased by $223 million, or 12.9%.

For the quarter, rebates and incentives grew $159 million.

Approximately $60 million of this increase was due to rebates associated with last October's revised cross-border pricing structure.

And the remainder was primarily attributed to new and renewed customer agreements, including some of the deals Ajay mentioned earlier.

Overall, rebates and incentives represented 26.8% of gross revenue versus 21% in last year's third quarter.

So now let's turn to page seven for some detail on expenses.

During the third quarter, total operating expenses decreased by 4.1%.

And within total operating expenses, general and administrative expenses decreased 6.7%, primarily due to lower personnel expense, which itself was down by $50 million.

Lower severance drove about half of the personnel expense decrease and we have taken some of these savings and reinvested them into the business.

Therefore, overall G&A was about down by $32 million.

The advertising and marketing expense was up 4.7% versus the third quarter of 2009, or 6.2% on a constant currency basis, primarily in support of campaigns in developing markets.

And our third quarter advertising and marketing spend was lower than expected, as some programs got pushed out to the fourth quarter.

Before getting into some thoughts for full year 2010, let me give you an update of what we are seeing for MasterCard processed volumes for the fourth quarter through October 28 of this year.

Our cross-border volume grew 17% globally, ahead of the 15% that we saw in the third quarter, and this was due to an uptick in volume growth rates in Europe, Asia Pacific, Latin America, and the US.

Although not a perfect proxy for GDV, total US processed volume growth, which was about 2% negative for the third quarter, was flat in October, and continues to be constrained by the roll-off of two debit portfolios.

Excluding the impact of the debit roll-off, total US processed volume growth was about 9%, versus growth of 7% for the second and the third quarters.

And this is certainly much healthier growth than what we saw in the third quarter of 2009 when US purchase volume was actually down by 7%.

US credit processed volume was positive in October, slightly ahead of the growth rate that we saw in the third quarter.

US debit processed volume growth continues to be down about single-digits, but was up by about 24% when you exclude the tempering effect of the debit roll-offs.

And in October, total processed volume growth for the rest of the world was about 18%, ahead of the 15% pace we saw in the third quarter due to strength in several regions.

Globally, processed transaction growth was about 4%, including the impact of the four debit portfolio roll-offs, and 17% excluding that impact.

The growth in both processed volume and processed transactions was in part driven by the Itau processing agreement that Ajay mentioned, as well as healthy underlying usage trends.

Now, on slide nine, let me outline our current view of 2010, which remains consistent with what we talked about on September 15.

We expect net revenue growth for the second half of 2010 to be somewhat lower than the 9.7% growth we saw in the first half.

And this is driven by the following factors.

First, the roll-off of a few debit portfolios through the year end will continue to dampen our processed transaction growth.

And our as-reported growth will remain constrained, at least through the first half of 2011 until the anniversary of the bulk of the deconversions.

But this will be somewhat mitigated by the impact of new business rolling on over time.

Second, we continue to expect contra as a percentage of growth revenue to average 26% to 27% for the full year, even with the simplified structure of our acquirer cross-border assessment fee beginning this quarter.

Remember, we will collapse all acquirer cross-border rebates into gross revenue with no impact on net revenue.

The slide labeled Appendix A in our deck lays out the adjusted impact through the third quarter had this change been implemented back in January.

And since this change has only a modest impact to quarterly rebate and incentive levels contra as a percentage of gross revenue would still be the highest in the fourth quarter due to new and renewed deals and the normal seasonality of rebates and incentives.

Now, moving on to expenses, overall we continue to anticipate our total operating expenses for 2010 to be down slightly versus 2009 levels including severance charges, as we reinvest in the business and key strategic initiatives.

Now, turning to the individual components of operating expense, we continue to expect general and administrative expenses to be down slightly from 2009 levels, again, including severance, but fourth quarter will be up more than 10% from the third quarter as a result of continued investments, and including the impact of DataCash.

Advertising and marketing spend should be up low-single-digits for the full year, and as we stated previously, up substantially versus the third quarter.

And based on our current view, it could actually be a tad higher than last year's fourth quarter advertising and marketing spend.

As mentioned earlier, we expect an $0.08 dilutive impact on full year EPS from the DataCash acquisition, of which $0.05 has already been booked in the third quarter.

Consistent with my comments on investor day, our full year 2010 tax rate will be somewhat lower than we previously expected due to a one-time benefit resulting from some of our tax planning efforts.

We now expect that our full year tax rate could be as low as 34%.

So, as a result of this, we continue to expect to achieve our objective of at least 20% net income growth for the full year.

Now remember, when all of our objectives are on a constant currency basis, our as-reported numbers include the impact of foreign exchange.

And this presented a 2.6% headwind to net revenue in the third quarter, and we expect a slight headwind for the fourth quarter, assuming the current exchange rates, particularly the Euro, to hold for the balance of the year.

Now, recall that the Euro averaged about $1.47 for the fourth quarter of 2009, versus its current level of about $1.39.

To date, 2010 has not been without its challenges, including continued mixed signals from the US economy and the roll-off of some debit portfolios.

But the fundamentals of our business remains strong with solid volume growth outside the US and a number of new business wins.

We are on track to meet our financial objectives of 2010, and want to remind you of our 2011 to 2013 performance objectives that we communicated at our investor meeting in September.

So that is, on a constant currency basis;

a net revenue compound annual growth rate for that period of 12% to 14%; a minimum operating margin of 50% on an annual basis; and an earnings per share compound annual growth rate of 20% plus over the 2011 to 2013 period.

So now let me turn the call back to Barbara to begin the Q&A

Thanks, Martina.

Before we move to the Q&A session, I would like to briefly point out Appendix B in the slide deck this quarter, which reflects an update in our treatment of US versus rest-of-world revenue.

We are changing the treatment of the intercompany fee that is paid from Europe to the US.

The key take away for you is that the percentage of our revenue coming from outside the US is slightly higher; further evidence of MasterCard's global presence, but there is no impact to total revenue.

We're now ready to begin the Q&A session, and in order to get to as many people as we can during our allotted timeframe, we ask that you limit yourself to a single question and then queue back in for additional questions.

Jeremy?

Thank you very much, Barbara.

(Operator Instructions) And at this time, your first question will be from the line of Jason Kupferberg of UBS.

Go ahead, sir.

Thanks, good morning, guys.

Just wanted to ask a question on the latest US debit wins.

Obviously, good to hear about Sovereign as well.

Now, I think at the analyst meeting, you guys had said that as these new wins kick in, they won't fully offset some of the runoffs you've been coping with.

But can you start to give us some sense of when collectively these new debit wins will start to kick in really at a full run rate as investors start thinking about how to model 2011?

Jason, as you know, usually that takes a little bit of time.

We've already talked about the SunTrust deal and we've talked about the debit actually starting in the latter part of the third quarter, as well as into the fourth quarter.

So we actually believe that we'll probably hit our full stride kind of mid-year of next year, and I think with all of the other deals that we've been talking about, you pretty much should assume that kind of length in terms of getting the cards into the market and for people to actually activating them and then using them.

So as I talked about, we'll still feel a little bit of a headwind in the first part of 2011, like the first six months from the deconversions, but then that's going to come off in the latter part of the year.

And in that latter part of the year, you'll also see the benefit from the new deals coming in.

Okay.

Can you guys just clarify quickly what part of your US PIN debit business, in terms of volume, is exclusive?

Jason, we don't really talk about that or give any disclosure on that.

Okay.

Thank you, guys.

And your next question will be from the line of Adam Frisch with Morgan Stanley.

You may proceed.

Thanks, good morning.

Ajay, given the regulatory environment and the consensus view that it's going to get more rigorous over the next couple years could you provide some color on your views around your use of pricing increases and its impact to growth versus more organic drivers, like emerging markets, e-Commerce, all the things you talked about recently?

Yes, sure.

Hi, Adam.

I don't know that it's a result of the regulatory increases as much as my general perspective on the business.

We are in a growth industry in the sense that cash is still 85% of retail transactions around the world.

And even in developed markets, as we talked about at Investor Day, cash still has a fairly strong proportion of retail sales; and I believe that to be the bigger opportunity.

And if you want to focus on that, then the right way to focus on that is to find consumer-friendly solutions that answer their needs as to why they should no longer use cash for what they use it for today.

And mostly cash transactions tend to be in the developed world for small ticket items.

That's why I'm interested in contactless .

That's why I'm interested in the mobile phone and those kinds of things.

In the developing world, those cash transactions are not only for small ticket items.

They could be because of the absence of acceptance in certain parts of the world.

That's why I'm so interested in the Indian unique identifier project, which takes acceptance to so many small cities and villages in the Indian system.

Or it could be because, because in some ways, cash allows a certain amount of tax -- let's say planning to use a politically correct word, for a number of these emerging markets.

So a number of the central banks and governments in these emerging markets are actually keen to drive down the use of cash, to improve the transparency of their economy and their tax revenue.

So I kind of look at all these factors coming together and I switch back to mobile phones, contactless , acceptance, promotions that explain why you should use a card or a different form factor of electronic payments as compared to cash.

That's kind of where we're driving a lot of our energy.

I don't know if that answers your question, but that's where my effort is.

Pricing to me is something you use when you see opportunities for strategic spaces in the markets that either give you a better margin in that market or give you the chance to compete more sensibly in some of these markets.

I don't view pricing as an end

Okay, great.

Just one follow-up.

You've been CEO now for a couple of months.

Aside from the obvious changes in your style and the way you communicate, to the outside world, it's fairly difficult to gauge what else is changed at MasterCard since you took over.

Can you give us some color on some of the internal changes you've driven that can give us a better understanding into how MasterCard may look or operate in the next few years?

Thank you.

Well, the -- let's see, what are we doing internally?

Everything from, from recruiting and promoting a number of people into jobs that allow this focus that we're talking about to show up.

So we've got a whole bunch of people focused on new channels and new clients and customers.

We call that our Business Development function.

So a portion of our sales force, both existing people and new people have been redirected towards that.

Hence the effort against governments and telcos and transit operators and merchant businesses.

We've also invested some amount of resources in beefing up our capability in the e-Commerce and mobile space.

We're looking at our entire data and figuring out how to make more use of that data in our Advisors space.

We have recast our Advisors business to bring it closer to our sales force in a number of the regions so that we can bring what I consider to be a competitive advantage with Advisors at the front end of our sales force.

A number of banks, as we talked at Investor Day, do not have access to thousands of people who will give them great insight into portfolio management.

We can do that with our Advisors sales force.

Similarly, we've created MasterCard Labs as a way of driving innovation.

I think the earlier conversation we had about mobile phones and e-Commerce and those kinds of biometrics in India for payments requires a Company that was otherwise very focused on the perfection of its delivery, the reliability of our clearing authorization and settlement system to find a way to take some thoughtful risks on investing in ideas.

Out of ten ideas, eight will probably not do well, and I'm going to have to learn how to cut the cord to those eight fast and smart, but invest in the other two.

So there's a lot of things going on here, Adam.

I just gave you a few examples of channels and products and innovation, and the kind of people that are focused on it.

There's also a great interest that I have in my own way of looking at business, where I believe that business is earned at the client's office and with their customers.

And so I'm determined to be out there meeting my clients, meeting regulators, meeting opinion leaders, and helping to make regulators and opinion leaders on the ground in different countries view MasterCard as a part of the way they grow commerce in their country; rather than a foreign company that merely exists to be able to facilitate its own profitability.

I think there's a lot of -- what I just said has a lot of stuff buried in it.

But this is something you'll see unfolding over the next couple of years.

I want to make real meaning of the slogan "heart of commerce", not just a statement, a real meaning of that slogan.

That's what MasterCard wants to be, at the heart of commerce.

Okay.

Thanks, Ajay.

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

You may proceed.

Thank you.

Good morning.

Just had a quick question on rest-of-world debit volumes.

Those have looked strong for some time now and I was wondering how much of that was organic versus new customer acquisitions?

And then one just accounting clarification question for Martina; the 26% to 27% rebate guidance for the year-- that basically assumes the accounting change happens in the fourth quarter and not for the first three quarters, right?

That's it.

Thank you.

Yes, Sanjay, for the last question, you're absolutely right.

In the fourth quarter, we are collapsing the contra revenue related to the cross-border rebates into the gross revenue.

Net revenue will not change; it will all be in that 26% to 27% range.

From a rest-of-world debit point of view, as you know, it's been growing very nicely and there is a mix in there in terms of that people are actually utilizing our cards more to do those kind of transactions, as well as we did have some business wins in there as we talked a little earlier about.

Sanjay, on the debit front, if you look at the data that's in our press release, you'll see Q3 2009 rest-of-world 27% up, Q3 2010 rest-of-world 30% up.

Nine months at 25% in 2009, 31% in 2010.

I guess that's where your question's coming from.

It's a little different in different regions of the world, trying to get a deeper understanding of how quickly debit is being embraced by consumers in different parts of the world.

If that's where your mind was going...

I would say in Europe, debit has always been a part of their life, and a large part of our transaction growth in Europe-- which is healthy by the way-- is coming from not just new wins, but also the fact that SEPA is allowing us to see and process much more transactions.

And we are being able to get into a situation like the Barclaycard example in Germany, which, by the way, is the sixth such bank in Germany where Maestro-only is now on their debit card.

So, in Europe, it's about winning space in the competitive space, because debit is already pretty well established, although I still look at Europe as a growth area because of the amount of cash still used there.

So that's Europe.

Asia and Latin America, I would say debit is less established as a way of life for consumers, but it's getting there.

In Australia, much more so than, say, India would be.

India is still very much an ATM withdrawal machine than a POS-users machine.

So is Mexico, much more an ATM withdrawal machine than a POS-users machine.

So you look at transaction growth.

You've got cash inside there as well.

If you look at purchase growth you'll begin to see what I'm talking about.

Okay, thank you.

And your next question will be from the line of David Hochstim with Buckingham Research.

You may proceed, sir.

I wonder if you can give us some sense of your expectations for China.

I mean, the MOU and I guess maybe some negotiations by our government to help open up China.

How realistic is it to expect that China could become a bigger and bigger money business like India or Brazil?

David, China is already a relatively attractive business for us, but the way I think about China is while it's relatively attractive and it's profitable and it's growing, there's this larger pot at the end of the rainbow that you're referring to which is the domestic processing business.

My view about the MOU with China UnionPay is first of all, I want to make sure that the business we do well today in China, which is the cross-border business both for Chinese traveling overseas and for people traveling into China, and for the e-Commerce space, that that is consolidated upon and grown attractively.

This MOU with CUP focuses, one, on the e-Commerce space, but, two, on that cross-border space.

In fact, as Walt said on Investor Day, out of the nine co-brands that came out in China in the last, I don't know, nine or ten months roughly -- I might be wrong a month or two here or there -- but roughly that number, we won all of them.

And that's partly to do with our relationship with CUP and how we are working together with partners.

Now, do I think that that will lead to some dramatic opening up of the Chinese market where the domestic sector will become open to companies like us and our competitors?

I don't know.

That's something that the Chinese government has to sort through in terms of their willingness to open that sector.

There's so much going on in the governmental space between our government here and the Chinese government that I don't know how to handicap where that will come out.

But my approach to that is we'll see what happens.

Let's keep the partnership going.

Let's build on what we're good at.

Let's make sure that it grows even faster.

Let me make an even more impregnable position in that space.

As the partnership develops, let's see where that goes.

I just don't know how to handicap it any other way.

Okay, and I guess the revenue guidance doesn't really assume a lot of domestic business for the next two or three years?

No, it does not.

But it does assume that we keep doing well on this cross-border and e-Commerce space and that this partnership with CUP remains a solid, good partnership.

Thanks.

And next you have a question from the line of Tien-Tsin Huang with JPMorgan.

Go ahead.

Hi, thanks.

The core is pretty clean but I'll ask about the rebates and incentives.

I'm curious as to if the cost to win and renew clients has changed at all and if you're seeing clients change their preferences between up-front rebates versus ongoing fee relief?

Hi, Tien-Tsin, it's Ajay.

I'll start off and Martina can add on.

But have I seen a change as these renewals are going on?

Not really.

I wouldn't say anything in the last three months but I've been here a year and a half now and I would say my general impression is that each of these deals is a very hard-fought deal.

There is not just a couple of competitors at the other end.

There is the economics of it, there's the value you bring from different products you place with them— InControl , EMS, fraud solutions , Advisors -- all of that comes into, what I call, an integrated pricing opportunity, along with an integrated solution that we're trying to propose to our issuer clients.

I think that, if you look out in the future, the trend of tough negotiations will only increase because every business has got pressure on its margins.

I think our job is to really find ways to; one, grow the overall size of the pie, hence, my focus on cash; two, grow my share, because I happen to be a lower share in some markets than some of my bigger competitors; and, three, to find intelligent ways to package solutions which allow me some pricing space.

And that's where I'm trying to work my way through this.

But it is the reality that everybody's got tough negotiations.

We've got a lady we hired here who does our purchasing contracts for us.

Trust me -- try negotiating with her and you will see she is on your case, and that's true of

Good.

That's, a good overview.

I guess I'll ask -- well, just as a follow-up.

I'm curious if there's a change between the up-front rebates versus ongoing fee relief, but my real follow-up question was more around the DOJ settlement.

Obviously, that was a good outcome.

I know it's not going to change your rules much, but I'm curious if you're going to see more discounting activity from the merchants.

And also I'm curious if you think there's any way that this settlement could change the outlook for the merchant litigation case.

If we can get an update on that as well, that would be great.

Thanks so much.

So two questions there.

The first question was about the DOJ settlement and whether I think the discounting will change.

I don't actually know that for sure.

I can speculate that there will be, in certain cases, the probability of some more discounting for the usage of cash.

But to tell you the truth, the total volume of our business that I think will be impacted by that discounting still remains very, very small in my mind.

And so while the settlement basically ended up in the right place with, let's say, merely a clarification of the way we were conducting our business, having had the experience of having conducted it that way for a while, I don't know that it's going to change a great deal with the settlement.

You know what I mean?

That's where I'm coming from.

And so I don't feel I'm staring at some big change in the way cash is used versus our cards are used.

I also think that all the other demographic and social circumstances are still a very strong tailwind, even in the United States, to go away from cash.

And I think that younger people, people with more education, more affluence, I see that as another little tailwind, in addition to our experience of having already had this kind of practical rule in the market before the DOJ settlement.

So that's kind of a long answer to a simple question, but it's a complex topic.

The second part, the MDL case --- nothing new has happened between, let's say, earnings between the September Investor Day and today.

The court heard these oral arguments back in November 2009.

They've not ruled on those motions.

There is mediation, court-recommended mediation going on right now.

That mediation is confidential.

It's tough for me to tell you where that will end up because I would be violating that confidentiality.

Do I see some progress in it?

Yes.

But do I see that going to a place where I can be confident that I see light at the end of the tunnel?

Not yet.

So that's kind of where we are with the MDL.

Will the DOJ settlement impact the MDL litigation case?

I don't know yet.

I don't know how to handicap these kinds of things.

I would rather not venture into that space and just deal with it as it comes along.

Okay, very good.

Appreciate it, thank you.

And, sir, your next question is from the line of Andrew Jeffrey with SunTrust.

Go ahead.

Hi, thanks for taking the question.

You've obviously got some momentum in US debit, which is encouraging.

Ajay, do you think that -- I know we don't know specifically what the Fed is going to say about exclusivity, but do you think just from a competitive standpoint, given your sort of distant second historical share in US debit, that as customers look at, or potential customers look at, what could happen to Visa in terms of its exclusive business, and that's factoring into their decisions now to go with MasterCard?

But it isn't so much an issue...

or maybe they figure the volumes are going to be heading your way regardless?

Or would you cite more your answer to Tien-Tsin as being sort of the key differentiator that MasterCard brings to the table as you take share in the US?

I understand what you're saying, Andrew.

Here's the thing.

The clarity around where the Financial Reform Bill was going and the sole exclusivity idea that came into the Bill really happened only a couple of months ago, if you think back in time.

It feels like a lifetime, but it's only a few months ago.

A lot of the debit wins we are talking about, in reality, is what's been going on for a year.

SunTrust took a year to go from initial conversations to real success.

Sovereign Bank has been going on from a couple of months since I joined the Company.

I can recall discussions at our Executive Committee around Sovereign Bank.

I remember Delta being a discussion from around the time I joined the Company.

I would say to you [that] some of the wins we've got are just good old hard work around what we bring to the party, what our capabilities are.

For example, in SunTrust's case, we have publicly gone out and said that the reason we won their business was because of the capabilities that MasterCard Advisors brought to the party in terms of portfolio management.

And I think those are the kinds of things that are helping us.

Going forward, if anything, I would like to see a little tailwind in that as we get some clarity around the exclusivity.

I just don't know what that clarity will be, so I don't know how to predict where it will go.

Does that help?

Yes, it does help, thank you.

And then rest-of-world debit, again, great share gains there.

Is that just market share and platform, or is there anything you could elaborate on in that regard?

No, rest-of-world debit has -- there two or three things going on.

One is we're learning on debit as we go along as a Company.

And we're trying to make real progress in Asia and Latin America with a number of our clients there.

We've got segmented offers in debit -- we're actually bringing our entire marketing might to the debit table.

In Australia, we went through an exercise of really understanding what youth in Australia were looking for from their debit circumstance.

We found that music, youth, and debit kind of created a nice holy alliance and we went after that in a very clever way with the partnership with a local bank.

And that's given us enormous gains in Australia.

So it's really hard work, country by country, on the debit space.

I would say in Europe it's a little different.

In Europe, it's about making sure that we start getting some benefit from SEPA.

And SEPA is a long haul, so don't get me wrong.

This doesn't change in one month or six months, but over the course of two or three years, as Javier said at Investor Day.

We think that SEPA gives us a real chance to see more transactions, as well as see more of them on Maestro-only cards, or MasterCard-only debit cards, as against co-branded with a local scheme.

Thank you very much.

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

You may proceed.

Thank you, good morning.

I wanted to ask a follow-up on Europe.

We've heard a lot of good new account conversions to MasterCard or Maestro-only and we don't get to see all that detailed information in terms of your major competitor over there.

One, I was hoping you could comment on perceived market share, if that's changed at all.

And, two, if you can comment on perhaps the discussions with the banks in Europe and their attitude toward going to a MasterCard-only solution versus what was trying for be pushed by the EC in terms of a pan-European system if that's what you would call it?

Thanks.

So two parts to that.

The first part is about perception of market share.

I would say that my general impression from the last year and a half of traveling in Europe is that we are seen as being the real player in debit and that we are seen as picking up some momentum in terms of the SEPA opportunity.

I don't think anything would have changed more dramatically than that in a year.

One thing I've learned about this business over time is that it takes time to change it upwards or downwards.

The debit losses in the US that are rolling off right now are the result of losses two years ago.

And the wins we've got just now in Martina's reply to the first question are really stuff that will roll on over the course of a year or year and a half.

So I would say nothing would have changed that dramatically in the course of this year.

The aspect of banks versus going towards a local European solution as against something else.

There's always constant dialogue with European banks and I would say, to first of all say, are European banks thinking about it will probably be a misnomer because each of them has a different perspective.

And that in itself tells you why it's not that easy to get one solution for the whole of Europe.

And the second thing is that the proof of the pudding will be in the eating, right?

And we've got real answers in the Netherlands where, as you know, MasterCard Maestro usage has now reached record numbers.

And we are making progress in a number of these markets and even in Belgium, as well as in other markets of continental Europe.

So I would say to you that I believe that the economic rationale of taking a global scheme that has the benefit of 100-plus modifications made to its core system globally every year which comes free to any one market, that benefit is now much more clearly understood than it was three years ago.

I think that remains a benefit for us on the ground in Europe where our technology and our global unified presence brings those 100 changes to every market.

For example, we are now amending our system to cope with biometrics for India.

Once it's done, and I saw the first transaction work with, by my own eyes actually, in India when I was there.

You can begin to understand that that will then be available to every market, including every country in Europe, across on our system.

If some other country in Europe decides to go to biometrics at some point in time, I can give it to them without a great deal of investment.

That to me is clearer in the minds of some of those European banks.

Some of the others, on the other hand, will still go differently, and it's a constant effort.

That's why SEPA and Europe is not a turn on a dime kind of thing; it's a two or three or four-year effort.

Okay.

And just to follow up on Banco Itau was the win of the switching there.

Was that driven by the change in rules around settlement and clearing?

Not really.

We've been talking to Itau for a while and it's basically an effort to get all their transactions to switch to us, and then of consequence we can see many more and give them many more value-added products for their portfolio.

It's more to do with that conversation than anything else.

Okay.

Thank you.

Thank you very much.

And your next question will be from the line of Tim Willi with Wells Fargo.

Go ahead.

Thank you.

You have mentioned a couple different times on this call the role of MasterCard Advisors.

Can you just sort of frame for us any kind of improvement that clients see in a portfolio, whether that be debit or credit, US or rest-of-the-world, just sort of a sense for the relative uptake in utilization improvements that people see when they utilize Advisors, when they utilize the research and rethink how to improve their card portfolio?

Are we talking sort of 10% kind of utilization rates, or 20%, 30%?

[Is there] any way to frame that and think about that uplift?

Hi, Tim.

I don't think I can give you that.

That's really something you've got to ask the banks.

It's their private data and I would be making a big mistake by passing that to you.

But I will tell you this.

Where I was coming from on Advisors [is that] some of the bigger banks around the world, in the US and elsewhere--- they clearly have excellent individuals in their company who have devoted a large part of time trying to understand their data and manage their portfolios right from more efficient acquisition of clients to utilization, to portfolio management, to bankruptcy prediction, to charge-off prediction, to loyalty schemes and so on.

Others, on the other hand, don't have those resources;those are the ones we focus on much more.

Having said that, even the bigger ones, when they do their information, they do it based on their own card portfolio.

What I can bring to the party through my anonymized data is a much bigger perspective of many more cards, not just the ones that are already in their portfolio, which may give them a somewhat unipolar view of what to do with their book.

And so those are the two aspects of Advisors that I'm trying to put forward as a competitive edge when our sales force goes to speak to everybody from credit unions to large banks in the US, as well as overseas.

But I'm sorry I'm not at liberty to give you a sense of the improvement in a bank's numbers.

That would be inappropriate of me.

Okay, thank you.

Operator, I think we've got time for one more question.

Okay.

Not a problem.

And at this time, I will bring forth the line of Rod Bourgeois with Bernstein.

Yes, guys, hey, just wanted to inquire as we compete under the Durbin regulation, is MasterCard planning to gain debit market share by competing more aggressively on price, or by using non-price ways to get your brand on more debit cards and also to attract merchants' routing decisions.

So can you give us some perspective on how the debit market share gains will be achieved and the balance of strategy from pricing versus non-price factors?

Thanks.

Rod, thanks.

It's first of all early days, I'm not going to go very far down that road because I cannot until I get some clarity on what exclusivity or the change that exclusivity means.

But, frankly, all the options we've looked at have a combination of both those things.

Even to get merchants to give preferred routing will require a combination of value-added products that they in turn perceive as important to them, as well as some pricing benefits.

Nothing will -- everybody's negotiating tough, as I said, these days and earlier.

It's a combination of both.

I don't know whether it will be more weighted to one or the other.

The way I look at my life right now is that all I've got here is the possibility of upside.

When I don't have that business, I'm trying to look at where that business could be positioned with me over a period of time.

I would like to get more of it with strategic value-added products and less of it with pricing, but we'll see how the game gets played out over the next year or two.

All right.

So, Ajay, on that topic, I mean, the banks are looking at lowered interchange in their debit portfolio.

Yes.

So as existing contracts come up for renewal, are you expecting more intense sort of pricing concession requests in these upcoming renewals since banks are looking at lower debit interchange?

Maybe they are going to ask for some pricing concessions across both the debit and sort of credit portfolios on the network fee side?

Is that something that you're anticipating, or is that being worried about something that's not likely to transpire?

That's a good question.

I would say to you that if you look at the volume of impact on their revenue line that has come out of the Card Act...

and I don't yet know what that impact will be in the case of the Financial Reform Bill because I don't know what that number will be.

But different banks have already begun to estimate, as you know, what that number could be.

They are talking about a very large number of dollars.

If you were to add up all the issuer processing fees I would make from banks of that size and scope, you're talking about, even if they were to negotiate back with me until the cows come home, you're talking about a very small difference in that number of revenue that they have lost.

What I saw in Australia when it happened in Australia, and I was at Citibank in those days, on the other side of the fence, was that the impact had to be made up of many other things; one being how you look at checking account fees, which as you can see is already beginning to happen.

In fact, right now they are getting fees on bank accounts that go past checking accounts, they go to different elements of the feature functionality of a checking account.

They'll happen with what you do with debit rewards and how you price those, they'll happen with how you price different services that you give, you may get pricing on ACH debits through a bank account, which today aren't priced that way, which in a number of countries are priced by the way.

If you talk to ING Direct in the Netherlands, they will tell you that ACH debits are priced.

Here they are not.

So there's a series of revenue items that banks will look at that I believe are more substantial in size than if you were to talk to some of the leading bankers in this country, they would tell you.

And they have been publicly quoted to say they already have really good pricing from the networks.

Therefore, I'm a little less worried about that.

I'm much more interested in providing them with more opportunities for thinking through how to make up their revenue as the next couple of years unfold.

I really believe that's my role as their partner.

But bottom line, there's some worry that pricing will need to be more aggressive in upcoming renewals, but it's still not clear to what extent?

Bottom line, there's less worry than you think that I have on what you just said.

Got it.

Then finally, if I could ask real quick, there's various arguments that two signature brands should be required on debit cards under the Durbin amendment, and I know from a MasterCard standpoint that that might be a nice feature if the Fed rules that way.

What's your best argument that two signature brands should be required on all debit cards?

No comment.

I cannot discuss that right now.

We are waiting for the Fed to come back.

It would be completely inappropriate for me to go out on that limb.

Okay, got it.

Thank you, Ajay.

Thanks, Rod.

Just before Ajay is going to go to his closing comments, I just want to reflect on one thing that we had in our disclosure this morning.

As you know, we ended the quarter with cash and cash equivalents and other liquid investments of about $3.6 billion.

And you will recall that our Board of Directors had approved a $1 billion share repurchase in mid-September, just before our Investor Community Day.

At this point, we have not repurchased any shares under the program.

As I stated at the Investor Community Meeting, there may be times, whether because of earnings or other corporate activities, that we're not able to do those share repurchases.

With that, let me hand over to Ajay.

So let me leave you with a few closing thoughts.

As Martina said, we're on track to meet our 2010 financial objectives.

We remain optimistic for the future to deliver the longer-term financial performance that we first outlined at the recent Investor Meeting in September.

I believe that we are at the heart of a growth sector and while we recognize that the industry is changing, we're not going to simply look to see our way through challenges that may arise, but we are going to convert on the underlying opportunities that they present.

As we reviewed in detail at our Investor Meeting, we believe we have the right growth strategy in place to grow our core business, diversify our customers and geographies and build new businesses in e-Commerce, in mobile and other areas.

We will partner and invest in innovation that complements our assets, our skills and our position in the payment space.

We will be flexible, we will execute this global strategy at a very local level, and this should enable us to continue to deliver strong results.

And we are building momentum; we have won some good deals and signed some really interesting partnerships across affluent, debit, prepaid, commercial, mobile, e-Commerce.

All I can say is that I look forward to these contributing next year and beyond, along with others still in the pipeline.

Thank you for your time today, and thank you for your support.

Thank you for your participation in today's call, ladies and gentlemen.

This does conclude the presentation, and you may now disconnect.

Have yourselves a wonderful day.