萬事達 (MA) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 MasterCard earnings conference call.

My name is Thelma, and I will be your coordinator for today's event.

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

We will facilitate a question-and-answer session towards the end of today's presentation.

(Operator Instructions).

As a reminder, today's presentation is being recorded for replay purposes.

I would now like to turn today's presentation over to Ms.

Barbara Gasper, head of Investor Relations.

Good morning everyone.

Thank you for joining us today, either by phone or webcast, for a discussion about our first-quarter 2011 financial results.

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

Following comments from Ajay and Martina highlighting some key points about the business and our first-quarter results, we will open up the call for your questions.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website 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 May 10.

Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about MasterCard's future performance.

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

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

With that, I would now like to turn the call over to our president and CEO, Ajay Banga.

Ajay?

Thank you Barbara.

Good morning everybody.

Before Martina gets into the details of the results, I thought I'd comment as usual on some operational drivers in the quarter as well as some recent business highlights.

In the first quarter, we saw net revenue growth of 14.8% with essentially no real impact from foreign currency exchange rates.

We saw healthy GDV growth of 12.8%, and an 18.5% increase in cross-border volume.

All of this kind of put together helped fuel first-quarter operating income growth of nearly 20% and an EPS growth of 24%.

Actually, we're quite pleased with a solid start to 2011, delivering our second consecutive quarter of double-digit volume growth, including improvement in the United States.

Outside of the United States, volumes continue to grow double-digits with solid increases in Europe, Latin America, and the Asia/Middle East/Africa region which is up about 20%-- this last one, Asia/Middle East/Africa-- despite the natural disasters and political upheaval that have occurred there recently.

So in particular, we are going to be watching what kind of impact these last mentioned events may have on cross-border volumes.

So far, what we've seen is that some of the affected markets have experienced double-digit declines in inbound volumes, but outbound volumes have actually jumped.

Other markets have seen related increases in inbound travel volumes, markets such as the United Arab Emirates and Turkey.

These gyrations are normal and usually relatively short-lived following disruptive events of the type that region has seen.

We are keeping a close eye on these developments.

Turning to the economy, while I think I'm really glad to see a number of positive trends across the world over the past six months, some of which as you can imagine are reflected in our numbers, I still remain concerned about housing prices and unemployment in the United States, about food and gas prices inflation around the world, as well as the medium-term impact of the events I just spoke about in the Middle East and Asia.

So overall, I would say I remain cautiously optimistic.

Moving briefly to US debit regulation, while I know this is of great interest of many of you but I have very little new information to report.

We as a company continue our advocacy efforts in Washington to delay or to change the Feds proposal, and we fully endorse all efforts to ensure that lawmakers have a better comprehension of the unintended consequences of the law that was passed about this time last year.

The fact is that interfering with the balance of costs paid by consumers and merchants will most likely tilt that burden towards consumers.

It will also stifle innovation as participants have less incentive to invest.

I believe this was not completely understood prior to the legislation being passed.

Also, given the complexity of the issue, while we were not surprised to hear Chairman Bernanke announce that the Fed would not meet the April 21 deadline, we actually don't have any further insight as to when the Fed will actually release its final regulations.

In some cases, this uncertainty has had very little impact on issuer decisions related to their debit portfolios, while in other cases, it shows they are taking a wait-and-see attitude before making any changes.

Ultimately, we will need to wait and see the reactions of all stakeholders, including issuers, acquirers, merchants and consumers, before the full impact to our industry can be measured.

Whatever happens, the earliest this regulation would likely begin to impact MasterCard would be in 2012.

We will need to remain nimble and navigate our way through this.

We continue to believe that we have some potential upside to our volumes as a result of routing non exclusivity if that were to go through.

Given that, from a share perspective, we have more to gain than to lose.

Meanwhile, with all this going on, we remain focused on executing our growth strategy.

So let me just highlight a few recent items.

Let's start with prepaid.

We recently completed the acquisition of the card Program Management operation of Travelex, and that now clearly extends our position in the prepaid value chain, positions us for additional prepaid growth around the globe.

Speaking of Travelex, under our previous agreement with them, we launched Cash Passport with the IPS processing platform in South Africa and Brazil, which actually is a conversion from a competitor.

In Costa Rica, we launched a government benefits prepaid MasterCard program that actually is aimed at replacing check disbursements with cards, creating cost efficiencies and reducing friction for the nation's principal insurance provider and beneficiaries.

In addition, we finalized several other prepaid programs in Asia-Pacific/Middle East/Africa during the quarter, including the renewal of a multi-currency prepaid card in Australia that is very popular among international travelers, the first general-purpose reloadable card in the UAE, the first multi-currency travel prepaid card in Qatar, and a public-sector prepaid card in Kuwait that displaces the government's use of vouchers for the disbursement of food aid.

So while I'm talking about the Middle East, I think it's worth mentioning that we also have a couple of other things.

The Arab Bank Group, one of the oldest banks in the Middle East, has launched the MasterCard World Card to its top customers in Jordan, UAE, Qatar and Bahrain.

In Abu Dhabi, we signed an exclusive debit deal with Abu Dhabi Commercial Bank, one of the top five banks in the UAE.

In Egypt, we reached an agreement with Egypt Air to develop a debit co-brand card.

So you can see that despite the turmoil in that region, we continue to get credit, debit, and prepaid deals done across several markets, including Egypt.

Continuing with some other debit highlights, very pleased that we've just renewed, the long-term renewal actually, of a Maestro debit portfolio Poste Italiane, one of our largest debit issuers in Europe.

We just continue to make progress with domestic processing in SEPA.

In fact, domestic processing grew over 40% versus the first quarter of 2010, a bit ahead of the 30% growth we've seen over the past two years.

These are still small numbers but the fact is we continue to benefit from a number of deals that we had signed in SEPA over the past couple of years, but we are also making progress in enabling Maestro cards for e-commerce use.

Over 80 million of the 300-plus million Maestro cards in Europe are now enabled and this is growing online acceptance of Maestro.

Groupon has opened several European sites to Maestro.

In fact, in only four months, Groupon has become the largest volume e-tailer for Belgian Maestro cards and one of the top merchants for Maestro in Spain.

And we expect other e-commerce merchants to follow later this year.

In Africa, we signed a cobrand deal with InterSwitch, the primary domestic player in Nigeria that will convert domestic branded debit cards to co-branded InterSwitch MasterCard debit cards.

Turning to mobile, I mentioned last quarter that we've entered into an agreement with Airtel Africa and the Standard Chartered Bank to link subscribers' mobile accounts for virtual MasterCard account numbers.

This functionality won the award for the best mobile money product or solution at the Mobile World Congress in Barcelona.

This demonstrates this solution hits the mark in this rapidly evolving mobile payment space.

A brief update on Telefonica JV, we continue to be in set-up and hiring mode in those 12 markets and will be through most of this year.

The JV has just completed a competitive process to choose its mobile payment processing solution, and has selected the platform that we are building with SmartHub from the Philippines as part of a separate partnership that we have with Smart.

The selection is based on a third-party independent evaluation which is the way we set it up with the JV, which actually is a great proof point for the SmartHub JV as it continues its own buildout not just in Latin America, but also expansion outside in other regions of the world.

Mobile is a fast-moving space for us.

We look forward to bringing you more news as we speak over the next few quarters.

So now let me turn the call over to Martina for a detailed update on our financial development and operational metrics.

Martina?

Good morning everyone.

Let me begin on Page 3 of the deck, which shows our reported results versus last year's first-quarter.

Net revenue grew 14.8% and to $1.5 billion.

Foreign exchange rate fluctuations had essentially no impact.

Net revenue growth was driven by increases of 12.8% and gross dollar volume on a local currency basis, 18.5% in cross-border volume, and 11.1% in processed transactions.

Approximately 5 percentage points of net revenue growth came from pricing.

These drivers were partially offset by an increase in rebates and incentives.

This quarter, the full 60% of net revenue was generated outside the US, as non-US revenue growth continues to outpace growth in the United States.

Total operating expenses were up 9.4%.

This was primarily due to higher G&A expenses as a result of strategic investments and the DataCash acquisition, as well as higher marketing expense.

Operating income was $836 million, up 19.4%.

This resulted in an operating margin for the quarter of 55.7%, 2.2 percentage points higher than last year's first quarter.

The effective tax rate declined to 32.8%, primarily due to the geographic mix of earnings and tax planning initiatives.

We delivered net income of $562 million, up 23.6%.

Earnings per share were $4.29 on a diluted basis, up 24%.

So on the next couple of slides, we have the breakdown of operational metrics for the first quarter of 2011 compared to the same quarter a year ago.

Let's go on Page 4 first.

Here you see that worldwide gross dollar volume, or GDV, was up 12.8% on a local currency basis and grew 15.2% on a US dollar converted basis to $728 million.

This is the highest quarterly growth rate we have seen since the third quarter of 2008.

US volume growth was 5.8% and across the rest of the world, volume growth was 16.8% on a local currency basis.

Worldwide credit volume grew 10.3% on a local currency basis, which breaks down into 4.8% growth for the United States and 12.5% for the rest of the world, including double-digit gains in Latin America and APMEA.

Worldwide debit volume grew 17.4% on a local currency basis.

In the US, debit growth was 6.9%, and it was about 28.4% for the rest of the world, driven by APMEA and Europe.

Cross-border volume growth on a local currency basis was up 18.5%.

This is actually the fifth consecutive quarter of double-digit growth.

This was supported by double-digit growth in just about every region, including the US.

Turning now to Slide 5, processed transactions were up 11.1% compared to the year-ago quarter at about $6 billion.

Processed transactions continued to grow at double-digit rates in Latin America and APMEA and have turned positive in Europe for the first time in several quarters as we continue to lap the UK deconversions.

The combination of the deconversions and new business continue to result in a net headwind for processed transaction growth.

But excluding these factors, underlying processed transaction growth was about 13%, a modest improvement from the growth rates we have seen in the last couple of quarters.

Recall, we began to report this breakout a number of quarters ago so you could see that our underlying business remained healthy, but as we think deconversions and new business will essentially offset each other starting with the next quarter, we do not believe this breakout will be necessary going forward.

Global card growth was 4.7% to about $1.7 billion MasterCard and Maestro card.

While this continues to be led by debit card growth, our credit card growth has turned positive for the first time in over two years.

Now let's turn to Page 6 to discuss the components of revenue and the performance relative to last year's first quarter.

First, domestic assessments increased 23.2% due to increased volumes and the impact of 2010 pricing actions.

Volumes benefited from new deals that we signed over the course of the last year, as well as better performance from existing customers, particularly in the US and in Latin America.

Just keep in mind that the price increase that went in during April of last year has now grandfathered.

Cross-border volume fees increased by 3.6%.

Excluding the impact of the October 2010 cross-border pricing structure change, these volume fees actually increased by about 21%, driven primarily by cross-border volume growth in Europe and APMEA despite events in the Middle East and Asia.

Strong inbound travel to the United States also contributed to these results.

Transaction processing fees grew 15.8%, driven primarily by the growth in processed transactions, which was due in large part to the diminishing impact of deconversion, new business in the US and in Europe, along with our processing win in Brazil.

As an aside, revenue from our DataCash acquisition is included in three revenue line items -- domestic assessments, transaction processing fees, and other revenue.

In total, gross revenue increased by $230 million, or 13.1%.

Rebates and incentives for the first quarter were $477 million, up $37 million from the year-ago quarter.

However, the increase was about $100 million, or roughly 27%, when adjusted for the cross-border pricing structure change.

The increase was due to the impact of new and renewed deals as well as the stronger volume performance we saw during the quarter.

Now let's turn to Page 7 for some detail on expenses.

During the first quarter, total operating expenses increased 9.4% and currency fluctuations essentially had no impact.

Within total operating expenses, general and administrative expenses increased 7.9%.

This growth was primarily due to increased investment in support of strategic growth initiatives such as mobile, e-commerce and information services, as well as the inclusion of DataCash.

Advertising and marketing expense was up 12.1%, mainly driven by customer-specific initiatives in support of sponsorships outside of the United States as well as by increased support of strategic priorities such as affluent.

Depreciation and amortization increased 19.3%, primarily due to the acquisition of DataCash and investments in technology improvements.

Let's move to the cash flow statement and balance sheet highlights on Page 8.

So we generated $355 million in cash from operations in the first quarter.

And we ended the quarter with cash, cash equivalents and other liquid investments of $3.9 billion.

We repurchased about 2.6 million shares of Class A stock during the quarter at a cost of approximately $654 million.

Through April 28, we have purchased a total of about 3.9 million shares at a cost of roughly $1 billion.

Also just a few weeks ago, the Board authorized the repurchase of an additional $1 billion in stock.

While we executed the first when $1 billion fairly aggressively since we were blocked from being in the market last year, we do not expect to execute this incremental authorization at the same pace as the first $1 billion.

Instead, we plan to purchase shares on a more opportunistic basis.

Turning to Slide 9, let's discuss 2011.

First, starting with an update of what we have seen for MasterCard processed volume for the second quarter through April 28.

Our cross-border volume grew roughly 18% globally, in line with what we saw in the first quarter.

This was driven by double-digit growth in all regions.

Although not a perfect proxy for GDV, total US processed volume grew 9%, ahead of the levels that we saw in the first quarter.

The uptick is partially due to a much later Easter holiday, as we saw higher growth in hotels and restaurants.

Higher gas prices contributed slightly.

In April, total processed volume growth for the rest of the world was about 22%, slightly ahead of the 20% pace that we saw in the first quarter, due to continued strength across the regions.

Globally, processed transaction growth was about 16%, ahead of the 11% growth we saw in the first quarter.

So based on what we see now, let me give you some thoughts for the full year.

While we had a really good start to the year, we continue to expect that 2011 net revenue growth will be slightly higher in the second half versus the first half.

This will be partially due to the diminishing effect of the deconversions and contributions from acquisition activities, but tempered by the anniversary of the April 2010 price increase.

That being said, we are watching very carefully for any impact from various world events or any potential slowdown in the economic recovery.

We remain committed to our target of a minimum 50% annual operating margin and continue to target only a small operating margin expansion in 2011.

Let me remind you that our operating expenses continue to include investments in strategic areas, such as e-commerce, mobile, prepaid, commercial, and information services.

It will also include the operating expenses of DataCash and the Card Program Management business that we recently bought from Travelex.

The vast majority of the impact of these acquisitions will be felt in G&A.

There will also be an impact to depreciation and amortization, which we expect to grow more than 30% versus 2010.

In total, we expect DataCash to be neutral to 2011 earnings and the Travelex Program Management business to be $0.04 to $0.06 dilutive, including integration expenses.

As a result, acquisitions will contribute more to operating expense growth for the full year than they will to net revenue growth.

For modeling purposes, you should continue to assume a full-year tax rate of 33%.

Finally, we remain focused on our objectives for the 2011 to 2013 period of a net revenue compounded annual growth rate of 12% to 14%, a minimum annual operating margin of 50%, and an earnings per share compounded annual growth rate of at least 20%.

Recall, we have said that these objectives are all on a constant currency basis and exclude acquisitions, except for DataCash and Travelex.

Assuming today's foreign exchange rates for the euro and the Brazilian Real hold for the balance of the year, you would expect a net tailwind of about 3 percentage points to revenue, to net revenue.

Based on the current mix of business, we estimate that a $0.01 change in the US dollar to euro exchange rate has about an $11 million to $13 million annual impact to net revenue.

This is a slight increase from our previous estimate of $9 million to $11 million as euro-based revenues are growing faster on a percentage basis than US dollar revenues.

The impact to our expense line continues to be about $3 million to $4 million in the opposite direction from the revenue line impact.

This results in an $8 million to $9 million annual impact to the operating income line.

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

Barbara?

Thank you Martina.

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

In order to get to as many people as possible in our allotted time frame, we ask that you limit yourself to a single question, and then queue back in for additional questions.

Operator?

(Operator Instructions).

Bryan Keane, Credit Suisse.

Hi guys.

Very, very solid results.

I did want to ask, Ajay, you commented about impacts or potential impacts due to Durbin.

One of the things you said is that there could be a potential benefit from routing of non-exclusivity.

So I just wanted to dig down on that a little bit because I remember on the last call I thought you guys made a point that multiple routing options on Signature could be a negative for the industry and maybe MasterCard.

So are we specifically talking about both multiple routing options on both Signature and PIN or are you trying to make a distinction there?

It is actually that if there were multiple routing options of Signature and PIN, I remember saying that would not be a good outcome for the industry.

It will be very confusing.

That still remains the case.

It's only if the routing options that come out are somewhat simpler than that and are limited to having a non-connected PIN brand along with a signature brand, one in the back, one in the front on a card.

I think that is the opportunity when, given our lower share of volume today, that we would have a volume opportunity.

It's not clear to me how this will work out; it's not clear to me what will eventually come out in the rules; it's not yet clear to me what the shorter-term impact will be versus the medium term.

But again, I'm looking out and saying just given the reality of my lower share, that should give me some volume benefit over a period of time.

Just a quick follow-up.

July 21, do you still expect the Fed to have a decision or at least some kind of decision on Durbin by then, or do you expect it'd be postponed as well?

I have no idea.

That's what the Fed Chairman has said repeatedly, that he and his team will be ready by that date.

I expect them to be absolutely on schedule for that one.

I just don't know any more than you do.

Congratulations on solid results.

Adam Frisch, Morgan Stanley.

Thanks.

Good morning guys.

Nice job on the quarter.

Ajay, you've made several positive and strategic hires lately at both the operating and the Board levels.

I'm wondering if you could give us a little bit more color on your thoughts and rationale there, what drove these changes and what we can expect over the next 12 to 18 months as you continue to accelerate your investments in growth and opportunities around the world in lots of different areas.

Thank you.

We've described our strategy as the strategy of trying to grow our current core businesses of credit, debit, prepaid, commercial.

So part of my hires are meant to reinforce our ability in both spaces, both in terms of product knowledge but also in terms of local regional delivery by country and by region.

So that's one part of the story.

The second part of our investment has been in diversifying our revenue streams across different kinds of clients, not just issuing banks but also merchants and governments and transit authorities, so whether it be the Social Security Administration or the government of Costa Rica that I just talked about, or the Indian government or stuff of that type.

That requires a certain skill set both in terms of the product as well as the kind of selling that is required in going to a government or a transit authority as compared to a normal issuing bank partner of ours.

So that's a different kind of space and so some of the hiring is in that.

Finally, a third part of our strategy has been to build out new revenue streams, whether it be get back into competing in e-commerce for a fair share of growth in that booming area, or whether it be to get to play to define the mobile ecosystem, or it be beginning to take advantage of advisors and our very talented people there to start using the data we have to create an information services business.

All those are needing new talent in some ways.

So really what I am doing is filling up the space that we needed against that grow-diversify-build strategy.

We've looked at people in the Company and a number of the jobs have been filled actually internally, and some have been filled by bringing in people from outside.

Martina, do want to add something on that?

In addition to that, one facet of the strategy is obviously what we are doing from an acquisition point of view or what we are doing from partnering with other companies.

As you know, with the DataCash acquisition and the Travelex and the Card Program Management business for Travelex, we will be -- we have acquired great resources in terms of people to be really driving spaces in that particular -- those particular arenas.

And so that's just another facet of how you can do it.

The last thing I would add is we just added a new member to our Board, a lady called Rima Qureshi who comes from Ericsson and hopefully brings not just global knowledge with her background and her global expertise in running a business as well as being a very active research and development scientist at Ericsson, but also brings direct let's say domain expertise in the mobile space.

Thanks guys.

Nice job.

Tim Willi, Wells Fargo.

Thank you and good morning.

I had a question around the mobile.

As you think around the emerging markets and the international growth, I was wondering if you could just sort of talk about the sort of thinking between the actual consumer application of mobile and making a payment versus the impact of the terminalization of these emerging and growing markets and if you sort of said two or three years ago we would've expected a growth curve of merchant acceptance points growing at a certain rate.

With all that's happened on mobile and the speed of the development there, do you feel like that curve of merchant acceptance is potentially moved to a steeper climb and more rapid terminalization over time to drive the availability of card payment options for consumers?

There are two angles to this.

One angle is, in the emerging markets, given the current absence of terminals that would accept something to do with a mobile phone, it's not -- I'm not sure that the mobile payment system ecosystem in those markets will develop the same way as it might in a somewhat more advantaged country that has better terminalization in place.

Mind you, having said that, contactless terminalization is still relatively small, even in the United States and in developed countries.

But whether mobile payments develop, and I've said this earlier, as a contactless-based system or as an SMS-based money movement system or as a true mobile commerce enabled system with be rapid deployment of smartphones in the world, I think of some version of all three will begin to develop.

What we are trying to do is to place bets on all three and to be partners with institutions, banks and phone companies and merchants in all three spaces.

Now, will this lead to a more rapid expansion of terminalization?

In the sense that this is part of how you get cash to convert, particularly small ticket cash to convert to electronic payments, a cash payment, a newspaper bought somewhere, a transit payment somewhere, yes.

I think it will drive terminalization faster.

But lots of work needs to happen for that to happen.

The cost of those terminals needs to become somewhat cheaper.

The fact that I think we'll find intelligent ways to make that terminal more easy for a small merchant to adapt to, that would help as well.

So there's a lot of work to be done in this ecosystem yet.

One angle is to get the issuers and the phone companies and all of us aligned.

The other angle is to get terminalization so that a consumer can actually get their money out at the other end or use their phone sensibly at the other end.

So I think you'll see a lot of energy going into that space, but I don't know to happen in six months or one year, compared to two years or three years.

I don't know the answer to that yet.

Craig Maurer, CLSA.

Good morning.

I wanted to ask, Ajay, your thoughts on the global economy and how recovery is shaping up.

We got some data out of Hong Kong this morning talking about total retail sales up 26%, but that the high end was up 54%, which is dramatic acceleration over the last three months.

Is the recovery that you're seeing outside the US very similar to what has happened in the US, where the haves are dramatically outspending the have-nots in terms of growth?

Also, if Martina could just comment, are there any seasonal aspects or sponsorship aspects to the marketing line that we should think about for the rest of the year?

Thanks.

I'm going to answer the A&M cadence first.

We have some very small seasonal aspects to the sponsorship activity.

But maybe it's a little bit more helpful if I can just sketch out for you how we see the rest of the year developing.

You saw a 12.1% increase in the first-quarter numbers.

I think for the second and the third quarter you should also be expecting to see some increases, maybe in the neighborhood of around 10 percentage points versus last year.

Then in the fourth quarter, you probably should see a number maybe slightly below what we have been spending in the last fourth quarter of 2010.

So hopefully, that's helpful for your model.

On the first question, in the US, you would expect that when you have a recovery from the kind of difficult circumstances we have been through, that if a recovery were to be sustained, you would expect that, in the beginning, it would be the more affluent that would come back into a spending circumstance.

Think of the stock market going back up again, think of asset prices and think of the affluent therefore getting back to feeling that their space in their world is improving again.

Think of big companies and manufacturing recovering of the United States, and you think of the owners of those companies and the well-placed executives in those, and you would find that their recovery will spark their spending first.

Hopefully, as this recovery start spreading, you will get back to the mass of consumers in the United States coming back into spending.

You can see that in the Fed report recently, banks have become more open with their lending standards again in an effort to, one, revise that portion of the market, but two, it reflects their relative comfort of their capital position compared to where they were let's say a year ago.

So it's going to take some time, but I believe it starts from the affluent, but it really spreads through the middle class.

That's where it gets its bedrock.

I think, oversees, in Asia and Latin America, it's a little different.

They didn't go through the same let's say financial turmoil in exactly the same way that we did in the United States.

To that extent, I think their affluent classes have actually had a relatively good run over the last two years.

The recovery of property prices and the recovery in the global commodity price system and stock price system has generated an enormous amount of wealth in those markets.

That's the spend you're seeing.

I used to live in Hong Kong just two years ago, and even two years ago in the midst of economic crisis with the developed world, I will tell you the kind of expenditure patterns I saw in Hong Kong were remarkable, and so Hong Kong is what it is.

With the prices of everything from jewelry to wine to Christie's auctions, that's Hong Kong.

I'm not sure that you should extrapolate from Hong Kong to the rest of the let's say newer developing world.

Hong Kong is truly a little different from some of the others.

But I would say, as we go along, we're a little bit -- back to what I said, if the economic recovery is sustained, then I think you will see a broader middle-class spend coming in.

But there are lots of factors that go against it.

Craig, the one thing that we are really watching very carefully, and Ajay said in his opening remarks, are food and gas prices, inflation in general.

While at the moment we are not seeing any impact other than some positive impact from a spending point of view, from a volume point of view on our volume, over the long term, the inflation could be crowding out other discretionary purchases that people can be making.

So that is one thing that we all need to be very focused on.

Andrew Jeffrey, SunTrust.

Thanks, good morning.

You laid out a number of different investment initiatives globally from prepaid to mobile, etc., SEPA too.

Is there a point at which you start to look at the investment spend in aggregate, both acquisitions and sort organic investment in new initiatives, and you start to evaluate ROI?

For those of us on the outside looking in, when do those investments start to move the needle top and bottom line?

How should we be thinking about them?

Let me start first of all.

We're looking at all of our investments together.

We don't just look at individual investments and then just add it up.

We really look at everything that we need to be doing in certain spaces; we look at specific business cases; we look at return in investment.

The one thing that we always try to do is we try to make sure that we have some short-term investments that give us shorter-term returns.

We look at some medium-type investments that the returns might come over a two, three-year period, and we are doing some longer-term investments.

You could put for instance the mobile activities in there from a longer-term point of view, that are returning, or that we think will be returning, profits over the longer-term, and that's probably beyond the three-year period.

So from a spending point of view, we're very critically evaluating it every step of the way how we do these kind of things.

But let me just give you some examples from a shorter-term point of view.

Well, we are hoping to have the return come fairly quickly, but when you look at it on a quarterly basis, there may be some pain that we have in the meantime.

So look at our acquisitions, for instance.

Look at DataCash.

We said DataCash to the bottom line in 2011 will not drive the bottom line at this point in time.

When in fact you're looking at the first quarter, DataCash contributed about 1.5 percentage points to our 14.8% revenue growth.

It contributed about 3 percentage points to our 9.4% operating expenses.

So you can see that there's already a little bit of pain that we have to endure from a shorter perspective on a particular acquisition.

Based on what the comment we made from Travelex with a $0.04 to $0.06 dilution in 2011, starting in the second quarter since we just closed the transaction, you will see a little bit pain there.

That's why we are saying what we are saying from an operating expense point of view, as well as from an operating margin point of view.

The only other thing I would add is I continue to believe that, with so much of the world's transactions being in cash and check, investing some of our capacity to invest in trying to accelerate our position in those places makes a lot of sense.

We're fortunate to have a Company with a business model and with a revenue-to-expense ratio that gives us the opportunity to put some money back.

But every single investment inside the Company is pretty let's say -- let's call it hotly debated before it reaches the ability to spend money.

Martina is part of that hot debate process.

Bill Carcache, Macquarie.

Good morning.

You mentioned a solution that you, Airtel Africa and Standard Chartered Bank created that won the GSMA Award.

I wonder whether you could comment on whether financial inclusion initiatives like these help to better position you with regulators in emerging markets around the world relative to more developed markets like the US, given that you're effectively helping to bring the unbanked bank into the financial mainstream.

Then separately, can you give us an update on the Unique Identification Program in India and how long it will take before we start seeing some transaction volume as a result of this?

Sure.

Working with governments in some of the developing countries, in the newer growth countries, is actually a very important thing to do, both for purposes of our positioning with regulators, but even more so for actually getting into the business model that will develop in those markets.

So it's kind of a two-way thing.

I don't think we have a choice.

If we want to grow in those markets and if we see the ability to convert cash to electronic payments in those markets as a very sizable opportunity, then we must do some of these things in a smart and sensible way.

So I think working with financial inclusion in those markets, frankly I think working on financial inclusion even in the United States is the right thing to do, where 45-odd million people --people estimate-- I don't know the numbers, I could be off by a few, but 45-odd million people do not have access to full banking.

If all the implications of Durbin come true, who knows.

That number may actually increase if retail bank accounts end up getting fees of a certain volume.

So I see opportunity in that entire space, both from a business perspective but also from the right kind of image for our Company, locally.

I want consumers to choose what we do with our banks and our merchants because of our offering the right solution to them.

So if there are people who need financial inclusion, they've got to find the right fit for them.

That's one part of the answer.

The unique identifier project in India, I was in India just a couple weeks back and met with the Authority again.

What we are in active phase right now is we demonstrated to them that we have adapted and improved our technology to allow issuing banks to be able to connect the 12-digit number issued by the UID Authority with a 16-digit number that we would use with the banks.

That ability to connect that through biometrics as a way of authenticating the transaction is what we are demonstrating.

In another month or two, we will actually demonstrate not only the authentication but the clearing and settlement of that transaction with the UID and some partner banks on the ground.

The UID Authority is in the process of issuing these identifications.

It's a fairly complicated process.

They've got a center set up and people come in to give their biometrics and their card gets issued.

That card is still not payment enabled, and so there are whole steps and series here.

I actually believe that it could well be another year or so before it starts translating into real few transaction numbers.

Remember the acceptance system also has to be built at the other end for those biometrics to be used for merchants.

So there's a lot of work to be done here.

I kind of -- my view of this is -- a bit to the earlier question -- be involved in what that government is trying to do.

They're trying to reduce cash, trying to reduce inefficiency, trying to reduce leakage of subsidies in the system, and we want to be a partner of theirs in that process.

Jim Kissane, Bank of America Merrill Lynch.

Martina, you sketched out marketing expense.

Is it possible for you to sketch out pricing and rebates and incentives for the balance of the year?

First of all (multiple speakers) somebody had to ask.

So you are the one.

On the pricing side, the only thing that I can really tell you which I said already in my prepared remarks is that obviously the April 2010 price increase has anniversaried in April.

So you're not going to expect to take that going forward.

We also said that, over the 2011 to 2013 period, we have included very little pricing going forward.

So that should give you a little bit of help for the rest of the year.

From a rebate and incentive point of view, we typically don't give any kind of guidance on that.

Last year was a little bit of an extraordinary period simply because of all the things that we had going on in the rebates and incentives line including this change from a pricing point of view.

You should just expect us to continue to go hard after new agreements, and we will renew all of our agreements, so you should expect another busy period this year.

Sanjay Sakhrani, KBW.

Thank you.

I've got one quick housekeeping question and one other one.

So my housekeeping question is I was wondering where you stand on providing us updated Maestro data.

I guess the second question is just that acceleration in US credit card volume growth.

I was wondering what was driving that trend.

Is it a focus by your customers on the transactor type customer or is it same customer volume growth?

Thank you.

Let me take your housekeeping item first.

Yes, we're trying to get our head around whether or not to put Maestro data out in the market.

We have done quite a bit of analysis, and in the end, we actually concluded that, based on the analysis, if you put out the data in the market, it really does not explain our revenues drivers any better than what we have.

Let me just explain to you why.

First of all, those fees that we are getting from domestic assessment revenues, half of those are actually driven by card fees or other non-volume related fees.

So, if you want to relate it to volume, half of them just don't relate to volume, and so you just don't have a very good explanation from a driver point of view.

The other thing is, from a cross-border point of view, as you know, quite a bit of our Maestro fees do come from cross-border transactions.

However, the volume of those cross-border transactions compared to total volume is extremely small, and then it's further complicated by that most of those come from the intra-Europe transactions which have lower pricing, as you know, than cards being used outside of Europe.

Then lastly, we do still deal with some data inconsistency in particular in countries where we do not have volume driven fees and the volume does not get reported to us.

However, the one thing that we do have, and we've always had in there, is Maestro transactions.

Any Maestro transactions that we transport over our network are in the processed transaction count.

I think that's actually the best way to look at Maestro, simply because it also, over time and as Ajay said in his prepared remarks, it will take some time.

But over time, you will see some impact from all the great work that our people in Europe do on SEPA.

So I think that's where we're leaving it at this point in time.

So far as your question on US credit volume is concerned, I feel there are two or three things inside there.

The first one is remember we've also got now SunTrust, some business coming in there.

Remember that we've got some recovery in the market with most of the banks being willing to go back and look for credit accounts, but the fact is we aren't seeing as yet a huge growth in the number of credit accounts.

In fact, in the first quarter, the number of accounts for us still declined by a very small percentage in the United States.

But its increase of -- it's -- let's say the decline, the rate of decline has reduced somewhat.

So, I don't know the answer has anything to do with accounts.

I think it just has to do with the consumer being willing to spend and use their credit lines and their cards.

That's truly what's going on.

There has been a good recovery in cross-border in the United States both coming in and going out.

I think that's part of it.

Commercial cards, on the other hand, are actually growing well.

That's yet another aspect of the business.

Moshe Katri, Cowen.

Thanks for taking my question.

Martina, in terms of the impact of contract renewals and rebates for the remainder of the year, are we talking about an unusual number of contract renewals here versus 2012?

2012 or 2010?

he got cut off.

I didn't know what you -- no, from a renewal point of view, what I am looking at is a similar active year as in 2010.

The only thing that we are still watching out for is as, Ajay had already said from a Durbin point of view, some issuers are taking business forward as usual and they are getting their head around it.

For some issuers, they will be waiting a little bit until the final regulations are known, but generally across the board.

You know about 60% of our revenues come outside of the United States.

We are on the ground and there is a lot of activity going on, so I expect that 2011 will be a similarly active year than 2010.

Tom McCrohan, Janney Capital Markets.

I just wanted an update on gas prices, and certainly they probably provided some benefit this quarter.

Can you give us an update on how payment volumes and the revenue growth were impacted by fuel inflation?

Sure.

Gas prices did help a little bit in terms of driving.

I have to tell you it helps slightly to drive the volume and the transaction.

From a volume point of view, it's now about 8%, just about 8% of volume, and it's just slightly over 15% from a transaction point of view.

So, it moved the needle just a little bit and you can see, from an average ticket point of view, it also went up just very slightly.

Julio Quinteros, Goldman Sachs.

Just real quickly on the -- in India it's always Julio.

That's okay.

So just on the discussions with the banks, maybe if you could give us some sense on whether the banks are at this point at all indicating they want to bundle discussions potentially on credit and debit as you sort of think about the post-Durbin, post Card Act world, and just help us walk through what you guys are hearing from the banks directly and maybe any sense from you guys on what you're sort of thinking around what some of the mitigation strategies might be.

Obviously, new products and things like that are going to help, but any sense there in terms of how the banks are talking to you guys and are they bundling credit or debit at this point?

Sure.

By the way, in the US it's Ajay, not Ajay.

So your question is a very deep question.

Here's what -- I haven't yet seen bundling of debit and credit discussions, although remember that the way banks operate those two businesses tend to be in somewhat different business lines inside.

They're answering different consumer needs in many ways.

So I don't know that actually will lead to a bundling in some way other than with maybe a few very large global accounts where that kind of conversation may happen.

But the -- it's very, very difficult to talk about what banks are planning to do with Durbin, just because in the last couple of months given all the progress on trying to get the bill on the floor of Congress, focus has been around that.

At the same time, within our Company as well as all the issuing organizations, there are teams of people working on different scenarios to do with where this could end up.

My sense is that some of it is pretty much out there in the open, that the level, if it were to go through the way it was originally proposed, the level of let's say revenue going away from issuer revenue lines is so large that they're going to have to find ways to get back some of that.

That's the experience we had in Australia, whether it be through fees on checking accounts or fees on cards or restricted expenditure on debit cards of certain types, or the stoppage of rewards on debit cards or the dis-incenting of employees in branches to sell debit cards, all of which might lead to a somewhat different way of consumer spending, maybe more on the credit line.

It might also lead to a number of consumers not being able to afford their banking accounts with as much ease as they used to.

That may lead to a prepaid card getting more and more attention at issuers as a way to cater to that customer.

So at the lower end of the spectrum, you know what I mean?

So from credit on one end to prepaid at the lower end to the actual impact on debit, I think within debit it's unclear to me right now whether signature and PIN will behave the way they used to.

It's unclear to me whether merchants will be incented to put in more PIN pads or not if the discount rate on the two is the same.

It's unclear to me therefore how merchants will be behave in this.

And so there's so many imponderables that what we've got is a series of different let's say situations, and our operating systems within those.

That's kind of what we are doing.

It's like a whole laundry list of things that are going on inside our Company, and inside our competitors I am sure and inside issuing banks.

That's kind of where it is.

David Togut, Evercore Partners.

Thank you and good morning.

I apologize if this question was asked.

I was joining late from another call.

But have you had any conversations with the Federal Reserve with respect to their leanings on network non-exclusivity, alternative A versus alternative B?

No I haven't actually, because if you remember during the comment period, they had no conversations whatsoever.

They're still now working through figuring it out, and I haven't gone to have any direct conversation with them after the original discussions that have been happening.

However, people in different organizations -ours and others - have, I'm sure, in the last couple of weeks, been engaged in those conversations, but we have no way of knowing what's on in mind.

Thank you very much.

This concludes our time for questions.

I would like to turn the call back over to Barbara for closing remarks.

Ajay, do you have something you'd like to add at the end?

Just a few closing thoughts.

As we've said, Martina and I, we are off to a really good start to 2011.

We try to remain positive about our ability to deliver on those longer-term financial objectives that she reminded you about.

But I am very -- we are very cognizant of 2011 not being without its challenges.

First and foremost, there is the impact of those natural disasters and political upheavals that we've just got to continue to keep an eye on.

Secondly, while there are a number of positive signs in the economy, we continue to watch the economy very carefully, given concerns that remain around unemployment and the housing market in the United States and, as Martina reminded you, around food and oil prices around the globe.

Of course, we've got to keep working our way through the ultimate impact of this US debit regulation which will depend both on the final regulations, the outcome of this bill, what the Fed says, and the reactions of all the stakeholders.

As we said, as Martina said, we're going to continue to invest in our business.

This is part of the execution of our strategy to differentiate MasterCard and position the Company to capture more than its fair share of growth.

There have been several significant steps recently, including the acquisitions of Travelex's Card Program Management assets and DataCash, as well as the establishment of some JVs, mostly in the mobile payment space.

We look forward to communicating more such developments in the future.

Thank you for your time today, and thank you for your faith in our Company.

Thank you for your participation in today's conference.

That concludes the presentation.

You are free to disconnect, and have a great day.