萬事達 (MA) 2011 Q3 法說會逐字稿

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

My name is Shantalay, and I will be your facilitator for today's call.

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

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

(Operator instructions).

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

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

Barbara Gasper, Head of Investor Relations.

Please proceed.

Thank you, Shantalay.

Good morning, everyone, and thank you for joining us today either by phone or webcast for a discussion about our third quarter 2011 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 comments from Ajay and Martina, we will open up the call for your questions.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the investor relations section of our website, MasterCard.com.

The earnings release and slide deck have also been attached to an 8-K that we filed with the SEC earlier this morning.

A dial-in replay of this call will be available for one week, through November 9.

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 most recent SEC filings.

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

Thank you, Barbara, good morning, everybody.

As usual, before Martina gets into the details of our results, let me start with some comments.

In the third quarter, we saw net revenue growth of 27%, or 24% on a constant currency basis.

This helped fuel operating income growth of 31% and EPS growth of 43%.

We are obviously pleased with our results this quarter, including our fourth consecutive quarter of double-digit volume growth as well as the highest growth rate in processed transactions since the IPO in 2006.

Each region posted healthy volume growth, with the strongest growth in Latin America and Asia Pacific/Middle East/Africa.

Volume growth in the US, up almost 14%, was led by strong debit results aided by the roll-on of business wins and double-digit increases in our commercial credit business.

Despite persistently high unemployment rates and a weak housing market that have resulted in the lower levels of consumer sentiment that we all read about, we are still seeing the consumers spend.

Our US consumer credit volume grew 4% and debit volume grew about 22%.

This is consistent, by the way, with our SpendingPulse data that shows retail sales growth ex-auto has remained, for the most part, between 8% to 9% year-over-year in the recent months.

Certainly, some of this increase is due to inflationary pressures, such as higher gas prices and food inflation, but it's still money that consumers are spending.

However, the comparison will become more difficult starting in November as US retail sales ex-auto were up by over 5% in November and December of 2010 versus last year's spring/summer period, when the comparable number was only about 1%.

Moving onto Europe, our performance there is driven by healthy cross-border volume growth and new domestic processing businesses in the Netherlands.

Given the sovereign and banking debt concerns in Europe, we are not surprised that consumer sentiment is low, and we will continue to watch it as Europe tries to get closer to a plan that should go some way towards alleviating these issues.

But in spite of the economic headlines, we are still seeing a significant opportunity from the secular shift to electronic payments in Europe.

In Latin America and APMEA, we continue to benefit from strong cross-border volume growth, which is above 20% in each of these regions.

Additionally, new business with Itau is driving growth in Brazil.

While both regions are still performing strongly, the issues faced by some of the world's largest economies could begin to impact sentiment and confidence in these emerging markets.

Given our growth this quarter, it is clear that this economic uncertainty is not yet showing up in our business results.

However, we will continue to keep a watchful eye, given that the signals remain mixed.

At the same time, we are very much focused on what we can influence and control, and that is winning deals and market share.

We also continue to see growth opportunity in the ongoing migration of cash to electronic commerce, and this is what we are dedicating our resources to.

Before I get to our business highlights, I would like to give you a brief update on the regulatory and litigation fronts.

First of all, although changes to debit interchange became effective on October 1, there are still a lot of moving pieces in the US debit landscape.

All issuers continue to work through their internal decisions as to how to make their debit cards compliant from a PIN mark perspective.

Merchants, issuers and acquirers continue to seek incentives for routing preferences.

Our perspective remains unchanged from what you heard Chris McWilton and me say on last quarter's earnings call and at our September Investor Meeting.

We are in a completely different competitive situation from others in the debit space and do not have the need to defend a large incumbent position.

We are focused on four objectives within our US debit business.

First, to retain our existing placement on the minority of our debit portfolios that are exclusive MasterCard debit portfolios.

It's important to remember most MasterCard debit portfolios are already Durbin rule compliant.

Second, to get Maestro as the PIN debit brand on the back of competitive debit cards.

Third, to continue to convert competitive portfolios to MasterCard as we have done with SunTrust, Sovereign and the recently announced Huntington Bank.

Fourth, to win routing preference with selected merchants and acquirers.

And with this in mind, we remain focused on strategic and surgical opportunities that make sense for us.

A deal-specific approach is what we believe is needed to give us the flexibility to navigate the complexities of PIN enablement and routing that exist in the market right now.

Remember that revenue yield on PIN volume was thin, even before Durbin, and will become even thinner after paying routing incentives.

As a result, debit volume growth rates will exceed revenue growth rates as this space unfolds.

But recall also that lower revenue yield does not necessarily equate to lower operating margins.

Given the scalability of our network, we are able to process these additional transactions at a very low incremental cost, and therefore, we will be strategic and selective when considering situations where we are willing to pay enhanced economics for routing.

So now let me take a few moments to provide you an update on litigation.

You will recall that last February, we announced a judgment and settlement sharing agreement in the MDL case, which capped our percentage of financial exposure at 12% of the monetary portion of a judgment of settlement that would involve Visa, MasterCard and the bank defendants.

We have also been involved in court-recommended mediations, and while we have made substantial progress with the individual merchant plaintiffs, there has not been similar progress with the class plaintiffs.

And based on developments in the mediation process, MasterCard has extrapolated an estimate of a reasonably possible loss of at least $500 million if there is a negotiated settlement with all plaintiffs.

At this time, it is not possible to put an upper limit on this loss, due to the significantly higher demand by the class plaintiffs which are unacceptable to MasterCard.

You will see our updated disclosure on this matter in the 10-Q which we shall file later today.

In the meantime, we continue to execute our strategy, and I have several business highlights to share with you.

First, with prepaid, in the US, MasterCard has been awarded 60% of all competitive public-sector programs, measured by volume, during the last 18 months.

These represent $16 billion in GDV.

One of the most recent of these, which has been launched is with the State of South Carolina Department of Social Services for Child Support Benefits, and this is in addition to the State of Illinois Unemployment Benefits Program that we previously announced that has now launched, and others that are coming in this area.

But prepaid is not only a tool for financial inclusion and benefits distribution, there is a value proposition here for various segments of bank customers as well.

So I will give you an example in Italy, where we have two prepaid programs recently introduced to talk about.

The first is a youth-focused product that is designed in partnership with Intesa Sanpaolo and is based on opening branches called SuperFlash, which, by the way, is also a name of a popular credit card they launched.

Three branches are already open; the focus is on simplicity and convenience, young staff, by the way, non-cash handling branches, although they do have some ATMs, and several more branches are being opened in eight cities in Italy.

The product involves other young or appeal brands for youth, such as Nike, Sony and Vespa.

500,000 cards have already been issued.

The second is a PayPass-enabled prepaid card co-branded with Vodafone as an extension of its loyalty program and actually an introduction of NFC technology to their customers.

And we continue to have success with IPS, our processing platform, and Access Prepaid, the program management business of Travelex that we bought, two extensions of our prepaid capabilities.

We have launched an Australian-issued multicurrency prepaid MasterCard running on the IPS and Access Prepaid platforms.

This card is capable of holding up to seven currencies at the same time.

It's distributed through Flight Centre, a major travel agent chain in Australia.

Thomas Cook, the largest travel-related financial services company in India, will be issuing MasterCard prepaid cards.

This is actually the first time that the Reserve Bank of India has allowed a non-bank institution to issue foreign exchange prepaid cards.

So now let's turn to debit.

Just a few moments ago I mentioned about Huntington converting its debit portfolio to MasterCard.

That started in early October.

All cards will be deactivated no later than the end of November.

In Italy, on the domestic processing front -- this is actually interesting.

We have signed a multi-year agreement with the first major Italian bank to migrate cards, that are currently co-branded with the domestic scheme, to Maestro only.

The conversion is expected to ramp up in the first quarter of 2012.

And in India, we are collaborating with the Ministry of Food and Civil Supplies for the Government of Punjab to establish an electronic procurement and payment system which should improve the efficiency and actually help to decrease the cost of their current manual system, which involves an annual outlay of $6.5 billion.

Also on the government front, we have launched two commercial credit programs in partnership with the Mexican government and Banamex, Citigroup's bank in Mexico, to migrate their T&E expenditure to MasterCard from non-electronic forms of payment.

And while on credit, let me mention, during the quarter we renewed our consumer and commercial credit agreement with EnterCard, a leading credit card player in the Nordics.

This builds on our recent success in debit with Swedbank that we all talked about last quarter.

In Latin America we are making really good progress with BBVA, with whom we previously signed a multi-year relationship covering nine markets.

BBVA is issuing MasterCard Black Cards in each of its nine South American markets.

This product will displace a competitive product over time.

And in Argentina, just last month MasterCard has begun to switch all of BBVA's credit transactions, the first bank, actually, among the leading international banks in the country to shift its domestic switching to our network.

In the US, we have signed a multi-year renewal of our consumer credit business with RBS Citizens, continuing an already strong relationship.

Working in partnership with Citizens, we have actually delivered a lot of innovations to their consumers, including a recent launch of inControl functionality for small business clients in their commercial portfolio and the use of MasterCard Advisors to improve the performance of other card product portfolios.

And while in the US, Citi, American Airlines and MasterCard have launched a Citi Executive AAdvantage World Elite MasterCard, its highest-level offering in this co-brand relationship.

This is actually a chip-enabled card with benefits such as Admiral's Club membership, priority check-in, waived baggage charges.

And now let's get to mobile.

We've continued to build our partnership with Telefonica, including a strategic alliance to launch co-brand credit products in 11 countries around Latin America and the Caribbean.

And in fact, we have just launched a Movistar co-brand card in Mexico, the first in this market to target mobile phone users with enhanced mobile benefits.

We are working with Etisalat, the leading telecommunications provider in the United Arab Emirates on a contactless mobile payment solution that will launch in the first quarter of 2012.

And while on the topic of contactless payments, let me take a minute and discuss some PayPass highlights from around the world.

PayPass has been implemented in over 37 countries and now is accepted at over 341,000 merchant locations and growing.

This is a product that started out in the card form factor.

It's increasingly being deployed as part of mobile handsets, and at our recent Investor Day those of you who were there saw it as part of a mobile solution and experienced the benefits it can deliver to consumers.

For merchants, it speeds checkout.

For issuers, it adds functionality to help drive top of wallet behavior and redemption.

In Canada, virtually all, greater than 90% of MasterCard cards, are PayPass-enabled, and roughly 10% of total MasterCard transactions are contactless.

In July, we added acceptance at McDonald's, adding another 1400 locations in Canada.

In Australia, the majority of banks that issue MasterCard are also issuing PayPass-enabled MasterCards.

There is acceptance in major retailers, including JB Hi-Fi, Bunnings, 7-Eleven, Caltex, Dymocks and McDonald's.

Acceptance continues to grow in transit categories, in cinema and stadiums.

And there are additional large chains that will add terminals.

We just can't announce their names yet, but watch this space.

There is more to come.

Our largest issuer in Australia, Commonwealth Bank has just launched an iPhone app called Kaching that works in conjunction with a special iPhone case to enable PayPass transactions.

In the UK, not only is the Transport for London implementing open payments, but the nation's largest bus and rail operator, FirstGroup, has also announced nationwide rollout of contactless acceptance and buses.

These are cash-heavy channels that will be replaced with electronic payments.

In Poland, we just reached 1 million PayPass transactions per month.

The PayPass acceptance locations in Poland are counted in the tens of thousands and include IKEA, as an example, who is also a partner in a PayPass-enabled co-branded credit card.

And in the US, we continue to see merchant interest in contactless as a result of the next wave of innovation that is happening with contactless mobile devices.

Just recently, several merchants have signed on to add PayPass acceptance, including Walgreens, Macy's, Subway, OfficeMax, The Container Store, Toys 'R' Us, Jamba Juice, Pete's Coffee, American Eagle, Foot Locker, Guess?, and there's more to come.

Now let me turn the call over to Martina for a detailed update on our financial results and operational metrics.

Thanks, Ajay, and good morning, everyone.

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

As you just heard, we had a terrific quarter.

Net revenue grew over 27%, driven by very strong volume and transaction growth across our base business as well as the addition of new deals.

Acquisitions contributed about 4 percentage points to this growth, resulting in a very robust top-line growth rate of almost 24%, excluding acquisitions.

Total operating expenses were up 23.1%, which included about 9 percentage points of expenses related to acquisitions.

Therefore, expense growth excluding acquisitions was just under 15%.

Foreign exchange contributed less than 4 percentage points to net revenue growth and just over 2 percentage points to operating expense growth.

The FX impact is the same for growth rates with and without acquisitions.

Operating income was up 30.9%.

This resulted in an operating margin for the quarter of 55.1%, up from 53.6% in last year's third quarter.

Bottom line, we delivered net income of $717 million, up over 38%, and diluted earnings per share of $5.63, up almost 43%.

Now, on the next couple of slides we are presenting the operational metrics for the third quarter of 2011 compared to the same quarter a year ago.

So as you go to page 4, you can see that worldwide gross dollar volume, or GDV, was up 18.1% on a local currency basis, or 23.4% on a US dollar-converted basis.

This is the highest quarterly growth rate we have seen in more than four years.

US volume growth was 13.6%, and outside of the US, volume growth was 20.4% on a local currency basis, including about 25% growth in Latin America and Asia Pacific/Middle East/Africa.

Worldwide credit volume grew 14.9% on a local currency basis, which breaks into 7.1% growth for the United States and 18% for the rest of the world.

Worldwide debit volume grew 24.2% on a local currency basis.

In the US, debit growth was 21.6% and outside of the US, debit growth was 26.3%.

Cross-border volume growth on a local currency basis was up 19.3%, and that's actually the seventh consecutive quarter of double-digit growth.

And in fact, we had double-digit growth in every region.

Turning now to slide 5, processed transactions were up 20.5% compared with the year-ago quarter to 7 billion.

This was the fourth consecutive quarter of double-digit growth and the highest quarterly growth rate for processed transactions since we went public in 2006.

All regions contributed to this growth, but let me point out some specific examples that are related to new deals that have now started to lap.

In the US, we continue to benefit from the new debit business, such as SunTrust, which converted to MasterCard starting in the fourth quarter of 2010.

In Europe, processed transactions are still increasing as a result of new business in the Netherlands that we began to see earlier this year.

And in Latin America, we are seeing more transactions from our expanded processing relationship with Itau in Brazil, which began to lap in September.

Now global card growth was 7.8% to 1.7 billion MasterCard and Maestro card.

So now let's turn to page 6 to discuss revenue growth versus last year's third quarter in a bit more detail.

The net revenue generated outside of the United States represents about 62% of total revenue compared with 59% last year.

This shift was driven by revenues growing at a higher rate outside of the United States, about 33%, compared with 19% growth for US revenue.

Let me turn to the components of net revenue.

Domestic assessments increased 25.5%, primarily due to strong volume growth.

Cross-border volume fees increased 7.4%.

But if you exclude the impact of the October 2010 cross-border pricing structure change, these fees actually increased about 23%, driven by double-digit cross-border volume growth in all regions.

Transaction processing fees grew 26.1%, driven largely by growth in processed transactions due to new business in Latin America, Europe and in the US.

Other revenues grew 41.3%, driven mainly by the inclusion of revenues from the acquisition of Access Prepaid Worldwide.

In total, gross revenue increased by $432 million, or 22.2%.

Now, rebates and incentives were $564 million, up $42 million, or 8.1%.

However, the increase was about $110 million, or roughly 25% when adjusted for the cross-border pricing change that I referenced just earlier.

This increase was due to stronger volume performance and the impact of new and renewed deals.

Remember that going forward, this pricing structure will largely be in the base as we made the change in October of last year.

Overall, third quarter revenue came in higher than we expected, primarily due to stronger Brazilian processing and cross-border inbound travel to the US.

However, please note that at this point we do not expect these two factors to contribute at this level to fourth-quarter revenue growth, and I will speak more about this in my thoughts for 2011, which comes a bit later.

Now moving to page 7, let's go through some detail on expenses.

So within total operating expenses, general and administrative expenses increased to 27.3% or 25.2% on a constant currency basis.

Now, this growth was primarily due to higher personnel and other expenses related to strategic growth initiatives such as mobile, e-commerce and information services and the inclusion of acquisitions.

In total, acquisitions contributed about 10 percentage points to G&A growth.

Advertising and marketing expense was up 9.8%, or 6.8% on an FX-adjusted basis.

Sponsorships, such as the Rugby World Cup held a couple of weeks ago in New Zealand, as well as promotional activity in support of strategic initiatives, accounted for most of the increase.

Depreciation and amortization increased 38.9%, primarily due to the amortization of intangible assets from our recent acquisitions.

As a result, we posted operating income growth of 30.9%, or 26.3% on a constant currency basis.

Below line, there are a couple of items to highlight.

We recorded other income of $28 million, primarily due to the realized gains on the sale of investments and an adjustment to the earnout related to the Access Prepaid acquisition.

We consider most of these items to be more of a one-time nature.

We saw additional benefit from a decrease in interest accretion now that we made the last AMEX litigation payment in the second quarter of 2011.

Also, our tax rate declined to 30.5% in the third quarter from 32.3% in the year-ago period.

While there were some puts and takes in terms of discrete tax items, the year-over-year decline was primarily due to a more favorable geographic mix of earnings, which resulted from the expansion of our operations in APMEA.

The cash flow statements and balance sheet highlights are summarized on page 8.

We generated $1 billion in cash from operations in the third quarter and ended the quarter with cash, cash equivalents and other liquid investments of $4.4 billion.

We repurchased about 250,000 shares of Class A stock during the third quarter at a cost of approximately $77 million.

Year-to-date through October 27, we have repurchased approximately 4.4 million shares of Class A common stock at a cost of approximately $257 per share.

This leaves $879 million remaining of the $2 billion in total share repurchase authorization.

We will continue to look to repurchase shares on an opportunistic basis.

So with that, let me turn to slide 9 and let's discuss 2011, starting with an update of what we have seen for MasterCard processed volume for the fourth quarter through October 28.

Our cross-border volumes grew 17% globally, and that is slightly below the 18%-19% growth we have seen over the last four quarters.

This was driven by somewhat tougher comparisons, particularly in the US as well as in Latin America.

Although not a perfect proxy for GDV, total US processed volume grew 13%, similar to the level that we saw in the third quarter.

Recall that US processed volume was flat in October of 2010 as a result of these conversions.

Total processed volume growth outside of the United States was 18% versus the 22% pace we have seen in the recent quarters, due in part to the Itau volume beginning to lap in September.

And globally, processed transaction growth of about 20% is in line with what we have seen in the third quarter, and this was driven by slightly higher growth in Europe, slightly lower growth in Latin America and continued and double-digit growth in the United States and APMEA.

So let me outline our current view for 2011, which remains fairly consistent with what we talked about on September 15 at our Investor Day.

While we expect revenue growth in the second half to be higher than the first half of the year on a constant currency basis, we believe the majority of that impact came in the third quarter.

This is because a number of deals are coming to their one-year anniversary, such as SunTrust, which began to convert in the fourth quarter of last year; Itau processing, which began late in the third quarter of 2010, as well as the lapping of the DataCash acquisition, which you might recall closed at the end of October last year.

Additionally, the year-over-year growth rate for cross-border travel into the United States could be slightly lower in the fourth quarter than the level we saw in the third quarter because of tougher comps in the fourth quarter this year.

As a result of all of these factors, revenue growth comparisons become a bit tougher in the fourth quarter.

Regarding foreign exchange rates, if you assume the euro trades at an average of $1.36 per euro, we should see minimal FX impact to fourth-quarter revenue growth, so we continue to expect a full-year tail wind of roughly 2 percentage points to net revenue growth.

We remain committed to our target of a minimum 50% annual operating margin and continue to expect only a small operating margin expansion in 2011 relative to 2010.

Operating expenses continue to include strategic investments as well as the expenses of both DataCash and Access Prepaid Worldwide, which mostly impact G&A.

As a result, G&A will be up significantly for the full year, though not as much as we saw in the third quarter, since the DataCash acquisition will lap in late October.

Turning to depreciation and amortization, it will be about approximately $200 million for the full year.

We continue to expect the proportion of annual A&M spent by quarter to be very similar to the patterns we saw in both 2009 as well as in 2010.

And when thinking about other income for the full year, remember that a number of the items that we saw in the third quarter were one-time in nature and do not reflect the normal run-rate of this line item.

For modeling purposes, we now expect the 2011 full-year tax rate will be just about 32%, due to the earlier than anticipated impact of some of our tax planning initiatives.

Now let's quickly review our long-term financial objectives, which remain unchanged from what we said at our Investor Day back in September.

For the 2011 to 2013 period, these objectives are 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%.

As a reminder, these objectives are all on a constant currency basis and exclude acquisitions except for DataCash and Access Prepaid Worldwide.

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)

Bob Napoli, William Blair.

I'd like a little update in Europe, if I could.

It's a third of your spend, and your slowdown -- your performance there, in light of the circumstances, is pretty impressive.

I'd like a little more color on what you're seeing there on a real-time basis.

I would imagine that some of these processing deals that you won made the numbers look better than the market itself.

Bob, let me take this first.

First of all, yes, we are seeing actually extremely good performance in Europe.

When you look at our total GDV numbers and growth -- GDV growth numbers in Europe, it's over 17%.

You see both from a credit as well as from a debit perspective a double-digit growth there.

You see double-digit growth, almost 18% from a cross-border point of view.

And then we are benefited in particular in the Netherlands by the deals that we did there on the transaction processing, which is 30% growth.

So we have really not seen any significant impact in Europe, given what is going on there from an economic point of view.

In part, it is because of all the good work that our people are doing on the local ground in terms of winning agreements and implementing things, it's, in part, the secular trend going from cash and check to electronic forms of payments.

And we will be watching this situation very carefully going forward.

But despite the turmoil, our business is performing well.

Thank you.

Chris Brendler, Stifel Nicolaus.

Martina, the domestic assessments strength you pointed to -- obviously -- I'm sorry, not assessments -- processing revenues were up, I think, 26%, and transactions were up 20%.

Was there any pricing in there that drove the outperformance, or is that currency?

Can you repeat that question, please, because I didn't get everything.

The domestic processing increased this quarter.

Revenues, I think, were up 26%, but processed transactions were up 20%.

Was there any pricing and there, or was it just currency that drove the outcome?

What you have to look -- yes, domestic assessment processing had a little bit of pricing in there, for sure.

Okay?

It's just a tiny little bit; it was about 2 to 3 percentage points.

But what you have to compare is you have to compare the 25% increase on revenues to what we did from a US dollar-converted GDV number.

And when you look at this, the numbers, except for that small price change, actually line up perfectly.

Okay, and just secondly, on PIN debit in the US, do you have any plans to try to use your signature rails to process PIN debit transactions?

I'm not going to tell you what plans we have, but I will tell you this.

We can obviously do that.

In fact, Maestro processing in Europe right now is done off those rails.

And so we actually have real experience on that.

But I'm not going to talk any more about our PIN debit plans, other than what I talked about in our opening comments and what we're trying to do.

Great, thank you.

Julio Quinteros, Goldman Sachs.

Ajay, can you just go back in rehash the strategy here on PIN debit?

You outlined the four things that I think make a ton of sense in terms of how you are going about this.

Maybe, as opposed to rehashing all four of them, just focus specifically, if you can, on the routing opportunity with both merchants and the merchant acquirers, if you will.

Julio, I'm not going to add much more.

We are working through the routing opportunity with selected merchants and acquirers.

We have actually been signing a few deals with them.

I'm just doing all this in a surgical, strategic way for those opportunities that make sense to us.

I don't feel it's in my competitive interest to be publicly talking about which ones I've signed and what my plans for the next quarter are.

So I just don't want to go any further down that path.

But you should just know all four of those things I talked about -- that is, retain our existing placement on the minority of our debit portfolios that are exclusive to us; second, get Maestro as the PIN debit brand on the back of competitor cards; third, keep converting competitive SIG portfolios to MasterCard, like we have been doing; and, finally, work on routing preference.

We are working on all those four ideas with strategic, surgical opportunities because the space is still complex.

And there's many moving parts and there's still a lot of negotiations going on.

And the issuers are looking for incentives, the merchants are looking for incentives, the acquirers are looking for incentives in a business that has thin the revenue yields to start with.

And so we want to make sure we do it well and smartly.

Thank you.

David Togut, Evercore Partners.

I apologize if you already addressed this, since I was cutting over from another earnings call, but did you quantify any changes in US debit volume growth since the new interchange regulations went into effect on October 1?

At least, can you quantify any that might be specifically tied to that?

David, it's really far too early to be looking at any different change in trend.

In fact, when I was talking earlier in my script, in my prepared remarks about processed volume, we really have not seen much of a change whatsoever in the United States -- not on the debit volume, as well not on the credit volume, but very similar to the third quarter.

So I would just suggest to you that it's far too early to be figuring out where that might go.

Thank you very much.

Glenn Fodor, Morgan Stanley.

Good morning, and congratulations on another good quarter.

Martina, you had your goal out there for operating margin of at least 50%.

I just wanted to get a sense of your appetite to flex around that target level over the near-term.

And, secondly, looking out over the next 12 months or so, how would you characterize it from an internal investment standpoint?

Are we looking at a heavier than normal amount of investments on the docket, about average, less than average?

Yes, Glenn, I would be happy to talk about this.

First of all, we put out the 50% plus operating margin out there for a reason.

And we put it out there because we are doing fairly significant investments in our strategic priorities, which we quote -- e-commerce, mobile, information services, what we do in the debit space, and what we do in the prepaid space, as well as in the commercial credit space.

In addition to that, the numbers that you are seeing here, we have acquisition expenses included, which will anniversary at one point in time, later than the first -- at the end of the first quarter, actually the beginning of the second quarter of 2012.

So you will see a couple more quarters of this coming through.

We are keeping flexibility from an operating margin point of view, primarily because we are looking into the future and what the economies, the world economies, might bring in the future.

So of course, when we put our plans together -- and this is, by the way, no different for 2012 than what we would have done for 2011 as well as 2010 -- we are putting certain plans together to make sure that we can flexibly react.

If you were to see some changes in economic environment, it doesn't matter in which part of the region of the world.

So you should expect us to have that kind of flexibility built into future plans, too, as we did this year and last year.

The only thing I might add is that, as you heard Martina in her prepared comments, the fact that we're sticking to the concept of a minimum 50% even for 2011, when clearly for the first three quarters we have done somewhat beyond that, it's because she has indicated that there are still expenses to come in the fourth quarter, maybe at a lower rate than what you saw in the third quarter, but probably at a higher rate than would otherwise have been thought about.

And I think those are the kinds of indications -- we're trying to put our money back into our strategic initiatives.

We have actually, from little, little things -- we have hired, this year, close to 700 people into our Company.

And that's in addition to those we got through the acquisitions of Access Prepaid and DataCash.

And by the way, of those 700, close to 350 are in the United States, where people think that hiring is not going on.

And so we are actually adding.

And I think that's part of what we're trying to do with our business is to invest sensibly.

But like Martina just said, we are very cognizant of the mixed signals that we are getting in the world economic system.

Whether the signals are coming from confusion between macroeconomics and microeconomics, I don't know, but I just know that I'm getting these.

It's not showing up in the business yet, and so every month she and I are very conscious of the need to keep some flexibility in the way we are constructing our expenses so we can react if we begin to see an impact on our top line.

That sounds good, thank you very much.

And remember that, even for our top line, we're trying to indicate that the third quarter did have certain aspects to it that may not get repeated in the fourth quarter, but we remain in the perspective that says the second half is going to be higher than the first half.

That part has not changed.

Thank you.

Jason Kupferberg, Jefferies.

On the rebates for Q4, I guess historically Q4 is the highest quarter for that line.

Do you expect that that will be the case again this year?

And any quantification you can provide around that.

And then we'd just love any thoughts from you guys on -- do you think we will see any new issuers join the Google Wallet initiative in addition to Citi at any point soon?

Thanks.

Jason, I really don't expect much change in the fourth quarter from what you see.

Typically in our fourth quarter, you will see a very normal fourth quarter from a trajectory -- from a contra-revenue trajectory point of view.

So there's really nothing to call out in specific.

As far as Google is concerned, Jason, I would say that two things are happening.

One, of course, [is] the bunch of new merchants that we talked about in my remarks.

But within the next few months, I think Google Wallet will open up to the other networks, which I believe is the right thing.

I believe that open systems are the only way -- I have been saying this for a while -- that mobile payments will begin to acquire traction.

I think that will be networks as well as, over a period of time, I'm sure they will open up to other banks as well.

I just don't know what the timing of these specific things is.

Okay, thanks.

Bryan Keane, Deutsche Bank.

Hi, good morning, super results, but I did want to dig down on the point four, which I think was on the debit strategy of winning routing preference from merchant acquirers.

I think that's the first time I've heard you talk about that, Ajay.

And we obviously know Visa has planned to incentivize merchants and acquirers.

So I guess my question is, won't that pressure some of your rebates and incentives going forward?

And how do we think about that?

And then, secondly, are you worried a little bit that you could lose some PIN share if you don't incentivize some of these merchant acquirers now that these Visa has put out this strategy?

Thanks so much.

Actually, it's not the first time I've talked about the routing preference and incentives.

It's just that I'm sticking to my way of thinking about it, which is I don't plan to go out with a broad-based approach.

I don't need to.

I will do these selectively with certain merchants where I believe it makes a difference to the kind of volume that we get on our debit business.

We have already been doing some of those, even prior to the changes in the rule because we have been having relationships with selected merchants where we feel that they will either make a difference to reducing the use of cash or they will make a difference to the perception of how debit can be used.

And that's not a new thing.

And the difference only is you aren't seeing as big an impact on our rebates and incentives line as you may have seen with other competitors.

But I've honestly got to ask them that question.

I don't know why that is the case.

Mine is what it is.

In fact, let me just add to it.

Although [of the] $110 million of increase in incentives in the third quarter, the vast majority is really related to volume performance.

Okay?

There is only a small portion related to signing new agreements or renewing agreements.

Okay, so no additional expense to think about as we head into 2012 as a result of this?

Look, as Ajay said before, things are changing every day.

The market has to work through a dislocation that happened from the legislation.

And we are going to have to work through that.

So I'm not -- we're not going to talk about 2012 at this point in time.

This is only our third quarter results.

Typically, we give you in the fourth -- on the February call with our full-year disclosure, we give you typically a few words about the next year.

But the situation is fluid, Bryan.

Okay, thanks a lot.

Bryan, think about what I said earlier.

We are going to keep our flexibility going.

I think, among other things like the economic environment, I think, similar to that, this whole debit environment is still moving around.

And I don't want to give you thoughts about something I don't have fixed right now directly for next year.

It would be a mistake in guidance to give you.

I don't want to do that.

Okay, thanks for the color.

Craig Maurer, CLSA.

Just a quick question on Brazil -- I was curious if the end of exclusivity and the opening up of those systems down there added anything to your growth rate and if we should think about any type of grow-over effect from that?

Craig, that's a great question.

Actually, when Redecard existed earlier in its original form and the predecessor to Cielo, which was the Visa-based acquiring scheme, existed in its earlier form, actually the distribution for the Cielo predecessor was wider than the distribution for Redecard in its predecessor form.

And so, in fact, the opening up of that market effectively expanded the distribution for MasterCard to the same level as that of all of the other competitors.

Now, it did that for others too, but it actually helped us in that sense.

Mind you, I'm not talking about a 50% expansion.

I'm talking about way south of that number.

But, it did help.

Should you be thinking about that in a lapping sense?

It's not a significant amount.

I think the bigger issue in Brazil in a lapping sense is the Itau processing, which lapped in September.

And the second issue, of course, out there is Brazil's economy and how well it holds up, and I mean, there's constant guidance that comes around Brazil saying doing well on commodities, struggling on industrial production.

So we keep an eye on that as well.

But I would say -- I wouldn't factor a great deal, in my mind, at least, of the lapping caused by the removal of exclusivity.

Thank you.

Darrin Peller, Barclays Capital.

You process and actually handle the authorization and settlement in about 5 or 6 countries, and I think you highlighted today new processing in Brazil and the Netherlands, which I think you may have discussed before.

But that has obviously continued to contribute to growth.

I think these types of transactions really boost your revenue yield per transaction longer-term.

So can you just comment on that for a minute?

Have there ever been any other further changes in the landscape, maybe SEPA or others, that really might incrementally continue to open up the opportunity to process more transactions around the world versus just the brand transactions?

You know, seeing your transactions and processing them is always useful for a company like ours, not just for what we get as the revenue directly from it, but for what it gives us as the ability to sell other value-added products based on what we see in those transactions.

And so all the effort we do with an inControl or a fraud management capability or behavioral scoring through Advisors -- all that does get enhanced when we see transactions.

So I believe that's what we'd like to do.

Now, we are trying our best to improve our position in that space across the world.

And I think SEPA clearly, as we have talked about, does provide a degree of opportunity there.

And in fact, our progress in SEPA over the last, I'd say, few months and few quarters has actually shown some of that.

Transactions in SEPA up -- beyond the ones we are seeing, are up beyond 100%.

In fact, our processing of domestic transactions grew 180% in the third quarter of 2011 and have grown 113% year-to-date.

Now, it's on a small base.

And Europe takes -- it's an evolution.

As you can see in the newspaper right now, Europe's not a revolution, although it feels like that on the roads of Greece.

But I'd say to you that's what we're trying to do.

Yes, SEPA and the payment systems directive does provide opportunities in Europe.

Yes, there are opportunities like that in other countries around the world as domestic schemes that were created over time begin to find that the economics of staying up to date with the technology investments required to be that way no longer make sense.

And they start coming to players of scale to say, well, you have got the scale across 200 countries.

Why am I redoing it in every country?

That's the principal way in which we get into these processing transactions.

It's very important to us.

It's a constant effort.

It's a slow effort.

Okay, that's helpful.

Just one quick follow-up -- conversations progressing with banks regarding debit pricing, especially given now, with the US banks, primarily retracting their debit usage fees that many had planned to instate.

Can you comment on the course of action you think these banks might take to take advantage of -- or really just try to replace the debit interchange revenue now?

There have been -- I would tell you that the amount of noise made in the media about one particular aspect of what they're trying to do is what the media chooses to do.

But they have been doing things with the taking away of free checking accounts for awhile.

They have done things with different fees.

They have looked at their rewards on debit cards.

They are looking at every line of cost in their system.

If you think about it, it's a fair amount of revenue that is moving from them to some of the retailers over this period of time.

They're going to try and find ways to make sense.

I don't know what they're going to do.

I don't know yet.

But I know what they're trying to do, is to look at every single line item from the cost of running a branch to the cost of rewards to checking accounts.

And also, they had looked, until recently, at debit card fees, and it looks like that one's gone away for the time being.

Okay.

Thanks, guys, nice quarter.

David Hochstim, Buckingham Research.

Could you give us an update on what's happening with China and with your relationship with China UnionPay and how much cross-border volume in China is affecting the APMEA numbers?

I'm not going to give you specifics on China's cross-border volume, but it's healthy and growing.

I would say on China UnionPay, our relationship carries on from where it was over the last few quarters.

We are now at the Mobile Payments Gateway trial; we have done that, it's complete.

We are actually moving towards commercial production of that.

Eventually, the plan is for us to help them increase their acceptance overseas, while CUP will help us increase acceptance for our brand in China.

But it's not just about increasing acceptance, it's based on getting revenue from that acceptance for them and for us.

So those are the kind of things we're working through with them.

We continue to work with them on this cross-border outside of China relationship.

As you know, domestically the market is still a controlled market with China UnionPay being in a monopoly position and with us and competitors, all of us, not being allowed to play there.

And that's an unfortunate situation.

Okay.

And again, I guess asked earlier, but in Europe, just to be clear, if you looked at same customers over time, there's no change in spending behavior?

At this point in time, we are really not seeing any significant changes, David.

Okay, thanks.

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

Sanjay Sakhrani, (KBW).

Martina, just a quick clarification on Europe.

What is the growth rate, ex-that add in Netherlands?

And when does it lap into next year?

And then just, separately, I was wondering if you guys had any thoughts on Durbin's request for an FTC study on the small bank debit interchange exemption.

Let me take the first one, Ajay will take the second one.

But, really where you see the Netherlands showing up in a big way is in the transaction processing numbers, which are very, very healthy in Europe.

I think I said 30% plus at this point in time.

In the volume numbers, as well as in the cross-border numbers that I was quoting for Europe, you are not really seeing a significant impact from the Netherlands.

So this is very good across all of the countries.

And, remember, this is not just Western Europe; there's a healthy portion of Eastern Europe in there.

And, Sanjay, as far as the second part of it is concerned, I continue to believe that once the law is the law, we will ensure that we implement it to the best of our capability.

And in that law, the banks below $10 billion are entitled to a differential interchange from those above.

And I am determined to implement that with the full force of what I can do.

So whether Senator Durbin wants to investigate it one way or the other is his call.

And I think it's his prerogative.

But I'm just determined as a Company to do what's right.

And now the law is the law, and that's what we're going to do.

Okay, great, thank you.

At this time, I would like to turn the call back over to Ajay Banga for closing remarks.

Please proceed.

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

We have delivered really good results year-to-date due not only to strengthen our base business across all five of our regions, but also driven by volume and transactions from new deals.

We remain watchful of macroeconomic trends around the world.

We are always ready to react, as Martina was saying in response to a question, if we see those trends going in a direction that begins to impact our business.

As we discussed at our Investor Meeting, we believe that global PCE will continue to grow over time.

There will be ups and downs by country, ups and downs by year.

But in the meantime, we've continued to invest and execute at a very local level to drive acceptance in new categories, displace cash and bring the benefits of electronic payments to more people and more institutions.

Cash is not free.

It costs up to 1.5% of GDP for a central bank to print it, secure it and distribute it.

It comes at a cost to banks.

It comes at a cost to merchants.

It comes at a cost to consumers.

We will continue to push innovative products into the market that drive efficiencies and growth for all these stakeholders.

And in turn, I believe this will drive MasterCard's share and long-term revenue growth.

So once again, thank you for your support for our Company.

Thank you for your time today, and I look forward to seeing some of you again over the next few months.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.