萬事達 (MA) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter and full-year 2011 MasterCard financial results.

My name is Yessenia and I'll be your operator for today.

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

Later we'll conduct a question-and-answer session.

(Operator Instructions).

Now I would like to turn the conference over to Barbara Gasper.

Please proceed.

Thank you, Yessenia.

Good morning, everyone, and thank you all for joining us today either by phone or webcast for our discussion about our fourth-quarter and full-year 2011 results.

We also appreciate your patience with the technical difficulties this morning and I'd like to say that we are going to extend the call beyond our normal length just to accommodate everybody for your patience.

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 the 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 until February 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 recent SEC filings.

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

Thank you, Barbara.

Good morning, everybody.

Before Martina gets into the details of our results, let me start, as usual, with some high-level comments.

In the fourth quarter we saw net revenue growth of 20% as reported, or 21% on a constant currency basis.

And that helped to fuel operating income growth of 34%, excluding the special items and the litigation charge.

And as you see on slide 2, this quarter's performance capped off a very strong 2011 for us, with net revenue and EPS growth ahead of our three-year objectives.

We had strong operational performance with annual gross dollar volume, cross-border volume and processed transaction growth rates in the mid- to high-teens all driven by very solid local execution.

And we delivered an operating margin of bit ahead of our 50% minimum target while actually finding a way to continue to invest in strategic initiatives for the long-term growth of our business.

We have some decent economic news on the United States lately with the unemployment rate dropping to 8.5% and consumer confidence increasing over the past few months to an eight-month high.

This comes as consumer balance sheets have improved, following a period of deleveraging.

All this has had a positive impact on consumer spending as is reflected in our SpendingPulse data which showed growth in December for all the 11 retail sectors that we track.

We saw continued strength in our own US volumes which are up about 12% for the fourth quarter.

This positive news remains tempered by the uncertainty that persists in the picture of the unemployment rate and housing prices.

And you should also remember that US retail sales, as well as our own US volumes, begin to hit tougher year-over-year comparisons.

Actually, that started late in 2011 and it will persist through the year 2012.

In Europe, our business remains strong in spite of another quarter of negative headlines regarding the macro situation there.

Fourth-quarter volumes grew almost 17%, in line with the growth we saw over the prior two quarters, driven by double-digit cross-border volume growth.

The addition of domestic processing in the Netherlands continues to drive significant processed transaction growth in the region.

You should remember that our European region is comprised of nearly 60 markets, extending far beyond Western Europe and the Euro Zone.

In fact, the majority of our revenue comes from the relatively stronger economies of Northern and Eastern Europe, where we continue to see strong growth in both processed volume as well as revenue, with particular strength in France and Germany and the Netherlands.

The countries most often talked about as troubled -- Portugal, Italy, Ireland, Greece, Spain -- account for less than 5% of our 2011 global net revenue.

In January, processed volume growth in these countries, these so-called troubled countries, has decelerated only slightly from the mid-teens level that we saw over the previous several months.

That said, in the Euro Zone we have seen a decline in consumer sentiment in the third and fourth quarters of 2011.

In the past, it has taken a few quarters before changing consumer sentiment impacts the growth of PCE in this region and, as such, we continue to watch our European business closely.

And of course there is the potential that Europe's impact could spread to the US and other regions.

That's what we read about in the papers every day.

But the facts are that, as it relates to Latin America and Asia Pacific/Middle East/Africa, these finished 2011 with GDV growth greater than 20% in the fourth quarter in those two regions as well, which strengthened both domestic and cross-border volumes.

So with all that as a backdrop, the facts are the lingering uncertainty in Europe and the lukewarm recovery in the US is what makes us continue to have a cautious outlook for overall consumption growth, or PCE.

We remain focused on what we can influence -- the steady displacement of cash and our ability to gain share in the electronic payment space, both of which we continue to make progress on.

Before I get to some business highlights, I thought I'd give you a quick update on the litigation front.

And as you see in this morning's earnings release, we took a $495 million after-tax charge in the fourth quarter.

This charge is an estimate of our financial liability that could result from a settlement of US merchant litigation, and it's based on the progress in the mediation process.

We know there's been a good deal of speculation in the marketplace about the terms of this settlement, or this potential settlement.

The mediation discussions remain confidential, so I can't really say much beyond what's in our release.

But being that much of the speculation is about credit interchange, I want to make clear that we would not agree to any significant or long-term reduction in MasterCard's credit interchange rates as part of any settlement.

In the meanwhile, we continue to execute our strategy, displacing cash, winning deals, to get more than our fair share of payments growth.

Let me share a few business highlights.

During this quarter we signed a number of really interesting partnerships connected to our strategic priorities.

First, a global agreement with Western Union to help us grow and diversify while displacing cash and serving some of the world's 2.5 billion financially underserved people.

In addition to becoming Western Union's preferred prepaid brand globally, we are working to enable all 485,000 agent locations of Western Union to serve as reload locations for any MasterCard prepaid cards.

Western Union and MasterCard are also working together using our MoneySend platform and issuer relationships to help remove cash from either side of the remittance transaction.

Last year we entered into a JV with Telefonica covering the 12 Spanish-speaking markets in Latin America where Telefonica operates the Movistar brand with 87 million customers.

In November, we signed an additional JV agreement with Telefonica, this one in Brazil, where Telefonica's brand is called Vivo and it reaches an additional 65 million customers.

With that, we now have completed our relationship across the breadth of Telefonica's geographic footprint in Latin America.

Both these JVs are focused on providing consumers with mobile payment services to drive financial inclusion and increase acceptance for usage of payments over the next few years.

We also entered into a strategic relationship with Intel to leverage Intel's Ultrabook chip, which some of you may have seen at this year's Consumer Electronics Show.

When a consumer reaches checkout on an e-commerce site, all they will need to do is tap their PayPass-enabled device on their computer, which should do with few things.

For consumers, it will speed up and simplify the checkout process by making the transaction more secure because it leverages dynamic authentication, something most PayPass transactions do.

And for merchants, while this security will help to reduce fraud, we believe this will also help to reduce shopping cart abandonment, making it much more productive for them.

We've also signed a commercial agreement with mFoundry, as well as having taken a small equity stake in that company.

mFoundry develops mobile banking apps for nearly 600 banks and credit unions in the US.

This should give us a chance to give the US consumers of these institutions -- of these 600 institutions -- mobile PayPass capabilities integrated with their online banking apps.

On to the US in specific, the team continues a solid execution across our lines of business.

In debit, banks are continuing to work through their decisions to comply with debit non-exclusivity.

At this point I can tell you we have won PIN deals with a couple of major US banks and have already begun to see some of those transactions.

We signed an agreement with KeyBank as well to add PIN debit and to move on to our IPS platform.

We've also renewed our signature debit and ATM relationship with them.

During the quarter, we completed the conversion of Huntington to MasterCard debit card and onto our IPS platform.

Interestingly, while the top 25 banks in the US do get spoken of most often, we all know that independent banks and credit unions are important players.

Credit unions alone serve over 90 million US consumers.

In 2011 we made substantial inroads here; we've signed debit and credit deals with almost 150 of these issuers.

And importantly, a good proportion of these deals were conversions from competition.

We've also won some new US public-sector prepaid programs which should be launching shortly.

The State of California will issue prepaid MasterCard for child support payments.

New York State and Oklahoma will leverage prepaid MasterCard as an option to distribute income tax refunds.

Dollar General now accepts MasterCard credit cards and will distribute MasterCard prepaid cards in its 10,000 stores, all of which should also become prepaid reload locations like those Western Union agents I was telling you about.

And just this week we contracted with Toys-R-Us to be the exclusive network partner for their co-brand program.

On the topic of merchants, we're bringing all of our actions to bear to drive value for merchants in a variety of ways.

Let me give you some flavor.

Two major automotive brands will begin accepting MasterCard debit cards in the US for monthly lease payments.

In France, Casino, a top-five mass retailer, will convert its private label store card to a co-branded MasterCard PayPass card.

PayPass acceptance new across geographies, some examples -- taxis in Hong Kong, pharmacies and gas stations in Russia, discount grocers in Austria, Canada's largest pharmacy.

In the US, RadioShack, GAP stores in San Francisco, Pinkberry, and so on.

With our Priceless Cities program now in New York, in London, and Toronto, we've partnered with restaurants, retailers, theaters and other merchants to drive traffic and offer cardholders priceless experiences they would otherwise not be able to get.

In Europe, we are partnering with affluent merchants to bring global travel benefits, VIP guest status, accelerated bonus points to MasterCard World Elite and Black cardholders.

The luxury banks we're working with include, for example, Mandarin Oriental, Fairmont Hotels, Oxfordjet, and more are getting signed up.

In the other regions, we're continuing to work on paving the way for the growth of electronic payments.

In Africa, a growth region that MasterCard has traditionally been relatively underrepresented in, we've signed a bunch of things.

During the quarter, we signed an MOU with Ecobank Group to drive issuance and acceptance of prepaid and debit accounts across 31 African markets where Ecobank has more than 750 branches and offices.

In Nigeria, we signed an agreement with Zenith Bank, one of the largest banks in Western Africa, as well as a debit deal with Skye Bank.

We continue to launch debit cards with other customers as well...

programs with GTB Bank in Ghana, NBC in Tanzania, as well as a major global bank with a presence in Kenya to issue World debit cards.

Also in Kenya, we've launched prepaid MasterCards aimed at young travelers with Equatorial Commercial bank.

In South Africa, we've launched PayPass cards and virtual card numbers as well as prepaid cards for insurance and, interestingly, microfinance distribution.

And now we've even got an office in Nairobi to serve as a hub for our East African business.

In Russia we're working with MTS, the largest mobile network operator in that market, and we're developing mobile PayPass products for their consumers.

We're pushing ahead with mobile payments in China.

We just signed an MOU with Unicom Wo E-Pay to explore collaborations.

And while on China, China Industrial Bank launched a Juneyao Airlines co-brand MasterCard which adds to the co-brand relationship we already have the top four airlines in China.

And in the commercial space we've launched numerous programs in China, including five new co-branded commercial card products for China Construction Bank, which, by the way, is also launching a frequent business airline travel card.

And talking of airline cards, Air New Zealand Airpoints customers will now get a card that comprises a multi-currency PayPass-enabled MasterCard prepaid card on one side, with their Airpoints membership card on the other side; and you can actually tap the card to check into your flight.

So that's just a flavor.

Tons of deals going on.

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

Martina?

Thanks, Ajay, and good morning, everyone.

Let me begin on page 3 of the deck where we'll focus on the 2011 non-GAAP column, which excludes the special item related to litigation, and then compare those numbers to the 2010 actuals.

This quarter's EPS growth of 27.5% was driven by a combination of strong revenue growth and solid expense management.

Net revenue grew 20.2% while operating expenses grew 11.5%, resulting in an operating margin of 44%, a 4.4 percentage point increase year over year.

Foreign exchange had minimal impact on these numbers.

Overall, acquisitions added 2 percentage points of growth to net revenue and 3 percentage points to operating expense growth.

This is a lesser impact than we have seen in recent quarters as we anniversaried the acquisition of DataCash in late October.

The effective tax rate was 32.3%, versus 28.7% in the fourth quarter of 2010, mainly driven by benefits we recorded last year in connection with the repatriation of foreign earnings.

Let's turn to page 4, and here you can see the regional breakdown of our gross dollar volume for the fourth quarter.

Worldwide GDV was $863 billion, up 16.3% on a local currency basis, or 14.9% on a US dollar converted basis.

US GDV increased 12.1% and rest of the world GDV increased 18.4%.

On a local currency basis, worldwide credit GDV was 13.6%, driven mainly by APMEA and Latin America.

Worldwide debit GDV grew 21.2%.

In the US, debit GDV grew 18.4%, aided by the Sovereign and Huntington wins.

Debit growth for the rest of the world was 23.4%, driven by APMEA and Europe.

Cross-border volume grew 17.5% on a local currency basis.

The slight deceleration versus the 19% cross-border growth that we saw in the third quarter was the result of lower cross-border growth for US-issued cards and in Europe -- although growth in both regions remained in the double-digits in the fourth quarter.

In the US, there is not a fundamental change in the usage of US cards overseas, but rather this was largely the result of a stronger US dollar on purchases.

In Europe the decrease was very modest.

Turning now to slide 5, we processed 7.7 billion transactions in the fourth quarter, up 23.2% over last year's fourth quarter.

Double-digit increases in all regions were aided by domestic processing opportunities in the Netherlands and Brazil, new deals such as Huntington and Sovereign, as well as from US debit routing changes.

Globally, the number of MasterCard and Maestro cards grew 11.3% to over 1.8 billion.

So now let's turn to page 6 to discuss net revenue in a bit more detail.

Domestic Assessments grew 18.7% and Cross-Border Volume Fees grew 14.5%.

Both of these line items were driven mainly by higher volume.

The 12.6% increase in Transaction Processing Fees was driven by a greater number of processed transactions including PIN debit transactions, which drive incremental revenue, albeit at a lower yield.

Other Revenue grew 27.5%, mainly driven by our Access Prepaid acquisition, which closed in April 2011, and growth in consulting services.

Rebates and incentives grew just under 9% for the quarter, driven by both new and renewed deals and healthy volume growth.

US revenue grew 15% in 2011 and represents now 39.6% of our total net revenue.

Let's move to page 7 for some detail on expenses.

Total Operating Expenses increased 11.5% excluding the special item.

Acquisitions, largely Access Prepaid, added about 3 percentage points to operating expense growth.

G&A increased 14.3%, primarily driven by higher personnel expenses related to strategic growth initiatives within core products, emerging payments, information services.

And Access Prepaid contributed about 4 percentage points to this growth rate.

The 4.8% increase in A&M was mainly driven by investments in Priceless Cities, customer-specific activities and sponsorships.

Depreciation and Amortization increased 24.3%, primarily due to the amortization of intangible assets from our acquisitions.

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

We generated $784 million in cash from operations in the fourth quarter and ended the quarter with cash, cash equivalents, and other liquid investments of $4.9 billion.

This slide also summarizes our progress on our share repurchase program through both year-end 2011 and through last Friday.

Now let's go to slide 9 and let's discuss 2012, starting with an update of what we have seen for MasterCard processed volumes for the first quarter through January 28.

Our cross-border volumes grew about 17% globally, in line with the fourth quarter.

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

In Europe, cross-border growth remains in the mid-teens, with intra-regional growth continuing to outpace inter-regional growth as Europeans stay closer to home.

In the US, cross-border growth remains about 11%, in line with the fourth quarter.

Although not a perfect proxy for GDV, total US processed volume grew about 13%, the same level that we saw in the fourth quarter, driven by continued strength in debit and commercial credit volumes.

In January, total processed volume growth for the rest of the world was about 17%, in line with what we saw in the fourth quarter.

European processed volume growth was in the mid-teens, consistent with the growth rate in the fourth quarter and only a bit below the third quarter.

Globally, processed transaction growth was about 25%.

This is higher than what we saw in the fourth quarter and was driven by higher growth in Europe due to the continued roll-on of domestic transactions in the Netherlands and higher growth in the US due to new debit wins such as Sovereign and Huntington, as well as an increase in PIN debit processing resulting from routing decisions.

Just a reminder...

In so much that we continue to get additional PIN debit transactions, processed transaction growth will continue to outpace related revenue growth due to the lower yield that we're getting on PIN transactions.

Looking forward, let's start with our long-term financial objectives.

We saw exceptional performance in the first year against our three-year objectives for the 2011 to 2013 period.

We remain confident that our business is capable of a 12% to 14% net revenue compounded annual growth rate and a 20% plus EPS compounded annual growth rate for the next two years as well.

These are, of course, on a constant currency basis and based on the current economic conditions that we see in the world.

We also remain committed to our annual margin target of at least 50%.

So based on what I just told you, let me just give you a few other thoughts specifically about 2012.

First, assuming the euro continues to trade at the 1.30 level and the Brazilian real at the 1.75 level for the rest of the year, we would expect about a 2 to 3 percentage point headwind to as-reported net revenue, net income and EPS growth for full year 2012.

Based on our current plan for 2012 strategic investments, we might have an opportunity to deliver some operating margin expansion this year.

However, the amount of any improvement will depend on several factors including global economic conditions and investment opportunities that may surface during the year.

Our plans currently call for G&A growing at a higher rate than A&M.

We also expect our Depreciation and Amortization to grow by roughly another $30 million this year as a result of our strategic investment activity.

And for modeling purposes, you should now assume a full-year tax rate slightly below 32% as a result of our ongoing tax planning initiatives.

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

Thank you, Martina.

We're now ready to begin the Q&A answer period.

And in order to get more people on the call this morning, we ask that you limit yourself to a single question and then queue back in for additional questions.

(Operator Instructions).

Sanjay Sakhrani, KBW.

Thank you, good morning.

Ajay, I appreciate the color on the merchant litigation.

Just to follow up on your comments there on interchange rates, do you mean that you guys would consider some kind of short-term implications to the actual rate?

And then just perhaps you could just follow up on the timeline going forward.

Thank you.

First of all, the details of this mediation are confidential, so I wouldn't assume that the opposite of what I said may come true, right.

Just don't jump to any of these conclusions.

I was just trying to take one topic of speculation off the table, which is what I was reading about in the speculation that is out there.

That's all I was trying to provide some sort of insight to.

So, I'm afraid I can't give you any more than that.

I also don't know anything about the timing because these things are always -- they move around on you, and speculating on timing is not going to get me very far on this topic, so I'm [staying] away from that one either.

Great, thanks.

Glenn Fodor, Morgan Stanley.

Good morning.

Just thinking about the incentive trajectory into fiscal '12 -- Is there any noise you might want to call out relating to KeyBank or any of these other debit wins that you alluded to?

And secondly, there's been talk by your competitor about incentives increasing due to signing more global deals to longer multi-year agreements.

Is that a trend you're seeing?

And if so, what's the long-term impact on your business?

Glenn, first of all, as you know, we are not really giving any guidance on the incentives and rebates line alone.

Our guidance includes that line item.

So we're coming down to net revenue and, as I just said, we feel that this Company is really capable of producing for the remaining two years of our three-year guidance, the 12% to 14% objective.

Anything that might have to move in the market, be it from what you referenced on the US debit side or other deals, we have that obviously baked into our thoughts, but I'm not really prepared to break that apart.

Thank you.

Tom McCrohan, Janney Capital Markets.

Thanks, just a question on the merchant loss outstanding merchant litigation.

Is there any outcome from that that will put at risk the 12% to 14% guidance for revenue -- net revenues for the next two years?

Well, the way we've tried to give you that guidance includes our thinking of the merchant litigation as we put out into our earnings today, so that's kind of where we are.

We've kind of factored our thinking in that.

Obviously if some unforeseen thing emerges from it, I can't speculate on that one.

But the way it is built today, clearly we factored that into our 12% to 14%.

Great, and given the 12% cap that you guys disclosed before as far as your obligation of any monetary settlements, should that -- I want to make sure I get the math right.

So based on that pre-tax special item this quarter, that assumes a monetary settlement about $6.5 billion?

Tom, what we have to do, of course, we have to estimate the amount that we would be taking for a charge.

And based on the facts on the table, based on the progress of the mediation, we had to develop a view on what kind of number we had to charge.

And this is our best estimate in terms of the charge.

And we have to see in terms of the development of the future of the mediation in terms of where that might be going.

But this is our best estimate as of today and it does reflect the 12% share that MasterCard would have to carry in a potential settlement.

Fair enough, thank you.

Chris Brendler, Stifel.

Thank you, good morning.

On the KeyBank relationship, I just want to make sure I understand -- this is PIN debit only?

And can you give us any other thoughts or updates on your progress in securing PIN debit business?

I guess my key question there is have you seen a lot of these banks that you're talking to make the decision on how they're going to address exclusivity or are they still wrestling with that decision at this point?

Thank you.

First of all, KeyBank -- this incremental agreement with KeyBank is to add PIN debit, and is to move on to our IPS platform, but we also have an ATM relationship with them and a Signature debit relationship with them, both of which have got renewed, along with this incremental move that I just talked about.

So it's a much wider relationship with KeyBank.

As far as the other aspect is concerned, somewhere in my earlier comments I talked about the fact that we've actually won these PIN deals with a couple of the very major US banks and we've actually begun to see some of those transactions.

So while the banks are working their way through let's say complying with the non-exclusivity criterion, a number of them have begun to make their decisions and those are the ones that we have been able to talk about.

So it's W.I.P., but progress is being made.

David Togut, Evercore Partners.

Thank you.

If you exclude portfolio conversions and de-conversions from the fourth quarter of 2011, can you quantify underlying processed transaction growth year over year?

Yes, so mostly what we do, of course, on the de-conversions is from a debit perspective, right.

And so when we -- there's very, very little movement in there from a de-conversion anymore because we pretty much concluded all of those.

There's really the roll-on for the new wins.

And when you strip that out you're coming kind of down to a number of the mid-teens, versus the 23% growth that is the top-line number.

Thank you very much.

Craig Maurer, CLSA.

Good morning.

Quick question for you on Europe.

I was just hoping to get your initial thoughts on the Green Paper that was published in Europe and is now out for comment.

Thanks.

Craig, it's Ajay.

Let me put it for you this way.

The Green Paper which came out recently, they've got a three-month consulting period that ends on April 11.

Basically, they're looking at all aspects of European card, internet and mobile payments.

This thing, they're coming from the viewpoint that there's not enough innovation, competition, or integration in Europe, which is fascinating given all the other things they're dealing with.

But what this does is it identifies potential obstacles or barriers to further expansion of card, mobile and internet payments and kind of says we're going to do stuff with this.

And they may actually lead to a legislative proposal later.

But in contrast to what the EC seems to think, we see e-Commerce and mobile payments growing dramatically in Europe.

Consumers are adopting new technologies, new players are coming in with different ways to pay.

I don't see Europe lagging behind other regions in innovation when you look at the complete picture.

So that's where we're coming from.

We share their goal to see commerce grow through more electronic payments on cards and mobile phones and on the internet.

And I think we have the ultimate open platform.

We allow new entrants to compete, we result in more choice for consumers, more choice for merchants.

We actually see ourselves as a part of the solution and that's how we're approaching the working with them.

We're kind of working with retailers, we're working with telcos, we're working with governments, we're working with software companies and a whole lot of other methodologies to make European payments simpler and easier.

I don't think regulation is going to meet that need.

It's just going to lead to more fragmentation, less innovation, and probably will increase costs at the end of the day.

So I'm not big on this stuff.

I think we can work with them in a way to enable them to meet their needs of allowing more innovation, allowing an open system, allowing more people to play rather than trying to put up walls to close the system in some way.

And that's our attitude towards the Green Paper.

Positive in terms of participation, but not completely agreeing with the basic premises on which the Paper was put out.

Glenn Greene, Oppenheimer.

Thank you.

Good morning.

Martina, I know you mentioned this in your prepared comments, but there clearly was a disconnect between the transaction processing fee growth and the transaction processing fees, almost a 10 point delta.

And I know you highlighted the PIN transactions sort of driving that, but it seems like an inordinate disconnect and sort of implies you had very healthy sort of PIN or Maestro transaction growth and I'm actually surprised that that's sort of happening so quickly.

Maybe a little bit of color there.

First of all, we are very happy that it is happening quickly.

So obviously people are making their decision, so we get the benefit of these kinds of decisions.

But let me give you a little bit more detail on the difference between the 23 -- roughly 23% transaction growth and the roughly 12% transaction fee growth.

So there's about a 9 percentage point difference between the two numbers and really a third of that, so roughly 3 percentage points, are due to the business that we are getting in the United States on the PIN side.

And the remaining 6 percentage points are mostly due to what's still happening in the Netherlands, where we're still getting incremental transactions.

There's a tiny little bit on Itau in there, but that's more natural growth.

But those are the three areas -- the United States, Netherlands, and a little bit Itau in Brazil that are really driving this differential.

And as I just told you about the January numbers where we're seeing transaction growth on 25%, you should be starting to see an even bigger gap just because what I told you, PIN transactions are coming in at a lower revenue yield.

But it's incremental revenue that we are making in our P&L.

Glenn, it's Ajay.

Let me just add one aspect to that for you.

As I said, we've managed to get a couple of those major US banks to use us for these PIN debit transactions.

And clearly you're seeing the beginning of the results of that, which is both the fact that we got the deal with them, but also the fact that we've been able to make the operational side of this come together relatively quickly.

That's the point I've been making for a couple of earnings calls -- that if we do this well, there is some opportunity here for our Company.

The second thing is to add a little color to what Martina said about Europe.

While the Netherlands is a very large impact of what we're doing, finally the SEPA conversions are beginning to show results over the last few quarters.

In the fourth quarter of 2011, processing for domestic transactions in SEPA grew 256% over the same quarter last year.

For the year 2011, we're up 155%.

These are still off small numbers, but the fact is that all that SEPA regulation change is finally beginning to give us some opportunity.

Julio Quinteros, Goldman Sachs.

Good morning, guys.

Hopefully it was all good.

Just real quickly on the merchant side -- [We] haven't really heard you guys talk too much about your efforts on the merchant side -- so, any color there in terms of routing exclusivity as we think about the merchants and their ability to influence post-Durbin here?

The fact is, as I told you earlier, we're looking at all this strategically.

We're not trying to put out some master policy statement on how we're going either at the big banks, or the smaller banks, or the merchants.

We're actually talking to all of them.

And clearly from the answer to the previous question, you can see some benefit in our processed transaction growth from what's going on with PIN transactions in the United States, that 3% incremental that Martina referred to.

So this is kind of what we're doing.

I'm just not going to be out publicly talking much more about it.

I'm just going to keep looking at it strategically.

David Hochstim, Buckingham Research.

Two things.

Can you just clarify what you were saying before about signing PIN business with top 25 banks?

So in addition to Key in the fourth quarter, did you sign some others as a second PIN network already?

Yes, so what I said was there's been a couple of major US banks, we have signed with them to become the alternative PIN brand at the back of their card.

And the result of that is showing up in the 3% incremental processed transactions that Martina referred to in the total increase.

So that's kind of the basic idea that I was trying to say.

But I was talking about the 25 banks in a different context.

I was saying that most people talk about the 25 large banks, but I was also trying to talk about the independent banks and credit unions and the business we're building with them, not just in PIN debit but also in credit and signature debit.

Okay, then could you just give us any color that you -- changes in spending behavior and credit in the US and in Europe maybe that occurred in the fourth quarter?

And did gasoline have much of an effect in changing spending?

Not really on spending.

Gasoline, actually Martina will tell you a little bit about, but not really any change in behavior either on credit in the US or Europe.

Or for that matter -- because I'm assuming somebody will ask that -- or for that matter between signature and PIN behavior in the United States.

Now it's early days, so I don't know where that could go.

But right now I'm not seeing anything.

On gas, we really haven't seen any changed behavior.

You know, the numbers in terms of total volume in the US that is spent for gas purchases is still 8%.

From a transaction point of view, it's still around about 15%.

So that sometimes it bounces a little up and down in the quarter, but we really haven't seen anything much different.

I just want to add one more thing on the PIN business side, David, because there are also some things that we're seeing as the exclusivity on the back of the card went away, for instance on the regional networks.

We are obviously seeing some of that business too because people are deciding to route through us rather than through the networks that were on the card originally, so that's a little bit of a benefit for us.

Darrin Peller, Barclays.

Thanks.

Ajay, first of all thanks for the comments and the color on the US interchange.

I think that goes a long way for a lot of investors.

But maybe just talk a little more about the regulatory environment in Europe for a minute, especially on a related topic.

In regard to the cross-border interchange lawsuit, I know we're coming kind of close to a conclusion there.

We're expecting a ruling from the EU at some point maybe in the next six months.

Any concerns over that or maybe even any expectations of further intervention by country-specific regulators around this topic and the topic of interchange in Europe?

Look, right now how this matter is sitting with the court, so it's kind of difficult for me to tell you what's new between the time we finished the court hearings and now.

So nothing new has come to us.

We're not a party to any discussion with the court since then.

We're all sitting there and waiting for them to come to a conclusion based on all the arguments that were presented.

We continue to believe we had a good argument and we presented it with clarity, but we're going to wait and see what happens.

There has been very little change at a country-by-country level to answer the second part of your question.

It's really more focused on the commission's ruling, the court's ruling, but also the Green Paper, which by the way came out around the same time and is actually not quite connected.

That's a separate conversation, but both things are going on in Europe right now.

Bill Carcache, Nomura.

Good morning.

Hypothetically speaking, what kind of impact do you think that the elimination of a no surcharging rule could have?

And if, hypothetically, something like that were on the table, would there be any reason for concern over an unlevel playing field with AMEX?

Well, hypothetically speaking I have no clue, because I genuinely believe -- I'll tell you my personal belief on this.

My personal belief is payment systems work best with the least friction.

Whenever you introduce friction, you always create the opportunity for consumers and merchants to feel less-than-perfect about their transaction.

That's kind of an obvious statement.

Having said that, in different countries where surcharging was allowed, it's not as though every merchant has jumped onto the bandwagon to actually introduce a surcharge.

That's partly because of the fact that they do see the value of the electronic payment system from their perspective and it's partly because, at the end of the day, I believe that there is a good competitive situation out there for merchants and they have to watch their own competitive circumstances versus other merchants.

And I think that rule will come to play in some stable way once the clarity around hypothetical surcharging becomes clearer.

That's kind of how I think about this.

I don't like friction, but it is what it is.

And as far as the AMEX angle is concerned, again your question assumes that the surcharging applies to some and not the others.

And I don't know if that's a hypothetical move too far.

So, I don't know yet where that will go, right.

So we'll see.

But that's kind of where I'm coming out of it.

Andrew Jeffrey, SunTrust.

Good morning, thanks for taking the question.

Martina, you had mentioned and I appreciate the difference in revenue yield on PIN debit versus other forms of payment.

Yet in the fourth quarter, your net revenue yield was up nicely.

Is there something else kind of going on there that we should be thinking about, whether it's mix or pricing or some other dynamic, that might be overall offsetting what would be an otherwise lower revenue yield?

Look, first of all, just to take the pricing comment out of the room here, there was only very little pricing in our numbers.

It was about 1.5% on total revenues.

So yes, it does impact a little bit, but it's not a big deal.

What's really also happening is that we obviously earn money both from a transaction point of view as well as from other businesses that are driving our revenues.

And they're not related to GDV.

So for instance, what you see is what our DataCash revenues are adding, what our Access Prepaid revenues are adding, what our consulting business is actually adding; that's not related to the volume driver.

So you will see -- as we're growing those kinds of businesses you would see some of these yields increasing and that would be.

Then, when you just look at our main processing business, we said over time you should be seeing a slight decline in the yield as we're getting more and more transactions and volume growth and as we are incenting customers to run more volume over our network.

So you have to look at those two sides and when you put them together, you really have to pull them apart.

That's why I say once in a while revenue yield is not the single metric you should use, because, in addition to what Martina just described, you've got the mix of cross-border volume, you've got geographic mix, you've got product mix.

Yield is a composite of many things and only one element of it is the PIN debit contribution to our total revenue, which clearly has a lower yield, as we've said, but not a lower profitability, just a lower revenue yield.

Jason Kupferberg, Jeffries.

Great.

Thanks, guys.

Nice to see you what I think most people would consider to be effectively a guidance raise here as you're taking the top- and bottom-line CAGRs out for the next two years.

Can you just talk about the general factors that gave you guys the confidence to do that at this point in time?

You obviously had an extraordinary 2011 which does create a tough comparison.

And as you guys discussed, there's still some macro uncertainty to cope with.

So I think it's all the more encouraging to see what you guys had to say for the 2012-2013 period.

Maybe you can just give us some of the underlying factors that are driving the outlook, that would be great.

So look, Jason, we are always going back to what we call the three concentric circles that we showed you at the Investor Day.

First of all, PCE, and where PCE in the world is, is a really important driver for our baseline growth.

And there we made the comment that the United States is feeling a little better.

We're not really seeing much pain coming through at the moment in Europe, but we're going to watch very closely because of the consumer confidence falling.

Asia Pacific, Latin America, Middle East Africa is still behaving very nicely.

So we're feeling relatively comfortable in terms of where we put our mark from a PCE point of view for those two years as well as from a longer-term point of view.

Number two, as you know, we are really going after converting cash to electronic forms of payment.

85% of the world's transactions are still done in cash.

There is a lot of room to be working.

And when you look at what our product people do and our services people -- how they help -- we are all focused on making sure that that 85% goes down to 80% to 75%.

Last but not least, we obviously want more than our fair share of that, right.

So our last focus is how do we behave in the marketplace?

How do we get profitable market share?

And how do we put products out there so that we are actually successful doing that?

So don't forget about those three things.

And even if one of those things, so the PCE number goes up and down depending on where the world is going, we still have the two other things to drive.

That's what you saw us do in 2011, and we feel, based on where we are today -- I always have to reiterate this is a today comment -- we feel that the next two years are looking good from that range point of view.

Let me add a little bit to that, Jason.

I think of those three circles -- just like I was talking about the revenue yield earlier -- I think of these as composites that come together.

They are almost like multiple legs of our stool that we control as we play our game of management.

And so yes, I don't control PCE growth, but given where we are today -- in Martina's comments -- the US, Latin America, and Asia and Middle East look okay.

Europe looks okay today.

But history has been that when consumer sentiment begins to go down, three or four quarters down the road it begins to show up.

So I'm a little less -- or more cautious about that than I am about the other regions.

But then I'm very focused on all the things I've been telling you for the last year or two on changing the cash versus e-Commerce ratio versus electronic-commerce ratio.

Hence the change with the Social Security in the US or with the Punjab government in India or within Russia or things we're doing in Italy with the post office.

All those add up to trying to take away the traditional sanctuaries of cash and look at getting them to come to us.

Now in any one transaction they don't change the needle, but when you do it consistently over a period of two or three years, it does change what numbers we operate off.

And then of course there's the marketshare game, which -- we're competitive guys -- we like to win some good market share.

And that's the third angle.

So all three give us a balance in the different legs to our stool.

Bob Napoli, William Blair.

Thank you, good morning.

Facebook released their S-1 yesterday, and I'm sure you knew that, but in their S-1 they showed $500 million of payment revenue.

I wondered if -- most of that tied to virtual games -- I just wondered if that surprised you, and just kind of how you work with Facebook and how the economics are and if their focus on the payments market is -- that you view that more is an opportunity for MasterCard or a concern?

So they've got their revenue.

Actually I read the S-1 in great detail.

I'm most interested in the Facebook IPO from a personal perspective as well.

I think it's an interesting development.

I'm not surprised at all by their payments revenue because how do you load the Facebook credit right now?

You do it through various ways, which include our cards.

So I cannot see that data and I understand it.

I actually think that, for us, working with them is a huge opportunity, just as it is for other people as well.

We're not the only girls at the dance, there's others, too.

And so we're all chatting with them and we're all trying do business with them.

And we do some things with them already and we're going to be doing more with them, I'm sure, as the years go by.

So it's the same approach I have with a lot of other opportunities.

I think new technology is an absolute opportunity for MasterCard if we engage with it and we work with it well.

We shared the same questions on telecom companies two years ago and we've shown you over two years we engage with them, we work with them.

And in fact, they realize our value, we realize their value, and there's a business to be made converting the 85% of transactions that still are out there that are coming to electronic-commerce.

So there's a much bigger space out there than getting worried about our risk.

I think it's an opportunity every day of the week.

Rod Bourgeois, Bernstein.

So I'll work on pronouncing my name better as well.

Just wanted to talk about the long-term plan on the operating margin front.

It seems like you're saying today that there's possible room for some margin expansion in 2012, but I also wanted -- After 2012, are you saying that we shouldn't be expecting margin expansion after 2012?

So if you could just clarify, what's the swing factor that matters the most for margins in 2012?

And then what's your current plan for post-2012 on the margin front?

I'll try explaining this again.

My approach to operating margin came out of the context when we were originally saying we would expand our margin by X hundred basis points every year.

All I was trying to do was to say given this 85% of cash out there, given the unbelievable opportunity in this industry, I would rather keep the margin at a very healthy minimum of 50% and take the money that generates for the Company with our revenue growth and with that leverage in our P&L and put it to work making tomorrow even better for our Company as compared to merely taking the 50 to 52 to 54 to 56 to 58.

That's the context in which I gave it.

I've also said that if revenues are doing better, I'll let that flow straight through to margin, which I've done over the course of 2011.

And that's kind of how I think about it.

So in 2012, right now, we feel pretty good about the fact that we can deliver more than the 50%.

We are even telling you that we may actually be able to deliver more than what we ended 2011 with, as a year.

But, if investment opportunities come up that today we have not foreseen, and if the economy looks to be in decent shape, and I feel there's a good risk-reward trade-off, I'm going to use some of that money to still meet my commitment to you, while putting it into the long term.

That's the angle in which I look at operating margins.

I look at revenue growth and Net Income and EPS growth as the two things that are the gating factors.

I look at the operating margin as if I can keep at least 50[%], which I think is an extremely healthy place to be, then put whatever I can get back into growth.

If I can't think of good ideas, it goes right back to you as the shareholder; that's the perspective on operating margins.

Rod, for each one of the years that we have in the three-year guidance, we said a 50%-plus operating margin.

Look, in 2011, yes, we had a little bit of a margin improvement, but we did precisely what Ajay said.

We didn't run after that particular margin improvement.

We had a certain set of facts on the top-line, we made the investments that we believe we need to make in order to actually make a better future for the Company to come...

and that's the investment that we did.

So the operating margin is really a result of those kind of managerial decisions.

And every year will be a little different on that, but we are focused on making sure that we at least keep this very healthy 50%.

Plus.

Okay, great.

And then just as one final question, and this is probably a quick one.

Visa has a common switch strategy and a network participation fee.

We know that there's not much detail on how those things will be implemented, but can you assert today a plan on what MasterCard will do on the common switch front or on the network participation fee front?

Or is it premature (multiple speakers)?

(Multiple speakers) I told you when you were here -- look, I told you when you were here we actually can, thanks to what we do with Maestro, by the way, that's exactly how it works.

So it's not that we can't do that.

I'll say that to you again and again.

We can do it.

It's not a revelation to us, so just so you get that context.

We have the ability, the capability, and the operational competence in our technology.

We've been doing it for years in Europe and elsewhere where Maestro is used.

As far as the network participation fee or a merchant strategy or a detailed strategy around Durbin is concerned, I don't feel that I need to go out with a blanket statement of a strategy because I'm not the one protecting the incumbency, somebody else is.

And so, in their shoes, I may well have done what they're doing, but I'm not in their shoes, fortunately, this time.

And so I'm doing it my way.

And my way is showing up in the processed transaction growth that you're seeing.

And so, that's what I'm going to say.

And I'm not going to be able to give you much more, unfortunately.

Got it, thanks.

Bryan Keane, Deutsche Bank.

Just looking at the First Data Spendtrack, PIN debit has been taking some share versus Signature.

But I think you said, Ajay, that you hadn't really seen that.

I guess maybe do you expect PIN to be taking some share versus Signature?

And I saw the EMV announcement you guys made this week.

It sounds like you guys are open to Chip and PIN, so I would assume that PIN would be -- could be increasing in the future.

You're actually onto a very interesting topic, which is just fascinating.

Truly I haven't seen that change.

Part of that is because, remember, we were starting from a smaller place.

So for me, I'm getting some incremental volume in the door and I haven't really seen a big move today between PIN and Signature.

Now let's step back from today, because today is still only a few months after the Durbin and non-exclusivity rules went into play.

There's so many things going on right now in that space.

Think about there's no real incentive for a merchant to move from one to the other because the merchant discount rate has just got equalized.

Interchange for the issuers has got equalized.

So nobody has gotten incentive to push one way or the other given the way it is today.

But if you look out further, if you think about creating a payment ecosystem for mobile payments, for electronic payments out a few years, we really believe that EMV is the right way to go.

And what we're trying to do is -- rather than mandate it -- is to consult with merchants, issuers, and other partners, which we have done systematically over the last few months.

And then we finally said, let's create the right incentives for people to go to the best way in the long-term, which would be the most secure way, which would be that we are going to EMV and PIN.

And that's the Chip and PIN angle that we're trying to put out there.

I see this as a journey.

I don't see it as it will happen tomorrow or the day after.

I think it's a journey and what we're trying to lay out in that EMV announcement is where we think the journey would lead to.

I can't tell you today how long it will take to get there because I suspect some issuers and some merchants will roll on quicker, others will roll on slower.

They all have their own compulsions and I kind of understand that.

So that's where I'm coming from.

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

Greg Smith, Stern, Agee.

Martina, I'm still confused about the transaction processing fees, the fact that they declined sequentially in the fourth quarter.

I understand the pricing impact and everything, but was there -- or the PIN debit impact.

Was there any sort of issuers hitting new pricing tiers or anything else going on that could have impacted that revenue line item?

No, we have seasonality and that's typical.

You have to really -- you shouldn't look at this sequentially.

You really have to look at that versus the year-ago quarter and that's where I made my remarks that you really have to compare the 23% transaction processing growth versus the 12% transaction fee growth.

Okay, that's helpful.

And let me just sneak in one last one.

Just as we think about moving to Chip cards in the US and mobile globally, how should we think about that impacting MasterCard's economics broadly over the next few years?

Favorably, I'm hoping.

That's where I'm coming from, so I hope to participate in it.

I hope to get more volume out of the conversion of cash.

I hope to get more secure transactions for my partners in the merchant world and the issuer world.

That's kind of what I'm going with here.

It's all part of driving our top-line the way that we talked about it.

I'd now like to hand the call back over to our CEO, Ajay, for closing remarks.

Thank you.

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

And thank you for all those questions, folks.

We had a terrific 2011.

Our financial performance was driven by strength not just in our base business, as well as from tremendous execution by our employees across our regions, which led to some significant business wins and that's the three concentric circle discussion that Martina got into.

At the same time, we have made targeted investments in partnerships in our strategic focus areas, and I hope by doing that, what we're doing is to lay the foundation for longer-term growth.

For the year ahead we are very mindful of concerns around how the European economy will fare and any knock on effects around the world.

The main effect of these -- the main impact of this -- would obviously be on that global consumer spending growth.

But PCE is only one of our growth drivers; the other two being the proportion of electronic-to-cash payments, and our share of that electronic portion.

Those two areas are where we are focused.

We will continue to execute in a local level to displace cash by driving issuance, acceptance in new categories, and by delivering the benefits of electronic payments to more people, more institutions and more merchants.

We're trying to ensure that we capture more than our fair share of payments growth.

So once again, thank you for your participation, thank you for your support for our Company, and thank you for your time today.

Ladies and gentlemen, that concludes your conference.

You may now disconnect.

Have a wonderful day.