萬事達 (MA) 2012 Q3 法說會逐字稿

Welcome to the MasterCard's third-quarter 2012 earnings conference call.

My name is John and I will be your operator for today's call.

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

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Ms. Barbara Gasper, Head of Investor Relations.

Barbara, you may begin.

Thank you, John.

Good morning and thank all of you for joining us today, either by phone or Webcast, for a discussion about our third-quarter 2012 financial results.

Hopefully, by postponing the call by an hour we made it a little bit easier for folks on the East Coast to be able to access the call.

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, the operator will announce your opportunity to get into the queue for our question-and-answer session.

Up until then no one is actually registered to ask a question.

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 includes reconciliations of non-GAAP measures to their GAAP equivalents.

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

A replay of this call will be posted on our website for one week through November 7. 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 President and CEO, Ajay Banga.

Ajay?

Thank you, Barbara.

Good morning, everybody.

Just some high-level comments first.

In the third quarter we saw net revenue grow 5% as reported, or 10% after adjusting for currency.

Volume and transaction growth are behind that increase, as well as the increase of our net income growth of 8% and our EPS growth of 10%.

It is a solid quarter despite the tough comparison to our exceptional performance in the third quarter of last year when we delivered 24% net revenue growth at constant currency.

Our actual performance, in fact, was right in line with the expectations we spoke about at last month's investor meeting, which took into consideration both this third quarter of last year performance but also the world's somewhat mixed economic picture.

In the US we saw an improvement in consumer confidence which resulted in an increase in consumer spending growth, although that growth is slower than 2011 or the numbers we saw in the first half of 2012.

According to our own SpendingPulse data, eight of the 11 sectors we track showed positive results in September and retail sales ex-auto and gas grew 4.1% in September, although that is lower than the growth in July and August.

As we have been saying for the last few quarters now, housing related categories of retail spending continue to perform well, which I think points to the underlying improvement in the housing market that we are all beginning to see.

Our US consumers, however, appear to be holding to their budgets with pretty tight and close controls on what they are spending on.

We are seeing a rotation in their spending from sector to sector based mostly on their seasonal needs.

So, for example, during the recent back-to-school season we saw a temporary increase in growth for the apparel sector.

That was in August.

But other sectors, such as the electronics, did not fare the well that month.

In September, consumers shifted their spend towards electronics and housing-related sectors at the expense of apparel.

So they are kind of moving back and forth.

We will be watching consumer spending closely for the remainder of this year and going into 2013.

As you all know, a lot will depend on how our government responds to fiscal policy issues once the current elections are over.

In Europe, our processed volume and transaction growth continues, albeit with some deceleration in the third quarter.

Softness in countries such as Spain and Greece continue to be more than offset by volume growth in the northern and eastern European markets.

However, a couple of those markets, like the UK and Russia, did slow down in growth.

Business sentiment continued to weaken in the third quarter, but the trend in Europe and consumer confidence has been somewhat more inconsistent.

It is up in the second quarter, began to turn down in the third quarter, and just recently has seen a very slight uptick.

Therefore, as it has been for some quarters, Europe remains a complicated economic scenario.

We are watching those signals but we are continuing to grow our business and we are doing pretty well under the current circumstances.

Asia Pacific and Latin America sustained double-digit process volume growth in the third quarter despite several major economies in these regions showing the early signs of deceleration.

There is no doubt that economic uncertainty in the US and Europe is impacting the rest of the world.

You all read the news about China and India; we see some of that in our data, too.

Brazil, however, seems to be showing signs of improvement in both sentiment and spending, probably helped by tax cuts and other government stimulus programs.

So, overall, we are just continuing to maintain a cautious outlook for the rest of this year and into 2013.

We will continue to watch global macroeconomic indicators, in particular the outcome of the US election, the fiscal cliff debate that will no doubt follow, as well as the ongoing problems affecting the European economy.

So while this economic climate remains complicated, we are navigating through these challenges by focusing on what we can influence and what we can control, which is really to remain focused on our business strategy.

So let's discuss some of the business highlights starting with several deals from around the globe.

Building on the momentum we had created with Swedbank, we recently signed an exclusive partnership with Nordea Bank for their consumer credit and co-brand products in the Nordic and extended this new partnership to debit and credit in the Baltics.

This deal doubles MasterCard's share of cards with Nordea, and along with other recent wins, we think we can double our market share in the Nordic and Baltic regions for the next three years, further extending our presence in these markets that are actually doing relatively well.

In France, we recently renewed our agreement with Credit Agricole, MasterCard's largest customer in that country, and with that behind us we have no other major contracts up globally for renewal until 2014.

In the Czech Republic, we signed a strategic cooperation agreement with CSOB bank, which is the second largest card issuer in that market, and we think that that deal will generate an incremental 20% share of cards for us.

And, most importantly, will enable the largest ever PayPass issuance in the Czech market to date.

Moving to the Middle East, we have just won a significant opportunity with the Commercial Bank of Qatar's Private Banking and Mass Affluent portfolios.

We gained significant share in the credit book and now we have exclusivity for debit.

With this deal in place, Qatar is showing the most significant acceleration in share growth of any of our markets in the Middle East/Africa.

In China, MasterCard was selected as the exclusive foreign payments brand for Citibank's Premier Miles program.

This is Citibank's flagship product.

They are targeting it at affluent frequent fliers.

Each card holder will be given a US dollar denominated MasterCard card that can be used when traveling outside of China.

In Hong Kong, along with the Bank of China, we launched a MasterCard exclusive youth card program called the i-Card.

This new program focuses on the most important spend categories for youth in Hong Kong, which are basically e-commerce, entertainment and travel, probably no different from other countries in the world.

Previously this youth card program was divided between two global networks.

Now, all these cards will be converted to MasterCard by 2014.

On governments, we continue to work with them to highlight the positive aspects of electronic payments.

And so this quarter let me give you two more examples -- one from the US, one from Mexico.

In the US, as I have mentioned over the past few quarters, we have run a number of public sector programs and we can now add the states of New Jersey and New Mexico to that list.

A number of municipalities are coming on to this as well -- Columbus in Ohio; Hamilton County, Ohio; other municipalities in Virginia.

Additionally, we have won programs with several federal agencies, such as FEMA, OCC, the Department of Alcohol, Tobacco, and Firearms, and the District of Columbia court system.

So moving to Mexico, MasterCard recently announced a partnership with a Mexican government-owned institution that provides credit to government and private sector employees.

Currently this institution has 700,000 closed-loop credit cards that can be used at 30,000 affiliated merchant locations.

By entering into the partnership with us, all of these closed-loop cards will be re-issued as MasterCard-branded credit cards and expand their use to include all MasterCard-accepting locations across Mexico.

We also continue to work with merchants, and I'm just going to highlight one that is really interesting.

MasterCard and Nakumatt Holdings, the largest supermarket chain in East Africa, have partnered with two banks, Diamond Plus Bank and Kenya Commercial Bank, to convert over 1 million proprietary loyalty cards to multicurrency EMV, PayPass-enabled prepaid cards.

Nakumatt has a presence in Kenya, Uganda, Rwanda, and Tanzania to serve about 80 million shoppers every year.

This deal basically gives MasterCard very strong brand association at the local level in these countries, as well as preference at the point-of-sale.

It is the largest prepaid merchant agreement for MasterCard in the Middle East and Africa region to date.

While on prepaid, let's just go on to India and what we are doing there with Thomas Cook and Western Union.

So let me start with Thomas Cook.

They are launching a MasterCard-exclusive multicurrency foreign exchange travel card.

They are calling it the Borderless Prepaid Card.

Thomas Cook is India's largest travel and travel-related financial services company and they will become the first nonbanking entity in India to launch a prepaid foreign exchange travel card.

They will also be using Access Prepaid as the program manager.

This Borderless Prepaid Card will allow travelers to load as many as eight currencies on one card and it's got a ton of other consumer-friendly, fun features.

Western Union and ICICI Bank in India have just launched a MasterCard prepaid card with a focus on people who don't have a bank account and want to avoid carrying cash.

So this new prepaid card offers the underbanked a way to store and access their money.

The idea is that eventually we will add remote top-up and card-to-card transfers to this card.

On the debit front, we are continuing to see robust momentum in the US with independent banks and credit unions adding to the more than 200 deals we completed this year.

We have had a number of wins in renewals with customers such as C-1 Credit Union, Gulf Coast Bank, Home Federal Bank, Midland State Bank, Wintrust Financial.

At our investor meeting last month one of the things we touched on was our focus on and our confidence in our ability to gain momentum and share in the US market for consumer credit and co-brands.

Over the past month we have begun to hit some of the singles and doubles that Chris McWilton talked about during that meeting.

We have renewed our sales co-brand program.

We have won the co-brand portfolio of RCI, the world's largest timeshare company, and additionally we have secured four significant consumer co-brand deals with one of our larger issuers.

I am just not at liberty to announce that to you yet, but we will as soon as we can.

Just to let you know, these co-brand deals span several merchant verticals.

We have a lot of work to do in this segment, but we have begun moving in the right direction.

Moving on to innovation and our activities around innovation and around mobile payments in particular, let me just bring across a couple of new partnerships.

We recently announced our partnership with NTT DOCOMO, Japan's leading mobile operator, where basically we are aiming to expand contactless payment options for Japanese consumers.

The collaboration will connect DOCOMO's domestic payment network to the rest of the world, enabling consumers using their smartphones to make contactless payments outside of Japan anywhere that MasterCard PayPass is accepted.

We also launched an exclusive five-year partnership with Everything Everywhere, the UK's largest mobile operator, to develop mobile and digital payment solutions for their customers.

In Poland, T-Mobile and MasterCard announced that PTC, the local operator of the T-Mobile network, will begin offering mobile payments based on our PayPass technology.

The offer, which will be made available in five major banks in Poland as part of a service called MyWallet, is one of the first advanced solutions commercially implemented in Europe.

It is an expansion of the global cooperation between Deutsche Telekom, which owns T-Mobile, and us.

If you remember, we announced this collaboration a little earlier this year.

Also in Poland, MasterCard Orange and mBank are launching a service called MasterCard Orange Cash, which is really a PayPass prepaid card on a mobile phone, that are giving them SIM access to their prepaid card, that will support contactless payments.

Finally, over the last two quarters I have talked about the progress we made with our DataCash business.

This quarter let me give you a few new highlights.

In Brazil, DataCash and Redecard recently signed a deal to provide payment processing and fraud and risk management services.

The deal, which is our first e-commerce gateway offering in Latin America, will be rolled out in the first half of 2013.

Latin America, as you know, does not have a great deal of offerings in this space so we think this is actually quite a breakthrough.

In Europe, DataCash's home territory, we are continuing to make progress, signing agreements with various clients as different as the National Bank of Greece on the one hand; Foxtons in the UK, where almost 80% of their payments are now being made online; and a contract renewals with Domino's Pizza, which is delightful, for their UK, Ireland, and Germany operations.

So now let me turn the call over to Martina for a detailed update on our financial results.

Martina?

Thanks, Ajay, and good morning, everyone.

Let me begin on page three of our slide deck.

So for the third quarter we saw good performance considering the very tough comps we were up against from the third quarter of last year.

As Ajay already said, this performance is in line with the expectations that we spoke about at our investor meeting in September.

Net revenue grew 5%, or 10% after adjusting for currency, driven by volume and transaction growth as well as new deals.

Total operating expenses increased 5%, or 8% after adjusting for currency.

So bottom line, we delivered net income of $772 million, up 8%, or 13% after adjusting for currency, and diluted earnings per share of $6.17, up 10%, or 15% after adjusting for currency.

As I mentioned last quarter, we continued to work on our tax planning strategy and we were able to realize some benefit from these strategies in the third quarter.

These benefits are primarily due to certain tax initiatives, some of which have discrete items in the period.

Cash flow from operations was $1 billion and we ended the quarter with cash, cash equivalents, and other liquid investments of about $5.6 billion.

While not shown on this slide, during the third quarter we purchased about 500,000 shares at a cost of approximately $216 million.

And through October 25 we repurchased an additional 255,000 shares at a cost of $119 million and we now have $1.1 billion remaining under the current authorization.

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

So let's turn to page four where you can see the operational metrics for the third quarter of 2012.

In general, the third-quarter performance of our business drivers was in line with what we presented on a quarter-to-date basis at our investor meeting in September.

So let's turn to our volume metrics.

First worldwide gross dollar volume, or GDV, was up 14% on a local currency basis.

US GDV grew 7%.

Debit growth in the US remains healthy at 14%.

Credit volumes in the US grew about 1%.

Commercial credit growth remains strong in the mid-teens, and as you know, we are still having work to do it in US consumer credit.

Outside of the US, volume growth was 17% on a local currency basis, including mid-teens growth in Europe and Latin America and more than 20% growth in APMEA.

The growth rates outside of the US were driven by the strength in both MasterCard credit and debit volumes, which were up 13% and 23%, respectively.

Cross-border volume grew 14% on a local currency basis, including mid-teens growth in Latin America and Europe and high teens growth in Asia Pacific, Middle East, Africa.

So turning to slide five, here you can see processed transactions were up 25% 24%, slightly lower than the growth rates that we saw in the first and the second quarter.

As expected, this deceleration was mainly driven by the lapping of our processing wins in the Netherlands, which will fully lap by the end of this year.

Drilling down further, about half of the 24% growth comes from the new PIN debit transactions in the US leaving about 12% as the underlying growth rate.

Globally, the number of cards grew 8% to 1.9 billion MasterCard and Maestro-branded cards.

Now let's turn to page six.

Here we can discuss our revenue growth in a bit more detail.

Domestic assessment and cross-border fees grew both 8% on an as-reported basis and 12% after adjusting for currency.

Transaction processing fees grew 10%, driven mainly by the 24% growth in processed transactions.

The gap between these two growth rates continues to be in the 13 to 14 percentage point range.

As we have mentioned previously, the majority of this gap is caused by US PIN debit transactions and non-US transactions that both come with a lower-than-average revenue yield.

The remainder of the gap is primarily explained by FX.

Other revenues grew 11%.

And, finally, rebates and incentives increased 20%, driven by the impact of new and renewed deals, as well as volume growth.

Moving to page seven for some detail on expenses.

Here you can see total operating expenses.

Within that, general and administrative expenses increased 10%, due to higher personnel costs in support of our strategic growth initiatives.

So very similar to last quarter, these include on the ground resources for pre-paid commercial and mobile, as well as supporting the growth in various markets and expansion into additional countries.

Advertising and marketing expense was 12% lower than last year's third quarter on an as-reported basis and 8% lower on an FX adjusted basis.

This increase was mainly due to the non-recurrence of expenses related to last year's Rugby World Cup, as well as the timing of certain initiatives this year.

Depreciation and amortization increased 14%, due primarily to increased capitalized software associated with our strategic projects.

So turning to slide 8, let me discuss 2012, really starting with an update of what we have seen for the fourth quarter through October 28.

Globally, our cross-border volumes grew about 17%, roughly 3 percentage points higher than what we saw in the third quarter.

This was primarily driven by Europe where cross-border growth improved from the mid-teens to the high-teens.

In the US, our processed volume proxy for GDV grew 7%, and that is pretty similar to our growth in the third quarter.

Processed volume growth outside of the US grew to about 15%, which is just a bit higher than the 13% growth we saw in the third quarter.

And in Europe, processed volume growth through October 28 was in the mid-teens versus the low-teens we saw in the third quarter.

Globally, processed transaction growth was about 22%, down from the 24% we saw in the third quarter, and that is primarily due to the lapping of the pin processing wins in the US and in the Netherlands.

So now I would like to share with you our thoughts for the rest of 2012, which remains fairly consistent with what we shared with you at our recent Investor Day meeting on September 20.

We continue to expect second-half revenue growth to be somewhat lower than the 13% FX-adjusted growth rate we saw in the second quarter due to timing of new deals, tougher comps and continued global economic uncertainty.

You saw the impact of these items on our third-quarter results.

However, some of what we expected in the third quarter for rebates and incentives will now likely materialize in the fourth quarter.

We remain committed to achieving a minimum 50% annual operating margin and we continue to expect only a small operating margin expansion in 2012 relative to 2011.

For the fourth quarter, G&A expense growth will be about the same as the growth rate we saw in the second and in the third quarter on an FX-adjusted basis.

We continue to invest in our strategic growth initiatives, including the expansion of our Access Prepaid and DataCash acquisitions, which have now fully lapped.

As we have said before, our 2012 A&M spend is expected to be lower than 2011 on an FX-adjusted and on an as-reported basis.

In addition, the quarterly spend as a percentage of the full year will be very similar to 2011.

So regarding FX rates, if you assume the euro continues to trade around 1.30 and the Brazilian real continues to trade around the 2.00 level for the rest of the year, we went expect about a 2 to 3 percentage point headwind to net revenue, net income, and EPS in the fourth quarter.

Based on some additional tax benefits that we were able to record in the third quarter, we now expect our full-year 2012 tax rate to be about 30%.

Going forward, as we said at Investor Day, in order to calculate our 2013 to 2015 EPS objective CAGR you will need to use a starting tax rate of 32%, not 30%.

So, finally, as we outlined at our Investor Day meeting last month, our new performance objectives for the 2013 to 2015 period are a net revenue CAGR of 11% to 14%, a minimum annual operating margin of 50%, and an earnings per share CAGR of at least 20%.

As you know, these objectives are all on a constant currency basis and exclude any new acquisitions.

Our assumptions also do not contemplate at this point a more pronounced deterioration in the US economy or more significant problems within the euro zone than what we are already seeing.

As I said at last month's Investor Meeting, while we have a three-year CAGR objective, in any given year, the actual net revenue growth could be above or below our 11% to 14% range.

Based on our current expectations of the economic environment, we expect that net revenue and EPS growth in the early part of this [period] might be slightly below the range.

In later years, assuming the world returns to a more stable environment, we believe net revenue growth could be at the higher end of the range, and that could also benefit EPS growth in that particular period.

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

Thank you, Martina.

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

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

John?

(Operator Instructions) Sanjay Sakhrani.

Thank you, good morning.

I was hoping to get some clarification on the European wins with Nordea and CSOB.

Could you just clarify the specifics on the expansion of those relationships?

For example, does debit now move exclusively to you?

Also, could you just touch on the timing of when those wins ramp into your numbers?

Then, just secondarily, on the rebates line, if, Martina, you could just clarify what you guys are expecting for the fourth quarter?

Thank you.

So Nordea, we have signed in the Nordics, we have signed Swedbank sometime ago.

What Nordea really is -- first the signing of their consumer credit and the co-brand portfolios, which are primarily driven off credit in the Nordics.

What they have also done is that they have expanded into the Baltics as a bank, and in the Baltics we have got both debit and credit with them.

So in the Nordics we don't have debit with them; we have credit and co-brand.

In the Baltics, we have debit and credit.

So when you put all that together that I said we will kind of double our market share across credit and debit in the Nordic and Baltic regions over the next three years.

Now why three years?

Because these are phased in, we are not doing a master flip on one day.

It is kind of a phased-in reissuance when the cards come up for reissuing over there.

In the Czech Republic with CSOB that one is actually -- what we are doing there is to flip them into getting more cards with us.

We think that because it's such a large player there, we could get a 20% increase in our share of cards in the Czech Republic.

This will take between eight months and two years to complete.

It is not an overnight flip either.

So, Sanjay, with respect to your second question on the rebate line, what I was just saying is that we did actually expect to have a little bit higher rebates and incentives line in the third quarter than what we had.

And that simply what happened is that a number of the deals that we expected to sign in the third quarter are slipping into the fourth quarter.

As you know, from a seasonal perspective, our fourth quarter is typically the highest quarter from a rebates and incentives point of view, simply because at that point in time you have the holiday season going on, you have a number of merchant initiatives and incentives going on.

So I just want to make sure that everybody captures that.

And we have got a pretty full deal pipeline, so that this kind of why she is so careful about this point.

Next question, operator.

Craig Maurer, CLSA.

Good morning, thanks for taking my question.

I actually had two questions.

One is, have you heard any rumblings out of Brazil in terms of the regulatory environment, potential changes down there?

And, secondly, in terms of US credit, you said you continue to look at initiatives.

My only question there is is there really anything to do other than continue to support your existing partners and wait for deals to come up for possible renewal or wins?

Thanks.

So Brazil nothing new that I have heard in the rumblings other than what has been there for a while with imposing taxes on foreign purchases and the like, but I haven't picked up anything new.

The part about credit in the US.

Commercial credit in the US, we are actually doing really well; strong growth, mid-teens.

It is consumer credit that we were talking about, and there are two parts to it.

One part is clearly the part about working with existing issuers.

We've got a mix of issuers, and you know who those are and you know who our competitive brands, there is a mix of issuers, and you also know which banks are coming out of the cycles faster in some cases than the others.

There is only so much you can do on that other than work with the existing portfolios, as you have said, to see if there is opportunities for those banks that could exist to work that portfolio harder.

But the other part of it has got a lot to do with kind of getting small wins going, whether it be independent banks and credit unions, which we have been doing consistently for the last year-and-a-half, two years, but kind of focusing on that.

The other part is co-brands, and co-brands keep coming up.

As they come up we work with them, but there is also geographic expansions on new products.

So a number of the regional banks are going into different kinds of new products in the credit space.

Their balance sheets, as you know, were somewhat better than those of some of the larger banks and those all come up for being available for discussion.

Almost all these banks are in dialogue with us at some stage or the other.

So it is a slow fix; it doesn't happen overnight unless you get some big change in the portfolio.

But if you do it systematically, and we are doing it systematically with the independent banks and credit unions and working with our current customers and looking at all the co-brands, then I am convinced that over the period of a couple of years we can make a really big difference to this number.

Don Fandetti, Citigroup.

Good morning.

Ajay, it looks like the cross-border started to accelerate nicely in October, particularly around Europe.

Can you just talk a little bit more on what you are seeing on the ground in Europe?

It seems like maybe the worst is behind you.

Don, I don't know that I would go that far about seeing the worst behind.

Honestly, I am as surprised as you are by the first four weeks of this quarter.

Mind you, it is there in the first three weeks too, so if you had looked at this data as of October 21 it's kind of a similar trend.

So it feels like the fourth week is similar to the first three.

Now I don't know if that makes a trend, but in another month or so I will feel a little differently.

Right now I just see a complicated economic environment out there.

I see, and I have said this openly, I think of the US as being in actually a relatively better shape as an economy than a lot of people give it credit for, both between individual and corporate balance sheets.

I think if the government was able to show some degree of clarity and leadership around solving for the cliff, I suspect the US economy could provide a surprise on the upside to almost every kind of company.

But that has to happen before you can say that, and nobody knows what will actually come out of that over the next month or two.

Then you go to Europe, and like I said, we have been fortunate as a company.

The mix of our business is biased towards Northern Europe and towards the emerging economies of Europe, and that has really seen us in good stead.

While Russia has slowed in growth a little bit, but when you slow in growth from a large double-digit number to a slightly less large double-digit number, I will take that every day of the week.

And so that has helped us.

We are less exposed to Portugal and Ireland and Greece and Spain.

We have said in the past that only 5% of our revenue as a company comes from the PIIGS economies and that has helped us.

So I think that part of what you are seeing in our numbers is our relatively high exposure to the economies that seem to be doing better.

In the last two or three months I have been in the Nordics.

I have been in Germany.

So I have actually seen a couple of these economies firsthand.

And, yes, they do look different from what you see in Southern Europe.

Then we come to Asia and Latin America.

In Asia, China is showing some impact -- and you read about it -- but remember, we don't do domestic processing in China; we do cross-border.

Cross-border is just fine, thank you, and that has been helpful.

Then you look at India.

In India, yes, the economy is slowing but it's 66% driven by domestic consumption, which is still doing pretty well.

And so, you know, our mix of business is what is allowing us to weather this storm in the way we are doing it, and that is what is factored into all our thinking.

When we spoke to you at Investor Day about how we think about the next three years, we think of 2013 as being probably more complicated than 2014 and 2015.

And 2013 may well bring, as Martina said, our revenue and our EPS somewhere lower than the range we gave you, but remember it is a cumulative average growth rate we are talking about.

We will probably end up somewhere better in the next two years, and that is how we look at our business and it mix.

It's a long answer to a simple question, but actually that ain't a simple question, Don.

Chris Brendler, Stifel Nicolaus.

Thanks, good morning.

Can you comment on the US domestic debit market?

You have provided some helpful disclosure there with about half of the growth rate of 24% coming from the PIN debit side.

Just wondering, are we completely through the portfolio conversions?

Do you have any insight into your pipeline?

You have had some nice US wins on the debit side, [they] seem to have slowed over the last year.

I think we are almost full lapping of that.

So the 12% -- I guess my question is the 12% is the core growth rate absent those portfolio conversions.

And also where is the track and the trend on the PIN debit side?

Are you maintaining your share gains?

Has Visa's PIN-authenticated debit had any impact on your debit wins on the PIN side?

Any color would be helpful, thanks.

Chris, let me take this.

First of all, for the quarter, yes, the 12% was the underlying growth rate when you strip out, and most of the differential to the 24% was really related to the new PIN debit business in the United States.

I think I want to differentiate between the PIN business and the signature debit business.

On the PIN business, as you know, because of the regulatory changes that had to happen in the US, there was a big push in the second and the third quarter and that is what we saw in the numbers.

Having said that, we are going to continue to work on the PIN business but I don't think you should be expecting going forward to have a similar push to what had to happen leading up to April 15 of this year.

On the signature debit side, again, you should be expecting that we are working those portfolios in a fairly significant way.

So we have deal pipelines and you should just expect that you will see these kind of more normal cadence that we enjoyed during time.

So whether the 12% underlying growth rate is going to persist that depends.

We had it now for a number of quarters.

As you know, it really depends on how consumers are using their debit cards going forward.

I think the one other question that you had was in terms of are we seeing any particular losses on the PIN business.

Again, as you know, it is a complicated business.

So far, we have been able to get a nice share on this.

We have not seen any material deterioration on that versus the last quarter, and we will be continuing to work this space as we see fit.

Chris, the only thing I would add to that is that you asked specifically about Visa's pricing strategy.

Yes, they've got that pricing strategy rolled out over there.

We are not playing the game the way they are.

This is my own understanding; I think they are impacting the regional networks more right now with that pricing strategy than the wins that we've got, but that could change.

So they are very carefully watching it.

We have got now great MIS now; we have got great ability to track of this stuff by merchant, by geography; and our team is very conscious of keeping our head above water on what we are doing here.

So that is what we are up to.

Thank you.

Can I ask a quick follow-up?

Go ahead.

On the acquiring side, there was -- I think it was a licensing fee.

I think, Martina, you actually characterized it as a pricing change in the US in your last public comments.

I just wanted to confirm that that was fully impacting this quarter.

My understanding was it kicked in July 1, but I didn't see any --?

Yes.

Yes, there was a full impact this quarter.

But I just didn't see any sequential change in your growth rates in domestic assessments or rebates or anything like that.

(multiple speakers)

No, it is not in domestic assessment.

It is in other revenues.

And so your comment that it was relatively small --

It is relatively small but it's part of --

Now you are into five questions, Chris.

That is one, two, three, four, five.

But, yes, it is relatively small.

I was expecting you to cut me off.

All right, thanks.

We try not to cut people off.

Operator, next question please.

David Togut, Evercore Partners.

Thank you.

Could you update us on your appeal of the European Commission pricing structure on cross-border debit and credit within the EU?

And in connection with that, we are hearing that the EC wants to regulate domestic interchange in the EU.

Do you have any reaction to that and what might be any impact on your own pricing strategy?

I have Noah sitting next to me right here and so Noah is going to chat with you about that.

Go ahead, Noah.

So as you know, we filed our appeal after the general court's decision against the European Commission.

That is going to play out over some time, so we have nothing else to add on that other than the fact that we feel it's pending.

And as to the question about the European Commission and domestic interchange, I think it remains to be seen as to the position they are going to take.

That also is in play, but time will tell as to whether ultimately they seek to regulate in that space.

And if the EC does regulate domestic interchange, do you expect to maintain your own network pricing within the EU?

Well, who knows?

But at the end of the day - you've got to remember, we don't make money out of the interchange.

And so we've got -- this is exactly what we have discussed in many countries around the world, pricing our ability to price our work with issuers, our work with merchants.

Yes, the entire market moves around with interchange in terms of economics between merchants and banks, but the impact on us comes more from what happens to total payment volumes and the interest that issuers have in expanding the payments business and the interest that merchants have in accepting electronic payments.

And that is the way we look at it rather than if interchange changes what happens to my pricing?

It hasn't proven to work that way for many years now.

We keep getting the same question and I keep giving the same answer, so hopefully I am consistent with that one.

Okay.

Well, thank you.

Thank you for asking.

Next question.

Gil Luria, Wedbush Securities.

Thank you for taking my question.

Wanted to ask about what impact you expect from the new retailer joint venture that they refer to as MCX.

They have tried legislating against you; Durbin ended up being a net positive.

Litigating, you seem to be settling on pretty decent terms, so now they are trying to compete with you.

Do you think they have the resources and the will to build an alternative payment network?

And in the shorter term, do you think that the fact that they will capture a lot of aggregate data means that they will have less demand for the data you sell from MasterCard Advisors?

So you've got two or three questions in there and the first part is this whole MCX has got very little detail on what they are doing, what they intend to do.

It is very difficult for me to give you much specific commentary on that.

Do they have the resources and the will to do something about MCX?

Yes.

Does it add up to a real payments network?

Not really if you think of what a payments network brings if you look at the totality of it.

So I think there are two very different angles in there.

We are -- a number of them are already business partners of ours.

Those are important retailers and we are always talking with them about what we could do with them and for them, so that dialogue is ongoing.

I think the aspect of data -- yes, some of them will be collecting more data, but remember that the data we have cuts across millions of merchants in lots of geographies.

The ability for our data to be somewhat, therefore, more predictive than that of any group of retailers is still very strong.

What we do not do, which we don't do even today, we do not collect SKU-level data and we do not collect individual names.

One of the best parts about our data is that we are not collecting your name.

In fact, your name doesn't come to us in the transaction.

What comes to us is a card number, a merchant code, a dollar value, and a time of the transaction.

And I think that still remains in our benefit -- that we aren't actually crossing the line into an individual's name.

So our way of using our data is different, and I think there is enough space in this growing "big data" market for us and some others to be competing.

So I am less concerned about that aspect of it.

Thank you.

Next question, please.

Jason Kupferberg, Jefferies.

Thanks, guys.

Any way to get a sense of potential impacts from Hurricane Sandy on your US, your cross-border volumes?

I am sure a lot of international trips probably got canceled or postponed by the storm.

Anything that you would suggest could end up being material, understanding you what wouldn't have any kind of specific numbers at this point?

Jason, when we did the analysis on other such storms in other parts of the country or in the world, net-net in the end of the day you see very little impact.

So we might be -- when we see our weekly data for this week, we might be -- we definitely will be -- seeing some impact, but usually over time, that evens out.

So what you have to understand, if you were in New York City on Saturday and Sunday -- first of all, everybody went to the shops and I am surprised that the shops have any kind of type of food still on the shelves because everybody was buying like crazy and stocking up.

So that was obviously a benefit because I saw a lot of MasterCards coming out of the wallets to be used for that.

Then you probably have a little bit of a down period.

Of course, people were not dining; of course, you had tourists probably laying low in the hotels.

Hopefully, they did some good spending there.

Then after the storm you have people starting to come out again.

Some of the food was spoiled, so they are going to have to start back up again and they'll have some pent-up demand.

I believe this weekend you will see some of that coming in.

So in the end, when we look at these kind of storms --and this was a two-, three-day kind of event, so it was actually a relatively defined event.

We believe that over the quarter you are not going to see some impact.

Obviously we are wishing well for everybody who had to go through this terrible storm.

The other angle, Jason, is that a lot of foreign tourists were also stuck here.

Others may not have been able to come in, so it has kind of worked both ways.

It is tough to predict, but there is no doubt that it creates a whole new element of uncertainty in so many people's lives with all they have been through.

Right, okay.

All that color makes sense.

Just for a follow-up on the merchant litigation, since you guys have Noah there.

Any concerns on the opt-outs getting to 25% of total, or any other circumstances you can foresee as you go through this multistep process towards finalizing, or truly finalizing, the settlement?

Anything that could potentially derail it, or is your level of confidence in having it go forward with essentially the same terms that we first heard about in July -- is that level of confidence intact?

So Noah actually ran out of the room as soon as you started your question (laughter) but he is here right now.

Go ahead, Noah.

Thanks for the opportunity to respond.

Let me say that, as you know, Judge Gleeson issued his order as far as preliminary approval is concerned.

We are pleased that he indicated that, despite requests for protracted briefing efforts, and insofar as the approval is concerned, he set a short date for a hearing and indicated that preliminary approval is appropriate where we have a situation where the proposal is the result of serious negotiation between the parties.

So we feel pretty good about that moving forward in a rapid manner.

At this point there have been some merchants, as you know, that are objecting to the settlement.

But I would point out that of the original merchants in the class, setting aside the trade associations, the majority of those merchants actually signed the settlement agreement.

And that is in addition to the 22 individual merchants that were plaintiffs that also agreed to the terms.

So at the end of the day, we think the prospects are good, but really it's up to the judge who will ultimately determine the fairness of the settlement.

At the end of the day, there can be opt-outs and if even that 25% number is reached, it is still up to the defendants to decide whether to go forward with the settlement.

So we believe -- we feel good about the prospects.

Again, it is up to the judge to determine the ultimate fairness of the settlement.

Then you feel pretty good about the appeal process, assuming that that occurs post-Judge Gleeson's ruling?

Absolutely.

Okay.

Thank you, guys.

Rod Bourgeois, Bernstein.

Wanted to inquire about the SEPA situation.

I mean you've had some pretty good SEPA wins in recent years.

Can you give us an update on the latest process for additional domestic processing wins in Europe, recognizing that the EU is pushing pretty aggressively for regulation in Europe?

Does that regulatory push in Europe at all, maybe in the next six months, alter your ability to win SEPA deals in Europe?

And does it make it more likely that future SEPA wins are further down the road rather than over the next two or three quarters?

Not really.

There is actually many different paths in Europe, like everything else in Europe.

The fact is that if you look to the third quarter our domestic transactions, now that they are lapping all those humongous wins in the Netherlands, still grew 26%.

We are still growing pretty handsomely in the Netherlands, per se.

We grew by an enormous number in Belgium.

We are beginning to grow in Austria; we are growing domestic transactions in Germany.

We have been able to implement a Maestro fraud shield in Germany to help reduce fraud and protect all our international Maestro acceptance.

In fact, we think that by the end of the year, 80% of all German Maestro cards, which is a number well in the excess of tens of millions of cards, will be on this tool, which is a derivative of inControl.

We are working at ING to be issuing PayPass-enabled cards in the Netherlands starting January.

I talked to you about the Nordea win.

I talked to you about Swedbank.

We have got a pipeline of deals across SEPA in this space, both in terms of traditional wins as well as processing.

So I would say to you there is different paths going on.

There is all the day-to-day business where there is all of the effects of SEPA and the payment systems directive that is still flowing through.

There is the issue of what is going to happen with the appeal, as Noah said, and what is going to happen with the Green Paper.

But every bank is moving forward and they are all moving forward with their business.

There is no doubt that continued regulatory uncertainty always makes people uncomfortable, but Europe has been having some of this uncertainty for quite a while now.

It is not a new event in Europe, so that is kind of where we are right now with all this.

Having said that, winning domestic processing in Europe is not something that happens in three months.

Any one deal takes quite a while to happen.

So I am not sitting and fretting about that issue right now in my numbers for the next few months or quarters.

Great.

Then just real quick as a follow-up on a related note.

It is good to hear that you don't have any major renewals until 2014.

On the deal that you, the large client that you recently renewed, did the European push for regulation have any effect on your new contract with this bank in Europe?

Credit Agricole you are talking about.

No, nothing at all.

I mean, listen, every big bank in every part of the world negotiates hard to protect their interests and negotiates hard to protect their growth, as does every big merchant whom we talk to.

So there is always that pressure with every institution each and every time.

It has been that way since 25 years, so that is there.

But I can tell you that there is no difference in our conversations with these institutions that is coming out of this.

They all want to know what is going on with the Green Paper.

They want to understand our strategy compared to that of our largest competitors.

They want to comprehend what our approach is in terms of affluent cards and non-affluent cards.

They want to make sure that they understand what we are doing.

But beyond that it is a pretty healthy dialogue.

Great.

So there is no terms in that contract that are contingent upon regulatory outcomes?

You were able to get everything etched in stone just like --?

No, and that is question number three, Rod.

Next question, please.

Bill Carcache, Nomura.

Good morning.

Thanks for taking my question.

There has been a lot of focus and a lot of attention on mobile acceptance technologies in the US, like Square and similar offerings.

I wonder if you could talk a little bit about what you are seeing, I guess, in terms of mobile acceptance, similar types of mobile acceptance technologies in emerging markets and whether -- I guess just thinking about the potential for there to be kind of a step change in electronic payment penetration rates in the emerging markets as a result of not having to kind of have the traditional point-of-sale infrastructure laid out.

Anything that you are seeing there?

Secondly, as the follow-up, if you could also talk about from the standpoint of your conversations with other mobile network operators, whether sorting out or hashing through the economics of partnerships, it seems like that is something that is taking place on a case-by-case basis.

But I wonder if you could give any comment as to whether that is a sticking point or any color around that?

Thanks.

So I will answer the second one a little bit quickly and then we will go to the first one.

In the second one it is absolutely correct that there is a case-by-case approach right now.

The reason for that is no one is clear how this will develop over a period of time.

So there is the traditional role of an operator versus a hardware manufacturer versus a bank versus the merchant versus the network; it's still moving around.

The one big difference is that everybody is there playing.

A little while back we used to all talk about how the mobile networks would be able to do all this without the banks and the payment networks, and I think you have seen that dialogue completely change through the efforts we have put in.

We now have 30 of these partnerships around the world.

I talked about a few a little while ago today, but if you add up what we have been doing over a period of time there are a ton of these around the world.

I remain convinced these will take time to come to fruition.

I remain convinced that infrastructure has to be built, that these economic terms have to be agreed to, that consumer behavior has to adjust and adapt for it to come to fruition.

One of the aspects of infrastructure that could help, which has not to do with mobile payments, it has to do with the other side of this, which is your first part which is mobile as a point-of-sale which could transform the acceptance of casual merchants, smaller merchants, and merchants with inadequate fixed line infrastructure in countries like India and South Africa and different parts of the world.

There is momentum.

We have invested in a company like iZettle, for example, which is out there trying to build this.

We have got a great partnership with Square.

We are actually talking to them about going to countries outside of the US.

There is other players, there is [Rev]; there are a couple of other players out there that are trying to think about how to use alternative methods to enhance the experience of using a mobile as a point-of-sale.

We ourselves are doing stuff as well, which is in MasterCard Labs that some of you have seen, that also works with using tablets and mobility devices as a point-of-sale.

These are all -- they are happening but they are far out there.

What I was talking about in India, for example, with the Unique Identification Authority, with fingerprinting, that I talked about a few quarters ago, that relies on the mobile having a fingerprint reader attached to it in a small village shop, which can then be used to enable transactions from the bank accounts into which the direct deposit of subsidies is made.

So there is a lot of work going on.

We have developed that technology.

It is in our system.

Because we have one release around the world, we don't have one part of the world as an association.

We have got everything together; we have got one release around the world.

We kind of have this done and we are ready to bring it into different countries as it rolls along.

We are working very hard on it at the front end, but I would say it is not going to happen tomorrow.

It is going to be a slow build over the course of a few years.

Thank you.

Next question, please.

Andrew Jeffrey, SunTrust.

Thanks for taking the question.

Martina, could you just clarify in terms of the rebates and incentives commentary with regard to the fourth quarter, is a higher level specifically tied to current period deal signings or is it related also to the higher volume within existing contracts?

First of all, as you know, our fourth quarter has always enjoyed the highest level of rebates and incentives.

So you kind of have to take --

If you can call it enjoy.

It is a relative term.

I love our CFO's words.

So if you look at our quarterly cadence over the last umpteen years it always was higher in the fourth quarter.

And as we told you before it was really higher in the fourth quarter primarily due to what is going on around the holidays and what we might be doing from a merchant initiative point of view.

Secondly, what you are having going on in the fourth quarter is that we have a very robust deal pipeline, as Ajay said.

Some of the deals we did not sign in the third quarter I fully expect them to come through in the fourth quarter, and then you would see a little bit of an up there too.

Lastly, you have just seen for October that our volumes are just a tad higher, not in the United States but outside of the United States, as well as with cross-border.

So depending on whether that will persist for the remaining two months of the quarter, you might see a little bit of an uptick there too.

Okay, that is helpful.

Thank you.

As a follow-up, it sounds like you are being very disciplined in your PIN debit share strategy.

Is there anything, Ajay, that you have seen intrinsically change with regard to PIN debit profitability?

I know you have always mentioned that the revenue yield is lower, but they are still very profitable transactions.

Is there anything that has at all been altered by the pricing environment with regard to the ROI on PIN debit, or just the incremental profitability?

No, Andrew, nothing has changed on that front.

In fact, as time goes by, as we see more of these transactions, I am kind of hoping that I will be able to do something with that data to help my Advisors business.

But typically you need to see some years of real data to make that predictability improve even further so that is not a 2013 event.

But seeing more data is really important to our company.

It makes a big difference to the values of what we sell in addition to just being a network, and so it is important.

We are working very hard, whether it be to the SEPA question that Rod was asking or your question right now, it really matters.

Okay, thank you.

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

Tien-Tsin Huang, JPMorgan.

Just a quick clarification, just a small operating benefit expected for the year.

In the past you have said that you could spend, I guess, some more on incremental growth investments.

Didn't hear that this quarter.

I am curious if that has changed.

And to the extent that there are incremental growth investments, would they be organic in the form of hiring people or inorganic like buying tech assets?

Just trying to assess where G&A could shake out as we get through the end of the year.

So you are stealing my closing comments, but that is kind of - I have every intention to keep using opportunities to put money back in.

Frankly, one of the things I'm trying to do very clearly and concisely is truly look at the Company's tax profile.

We used to pay a much higher tax rate.

We are working very hard in the Company to bring a tax rate down through two things.

One is a consistent, proper tax planning in terms of where our different assets are located and how the revenue reaches those assets compared to the tax rates in that geography and considering the tax rates across the United States in that geography.

The second is all the clearing up of one-timers that Martina and Tim Berger have done an outstanding job on.

So my attitude is to use those two, and in addition to business growth that I feel may give me better margins at different points of time, and keep putting that back into short-term opportunities.

But I also want to put our cash back into longer-term opportunities, whether it be the DataCash or Truaxis acquisitions, Tien-Tsin, or be it the purchasing of patent portfolios from ViVOtech which we recently also announced -- I don't know, Noah -- about a month or so ago, month-and-a-half, two months ago?

Yes.

So I am trying to do a bunch of things that are both short term and medium term in nature by using these opportunities, and that has not changed at all.

Okay, that makes sense.

The other clarification -- just October trends for US credit and debit; did you give that, Martina, or did I miss it?

What I did is I basically talked about our processed volume proxy for GDV in the US and I said it grew after October 28 at 7%, which is very similar to what we saw in the third quarter.

Okay, got it.

Thanks.

The improvement, Tien-Tsin, in the four weeks of October has been mostly outside of the US and it has been in every region outside of the US.

But in the US it has been kind of the same number as we saw during the third quarter.

Got it, got it.

Amazing how resilient it is.

Thank you.

Ajay, you have got some closing comments?

Yes, now that Tien-Tsin has stolen them.

Thanks for all your questions.

We basically delivered a solid third quarter and I want to make this point -- it was right in line with the expectations that we had as we lapped that exceptional third quarter of last year.

We believe the markets are going to stay unpredictable for the next, I don't know, 12-18 months.

But barring any significant deterioration in global economic conditions, we are very committed to our new performance objectives for the 2013 to 2015 period.

As Martina indicated and we spoke of in our recent Investor Day and I just said so again in answer to one of the questions, net revenue and EPS growth could be slightly below the range early in that three-year period.

My view is unchanged; the payment space is a great business to be in; 85% of the world's transactions are still being conducted using cash; that provides us a strong driver for revenue even during periods of overall economic uncertainty that impact per capita expenditure.

We continue to look at targeted investments and partnership opportunities to help drive our strategic focus areas for short- and long-term growth -- that is the Tien-Tsin portion.

Thank you all for your time today and thank you for your faith in the Company.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.