萬事達 (MA) 2013 Q1 法說會逐字稿

Welcome to the first-quarter 2013 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.

Ms. Gasper, you may begin.

Thank you, John.

Good morning, everyone, and thank you for joining us for a discussion about our first-quarter 2013 financial results.

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

Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q&A 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 at MasterCard.com.

These documents have also been 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 May 8.

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

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

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

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

Ajay?

Thank you.

Good morning, everyone.

In the first quarter we reported net revenue growth of 8%, or 9% after adjusting for currency.

This, combined with operating expense growth of 6%, helped drive our EPS growth of 16%, or 17% on an FX-adjusted basis.

This quarter's performance was in line with our expectations, which took into account last year's strong first quarter as well as the mixed global economic environment, both things that Martina and I have been talking about for a while.

So let's start in the US.

Consumer spending started out the year rebounding from what was a weak holiday season at the end of last year, but started to cool in February as consumers adjusted to higher payroll taxes, to some inflation in food and gas prices, as well as the effects of late-season winter storms in March.

I think these factors contributed to consumer confidence levels fluctuating over the quarter.

Our first-quarter SpendingPulse data mirrored these trends, showing that US retail sales, ex-auto, grew by only 2.6% in the first quarter this year, compared to 3.9% in the fourth quarter of last year and 7.4% in the first quarter of last year.

So you could see the declining trend in these US retail sales, ex-auto.

Much of this deceleration is attributable to slower consumer spending; but of course some of it is also the result of the leap year comparison as well as comparisons against a strong first quarter in 2012, when an early spring helped boost retail sales growth to that 7.4% number I just talked about.

Overall, our US business reflected these mixed conditions.

First-quarter processed transactions and GDV growth were lower than what we saw in the fourth quarter of 2012.

Looking ahead, recent positive news about the strengthening US housing market -- which, as we have been talking about, has been going on for a few quarters -- could be a good signal that the economy is turning.

But we are going to watch, and the second half of 2013 will be the test of that.

For Europe, the environment in Europe remains similar to what we saw last quarter.

Both the economic situation and our business there can best be described as a tale of two regions, developed versus emerging.

The Eurozone and the UK, developed, saw retail sales slow despite improvements in consumer confidence and in business sentiment.

And MasterCard's business in these markets reflected that slowing growth trend -- still growing, but slower than the past.

We also experienced some slowdown in growth in the Eastern European countries, Poland, and Russia.

But this slowing was more a function of the denominator, based on the expanding size of that market, rather than a real decline in economic drivers.

MasterCard's total European volume growth was in the low teens, a little bit lower than the last couple of quarters, but still pretty good, as the secular shift away from cash, accompanied by a continuing growth in share helped overcome the headwinds from economic uncertainty.

In Asia, indicators show that consumer confidence and business sentiment are on the rise in the majority of markets, and as a result consumer spending and retail sales in some of the major markets are picking up.

Australia is projecting economic acceleration.

But on the other hand, views on the outlook for China's economic growth are currently mixed.

As you know, China will be impacted by any deterioration in the European economy.

Europe is one of their largest trading partners; and that, of course, has potential implications for the broader Asian economy.

Having said all of that, our business in Asia-Pacific remained at healthy levels, similar to the past several quarters.

In Latin America, growth projections for Brazil and Mexico indicated a slight improvement over 2012's lower levels of economic growth.

Consumer sentiment was mixed across the region, with Brazil at its lowest levels in three years, while Mexico is bouncing up against five-year highs.

Overall, our business in Latin America saw transaction and volume growth in the mid-teens, similar to the past two quarters.

So looking out the rest of the year of 2013, we are still maintaining the same cautious outlook we have talked about for a while.

Europe's economic picture remains mixed; uncertainty will likely continue there for the near future.

In the US, the second quarter right now looks a little bit dodgy, but there could be some upside going into the second half of 2013 as far as US economic growth is concerned.

Economic growth rates in Asia-Pacific and Latin America have softened a little versus the past couple of years; but on the ground there is still a great deal of energy.

So with all of that as a backdrop, our focus remains clear.

We are still focusing on our strategy to displace cash, to increase our share of electronic payments.

So before we move on to recent business highlights, I know there has been some recent news reports about European regulatory matters, so let me quickly get a few words about those.

First, as for the investigation launched by the European Commission in early April, based upon what the Commission has told us and stated publicly we do not believe that the investigation is about our network fees.

Rather, we understand that it is about our interregional interchange fees that are paid by EU merchants, as well as our cross-border acquiring and point-of-sale acceptance rules, including the Honor All Cards rule.

The Commission had already launched a similar investigation on Visa's interregional interchange fees.

Second, in terms of the Commission's plan to announce proposed legislation related to card payments within the EU by summer, we have no new insight to offer you, either about the timing or the potential components of that proposal.

As you probably know, the EC has publicly said there are plans to propose legislation during June.

So now let me move on to some of our recent business activity.

We are continuing to work on improving our US consumer credit business, where we are winning new deals with more in the pipeline.

This effort will be a slow, steady build from what I shared with you last quarter.

And this quarter, to add to some of the wins we had from last quarter, I am pleased to report that Bank of America recently launched a new consumer credit card called Better Balance Rewards, which provides consumers cash back for responsible payment practices.

This is the first Bank of America product other than a co-brand that is exclusive to us at MasterCard.

In Canada, TD Bank, a long-time customer of one of our competitors, has now launched their very first TD branded MasterCard product, a credit card that offers cash-back rewards.

And we are continuing momentum in the commercial space.

In the US, we have continued to work in corporate T&E with issuing partners such as Bank of America, Citibank, Capital One and HSBC, where we signed both large and small deals across a number of industries.

The Government of Canada is converting their travel and expense program to MasterCard early next year.

The win builds on our current partnership with Bank of Montreal for the Canadian government's purchasing card program that started years ago in 2004.

In Latin America, we have a couple of examples from Colombia in the micro-business commercial space.

Bancolombia chose us to help them develop a micro-business credit card program which includes things like credit risk modeling.

We also won Bancamia's micro-business debit card program, which includes a flexible insurance package customized for that market segment.

We launched a number of new travel, e-Commerce, and affluent programs around the world, which will continue to aim to enhance the cross-border component of our business.

So I will give you a few examples.

In Australia, Qantas will upgrade its frequent flyer program cards to enable prepaid functionality.

This feature will be available to all its 9 million Australian-based members.

In addition to the existing functions, this Qantas cash card will now allow members to load money, withdraw cash and foreign currency from ATMs, as well as earn frequent flier points from purchases made at MasterCard accepting locations.

And in March, we signed an MOU with Alibaba Group, Asia's largest e-Commerce company, to establish an enhanced e-Commerce environment that we think will benefit consumers and small businesses both within and outside of China.

This MOU has many potential opportunities, including making the MasterPass wallet available to Alipay's 800 million users, providing the ability to offer virtual card numbers for online payments, giving Alibaba's 6 million merchants the ability to acquire MasterPass payments and providing Alibaba with fraud and risk management tools.

Rakuten, Japan's largest e-Commerce shopping site and the second largest online retailer in Asia, launched a service which will provide their Japanese Rakuten credit card holders access to virtual MasterCard prepaid cards that can be used to shop online safely and securely.

A new prepaid program for Chinese tourists traveling to the US is being launched this spring through a company called Oriental Tours, a China-based travel Company.

MasterCard prepaid cards can be loaded in advance with US dollars through Western Union outlets in China and then picked up from the tour company when you get here to the US.

This program will be available to an estimated 600,000 Chinese tourists annually.

We have had a number of affluent launches around the world.

I will give you a few.

In Canada, CIBC launched two World Elite programs -- one travel, one cash back.

In France, Credit Mutuel is converting their title and portfolio to World Elite.

In Mexico, Banca Mifel launched World Elite as their new top-tier consumer credit product.

In addition, Citibank launched their Citi Prestige program in Hong Kong, Malaysia, Mexico, Singapore, and the US.

Most interestingly, in South Africa NedBank, one of the four largest banks in the country and a long-time key customer of one of our competitors is now converting the bulk of their entire business to MasterCard.

NedBank will also be issuing our Platinum and World cards for the first time.

When this win is fully implemented, we will become the market leaders in South Africa.

On the mobile front, we continue with our efforts to develop partnerships with mobile network operators around the world.

We have now got relationships with over 30, with a combined reach of 1.3 billion people in 28 countries.

A few examples of some of these recent mobile deployments.

We have now launched MasterPass in Australia and Canada and the US.

In US alone, currently 100 merchants are now able to accept MasterPass.

We are partnering with banks around the world.

WestPac and Commonwealth Bank in Australia; Bank of Montreal in Canada; Citi, Fifth Third, and several credit unions in the US; and the launch of MasterPass in the UK is on track.

We are aiming for the end of summer, and we hope to be available in at least nine other countries by the end of this year, meaning a total of 13 by the end of 2013.

MasterCard and VimpelCom, a telecommunications provider with over 200 million subscribers in 18 countries around the world, recently announced a strategic partnership.

We expect the first deployment end of 2013.

Wind Italy, a VimpelCom division and Italy's third-largest mobile operator, will now enable subscribers to pick up a prepaid card at one of Wind's retail stores, link it to their mobile phone, and then use apps on their phone to top up the prepaid card, pay bills, purchase additional air time.

Building on our partnership with Telefonica in Latin America, we have now launched two more initiatives with Telefonica this past quarter, this time both in Europe.

The first is a mobile PayPass program in the Czech Republic.

The second is an O2 branded wallet in Germany.

Finally, one of the largest banks in Indonesia, Bank Negara Indonesia, launched a mobile payments program that also leverages our inControl platform.

For the first time, this bank's 9 million debit MasterCard cardholders can shop online, thanks to virtual card numbers which will give them on-demand through their mobile banking application.

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

Thanks, Ajay, and good morning, everyone.

Let me begin on page 3 of our slide deck, where you see the as-reported as well as the FX-adjusted growth rates.

All of my comments pertain to the FX-adjusted figures which, as you can see this quarter, are almost the same as the as-reported numbers.

As Ajay said, we are pleased with our performance this quarter given the tough comps we were up against from the first quarter of last year and the relatively choppy economic environment.

Net revenue growth of 9% combined with operating expense growth of 6% supported our net income growth of 13%.

EPS growth of 17% also benefited from our share repurchase programs.

Cash flow from operations was $872 million.

And we ended the quarter with cash, cash equivalents, and other liquid investments of about $5 billion.

During the first quarter, we repurchased about 1.5 million shares at a cost of approximately $766 million.

Through April 25, we repurchased a little more than 340,000 shares at a cost of $182 million; and now we have about $1.7 billion remaining under the current authorization.

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

So let's turn to page 4, where you can see the operational metrics for the first quarter.

Our worldwide gross dollar volume, or GDV, was up 12% on a local currency basis.

US GDV grew 4%, with credit volumes growing 2%.

US commercial credit growth was in the low teens and slowed somewhat from last quarter as we have lapped a couple of deals.

US consumer credit growth remained slightly negative, similar to last quarter.

Our US debit growth slowed to 6%, as we have now fully lapped our signature debit wins and a large, seasonal program expected to decline versus last year.

Outside of the US, volume growth was 16% on a local currency basis.

This continues to be driven by APMEA, with more than 20% growth, and a solid double-digit growth in Europe and in Latin America.

Cross-border volume grew 16% on a local currency basis, including more than 20% in Latin America and APMEA and growth in the high teens in Europe.

Let me turn to page 5. Here you see processed transactions grew just over 12%.

As expected, this deceleration from the fourth quarter was mainly driven by the lapping of our processing wins from new PIN debit transactions in the US and the effect of leap year.

After considering the start of the lapping of the US PIN debit wins as well as normalizing for the effect of the leap year, our underlying growth rate was about 11%.

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

Let's turn to page 6 for some insights on a couple of our revenue line items.

Again, I will be talking only about the FX-adjusted figures.

Domestic assessments grew 8% while worldwide GDV grew 12%.

The gap between these two growth rates is 4 PPT, which is driven primarily by the contribution of higher growth outside the US with lower than average revenue yields.

Cross-border fees grew 14%, while cross-border volumes grew 16%.

Similar to last quarter, the primary reason for this difference was a higher mix of intra-Europe activity, which comes with a lower revenue yield.

Transaction processing fees grew 9%, driven mainly by the 12% growth in processed transactions I just spoke about.

The gap between these two growth rates can be attributed mainly to US PIN debit transactions that come at a lower than average revenue yield.

So I am moving to look at the components of total operating expenses on page 7. The increase in G&A expense was primarily driven by the impact of higher compensation costs as a result of the increase in a number of employees compared to the same time last year, to support our growth initiatives.

The slight increase in advertising and marketing expense was mainly due to the impact of new and renewed sponsorships.

Turning to slide 8, let me discuss what we have seen for the second quarter through April 28.

Globally, our cross-border volumes grew about 15%, slightly lower than what we saw in the first quarter.

This was primarily driven by slower growth in Europe and Latin America.

In the US, our processed volume grew 6%, up from our first-quarter growth due to improvements in both debit and prepaid.

Our US credit growth remained about the same as what we saw in the first quarter.

Processed volume growth outside the US grew about 14%, equal to what we saw in the first quarter.

In particular, our European processed volume growth was in the low teens, similar to what we saw in the first quarter.

Globally, our processed transaction growth was 8%.

That is down from 12% that we saw in the first quarter, driven by the full lapping of our US PIN debit wins and merchant routing decisions that began last April.

We expect our transaction growth for the entire second quarter to be closer to our normalized growth rate of 10% to 11%, as the impact of these merchant routing decisions from April 2012 settle out.

Looking forward, let me start with our long-term performance objectives.

We continue to remain confident that our business can deliver an 11% to 14% net revenue CAGR and at least 20% EPS CAGR over the 2013 to 2015 period.

These growth rates are on a constant-currency basis and exclude any new acquisitions.

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

As we said several times in the past, based on our current view of the economic environment we expect that net revenue and EPS growth in the early part of this three-year period might be slightly below the 11% minimum for net revenue growth and 20% EPS growth.

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.

That could also benefit EPS growth in that particular period.

I just want to reiterate one other comment about our EPS CAGR objective, which we said was based on a normalized tax rate that excludes the impact of several one-time benefits that we were able to achieve in 2012.

So our 2012 normalized tax rate of 31.8% would have resulted in a pro forma EPS of $21.44, which becomes the base on which you should be modeling EPS growth beyond 2012.

I think most people are clear on this point, but I wanted to mention it again for those who might be newer to the MasterCard story.

Now I would like to share with you a few specific thoughts about 2013, which really haven't changed from what we had said on our year-end call back in late January.

We expect net revenue growth in the first half of 2013 to be below the 10.7% currency-adjusted rate that we saw in the second half of 2012.

We expect the second half of 2013 to be slightly better than the first half, given our current view of the economic environment.

Given the complicated economic environment, we continue to spend on the right things to support our growth initiatives, such as mobile, e-Commerce, and information services, but are keeping a close eye on other more discretionary expenses.

As a result, we expect total 2013 operating expenses to grow a bit below the 8% currency-adjusted growth rate we saw in 2012.

We expect to be able to deliver some operating margin expansion in 2013.

The amount of any improvement will depend on both top-line growth and investment opportunities that may surface during the year.

For modeling purposes, you should continue to assume a tax rate of roughly 31.8% for the remaining quarters of 2013.

With respect to FX, while it proved to be a slight headwind for us in Q1, we expect a tailwind of at most 1 percentage point to as-reported net revenue, net income, and EPS growth for full-year 2013.

And this obviously assumes that the euro continues to trade at the 1.31 level and the Brazilian real at the 1.98 level for the rest of the year.

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.

And 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.

(Operator Instructions) Craig Maurer, CLSA.

Yes, good morning, everyone.

Wanted to ask on rebates and incentives; they were materially higher in the quarter than what I was expecting, both absolute and as a percentage of gross.

As we look through the year, was there timing issues that inflated first quarter?

And what should we expect that pattern to look like through the rest of the year?

Craig, let me take this.

I mean first of all, I have to tell you that actually rebates and incentives came in spot-on on our expectation.

And when I look at the consensus out there, the consensus seems to be actually really spot on with what we expected.

As you know, there are gyrations from time to time and from quarter to quarter, really depending on when we sign new deals and renewed deals.

And in fact for this quarter, we had actually the lapping of a new deal, and so we actually got a little bit of a benefit from that.

And that was the reverse in the last -- in the year-ago quarter.

So I am not sure how to guide you other than to say what people have out there is pretty much spot on with what we expect.

Okay.

If I could just follow-up.

The Alibaba announcement, you were talking about MasterPass wallet possibly getting into -- well, it was a very big number.

I think you said 800 million users, which I know is just the market size.

But what is the economic value of getting those wallets out there?

Craig, it is actually -- I am not making money out of a fee from the wallet.

That is the big difference in our program.

I don't want to charge consumers for the privilege of having this wallet.

There's going to be 150,000 wallets out there before we know what is going on, and I don't want to be the one charging fees on it.

I want to make money from it when they use their wallet.

So if they use their card or they use services that the wallet will provide, that is when we will make our money.

So I am not doing it based on how many users pick up the wallet.

It is really, to me, what Alibaba is a partnership that expands the distribution footprint of MasterPass wallets across the 6 million merchants that Alibaba has, and has the ability to make it available to as many as 800 million users.

They are adding 300,000 users every month, so there is a whole new number there.

But I don't know how many of them will adopt it.

We'll see.

But the merchants are 6 million.

That will be a big distribution footprint expansion.

In addition, they're going to use virtual card numbers for the merchants to buy goods cross-border as well as within China, which has been a big problem for them to be able to do, thus far, on e-Commerce.

So I believe that is going to help enormously with the facilitation of that purchasing.

And then, of course, we are going to work with Alibaba on helping them with fraud, security, and the like.

So it has got three components to it.

Thank you.

Chris Brendler, Stifel.

Hi.

Thanks.

Good morning.

I wanted to ask a question on the US debit business.

Do you think at this point we should start to see the more normal debit rates continue?

And also, its pressure on the yield related to the PIN debit perhaps played its way through here.

And I have a follow-up as well.

Thanks.

Yes, Chris.

On the US debit business, I think what you're seeing from the numbers and then what I said about April, you are starting to see everything going more to normalized rates than to the market growth.

Right?

We think from a volume -- from a US debit volume point of view, the market growth will be around the 6% to 8% for the foreseeable future.

That is what we are trending too.

And something very similar you are actually seeing from a transaction processing point of view.

We have one more quarter to round out; and then you should really see us coming back to market.

Okay, great.

Thanks.

My follow-up is a more strategic question.

You are hearing a lot of noise and mostly complaints about the US EMV initiative.

Is there anything you can say to give issuers and merchants a little more of an incentive, why this is going to benefit them?

I think a lot of merchants in particular don't see much benefit from moving to EMV.

And it sounds like some merchants are actually thinking that the liability shift is not much of an incentive.

Can you just give me any color there?

Thanks.

I think you are mixing up a couple of things, so let me just help a little bit, put it into context.

The liability shift is right now being discussed mostly with the ATM operators.

That is where the conversation is; different from merchants.

The objective of that was people who had EMV cards from other parts of the world, when they came to the US, which was still a mag-stripe environment, the level of fraud was much higher.

Fraudsters will move to where the security and protection is the weakest in the chain.

EMV is clearly a higher security protocol than mag-stripe.

All we are trying to do is ensure that card consumers who are traveling from other parts of the world when they come to the US do not have experiences that make them feel that their cards are not safe.

A number of the ATM operators and banks are actually quite comprehending of that.

A number of them are spending the effort and energy to get some of their ATMs upgraded.

In others, what we're trying to do is to roll out a tool called Fraud Risk Manager, which allows the ATM operator and the issuer and the acquirer at the other end of the game to look at the risks involved in an EMV card coming to a mag-stripe ATM.

And that helps them manage that risk.

My expectation is not -- just to make clear -- that people would, like a tap, switch on, on April 19, that tens of thousands of ATM switch.

I never expected that.

What I expect is a roadmap that shows that in most places that tourists travel, where their frequency of utilization of the ATM will be maximum, that they will get the right experience with an EMV-enabled card.

My expectation is over a period of time most ATMs in the US will switch.

I just think it will take some time, because it will be the right thing to do for all the right reasons.

I think it is connected a lot to the launch of EMV-issued cards as well as in the US eventually.

There will be a time frame that it will all come together.

We are starting with ATMs; it will move to the issuance of cards.

This may take two to three years to play out in its full form, and I understand that.

But all we are trying to do here is protect consumers who travel, as well as ensure that banks overseas do not get unnecessary fraud experiences because this market has the lowest ability to provide security protection based on mag-stripe versus EMV.

That is what we are trying to do.

I think we have had a very productive dialog with a number of merchants and banks and the ATM providers.

In all big changes like this -- this is a very big change.

In all big changes like this you will have people pulling in different directions.

Our job is to try and make them get the incentive to go and feel the importance of going to the right level of security protocol.

That is all we are trying to do.

Next question, please.

Jason Kupferberg, Jefferies.

Hey, thanks, guys.

I just wanted to try and get a read on the overall tone and message that you guys want us to be picking up on here.

Obviously your guidance is unchanged, which I think is what people had expected.

But should we be reading any kind of nuanced difference in your overall tone just in terms of thoughts on the macro and the general outlook for the business?

It sounds pretty consistent with the past couple of quarters, but just wanted to verify that you are still feeling essentially exactly the same about the macro picture and its impact on your business now as you were a quarter or two ago.

Is that accurate?

Or should we be feeling a little bit better or a little bit worse?

Accurate.

Just absolutely accurate.

Everything we have said was -- remember, we said second half will probably be a little better than the first half.

That is coming to where we thought.

We are right on where we expected in the first quarter.

I continue to believe that the second quarter the US economic growth will be somewhat less than what people might be hoping for.

I think that there is a lot of mixed currents in the US between payroll taxes and all the moving parts there, although housing looks like it is better.

But if you look at SpendingPulse, and if you look within SpendingPulse, it is really interesting.

While earlier categories of everything that had to do with housing was going positive for the previous four quarters, in the first quarter out of the two categories to do with housing went one went slightly negative, one remained positive.

Now, that is the first time in five quarters I saw that.

But I expected some of that, given that I think the first half will move in and out a little.

So no change in how I feel about where the economy is in the US, in Asia, in Latin America, and in Europe.

No change at all.

Okay.

Thanks for clarifying.

Just can you give us a couple of comments on your reaction to the Chase Visa deal?

Is that something you guys might be interested in pursuing similarly with other issuers?

And just how you feel philosophically about giving one of your issuers the ability to negotiate interchange directly with a merchant.

Well, we haven't done it, so philosophically you can figure out where my philosophical stance is.

The fact is that we're going to see how this thing goes in the marketplace.

It is very early days.

A lot depends on how issuers and acquirers respond, as well as how merchants respond.

A bit like a Durbin.

I don't believe I have the need or the pressure to do anything differently other than look at it strategically.

We have the ability to offer a similar thing.

It is -- our white-label capability existed for a long time.

We could do it.

I just haven't put on the tap.

So it is where it is today and that is what I'm.

Philosophically I am unchanged from where I was before the Chase Visa deal got announced.

Next question, please.

Sanjay Sakhrani, KBW.

Thank you.

Good morning.

I had a question, Martina, on the domestic assessment revenue line.

When I look at that revenue line over GDV, it came down.

The yield came down quite dramatically year-over-year.

I was just wondering if it was all that mix shift that you talked about, and how we should think about it going forward.

Should we expect that decline year-over-year to sustain itself as we move through the quarters?

Thanks.

Sanjay, that is a very good question, and really there are a couple of things going on.

One is what I said; that when you look at the mix of the growth of the business in the United States, which comes at higher revenue yields, versus the growth outside of the United States, which does come at times with lower revenue yields, especially in some of the emerging markets, that is really contributing to that kind of a differential.

Now you have to understand, domestic assessments are only one set of fees that we are actually charging in the markets.

You really have to think about it very comprehensively.

In those countries where we are actually processing, we obviously also get the benefit of the processing fee.

So that is one explanation.

The other explanation is in terms of what is happening from a cash utilization.

So especially when you go in new emerging markets and people are getting their cards, they predominantly start to go to the ATM first until we are getting them used to actually going directly to POS.

And the ATM fees that we typically get are lower than what you are getting at the POS.

So those are the broad changes.

So in terms of going forward, I do believe it depends on the mix, right?

It depends on how the US grows versus our other markets are growing.

But our current view has that this kind of a difference in terms of growth of the domestic assessment fees versus the volume will persist for the rest of the year.

Okay.

Maybe just one quick follow-up for Ajay.

I was just wondering strategically how you felt if Visa Europe were to exercise its put, as talked about in the marketplace, and what implications does it have on your business.

Thanks.

I don't know what the latest news is.

They were supposed to be deciding.

It has been a couple of days, so I guess they're still thinking about it.

I don't know.

Maybe you guys know.

You will find out when you talk to Visa today.

But my perspective is, whether they go one way or the other, I think we have got to be as a company capable of handling both.

So let me put it for you this way.

If they exercise the put option they are going to have to go through two or three things.

One is integrating technology, people, systems, cultures.

From our own experience of doing that with MasterCard Europe and before that with Europay, the European way of working, their psychology, their association culture, merging that with a different culture, it is a reasonably preoccupying time.

The second part is that when you need to innovate you need focus, you need time, you need attention, you need management energy.

If you are going to divert it to integration, it makes it a little more difficult.

So I think that in the short to medium term, Visa will have to do all those things.

They are the right things to do, by the way, if you are integrating something.

But it will provide us with our own space and opportunity, along with the fact that a number of the Visa-issuing banks who may be waiting for the put option to be able to get some benefit one time, they may well be in play after that once they have booked that relatively large benefit.

On the other hand, if they don't do it, then life carries on the way it is today.

And we think we're doing pretty well in Europe and growing market share and growing our business at both the cost of cash and at the cost of our competitors.

So life will continue in that form.

So I think about our Company as responding with focus on our strategy either which way.

Just keep plugging away at what we are doing in Europe.

We're doing well; we want to keep doing well.

Next question.

David Hochstim, Buckingham Research.

Operator, why don't we go to the next call?

We will try to get David back after that one.

Bill Carcache, Nomura.

Thanks.

Good morning.

Ajay, I was hoping to follow up on a comment that you made about payroll taxes.

I was wondering if there were any noteworthy observations relating to the impact of payroll tax increases on the spending behavior among your customers in the US, particularly if you stratify the customers by income segment.

Then also, could you talk about the potential for near-term upside to numbers, to your earnings, from staged digital wallet operator fees that are scheduled to kick into effect later in the year?

So two things.

The staged digital wallet operator fee, as we said it comes in later but it is a relatively de minimis number for a company of our size and scope.

So in fact a lot of the noise that is made around how that fee was put in and why it was put in, focused on the economic impact to us and the wallet operators.

I think that is completely the wrong noise.

It was more about the principles of creating the right rules and the right operating methodology to allow us to operate with staged digital wallet operators.

In any case, that number is in the plan; it is de minimis.

So who cares?

That's a small number.

The real issue here is the first question, which is about payroll taxes.

I don't have a way, just as nobody else has, for connecting payroll taxes directly to spending impact by segment or type.

But I can watch different kinds of retail stores where people who are more likely to be impacted by small movements in their take-home pay are shopping, and I could see that they were impacted by the payroll taxes.

They didn't get impacted in the first time around.

It is almost like they didn't register how much the impact would be.

By the time February came around, boy, they had felt it.

So to give you an example, SpendingPulse ex-auto, January retail sales ex-auto, were actually pretty good.

They were back -- not pretty good; meaning in this environment, 3-something-%.

You come to February, 0.8%.

So, it is sure that that came right in their face.

Whether there is only payroll taxes, whether there are other issues as well, I have no individual way of segregating those impacts.

But I am putting them all together and then putting together anecdotal evidence from different types of stores and different types of merchants and retailers whom I am in contact with, and getting that back to you.

Thank you.

David, your line is open.

David, are you there?

I guess we are having problems.

Wait, how about this.

Can you hear me?

Okay, go.

Is that better?

Sorry about that.

We have a new phone system.

I'm sorry; I don't know how to use it.

Anyway, I was wondering if you give us an update on your thoughts about the Chinese market, what your reaction is to China UnionPay coming here to issue prepaid cards.

In the past you said you think it could be many, many years before they open the market.

But has that changed?

No.

I don't know if many, many years was what I said.

What I said was that China UnionPay has expansion plans around the world.

They have been trying to expand for a number of years.

They mostly try and first start doing acceptance deals, so that the Chinese users can get to use a China UnionPay card when they travel, as compared to -- you know, the co-branded card with them is where our strongest partnership is, and we are the ones who have been winning all the deals with them for the last two, three years.

If that picks up momentum, it impacts the growth rate of our cross-border business out of China.

But I haven't seen great differences there yet.

I have seen acceptance grow and improve; but China is growing at such a great rates on its expansion that I think that increment gets hidden in the wash.

Now as far as their issuing prepaid cards in the United States (inaudible), the United States is concerned, what they are doing is issuing a prepaid card with Bancorp, which has to be then distributed to other US banks because Bancorp doesn't really have the branch network.

So other US banks have to agree to distribute this Bancorp-issued prepaid travel card to those people who want to buy it from here before they go to China.

I don't know; we will see.

We will see how that goes.

But at the end of the day, there is a large business opportunity in prepaid.

I don't think this changes anything very much.

I think China UnionPay will keep attempting to grow its self-standing business, as I would in their shoes, while trying to keep working the partnership with us, which is what we are doing.

In the meantime, the WTO judgment has happened.

China has accepted that judgment.

I am expecting in a few months that we will get clarity on the meaning of that acceptance.

When we get clarity on that, we will figure out how to work our partnership with CUP.

I met them in China last month; I met them in New York a couple of days ago.

We have got a great partnership, and I am still very happy with what I am doing with them.

Thanks.

Can I ask one follow-up?

Since you waited that long, go for it.

Thanks.

Can you give us any thoughts about the prospects for some benefits in your US credit business from the emergence of American Airlines from bankruptcy and from GM starting to do better?

You have GM co-brand relationship.

I mean, are those a potential positive?

Yes, Yes.

American Airlines, as you know, is already our co-brand, and a large part of it is with us.

And GM is also there.

I don't think people, in the case of GM anyway, I don't think they spend more on that card based on how GM is doing.

In the case of American Airlines, it is without a doubt that a certain amount of American Advantage card spend goes towards the travel on American Airlines flights, without a doubt.

But it is only a certain amount.

And I think that this utilization of these cards has a little less to do with the parent company's performance as compared to how the consumer who holds that card is feeling about their spending pattern and the like.

That is a much bigger impact.

So the bigger issue remains about the US consumer and their spending pattern across segments.

As I said in that one I am still not convinced that the second quarter will be much better than the first quarter.

I think I used the word dodgy; but that is just a technical term to indicate that I am not sure that US economic growth in the second quarter will be much better than the first.

I do believe, however, that the second half of the year will be better.

We have got a number of wins that we are doing.

But the US credit business, our predominant business is with a certain set of issuers who themselves are working their way through what has been a very complicated year for them -- and a few years for them.

I'm reliant on them in many ways.

But I am trying to build through co-brand wins and other wins.

Last quarter we told you about KeyBank, we told you about the Intercontinental Hotel Group, we talked about Bass Pro.

We talked about a bunch of those.

The Shell rewards card, and the Fuel Rewards Network.

And this quarter we talked about Bank of America.

We have got a bunch of things brewing on the commercial credit side, but this is not something that will change on a dime -- unless a big flip happens, which I have no way to assure.

So that is the nature of our business.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

Just following up on the question about the domestic assessments revenue.

If you look at what you said about the first quarter and then the month of April, it seems like that mix shift is continuing, if US volumes accelerated but credit was flat with the first quarter, I guess.

Is that a fair way to think about it, that that is what is actually going on?

That that further shifted to debit, if credit is flat?

And again, that would seem to be somewhat of a weakening because, obviously, the leap year effect doesn't hurt you into the second quarter.

Moshe, on domestic assessments, what the big issue was is between what the growth is we are seeing in US versus the growth that we are seeing actually outside of the United States.

That mix effect, both from a POS point of view as well as how people are using their cards at ATM, especially emerging markets, I did say that we will continue to see that going for the rest of the year.

You will see that differential from a growth perspective between the fees and the volume for the rest of the year.

Just one thing I want to make sure I didn't hear you wrong.

You said something about the leap year effect impacting us in the second quarter of the year.

No.

Right -- no, what I said, Ajay, was that you said that the US credit was flat with the performance in the first quarter; and the first quarter was impacted by that.

So the second quarter would be somewhat weaker, correct?

No.

What we actually said is that our processed volume fees -- the US processed volume fees in the second quarter is actually higher at 6%; and we said it is mostly driven by debit and prepaid.

We did say that credit -- the credit growth is very similar to what we saw in the first quarter.

We said processed volume, not processed volume fees.

Yes, processed volume.

Look, that's correct, and I also continue to believe that the second quarter in the US will be less than clearly predictable on PCE and consumer spending.

That is what I am trying to tell you.

I am actually not believing that you should read any more into it than that.

Okay.

I guess I would have thought that some of the stuff in terms of tax refunds and the like would have provided a little bit of a tailwind into Q2.

You can see that a little bit of volume increase has happened in Q2.

Prepaid and debit have picked up already by April 28.

And Martina is trying to indicate that she thinks it will settle to a certain number over the course of the quarter.

It is in credit that we at least have not yet seen a pickup in the second quarter versus the first quarter.

That is what our numbers currently are telling us.

Rod Bourgeois, Bernstein.

Okay.

You mentioned that you are philosophically against licensing the MasterCard network to a bank.

I didn't say that, Rod.

I just said I haven't changed my opinion from where I was earlier, which is that we are where we are.

We do not have that license today.

I am watching what is going on with Visa and Chase.

If merchants, issuers, and acquirers respond in a way that would put me in a situation where I may need to do something which is thoughtful, I will.

But I am reluctant to just jump to a conclusion that I am against or for anything until I watch what they do.

I don't feel the pressure to have an against or for right now.

Right.

My guess is that Visa would have said six months ago that it is philosophically against licensing its network; but it sort of needed to do that in order to maintain a relationship with Chase.

I guess I am wondering if a bank, maybe call it HSBC just as an example, if it were to ask MasterCard to do a Chase/VisaNet type of a deal, even though you're philosophically not excited about that, is it something that you would look at doing?

Because that may be a trend at certain banks that have a big presence in issuing and acquiring.

It could be a new trend that comes down the road.

Is that something that you are looking at?

Many many things there.

One is I'll look at anything.

If clients talk to me, I will think about it.

I don't know what I would conclude because it would depend on what it does for our brand and our Company, as well as for that client and for the other clients whom I have relationships with.

It is going to be a very complex Rubik's Cube to think our way through.

So I don't know the answer to that yet.

The second thing is, I don't know exactly what is inside the Visa/Chase deal.

I may not do exactly like them.

If I do something, it may be done differently.

So this is all speculation.

I have no clue.

I know this, that -- just like in Durbin -- I will watch this very carefully.

And if I feel the need to make some moves to be able to ensure that the banks who are partnered with me or my brand don't suffer in the marketplace, I will.

But I am not going to jump to a conclusion right now that I need to do something either similar or a little different or nuanced differently.

I don't know yet.

I just don't.

Bryan Keane, Deutsche Bank.

Hi, guys.

I just wanted to follow up on that Chase/Visa deal.

Obviously there has been a lot of questions on it.

I guess there has been some speculation that you will lose some Chase card volume in that deal.

Just wanted to see it that is correct.

And then, I know Chris McWilton questioned the economics of the deal, so I just wanted to get your thoughts on allowing Chase to do on-us transactions, do you think that model makes sense?

We have a certain amount of business with Chase.

As you know, Chase was a predominantly Visa bank even earlier.

But we have a good relationship with them.

We have still got business with them.

We are -- in fact the recent Intercontinental Hotels co-brand that I talked about to you last quarter is actually with Chase, which was signed and done post the announcement of this deal.

So I don't know.

My approach is to keep building that relationship with them.

We are doing business with them on prepaid cards.

We are doing business with them on commercial cards.

We are doing business with them on co-brand; and we have some non-co-brand but simple credit card products with them.

My sense is that what they have done with Visa is to allow them to certainly protect the business they have with them.

I think they are still open to doing some business with us, and we are pursuing that relationship.

So I don't know where that will go.

I have no idea.

Then just -- does the model make sense to you on how they probably would be paid?

Then just the one follow-up is the acquiring.

You are waiting for what the acquirers might do.

I just want to make sure I understand what you mean by that.

You know, everything depends on how acquirers, issuers, and merchants respond to all these deals.

It is like in Durbin; all three players had different responses to the way Durbin played out.

I am just making sure I am keeping an eye on all the three players and how they respond.

Does the model make economic sense?

I have no idea.

You have got to ask Visa because I don't know what is inside.

Moshe Katri, Cowen and Company.

Hey, thanks.

Thanks for taking my question.

Did Martina mention something in the context of losing some credit portfolios during the quarter?

If so, can you elaborate on that?

Losing credit portfolios?

No, that is not what I said, but I think I might recall what you are referring to.

This was when Craig was asking about rebates and incentives and the level of that; and one of my comments is that we actually had the lapping of a new deal.

You might know that whenever we sign a deal we might have an impact on our rebates and incentive line, and that can happen in any particular quarter.

We had some impact in the first quarter of 2012 and that is basically lapping.

Actually it was in the fourth quarter of 2011 and that is now lapping in the first quarter of 2013.

But the deal is live.

It is just the way that the accounting works.

Okay, great.

Just as a follow-up, can you talk a bit about what you are doing in credit in terms of trying to gain share in the market?

Maybe talk about what you are seeing in the US market versus overseas.

So as I said, overseas it's the same business.

We're out there winning deals.

A number of the things I talked to you about -- NedBank as an example in South Africa is both credit and debit and commercial credit and so on.

It is in the US that we have got a situation, which we have talked about, which is that our consumer credit share is not where we would like it to be.

So it is not something that will change in a hurry unless some very big portfolio switches over, for which I have no ability to decide yes or no.

That depends on how you negotiate it; typically large portfolio flips are relatively long selling cycles.

What I am focused on, however, is all the business that comes around that.

So co-brands, which is what I was telling you about; in the last quarter I gave you a number of examples.

Other opportunities with new launches; I have given you the example of Bank of America this quarter.

And a ton of things on the commercial credit space, where we are doing things with Citibank and Bank of America and with others in a number of industries.

So that is what we are up to.

I think our consumer credit share business will not change in a hurry.

It will change over a period of time.

But we have got all the right building blocks, and we are out there using both our ability to bring inControl, Priceless Cities, and a number of other assets, Advisors, to play while also looking at our ability to bring value to the co-brand partner.

So those are the kind of things we are up to.

Julio Quinteros, Goldman Sachs.

Hey, Ajay, wanted to ask you a philosophical question since we've been doing a lot of philosophizing today, on this white-label stuff.

Do you believe philosophically that banks are actually trying to give away interchange, or not?

Then I guess when you think about the value of the network itself, is the value of the network under duress?

And possibly going into some other areas, meaning that you need to be in more advertising areas, loyalty, other things that I guess would be additional sources of potential revenue for your model.

The second question and first are actually interrelated.

Let me -- I think you're onto a good topic, which is that going forward would people like us be also building revenue streams from other places rather than just the traditional clearing, authorization, and settlement function that in some ways has been a certain proportion of our revenue.

I think you have heard me talk openly about diversifying our business, from the day I joined.

And the reason is that I believe what we have in our network is the asset of connecting billions of consumers with millions of merchants with tens of thousands of banks in 200 countries with all the local legal regs built in.

That is a great asset.

What we need to do is to be able to leverage that asset in many ways.

One of the reasons why I am investing in loyalty and rewards, why I am investing in things like inControl, why we got into prepaid program management, why we are doing all those things and the investment we are putting into data and information services and the Advisors business, is all about making sure that we build our Company not just based on converting cash but also embedding ourselves better with merchants, with issuers, with acquirers, with governments, with consumers for these value-added services that you can bring by using what you do well, which is the network, and the data warehouse, and the processing.

And that is what I have been doing from the beginning.

So nothing has changed in that regard.

I am focused on that still, and that is where the investments are going as well.

Yes, we are investing in credit, and in debit, and in prepaid, and commercial.

But we are also investing in new channels like mobile and e-Commerce.

But we are also investing in this diversification.

That is the grow/build/diversify strategy that I have been laying out for MasterCard for a while.

Right, okay.

Maybe just one quick follow-up for Martina on the margins.

Thinking about the trade-offs between revenue growth and the ability to continue to defend EPS, anything in particular that you would highlight as continued drivers to defend the EPS on the margin side, that you would have left for the rest of the year here?

Well, I think as we said, it really depends on where the revenue growth comes in for the rest of the year and what we might be doing from an investment point of view, where the margin is going to come out for the year.

But at this point in time, with the visibility that we have, we do believe that there will be a small margin expansion.

But just to remind everybody, we have really a number of levers in terms of EPS growth.

Right?

One is what is happening on the revenue and on the expense side.

Two is what is happening on our tax rate; everybody knows that we are working at that.

And, three, what we are doing from a share repurchase point of view.

So we are looking at all levers to be making sure that we are producing on our financials.

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

Bob Napoli, William Blair.

Thank you.

I was hoping, Ajay, you could maybe give a feel for the emerging markets story over -- do you still think that you're going to be able to grow internationally in a mid to upper teens, especially in the emerging markets over the next several years?

And just a minor point if you could.

We have had some crazy weather here in the US.

I think you are getting 7 inches of snow in Minneapolis today or something; and Denver is getting -- but have you seen an effect from some of the unusual weather in the US on your business?

Yes, so there was some.

March clearly was a month that got impacted by the unusual weather in terms of spending.

So that I think does happen periodically.

I tend not to give it more credence than that, because eventually it evens out over the course of time.

So I tend to worry about it in a context of a month, but not in the context of a longer period of time.

I look at the basic franchise and what it is doing as the real context I think in.

I think the emerging markets question -- I still believe that there is enormous opportunity to grow our kind of business in the emerging markets.

You take the South Africa story; we were a smaller market share player there three years ago, but through consistent wins and now the latest one with NedBank, when we finish implementing NedBank we are in a market where there is still a great deal of cash and yet the economy is clearly the most powerful economy in Africa.

Then I feel that we will end up being a market leader there.

That is a pretty big opportunity.

Because not only would we have the market leader in terms of cards issued, we can keep focusing on the secular change of cash to electronic as well.

Hence the focus on the Social Security payments in South Africa, where now 10 million cardholders have come out of where there were none earlier; their Social Security payments are now going into their card.

Now as Martina said, a number of them take that card and go to an ATM or a cash point and take out cash.

That creates a lower revenue yield than going to the point-of-sale.

The next step in all these cases is to find a way to encourage them to go to the point-of-sale rather than taking out cash.

So all these things are a -- the emerging markets are step-by-step building process.

You have got to build issuance, you have got to build the habit of using a card, you have got to build acceptance, and you have got to build government support, and all of that together.

So we are systematically going about it in a number of countries.

I just gave you the South Africa example because it is a live example from this quarter, and I was there in January when I signed this NedBank deal which we have now publicly announced.

So I feel still that the emerging markets are still a great opportunity for where this Company is going, and South Africa just being one example.

China being another.

India being a third.

Parts of South Asia, parts of Southeast Asia, Latin America.

There is a lot going on.

There is all the emerging markets in Central and Eastern Europe where we are making really good headway.

And I think it is not just in the payments business.

But, to Julio's earlier question, it is also in diversifying our revenues through alternative ways, whether it be data and analytics or Advisors or inControl or different value-added services that embed us better in that marketplace.

And I am trying to do all those things as a way of growing our future over the next few years.

Thank you.

Ajay, you want to offer some closing comments?

Sure, sure.

Thank you for all your questions, and I want to leave you with a few closing thoughts.

We are going to continue to work through some of these challenging economic conditions that we have been talking about for a while.

I think we are off to a good start in 2013.

With this first quarter's performance in the past quarter, we're absolutely in line with where we thought we would end up.

The slower growth in consumer spending and confidence from the second half of 2012 has continued into 2013.

But we also saw the expansion of electronic forms of payment around the world.

So we're going to keep a careful eye on expenses.

We're going to keep investing in those initiatives that will set up our Company for future growth, for that diversification as well that I just talked about.

We remain confident in our three-year performance objectives through 2015.

As we said last quarter, we expect performance in the early part of that period will probably be slightly below the range, with growth kicking up as the global economy returns to a more stable environment.

There are signs that that stability will come.

All in all, our focus is clear.

Grow our share and drive the conversion of cash through technology, through partnerships, around the world, while continually developing products and services that embed us with banks, with merchants, with governments, and consumers.

So thank you for your participation.

Thank you for your support.

I appreciate it.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.