萬事達 (MA) 2013 Q2 法說會逐字稿

Welcome to the MasterCard second-quarter 2013 earnings conference call.

My name is Cliff and I will be your operator today.

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 would now like to turn the call over to Ms. Barbara Gasper, Head of Investor Relations.

Ms. Gasper, you may begin.

Thank you, Cliff.

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

With me on the call this morning 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.

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.

Both the earnings release on the slide deck include reconciliations of any non-GAAP measures to their GAAP equivalents.

All of 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 August 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 CEO, Ajay Banga.

Ajay?

Good morning, everybody.

We are very pleased to report EPS growth of 23% for the second-quarter, our net revenue growth of 15%, operating expenses grew 5%, and we continue to execute on our global strategy and navigate through what we all know is a somewhat uncertain economic environment.

So let's take a look first at the US.

Consumer spending was up last quarter.

Retail sales growth was better than expected.

Housing indicators continue to show signs of recovery.

Our SpendlingPulse data for the second-quarter showed that growth in US retail sales, ex auto, was 4%.

That is over the same quarter of the prior year and that is up from 2.6% as the same number for the first-quarter.

So contributing to the growth was a steady improvement in consumer confidence and some stabilization in the employment levels in the country.

Our own US business reflected these improving trends with 6% volume growth, up from last quarter's 4% growth.

Moving on to Europe, the environment is somewhat similar to what we saw over the last several quarters.

There are a few upbeat notes there.

Economic trends were similar for the UK and for parts of Continental Europe during the second-quarter.

Consumer confidence increased there.

Business sentiment was a little weak in the second-quarter there, although recent PMI surveys indicate that business sentiment now may also be turning up.

In spite of those mixed economic signals, we are still seeing opportunities to expand our business and take advantage of that secular shift from cash to electronic.

And that shows up in our solid second-quarter volume growth of 14% in Europe.

In Asia, consumer spending in the second-quarter was on the rise.

In the majority of markets consumer confidence levels are doing well across the region with key markets, like Korea and Japan, seeing marked improvement.

Business sentiment across the region was mixed and that is kind of due to the lingering concerns about the effect that the sluggish Chinese and European markets may have on the broader Asian export-dependent economy.

Our business in the region, however, continues to do well.

We had volume growth of 21% in Asia.

Latin America, consumer confidence in both Brazil and Mexico is somewhat challenged for all the reasons you read about and expectations for GDP growth in Mexico have recently been lowered.

But we are still growing our volume in Latin America at almost 17%, but clearly we are watching the wider economic trend there very carefully.

So before we go over to some recent business highlights I thought I would spend a minute on the legal and regulatory front, particularly with regard to the US merchant litigation.

The merchant opt-out period ended in late May, and as most of you already know, about 8,000 merchants decided to opt out of the cash settlement.

That represents just marginally over 25% of the total purchase volume over the settlement timeframe.

The defendants, as a group, had the right to terminate the settlement agreement because the volume threshold of 25% was exceeded, but elected not to do so.

We expect most of the larger merchants who opted out will file separate actions to recover damages and many of them have already started to do so.

The final approval hearing is scheduled to begin on September 12.

We remain confident that the settlement will be approved.

We are also pleased that the Canadian Competition Tribunal recently upheld our no surcharge honor all cards and no discrimination rules in Canada.

In Europe, I know that Javier and Noah were on a call with most of you last Thursday to discuss the EC's proposed legislation, so I am going to spend less time on that, but I do want to offer a couple of thoughts that I had on the topic.

We partner with governments around the world in many areas related to electronic payments, but there will be times when the interest of some of our stakeholders requires us to raise concerns about proposed actions.

This is one of those times.

We support the European Commission's goals of a secure, efficient, competitive, innovative European payments industry.

We believe that they have made a good start towards recognizing the importance of a level playing field.

It also appears that there is actually potential to further open up and get competition in place for domestic processing.

However, we remain concerned that some of the proposed legislation could have unintended consequences of hindering competition and innovation, and we remain concerned that it could be harmful to consumers and small merchants in Europe.

And so the upcoming debate as the proposed legislation winds its way through the process we are going to engage with all participants in the process.

We will try and ensure the best possible outcome in the best possible way.

Finally, I want to reiterate Javier's confidence that our model, our business model will adapt as necessary to allow us to compete effectively and continue to provide innovative payment products and services that our customers want to offer, consumers want to use, merchants want to accept.

And that is where we are focused on.

So moving from there to some recent business activity.

You will get a chance to see a lot of things at our Investor Day in September, so I'm going to focus our progress here around a few key themes and keep it short.

During the quarter we continued to sign new agreements supporting the expansion of our credit and debit business.

That is the first theme, including the following examples.

In Europe, Danske Bank, the largest bank in Denmark, will be issuing MasterCard consumer debit, credit, and commercial cards in 10 countries.

And together with what we did with Swedbank and Nordea, the wins there, we expect to grow our total market share by 50% in the Nordic and Baltic region over the next five years.

In Korea, we have two new debit card wins to help lock in our debit market leadership position.

The first is Woori card, a recent spinoff of the card division of one of Korea's largest retail banks, and they are now issuing platinum debit cards with us.

We also recently signed an agreement with HanaSK that will further increase our dominant share of their debit portfolio.

In the US, we have continued to aggressively pursue all opportunities in the consumer credit and co-brand space as they arise.

Pretty confident and showing regular progress as and when they come up and we can announce them.

Moving to cross-border, which as you know is an important part of our business; that is the second theme.

Let me give you a flavor of some of our new travel and affluent programs around the world.

In the UK, our Access prepaid business recently launched four new multicurrency cash passport programs, all of which are available online.

One example is British Airways launching their Executive Club Cash Passport card with us, which is capable of having up to seven currencies loaded on the card.

South Africa, Absa Bank, the Barclays Bank in South Africa, launched the country's first reloadable prepaid travel multicurrency card.

This allows for four currencies to be loaded on to the card.

One of the largest financial institutions in the Middle East, Riyad Bank in Saudi Arabia, just launched a gold-plated World Elite card for their private banking clients.

These benefits include everything from unlimited lounge access and a cross-border rewards program and the like.

So third theme, leading the transition to digital payments.

We are focused on creating better shopping experiences for the consumer, more value for the merchant, and let me give you a couple of examples.

First, MasterPass Digital Wallet.

That rollout has now expanded to four countries.

Canada launched this past quarter; the UK is launching, as you have read in the media, as we speak.

With the addition of Web.com, that is a provider of Internet services for small businesses in the US and Canada, this wallet is now accepted at more than 20,000 merchants globally.

In Singapore, with the addition of SingTel's recent launch of their in mCash program, all three telcos in Singapore -- SingTel, StarHub and M1 -- now have Wallet's MasterCard as the only open-loop payment card option.

Last theme, IPS, our issuer processing platform for debit, ATM and prepaid.

As you know, IPS enables our consumers -- our customers rather, to decrease their reliance on their legacy systems, increase their ability to drive innovation and get to market quicker, reduces some of their costs of complying with some of the increasingly complex regulatory requirements.

In the US, KeyBank, Huntington and USAA all recently completed conversions to IPS.

Wells Fargo is completing a conversion later this year for a commercial prepaid offering.

IPS also partners with Access Prepaid, which is our prepaid program manager, to support global travel programs such as the Qantas multicurrency card, which I talked about last quarter.

So just to give you a headline on this, in the last couple of years we have increased our IPS customer base from five to 16.

We are now in 23 countries and 17 languages.

We can scale and we will scale and we will expand this platform.

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

Martina?

Thanks, Ajay, and good morning, everyone.

Let me begin on page three of our slide deck where you can see this quarter the as-reported as well as the FX-adjusted growth rates are essentially the same.

As Ajay said, we are very pleased with our performance this quarter given the continued slow-growth economic environment.

Net revenue growth of 15% combined with operating expense growth of 5% supported our net income growth of 19%.

And EPS growth of 23% also benefited from our share repurchase program.

Cash flow from operations was $742 million and we ended the quarter with cash, cash equivalents, and other liquid investments of about $5.1 billion.

During the quarter, we repurchased almost 1.1 million shares of Class A common stock at a cost of approximately $580 million.

Through July 25, we repurchased almost 300,000 shares at a cost of $174 million and we now have $1.1 billion remaining under the current Board authorization.

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

So let me turn to page four and here you can see the operational metrics for the second-quarter.

Our worldwide gross dollar volume, or GDV, was up 13% on a local currency basis to just over $1 trillion.

US GDV grew 6% with credit volumes growing 3%, and US commercial credit growth was in the low-teens, similar to last quarter.

US consumer credit growth was slightly positive, also an improvement from last quarter.

Our US debit growth was 9%, driven by higher growth across all of our consumer and commercial debit as well as prepaid programs.

Outside of the US, volume growth was 17% on a local currency basis.

This continues to be driven by APMEA with more than 20% growth and solid 14% and 17% growth in Europe and LAC, respectively.

Cross-border volume grew 17% on a local currency basis, including more than 20% in LAC and APMEA and growth in the high-teens in Europe.

Turning to page five, processed transactions grew over 11% globally.

In the US we saw growth of 5%, which was lower than last quarter as we anniversary our PIN debit processing wins.

As you know, we are managing PIN debit transactions to optimize our revenue and our transaction level has remained about the same over the past several quarters.

Outside the US, processed transactions grew 20%.

We saw increased growth in all regions with particular strength in Brazil, Russia, Australia, Netherlands, and South Africa.

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

Let me now turn to page six with some insights on our revenue.

Within our net revenue growth of 15%; gross revenue grew 12%, in line with volume and transaction drivers as well as some pricing.

Rebates and incentives only increased by 2%.

As you know, the rebates and incentives line can move around on a quarter-to-quarter basis, depending on the timing of deals.

Specifically in the second-quarter we had two factors that contributed to this relatively low growth rate.

First, some contracts were not yet signed by quarter close and, second, we had some lumpiness due to the performance of a few contracts.

Overall these factors represented about 2.5 percentage points of our total 15% net revenue growth.

Similar to the prior quarter, growth in domestic assessment was again driven by strong growth outside of the US which comes at a lower yield.

And the gap between the growth in cross-border volume and revenue continues to be due to a higher mix of intra-Europe activity, excluding the impact of pricing.

So let's look at the components of total operating expenses, which you see on page seven.

The increase in G&A expense was primarily driven by the impact of higher compensation costs as a result of the increase in the 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 eight, let's discuss what we have seen for the third quarter through July 28.

Globally our cross-border volume grew about 15%, so that is just slightly below what we saw in the second-quarter.

And this was primarily driven by slower growth outside the US due to the timing of Ramadan.

In the US, our processed volume grew 9%, up from our second-quarter growth due to improvements in both credit and debit.

Processed volume growth outside of the US grew 16%; that is about equal to what we saw in the second-quarter.

And in particular, our European processed volume growth was in the mid-teens, very similar to what we saw in the second-quarter.

Globally processed transaction growth was 14%, so up from the 11% that we saw in the second-quarter, driven by higher growth in the US for both credit and debit.

Looking forward, let me start with our long-term performance objectives which have not changed.

We 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.

And these growth rates are on a constant currency basis and they exclude any new acquisitions.

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

However, assuming that the economic environment remains similar to where it is today, we now expect that net revenue and EPS growth in the early part of this three-year period will likely be at the low end of our stated ranges for net revenue growth and EPS growth.

And that is slightly better than we had previously anticipated.

Now I would like to share with you a few specific thoughts about 2013.

Given our stronger-than-expected second-quarter net revenue growth and what we see for rebates and incentives for the balance of the year, we now believe that second-half net revenue growth will be similar to what we saw in the first-half.

We continue to anticipate total 2013 operating expenses to grow a bit below the 8% currency-adjusted growth rate that we saw in 2012 as we continue to spend on the right things -- to support our growth initiatives while keeping an eye on more discretionary spending.

We also continue to foresee some operating margin expansion in 2013.

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

For your modeling purposes, we now think that you could see a full-year tax rate of about 31%.

With respect to FX, if rates remain the same as they are today, so that is the euro continues to trade at the 1.33 level and the Brazilian real at the 2.26 level for the rest of the year, the impact of the euro and the real will essentially offset each other for full-year 2013.

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

Barbara?

Thanks, Martina.

We are now ready to begin the Q&A 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.

Operator?

(Operator Instructions) Craig Maurer, CLSA.

Good morning.

I wanted to ask a follow-up to the European discussion.

In terms of EU assessment revenue, what percentage of that is earned on a per volume -- on a volume basis versus a card licensing basis, as it would seem that there might be some rules preventing you from assessing on transactions where your scheme was not used to process even though your brand was present?

Craig, it is Martina.

I think I will take that question.

So, first of all, what I presume that you are actually asking about Article [A8] on co-badging and the EC-proposed legislation, right?

We obviously know the number when you just strictly look at volume-based assessment fees that we earn in Europe on domestic transactions that we do not process.

By the way, it is not material to our overall MasterCard numbers.

But I am a little bit reluctant to put out this number here at this point in time and really for a couple of reasons.

One, this is one of the sections of the proposal where the language is actually unclear.

And, second, there are a number of puts and takes in the entire legislation, which makes it fairly difficult for us at this point to estimate what part of this revenue figure might actually be subject to this potential provision.

It all is basically wrapped up in terms of us being difficult to understand the intent of this co-badging provision.

So imagine when an issuer elects to put our brand on a card they must have a reason for doing so.

Presumably because their consumer recognizes and values our brand and, therefore, users uses his or her card with the MasterCard brand on it.

That brings value to our stakeholders in the system.

Of course, we are not going to provide our brand for free and we don't believe that that could be the intention of the EC.

On the other hand, there are also some other provisions in the proposal which could, as you know, allow for more competition in domestic processing, which we would certainly welcome.

So once we get more clarification from the EC -- we think that we still have quite a bit of work to do getting our hands around the provision and how that could impact us, if at all.

Sanji Sakhrani, KBW.

I guess I had a question about the rebates and incentives line.

It looks like there was some kind of restatement as well -- it was about $21 million or so -- for last year's number.

I was wondering if, Martina, you could just talk about that a little bit.

Then just as far as the assumption going forward on rebates, should we expect that those levels remain fairly low, consistent with the second-quarter?

Thanks.

Sanjay, so let me take the first one which is really a reclassification.

So we had some of our Advisors services both reflected in the gross revenue line and in the contra line.

All we did is we collapsed them in the gross revenue line so from a net revenue point of view there is absolutely no difference.

All we did is we re-classed the numbers for 2012 so that as the accounting change came in on January of 2013 you were looking at apples to apples.

So that is on the re-class.

In terms of the rebates and incentives, what you saw in Q2 was really a much lower growth rate on the rebates and incentives that we would normally see.

Why do I say that?

Two factors.

One is we didn't get to sign all of the contracts that we thought we would sign by the end of the quarter.

Those contracts will be showing up either in the third quarter or in the fourth quarter, so you cannot assume this level of rebates and incentives going forward.

It will go back to what you normally see with the lumpiness.

This is a little bit more lumpy, of course, in the second-quarter than we normally have.

Then, secondly, I think I did explain that we had a couple of performances on the number of contracts where we paid out lower incentives than otherwise anticipated.

So do not take this increase in rebates and incentives for Q2 and apply it for the rest of the year.

You really need to go back to my comment where I said that net revenues for the second-half of the year will probably come in similar to what we saw in the first-half of the year, and that bakes in our assumptions on rebates and incentives.

Perfect.

Thank you.

Jason Kupferberg, Jefferies.

Thanks, guys.

So just wanted to ask, on the revenue side of things it looked like both the purchase volume yield on domestic assessments, as well as the revenue per process transaction, or I should say the TP revs per processed transaction, were both down year over year.

I think on the purchase volume yields on the domestic assessments it was the lowest we have seen in a while.

And on the transaction processing revs per processed transaction it was down year over year in Q2.

I think almost as much as in Q1, despite the Durbin routing dynamics anniversarying.

Can you just comment on those metrics; if there were any anomalies in those numbers or how we might think about them for the second-half?

Jason, first of all, this trend we had now for a number of quarters.

First, let's talk about the domestic assessment.

We have particular growth coming in terms of jurisdictions outside of the United States.

Often enough we have to, obviously, compete with what is going on from a domestic pricing point of view, so where we have the growth they do come at a lower yield.

That is number one.

Number two, you also see when you look at our statistics that we put out that we have relatively larger growth on cash transactions in those jurisdictions versus EOS transactions.

And those do impact the yield, too.

So, by the way, this is nothing different.

As we are going to grow in those kind of jurisdictions and really expand our business outside of the United States even more you will see these trends continuing.

From a transaction point of view, I think I said something as part of the transaction volume that we are seeing.

We saw particular growth in Brazil, in Russia, actually Poland, Netherlands still, some Australia, and those actually do drive also that differential between what you see on transaction growth versus what you see from a transaction yield point of view.

Again, nothing different than what we had before.

Jason, it's Ajay.

What I will add to that first part of the question, think about things like we're doing in Nigeria and South Africa with Social Security payments.

What tends to happen is the consumer who gets an electronic card for the first time tends to in the beginning go even more for cash than the average consumer in our portfolio.

So we keep doing this well and we keep trying to intervene in the cash flow between governments and consumers, which is a large part of where the cash comes from, you will first find them going to cash.

Then all the efforts kick in around what we call the five-step program for taking people from using cash at an ATM to eventually going more and more to delivering at a point of sale.

And that five-step program takes a certain number of years and a certain set of events to happen.

So you are going to see this build and develop; that is an important part of the nature of what we are trying to drive.

All right.

So it is the mix shift during the transition?

Okay, thanks.

Absolutely.

Jason, it is not the transition that will happen in a year or two.

This thing, as you can imagine, with 85% of the world's transaction into cash there is a whole game to be played out here.

So you are going to get this mix of cash and POS.

Then in some countries the POS picks up, in others cash remain strong and it takes certain time for that mix to go the right way.

Okay, understood.

Thank you.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

I guess as sort of kind of discussed on previous calls, US credit you had said was slightly positive and slightly better than the first quarter.

But obviously the first quarter was a weak quarter because of the comparison.

It seems like it kind of accelerated somewhat less even than kind of what you have cited as overall retail spending and as your debit spending.

We have seen a little bit of success in what you have done with Bank of America on the credit side.

Anything else that you can kind of point to in terms of strategies and tactics?

And can you also give us an update on the American Airlines contract?

So no update on American Airlines because it ain't anywhere where I can tell you anything about it.

And if I knew anything you can appreciate I wouldn't tell you on a call like this.

So that one won't happen.

We are in negotiations with them, as is everybody else.

There is a lot going on there, but we are all in negotiations.

The first part, nothing has changed.

We know that US consumer credit is what we have to work on.

We have got a series of things that we have been doing over the last period of time to try and improve the trajectory of our US consumer credit spend growth.

Some of it is caused by deals we are winning, whether it be all the things we have announced over time.

We have talked to Bank of America doing things with us, but there is a series of other deals from Bass Pro and InterContinental Hotels Group to other banks like KeyBank and stuff we have done at Huntington and SunTrust.

And all of that that is going on.

All those things take a certain time to begin accumulating in the book, just as losses take a certain time to reflect in the book as you know in the past.

So we are kind of working our way to it.

There is a number of opportunities around co-branding.

There is a number of opportunities around things like what we are doing with Bank of America where it's not wholesale flips, but it is the opportunity to work together in specific areas that we are working with.

Some of those deals couldn't get announced because they weren't signed; some of those got signed.

And so that is one of the lumpiness in our numbers in Q2.

So stuff is going on.

We will have ups and downs as we go along, but we have got a pretty clear pathway to working on both co-brands and the effort to win business with banks that are currently higher market share with other competitors.

That is the work.

The third aspect is that the nature of our book and it is performance depends a little bit on the nature of our customers' books and their performance.

As the banking industry, more and more of the banking industry, comes back to a more normal keel on the credit book as the economy improves I think we are the next beneficiary of that as well.

I don't think that has showed up adequately as yet in our book.

So we have kind of got these three things going on.

Great, thanks very much.

Darrin Peller, Barclays.

Thanks, guys.

You beat across a number of metrics clearly in the quarter, including incentives, and also your cross-border yield came in pretty strong.

When you say you now raised expectations obviously versus the low end -- or to the low end of your range versus obviously the earlier years being below that previously, can you just give us a sense specifically which metrics are coming in now better than you initially anticipated at the beginning of the year to drive that?

Then maybe more specifically on cross-border, second part of the question.

The volume growth of 17% versus revenues of 20%, how much of that is actually pricing versus mix?

Just because we want to -- especially since we have seen volume growth exceeding revenue growth over the last several quarters.

Thanks a lot.

Darrin, on the metrics, first of all, what we are seeing is that from a domestic volume point of view we see improvements in a number of regions versus what we have seen before.

To see what is going on in the US, even though we would still think this is a pretty slow growth environment, it is feeling a little bit better than earlier this year and certainly than late last year.

Look at all of the press that is coming out of Europe.

It is starting to feel better.

In fact, all of our European countries grew except for Spain.

Spain, there is still a little bit of an issue, but you read the recent articles it seems like even that country starts to feel a little bit better going forward.

So I think we are just seeing a little bit of more robustness coming in than what we had assumed before.

In terms of your question on the cross-border volume versus the revenue side, so what you really have to contrast is our cross-border volumes grew 17% and you saw that our revenues grew 19%.

Really what we have in there is we have this quarter the US Acquirer Support Fee coming in.

That is the first quarter that is coming in.

It will be with us for another three quarters.

That reflects about 8 percentage points off that 19%.

So if you take that out, you compare 11% revenue growth to the 17% volume, and that difference, that 6 percentage points difference is exactly what we had before in all of our prior quarters, in terms of what is happening from the intra-Europe mix on cross-border versus inter-Europe mix.

Remember intra-Europe mix comes at a lower yield than inter, and so that's again nothing new, continuing trend, and that is what we are seeing.

The only thing I would add to that, Darrin, is that remember I have been saying for a while that I expected the second-half in the US to be better than the first half.

I have said that now for three quarters.

I still believe that.

The difference is the second-quarter came in better in US spending than we thought it would when we first made that statement.

So what is happening is a little bit of that improvement that we thought we would get in the US in the second-half feels like it has come a couple of months before.

What we had already factored in for our thinking when we spoke to you about our estimates of how this year will go some time back.

That little extra is what you are seeing us show up in the second-quarter results, one of the things that is driving it.

There is lots of others.

There is cross-border; there is stuff in other countries and all of that.

But the US is at the end of the day 40% of our revenue, give or take, and so that number still drives a change in what we think.

And that is kind of an important part of the context.

Thanks.

Smitti Srethapramote, Morgan Stanley.

I was wondering if you can give us an update on what you expect to see happen in China.

Our understanding was that the government over there was supposed to respond to the WTO by actually today.

I think the way they are looking at it my sense is that they are supposed to clarify certain things, but their actual policy, I think they believe they still have a month or two to respond in.

So we are waiting for that to come out.

They're periodically talking to us, as well as other players, and clarifying that they have certain thoughts around how to open up, but in truth we don't have enough of a picture to be able to give you a better answer.

With that talking to them all of the time and they are working their way through their thoughts.

Got it.

Maybe just a quick question on something else.

Meanwhile, life carries on.

There is the normal issuance of co-branded cards going on, and as I have been telling you, we have been winning most of those deals.

We are still in that same position.

We just got a couple of approvals for co-branded cards there.

We have issued those; work has started on those.

You had the deals, Alibaba, that is moving in the direction we wanted it to go.

We have had that whole report about one cross-border e-Commerce kind of player who used to do clearing in renminbi in Hong Kong with the PBOC was not quite within what they want to do going forward.

That one is held up, but everything else is carrying on.

So China is going along where it is today, but everybody is waiting for the new policy.

Chris Brendler, Stifel.

Thanks, good morning.

Can you talk about -- I know we have hit this a lot on processed transaction growth and transaction growth, but the numbers in Europe particularly look really strong, especially on a core basis accelerating sequentially.

Is that macro or are you still seeing the benefit of deals like the Netherlands and Italy?

Are there new deals that you potentially are signing in Europe?

Just the European transaction and core numbers look very strong.

And just one additional question if I could.

I did see a Bloomberg headline about a judge rejecting the debit fee regulation from the Fed.

Any color there would be helpful, thanks.

So the Bloomberg headline -- we are talking to you so we don't have access to Bloomberg terminals here so I have no idea what that one is about.

Noah, do you know anything about it?

Don't know about it.

Separate conversation.

The Europe one, the best way to answer is both.

You are getting some improvement in macro, but we continue -- as we have been telling you, in our conversations we have continued to win deals and win share both with institutions in Europe.

But also remember, we are continuing to get some transactions out of different places as the SEPA migration allows us to win some domestic processing across the countries in Europe.

Let me just add something to that, Chris, because you know Javier actually mentioned at last Thursday's conference call that we processed well below 50% of the POS transactions done on our cards in the EEA.

Actually when you put all the numbers probably together, it is actually just below 40%.

And by the way, if you include both POS and cash transactions, we only process about 25% of the transactions done on our cards.

And so that is why we are saying there is just absolutely plenty of opportunity for us to compete in domestic processing.

We have done that over the last four or five years as SEPA came in, and hopefully, with some of the changes in the regulation, we might be able to do even more there.

Ajay, can I just ask real quickly your thoughts on whether or not the regulation in Europe would slow the progress on MasterCard's ability to gain processing share or somehow increase it or is it about the same?

So what Martina was saying just now would indicate that I don't believe it is going to slow it down and that is kind of the where we both are.

As you can imagine, we have had a fair series of discussions in the Company around this.

The fact is that until everything becomes really clear, until it goes to the next -- it could take a year, it could take two years for this to become really implemented.

So I don't know how to answer that any better because that is just the way the European legislative process will work.

In the meantime, we are counting on winning domestic processing business because there is so much space for us to win in.

We were a very small portion of domestic processing till a few years ago.

Glenn Fodor, Autonomous Research.

Good morning.

Thanks for taking my question.

Just wanted to dig into your financial goals just a little bit.

You have made it very clear you are aggressively focusing on energizing the US credit portfolio, but that takes time, investment, and obviously incentive.

So if could you just give a sense of how much improvement here, such as new customer wins and such, you have baked into these three-year financial goals.

Glenn, you just have to go back to what we have put up at the last investor day.

There is this one chart which clearly shows you the three drivers of our growth.

One is PCE growth and we assume 4% to 5% per year on average over the long term.

The second one is the secular growth, which is basically the conversion from cash to check to electronic forms of payment.

That is 4% to 6% per annum, roughly, over a longer term.

And then in addition to that you saw our 2, 3, 4 percentage points on top of it in terms of strategic investments.

And strategic investments actually include a number of things.

It includes things that we are doing in the digital space.

It includes things that we might do be doing from a market share point of view.

Those are all of the things that were baked into and that is out there, and we haven't changed our view on that one iota.

Thanks, Martina.

Bryan Keane, Deutsche Bank.

Most of my questions have been answered, but just curious going back to the big news of last quarter around the Visa-Chase deal.

Has there been any new perspective you guys have gotten from other bank participants and how you guys are thinking about that relationship as with other potential banks; how MasterCard works with?

That is kind of question A.

Then question B, still curious to know if you guys have any idea if Chase is going to move some volume off of MasterCard over to Visa as a result of this deal?

Thanks.

Boy, I wonder what the other questions were.

So, first of all, Visa-Chase; no, nothing new.

There is actually the same series of conversations that are going on.

A number of the other banks that are obviously concerned about what this means longer term, but everybody is waiting and watching to see how this gets implemented.

We are in those dialogues, a number of them.

It does help to help open doors for us without a doubt, but beyond that I have got no new perspective for you there.

Will Chase move volume over to Visa?

I mean we have also got volume coming to us from Chase.

The InterContinental Hotels Group is a Chase co-brand, which we just won.

So will they move volume?

I assume they would move some, but I am not inside of Chase discussing this.

But being a banker in my previous life, I would still like to keep doors open with more than one network because it suits me when I am a banker.

Does that mean that the share will not change and the proportions will not change?

I would assume that the proportions will move towards the one you have chosen to put more investment in and so I actually believe that to be the case.

I just don't know actually what they will do.

Okay, helpful.

Thanks much.

Julio Quinteros, Goldman Sachs.

Ajay, when we were at the last investor day together you had mentioned that once you show us a margin above 55% it was going to be hard to go backwards.

We are running two quarters into the year at north of 58%.

The full-year guidance suggests something around 50%.

What is the delta there for the rest of the year as you guys think about the margin profile?

And why should your margin step back here from the sort of 58% level or so?

Good question.

I don't think it is going to go back to 50%.

We never said 50% is the guidance, just that a minimum of 50%.

As I told you, I did that when I came in because I found that at that time we were out there saying we were going to continually increase our margin by a few hundred basis points every year.

And I didn't feel that was a strategic goal for the Company compared to growing our franchise, growing our revenue and converting cash.

I just thought that is a much better way of thinking about what the Company is trying to do than trying to put a margin growth target when you already have a relatively attractive margin in the Company.

Having said that, our margins tend to be a little variable by quarter.

So the fact that we have got 58% right now, from what I recollect, normally the fourth quarter has a relatively low margin.

And I think that has been the case for the three or four -- I have been here four years now.

It has been the case for these three or four years that I have seen it.

So I think the annual margin tends to settle at a different number, particularly since the fourth quarter also is a relatively large quarter in many other ways.

So I don't know that you would assume that 58% is fixed.

I will tell you this; we are very focused on not going and throwing away money just because the margin is higher.

We are also focused, as I said, on taking away pricing as the only way to grow, although as I have said many times we work on many lines of pricing every quarter and the results show up.

This quarter there was a certain amount of pricing.

This pricing will give us some benefit for a couple of more quarters to come.

We think of pricing every quarter.

There are thousands of lines in 200 countries and that is a fair opportunity.

So will it be a high increase in pricing, low increase in pricing?

Remember this, I am not into pricing as a way to grow revenue.

I am into trying to fight that 85%.

But we will do what we can at the right time with pricing and in margin.

So I still think around that 50% minimum that is to reassure investors that we are not going to throw the money away.

But we are not going to give you an estimate that it will go down or up just because we quarterly variances.

All we have to do is put some more money into a serious investment and it will take a couple of quarters were the margin will be lower than it is today.

It will still be for the year above 50%.

That I promise you.

Got it, great.

Thank you.

Rod Bourgeois, Sanford Bernstein.

So I guess on a related note on the margin front, I mean it is encouraging to hear that macro is starting to improve some in certain parts of your business, particularly in the US and maybe even some early signs in Europe.

Does that at all change your view on margins going forward?

In other words, in years where the revenue growth is weak you seem to give some margin expansion to help with the earnings growth.

But if the macro continues to get better how does that affect the outlook on the margin front?

Rod, let me just jump in here.

First of all, we are not running the business based on a particular margin.

As Ajay just said, we put a margin minimum in place to make absolutely sure that our investors understand that we look at every investment that we do in the Company critically and that we do it in such a way that we get returns from it.

That is how we look at investments.

And really how we run the Company is looking at these investments, making these investments every year, every quarter as we see fit.

We think that based on our current business trajectory, the business that we have today that we will be at a minimum 50% margin.

We do not run the business for margin expansion per se.

That cuts across whether the economy is doing better or worse, and that is not what we are doing.

So I wouldn't assume any change based on the US economy looking better or not better.

Nothing has changed in our strategy.

And just to clarify on that, does that mean as we move into 2014 your view on margins is still keeping margins in the around 50% range?

Absolutely, Rod.

Minimum.

Our annual operating margin minimum that we put out for three years is 50% and it is the minimum.

That doesn't mean that it couldn't go higher, and that is mostly because of revenue growth.

But it is a combination of where the revenue growth comes in and the investments we decide to make in the Company.

Understood.

On the pricing front, I mean you mentioned that pricing was somewhat of a benefit.

Can you quantify, was it a 1% benefit to your revenue?

No, Rod, it was 4% in total on the revenue line.

4% in total.

Then that benefit, does it taper off in the next couple of quarters?

No, there are a couple of pricing in there.

One, I already mentioned which was the US Acquirer Support Fee.

It just started this quarter.

That is going to be with us for the next three quarters and that was probably about half of the price changes.

Then we had a couple of other small ones.

One anniversaried this quarter, which was the acquirer license fee, which we have talked about.

Then there is a very small one which you know that we have been starting to put through, which is pricing related to the Digital Wallet operator but we are talking about smaller numbers going forward.

Bill Carcache, Nomura Securities.

Good morning.

Ajay, I was hoping you could give us a sense of whether in your conversations you see any indication of certain groups in the industry moving closer to thinking of debit as just being debit, with the distinction between PIN and signature just not being as important.

For example, like in your discussions with insurers, just given that their economics are identical for both now.

Or do see the distinction continuing to be drawn?

Then I guess for the industry as a whole, ex market share shifts, do you have a sense for whether there has been any kind of a notable shift in the mix of signature versus PIN transactions post all of the Durbin regulation?

Great questions, Bill.

So the second one, the one about industry as a whole, has there been a move from signature to PIN, actually not identifiably so.

Has there been a move from debit to credit?

Not identifiably so.

Do people talk about -- in the banking industry and in the merchants business do they talk about expecting changes?

Yes, but it has been about a year now and it hasn't really delivered great change.

I think finally it is not about the bank and the merchant; it is about the consumer and what they want to do.

I think the consumer is unimpacted by this dialogue in most ways other than seeing indirect impact caused by an increase in checking fees or a drop in free checking accounts and so on.

They don't in their minds necessarily connect one to the other.

I think they are still behaving the way they choose to behave, which is to use their debit when they want and their credit when they want.

They are impacted more by overall trends in the economy.

So I think as the US economy continues to recover, generate jobs, and the like, you will probably see an increase in credit spending that may be faster than debit.

But that still is out there to be seen.

This is past cycles I am talking about.

So I would say nothing much right now.

Okay, that is really helpful, Ajay.

If I may, one last follow-up here.

Can you comment on the Isis announcement of its national rollout?

We have seen a number of reports suggesting that the rollout of NFC is just pretty unexciting, but can you share your thoughts on the growth outlook for NFC as you see it over the course of the next 12 to 18 months?

Thanks.

NFC, to me, has opportunities because it is a technology that is applicable not just to payments, but also delivering things around security and think around loyalty and so on and so forth.

I think anything that goes beyond just payments to the whole shopping experience, to the whole consumer experience, to the merchant's experience is an important aspect in the upcoming transition that is going on between physical and digital.

That is how I think about it.

I don't think these are 12- and 18-month things, Bill, because just think of the ecosystem and the infrastructure that needs to be built for any of these to happen.

And so I tend to look on it as a longer-term effort.

I think that most people would say -- if you look at contactless payments in Australia as an example, I was looking at data the other day.

Something like 25% or 30% of all transactions in Australia under AUD100 are contactless.

That is a big number compared to where they used to be two years ago.

Now will it go even higher?

Probably.

Will it take years to happen?

Probably.

So some countries like Australia, Canada, and Turkey are further ahead in NFC than others.

But you run a business to so many countries it is a mixed bag and it is tough to generalize across all of them, but in general I think NFC has got opportunity.

I am not sure that I can tell it to you or 12 or 18 months.

Thank you very much.

Appreciate it.

David Hochstim, Buckingham Research.

I wonder could you give us an update on your joint venture with Telefonica in Latin America and what is happening there and what you have learned so far.

Sure.

We have got two different JVs with them.

We have got the one that is in 12 countries, excluding Brazil; what we call Wanda.

And then you have got Zuum, which is in Brazil.

That is because of the way Telefonica was constructed when these JVs were signed.

So in the first one, Argentina was the first one to go out.

They actually used the mobile wallets that exist in the joint venture we have with Smart Telecom in the Philippines, MPS.

So that is the first one out there.

The second one is Zuum.

It just launched in April actually, I think just around the time of our first-quarter earnings call or just after or just before.

I am kind of forgetting.

That is the first mobile program in the region that has a MasterCard prepaid companion card in addition to the mobile wallet.

So two different kinds of flavors.

My sense is the concept of having a prepaid card as a companion card, a cash to the mobile payment, will probably drive this faster than just the mobile payment by itself.

Only because of my answer to Bill's question, building ecosystems around new things takes time.

The card acceptance system, even if it is not completely built out in Brazil, is way more built out than a mobile-only payment system.

So that is the first learning we have got and I think we have got a lot of learnings about working with Telefonica.

We have now actually in the, last three or four months, I forget when, we have launched two more initiatives with them both in Europe.

I think there is something in the Czech Republic and there is something with them in Germany that we are doing.

So the relationship has expanded a little bit beyond the original construct in Latin America.

Tom McCrohan, Janney.

Most of the questions on the quarter were answered; I will ask a bigger picture question.

When you joined MasterCard three years ago you talked a lot about innovation and the importance of that.

I was wondering if there is any way you can speak to how you are tracking to creating that culture in terms of financials.

Like how much of your revenue, for example, revenue growth the last few years was a function of new product introductions or new innovations?

And as you look forward into your three-year financial outlook, how much of that is going to be -- how much of the growth is going to be attributable to some sort of innovation that MasterCard is developing today?

So we haven't put out a measure of innovation index, which is what you are referring to.

But as Martina just explained in an answer to Rob a little while ago, if you think about our three-year projection on revenue growth those 2, 3, 4 percentage points at the end that she was talking about are from innovation and new products.

From things like data analytics, which to me is a relatively new product, all the way to changes in market share and growth, whether it be US credit or, frankly, US debit or all the things we are doing overseas as well.

So you can see it's in that ballpark in that block of 2%, 3%, 4%.

My whole attempt around innovation was to change the way we went to market so that we didn't just sell credit, debit, prepaid, and commercial, but we looked at diversifying that growth from the core products, both in terms of geography and in terms of the kind of clients we worked with.

So there you can see 30-odd deals with mobile telecom operators in the last two years.

We had none three or four years ago.

In fact, the dialogue used to be how they wouldn't need the banks and the networks to be able to grow.

I think that demonstrates clearly that we have been able to show that our product set and technology adapted to mobile payments can work with them.

I just was talking about Telefonica, but there is an example like that in a number of others.

I've talked about SingTel and the other telcos in my call as well.

So that is the first part.

The second part around innovation has to do with mobile payments, e-commerce, and the whole aspect of information services.

We are making a lot of progress on all three.

Mobile I just talked about.

We have done a lot of work in information services and data analytics, so that is where we are.

I don't have an innovation index that I am going to give you publicly, because the issue is what is a new product.

In a consumer product company you can evaluate it in different ways.

What is the new product for us?

Is a credit card with a new set of features a new product, or is a new product only that which comes in a new delivery channel?

And then we will get into endless discussions about that.

I am much more focused on measuring our ability to generate new ideas in the Company through solution-based selling to our clients and see the impact on our brand.

And our brand has gone from being number 87 in the brand index evaluated by clients to number 20 in four years and we have spent about the same or a little less money than we used to.

If you look at that brand index, it talks about innovation as being a big driver of the change.

So that is kind of how I measure it right now.

Maybe a few years down the road Martina will actually allow me to talk about innovation index and I will let you deal with her on that one.

Thank you.

Tien-tsin Huang, JPMorgan.

Good morning.

Good quarter.

I just want to ask a couple of follow-ups.

I guess on product innovation; at Visa's investor day they talked about -- I was trying to look up the number -- something like $300 million in the last two years in product innovation.

I'm curious how does that compare roughly to what MasterCard has spent in product innovation?

Then my follow-up was just -- I just wanted to clarify from Martina, the Other line was a little bit better than we had modeled.

Does that capture the pricing you referred to beyond the cross-border change?

Tien-tsin, let's take Other revenues first.

In Other revenues what you are seeing showing up is some really nice growth in our Access prepaid business as well as in our Advisors business.

Ajay already talked about some of the proof points, such as in Australia, etc., that we are doing with both of those businesses.

In addition to a couple of the price increases that I talked about which are reflected in other revenues.

Last part, Tien-tsin; I don't know how Charlie measured the numbers.

I haven't had a chance to understand what is inside that number.

Investor Day is not that far away so we will chat with you then on that topic.

But the issue is what is inside it, as I was answering to the earlier question, makes all the difference.

For example, all the work we are doing on fraud tools, is that innovation?

In a sense it probably is because it is developing entire new forms of technology.

All the work we are doing on tokenization, is that innovation?

Probably is if it delivers a new way of dealing with safety.

All the work we are doing with Truaxis to drive merchant-funded loyalty programs around the world, is that innovation and R&D?

Probably.

We have got MasterCard Labs.

We have got different portions that are delivering this answer.

I actually don't look at it that way.

I look at it, as I said in the earlier question, of funding this many different ways.

But most importantly, in changing the way we talk to merchants and banks and governments about relating with them in a more solution-based selling way.

So the example with Nigeria where they were trying to do an ID scheme, which ended up being not just that but also a payment scheme with a card that is two-sided with a chip, we spent money on that.

Is that innovation?

We spent money on biometric identification for UID in India.

I don't want to get into I have counted this and not counted that and create some new metric that everybody will try and track.

But you should know that there are a ton of people in this company whose only job is if they want to come to work on January 1, 2014, they had better have new ideas or they won't be around.

That I can promise you.

Ajay, do you have some closing comments?

I do.

After all of that?

So how do I think about this?

We delivered pretty solid results for the first half of this year driven off, as we have talked about a little bit, volume and transaction growth around the world.

Worldwide GDV crossed the $1 trillion level for the first time in the second-quarter.

When Martina was reading that out I was looking at that as a milestone in some ways, but on to the next trillion already.

And our first-half net revenue growth was a bit better than we have forecasted for all the reasons we talked about.

We remain confident about this three-year performance objective that we have got out there, and we are working hard to deliver another good year in spite of what I consider to be somewhat unpredictable economic conditions.

My view is that the secular trends in our industry are just of great interest to me.

They are strong drivers for top-line growth, even in slower economic environments.

So I am looking forward to seeing many of you at investor day in September.

I think you will get a chance to hear about our strategic focus areas.

You will experience, as you have done for the last couple of years, some of our innovative products and services.

We have got some really cool ones lined up for you this year, so hopefully that will be fun.

In the meantime, thank you for your support and thank you for being on the call with us today.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.