萬事達 (MA) 2013 Q4 法說會逐字稿

Welcome to the MasterCard fourth-quarter, full-year 2013 earnings conference call.

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

(Operator Instructions) 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, Clifford, and good morning, everyone.

Thank you for joining us for a discussion about our fourth-quarter and year-end 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, MasterCard.com.

The earnings release includes reconciliations of non-GAAP measures to their GAAP equivalents.

The release and the slide deck 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 February 7.

All of the EPS figures in our press release and those discussed on today's call are presented on a post-split basis, consistent with the SEC's reporting requirements following our 10-for-1 stock split that was effective at market open on January 22.

In order to provide a bridge for you between the pre-split and post-split EPS figures, we have added a page in the Appendix section of the slide deck that breaks out the 2013 EPS by quarter and full-year, as well as the 2012 figures recalculated on a pro forma basis.

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?

Thank you, Barbara.

Good morning, everybody.

So, we were pleased that we were able to deliver strong results in 2013.

Those results basically were in line with our expectations.

Our net revenue growth was 13%, both as reported and adjusted for FX.

It was driven by solid operational performance in processed transactions, in gross dollar volume and cross-border volume growth.

And we were able to deliver some margin growth in spite of investing more back into the business.

For the full-year 2013, excluding special items, we saw net income growth of 15%, or 14% adjusted for currency, and reported EPS growth of 19%, or 18% on an FX-adjusted basis.

Looking at the fourth quarter, which came in about where we thought we would, even after signing more agreements than we had anticipated, some of which I will talk about in a moment, as well as putting some money and investing some money back into the business.

I will let Martina get into the quarterly financial details a little later.

So, let's go to the global economic trends, starting with the United States, where it feels like the economy is beginning to show a bit of forward momentum.

Our SpendingPulse data showed that US retail sales growth, ex-auto, for the fourth quarter was 3.9%.

And that includes the fact that holiday retail sales grew faster than last year, with particular strength in the e- and m-commerce space.

Economic indicators, such as housing and employment also showed some improvement during the quarter, and consumer confidence bounced back from what was the low of October.

We saw an increase in our United States business in the fourth quarter, with volume growth of 7%, driven by improvements in consumer credit and in debit.

In Europe, overall economic growth in the fourth quarter remained subdued, although there are some indicators of a potential recovery.

Consumer sentiment continued a slow, but very steady climb, as did business sentiment across our major markets.

Northern Europe continues on a solid footing.

Southern Europe is moving up, although it is coming off a lower base.

Key contributors to our 14% fourth quarter volume growth in the region were Russia, Sweden, the Ukraine and Poland.

In Asia-Pacific, consumer and business sentiment levels declined in the fourth quarter across major markets including Australia.

In addition, worries about slowing growth in China go beyond being just a domestic issue and have broader implications, as you all know, for other markets that depend on Chinese demand.

In Latin America, economic growth slowed a bit in the fourth quarter, with consumer confidence declining in both Brazil and Mexico.

But across the rest of the region, it was fairly positive.

Despite these sluggish economic indicators in both regions, our Asia Pacific/Middle East/Africa GDV growth was 20%, and our Latin America growth was 17% in GDV, with transaction growth in the high-twenties and the high-teens -- the high-twenties for Asia Pacific/Middle East/Africa, high-teens for Latin America, all relatively similar to previous quarters.

The fact is that a significant proportion of our growth in emerging markets comes from the secular shift to electronic payments, which I think is relatively uncorrelated to some of the economic cycles that we see the emerging markets currently going through.

Overall, it feels like the US and Western Europe, markets will be where we generate well over half of our revenue, are slowly starting to regain their economic footing.

The general consensus is the US should have a decent economic growth in 2014, and there is increasing optimism about Europe.

As these developed markets recover, it could be a catalyst to spark further growth in Asia and Latin America.

So now, before moving on to the business highlights, let me say a few words on the legal and regulatory front.

In December, as you know, Judge Gleeson issued final approval of the US merchant litigation settlement.

We anticipate that most of the larger merchants who opted out will initiate separate actions; and based on that analysis we have taken a $95 million pretax charge in the fourth quarter.

The cases filed to date are in the early stages, but most have been consolidated under Judge Gleeson's court.

Also, in mid-January both the Federal Reserve and the merchant plaintiffs presented oral arguments to the Appeals Court in response to Judge Leon's July decision on the Fed regulation around implementing the Durbin amendment.

The Appeals Court will likely issue a ruling sometime in 2014.

With regards to the proposed European legislation, you have probably all seen the rapporteur's amendments to the EC's initial proposal.

But you should know that there are also more than 300 amendments submitted from other members of Parliament.

So the process is quite complicated.

A committee of Parliament will now deliberate and vote on all of this in late February.

And a vote by the full Parliament is currently scheduled for April.

Also in late February, the Council of Ministers is expected to start a separate, parallel review of the legislation.

So we continue to believe that the timeline for final adoption appears ambitious; but obviously we are watching that situation very closely on the ground.

We were disappointed to learn yesterday that the Advocate General in Luxembourg issued an opinion siding against our appeal of the European Commission's 2007 decision regarding our intra-Europe cross-border interchange rates.

The Court now has to rule; and we'll find out what they say at some point this year.

But keep in mind that we have already modified these interchange rates to 20 and 30 basis points for debit and credit, respectively, in mid-2009.

So in effect this changes very, very little in that space for either the banks or the merchants or us as of today.

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

As I mentioned, we finished the year signing even more deals than we anticipated, which is good; it sets us up well for future growth.

Let me just call out a few of these that I personally found interesting.

The first, we were very pleased to be able to continue and in fact, enhance our partnership with Citi on the American Airlines portfolio.

That is an important co-brand for both of us.

As you know, American Airlines is now the world's largest airline after this recent merger.

Second, we recently completed a new agreement with Chase for their US commercial card portfolio, providing corporate, purchasing and fleet cards for their customers across many industry sectors.

These customers range from midsize companies all the way up through large, multinational corporations.

In December, we also renewed our agreement with the Bank of Montreal, which for us is a very important partner in Canada and in the United States.

An in fact, in the US we expanded our relationship to include consumer credit.

We also recently extended our agreement with Tesco Bank and, as you know, Tesco Bank is a part of the third-largest retailer in the world, for their UK consumer credit card portfolio.

That is a very good partnership for us with lots of future scope for expansion.

Finally, capping off a year of advancements in Africa, from a 13 million identity card pilot being launched in Nigeria that we have talked about, to the NedBank conversion in South Africa, we have now recently signed an agreement with Ecobank.

Ecobank is the largest pan-African bank.

It has a presence in 23 countries in Africa, reaching 65% of Africa's population.

The bank will now issue our debit, credit, prepaid and other payment solutions; and also it allows us to expand our acceptance in these markets.

Meanwhile, MasterPass.

Momentum around MasterPass continues.

By the end of last year, of 2013, we are now live in five markets with actually many more in the pipeline.

You probably saw our US advertising campaign with J.Crew and MasterPass over the holidays, but we also had a number of other major global retailers agree to accept MasterPass, including Brooks Brothers, Orvis, Live Nation, Ticketmaster, Singapore Airlines.

That brings the total number of merchants to more than 30,000, with most of them already live.

We are continuing to add new banking partners around the world as well, including Unicredit in Italy; the three largest banks in Sweden, SAB, Swedbank and Nordea; and Caixa in Brazil.

And this adds on to the ones we signed up in previous quarters.

Such has been on MasterPass.

Now, another big area of focus for us is processing, and that goes beyond our traditional role of switching transactions, but also includes providing processing services on either side of that switch, to surround the transaction.

As some of you heard from Gary Flood at Investor Day back in September, the more transactions we touch the better our ability to deliver a wide range of services and generate additional revenue.

Touching a transaction, even if you don't switch it, can be very valuable to us.

So let me give you a flavor of a few recent initiatives in this area.

We have now completed our acquisition of Provus, a provider of issuer and acquirer processing, prepaid solutions, and ATM processing services in Turkey.

That's going to enable us to increase our processing presence in the high-growth markets in the European region.

TREVICA, our issuer and acquirer processor in Poland, will provide processing services for one of the largest retailers in Portugal.

In the first half of this year, that retailer is expected to roll out a new store card that will be able to accommodate credit, prepaid, private label and installment payments.

We recently announced a partnership with BICS, a Belgian telecom company, and eServeGlobal, a mobile money solutions provider.

We have formed a joint venture that will enable their HomeSend platform to connect to any financial institution across the MasterCard network.

That service is already offered in 50 countries with mobile network and money transfer operators.

And as we build our P2P initiatives, this joint venture, along with our relationship with Western Union, gives consumers more places to send money, both domestically and internationally.

Finally, before I hand this over to Martina, let me talk about the topic of safety and security of payments, which has received a great deal of attention given all that has happened in the recent past on data breaches.

In last quarter's call we discussed safety and security in some depth.

The fact is, this is fundamental to everything we do, and it is what consumers expect and what they deserve.

In the United States, migration to EMV is a necessary and critical step.

It makes stealing data much more difficult, and also it makes stolen data less valuable to a fraudster.

That is why we announced two years ago our plan for the US migration from mag-stripe to chip technology starting October 2014.

Earlier this month, we reiterated that we are holding firm to that date, because we believe it is the right thing to do.

Beyond the zero liability protection for which our rules already provide, consumers should not be at risk of having their personal information stolen, and face enormous inconveniences and distress as a result.

While EMV works to protect in the physical space, we also do need to make sure that we are ahead of this issue in the digital space.

And that is why we announced tokenization standards with all our other partners back in October.

What we would now like to see is that all players within the payments ecosystem come together with a sense of urgency to ensure that the highest payment security standards are put into place.

This is not easy, but it is key to doing the right thing and sustaining consumer confidence and trust.

So with that, 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.

As Ajay already said, we are very pleased with our 2013 performance of 13% net revenue growth.

EPS growth was 21%, adjusted for foreign exchange and normalized for discrete tax benefits in 2012, which is consistent with the calculation of our long-term EPS performance targets.

I will now focus on the details of the fourth-quarter results, excluding the $95 million pretax charge that we took this quarter related to the opt-outs in the US merchant litigation.

Let me begin on page 3 of our slide deck, and here you see the differences between as-reported and FX-adjusted growth rates for this quarter, ranging from zero to 2 percentage points for each line item.

All of my comments today will pertain to the FX-adjusted growth rates.

Net revenue grew 11%, driven by strong underlying operational metrics, but primarily offset by an increase in rebates and incentives as a result of signing a significant number of agreements in the quarter.

Based on our net revenue and operating expense growth, net income increased by 11%.

EPS growth was 16%, benefiting from our share repurchase program.

During the fourth quarter, we repurchased 9.8 million shares of Class A common stock at a cost of approximately $750 million.

Quarter-to-date through Friday, an additional 4.2 million shares were repurchased at a cost of approximately $350 million, with $3.3 billion remaining under our current authorization.

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

Cash flow from operations was $1.2 billion.

And we ended the quarter with cash, cash equivalents, and other liquid investments of $6.3 billion.

Now let's turn to page 4, and here you can see the operational metrics for the fourth quarter.

Our worldwide gross dollar volume, or GDV, was up 14% on a local currency basis to over $1.1 trillion.

US GDV grew 7%, with credit volumes growing 6%.

US commercial credit growth was in the low-teens, down from last quarter.

US consumer credit growth of over 3% was about the same level as what we saw last quarter.

And our US debit growth was 9%, driven by solid growth across our consumer and commercial debit and prepaid programs.

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

This continues to be driven by Asia Pacific/Middle East/Africa, with 20% growth; and mid to high-teens growth in both Europe and Latin America.

Cross-border volume grew 18% on a local currency basis, including more than 20% in Latin America and Asia Pacific/Middle East/Africa, and growth in the mid-teens in Europe.

Let's turn to page 5. Here you can see processed transactions growing 13% globally to more than 10.4 billion.

We saw double-digit growth in most regions around the world, with particular strength in our Asia Pacific/Middle East/Africa region driven by Australia and South Africa.

Compared to last quarter, this growth where it was down slightly.

However, when normalizing for the number of processing days, processed transaction growth for the fourth quarter was similar to what we saw in the third quarter.

Globally the number of cards grew 9% to almost 2 billion MasterCard and Maestro branded cards.

Now let's turn to page 6 for some insights on our revenue.

We are very pleased with the 15% growth in gross revenues, which was in line with our expectations and driven by increased volume and transactions, along with some contribution from pricing.

In addition, beyond the two functional currencies that we adjust for, revenues were slightly impacted by the strengthening of the US dollar and the euro versus other currencies.

However, net revenue growth of 11% came in a bit lower than expected, as a result of signing more deals in the quarter, which Ajay already called out.

So the rebates and incentives lines increased by 23%; but we view this as a good thing for long-term revenue growth.

Growth in domestic assessments continues to be driven primarily by stronger volume growth outside of the United States, much of which comes at a lower yield.

One last note on revenue: excluding pricing, cross-border revenue growth was 12%.

The resulting gap between cross-border volume and revenue growth continued to be mainly due to the higher mix of intra-Europe activity.

Moving on to page 7, you can see that total operating expenses were up 11% in the quarter as we took the opportunity to reinvest more back into the business, similar to what we did in the third quarter.

First, the 12% increase in G&A expenses continues to be primarily driven by investments related to all aspects of our growth strategy, including initiatives such as MasterPass and tokenization.

Part of our investment was in people, and we ended 2013 with approximately 8,200 full-time employees, up 9% from year-end 2012.

But what is more interesting is that the people that we have been hiring for the last couple of years are coming from sectors such as technology, retail, consumer goods and government, which has been helping us to execute in these areas.

Second, advertising and marketing was up by 8% mainly due to higher customer marketing support and media spend.

And while not on these slides, I would like to note that the Other Income/Expense line was $9 million negative -- i.e., it was an expense -- in line with our expectations and primarily due to a number of our joint ventures such as the two with Telefonica.

As we ramp up these initiatives you can expect this line to continue to be negative.

Let me now turn to slide 8, and here we discuss first what we have seen in January through this past Tuesday.

Each of our business drivers were flat but slightly higher in the period compared to the fourth quarter.

So the numbers through January 28 are as follows.

Globally our cross-border volumes grew about 18%, and that is about equal to our fourth-quarter growth rate.

In the US, our processed volume grew 9%, about 1 percentage point up from what we saw last quarter, due to improvements in consumer credit.

Processed volume growth outside of the US grew 17%, and that is also a slight increase over the fourth quarter.

In particular, our European processed volume growth was in the teens, a continuation of the growth rate that we saw throughout 2013.

Globally, processed transaction growth was 14%; and that is also up about 1 percentage point over what we saw as a growth rate in the fourth quarter, driven by higher growth in the US and in Europe.

Looking forward, let me first start with our long-term performance objectives for the 2013 to 2015 period.

We remain confident that our business can deliver an 11% to 14% net revenue CAGR, which includes a modest contribution from pricing over the three-year period and an at least 20% EPS CAGR.

This growth rates are on a constant-currency basis and exclude new M&A activities.

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

Just one other comment about our EPS CAGR objective, which we said was based on a normalized tax rate that excluded the impact of several one-time benefits that we were able to achieve in 2012, which you will recall resulted in a pro forma EPS number of $21.44.

But after adjusting for our recent stock split, you should now be modeling EPS growth beyond 2012 using a base of $2.14.

Now I would like to share with you some thoughts about 2014.

With respect to net revenue, we have signed, as you just heard, a significant number of deals over the last couple of years.

And as the new deals onboard, they will provide a tailwind for 2014.

However, we are also expecting a headwind from one portfolio conversion to a competitor.

As you all know, back in 2012, we lost our portion of Chase's consumer credit portfolio.

And while we expected some attrition would occur in 2013, that did not happen.

We don't have any specifics on how these cards will migrate, but we are now assuming an impact in 2014.

Given the size of this portfolio we can offset some, but not all, of this attrition with our wins.

And thus we expect net revenue growth for 2014 to come in at the lower-end of our three-year range.

We also expect a return to more normal growth rates in rebates and incentives in the second and third quarter this year versus what we saw in 2013.

We anticipate total 2014 operating expenses to grow less than the 9% that we saw in 2013.

As we have always said, any upside to top-line growth may provide the opportunity to reinvest more back into the business as well as determine how much, if any, operating margin expansion we can deliver in 2014.

As I just mentioned, the impact of new M&A activities is not reflected in our long-term performance objectives.

At Investor Day last September, I talked about how we are looking more actively at potential M&A opportunities that address our strategic priorities and provide us with critical capabilities.

We are pleased that we recently completed the Provus and HomeSend deals, both investments that add to our capabilities.

They will contribute some revenue; but together with their base expenses and our integration work, we expect to see $0.01 to $0.02 dilution to our 2014 earnings per share figure.

We will continue to update you as we go forward on these numbers, as well as on the impact of any additional M&A activities we may have.

For your modeling purposes, you should assume a full-year tax rate of about 32%, which does not recognize the impact of any discrete items such as what we have seen in the recent past.

Finally, with respect to foreign exchange, if rates remain similar to where they are today -- that is, the euro trading at about the $1.35 level and the Brazilian real at about the $2.42 level -- for the rest of the year, the net impact of the euro and the real would essentially offset each other for full-year 2014.

And as I mentioned earlier, foreign exchange had a slight impact on our fourth-quarter beyond adjusting for these two functional currencies that we typically call out.

Given the current volatility in the FX markets, especially with an appreciating US dollar and euro versus other currencies, we are carefully managing those exposures, but we could see some impact depending on how these currencies behave in 2014.

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

Barbara?

Thank you, Martina.

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

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

Clifford?

(Operator Instructions) Chris Brendler, Stifel.

Hi, thanks.

Good morning.

Can you give us a little color on the progression in 2014 of the cross-border price increase?

I think you mentioned still about 1,000 basis points of benefit on your cross-border revenue growth.

When does that start to anniversary?

Is there any limiting impact from additional price increases on your cross-border revenue growth?

Thanks.

Chris, we put the cross-border acquiring price increase in place in April of 2013; so you would see that basically anniversary at the end of the first quarter of 2014.

Any additional pricing actions that could mitigate that?

No.

I said as part of our long-term objectives, we will only see some modest pricing.

This is still a big one that is basically going to anniversary.

Thanks so much.

Craig Maurer, CLSA.

Yes, thanks.

Good morning.

The advertising and marketing, could you just provide some additional color on what drove that number up in the fourth quarter?

What opportunities you saw.

And does the Chase deal include the same kind of network separation as you are seeing from Visa?

Thanks

Hey, Craig.

It's Ajay.

Not sure I understood the second part.

Are you talking to the Chase, our commercial deal?

That is just a regular deal like we would do with any other institution in our commercial business; so that is how that is done.

The part about advertising and marketing, actually, the fourth quarter is when the maximum transactions occur across most parts of the world.

We have been trying for some time to get our advertising and marketing to fit and match the right time periods for when it should be correlated to our transaction spend.

It kind of depends on how it works.

In some cases, you get the right opportunities; in others, you don't.

In this particular one, we got a great deal of opportunity around the end of the year to sign up a few things, to participate in activities and social media and physical media around the New Year in different places, to give us a chance to put ourselves back into people's eyes and minds at the right time of the year.

That is what that is about.

It wasn't out of normal with -- if you look at our fourth-quarter spend on advertising and marketing.

We should be spending this kind of money to correlate back to the kind of revenues and transactions that happen in the fourth quarter.

Gross revenues.

Let me just add a comment for 2014, because I am sure every one of you would like to know a little bit about the cadence of our A&M spend.

The cadence will be relatively similar to what you saw in 2013.

The only thing that we are trying to do, and Ajay already referenced that, is maybe smooth out a little bit the first and the second quarters.

You might see a little bit more in the first quarter, and we're talking just a bit more, taking it out of the fourth quarter.

The second and the third quarter should be from a cadence point of view, very similar.

Next question, please.

Jason Kupferberg, Jefferies.

Hey, thanks, guys.

Can we just get a little bit, color and clarity on the full-year 2014 rebates?

Do you think they will be -- with they grow faster, slower, or about in line with gross revs?

And do you guys think you can grow US consumer credit in 2014 with the Chase volumes coming off that you mentioned?

First of all, with your last question, we are obviously growing credit because otherwise we wouldn't be able to offset some of the losses that we might see from the Chase portfolio in 2014.

That was in my prepared remarks.

What was your first question?

On rebates and incentives.

Rebates and incentives.

Let me just tell you, rebates and incentives, we think that from a cadence point of view it is going to go back much normal to what we have seen prior to 2013.

In the second quarter and in the third quarter you'll see normalized growth rates.

It is very tough for us to be telling you what you should be thinking about as a percentage of gross revenues.

But when I look forward, I would look at something not too different to what you saw in 2013, which would also suggest that overall the annual growth rate is not too different for 2014.

Understood.

Thank you.

Bill Carcache, Nomura Securities.

Thanks.

Good morning.

In Europe, you guys are significantly outperforming one of your key competitors, who is still operating under an association structure.

And it seems like you are able to offer much greater value to both banks and merchants, given your much more innovative offerings.

Can you talk a little bit about your confidence in your outlook for market share gains in Europe?

And perhaps just give us some color around competitively how you feel you are positioned there.

Look, we enjoy our position in Europe.

And I have said a few times that I actually consider Europe to be a decent growth market for our Company, even the developed markets of Western Europe, primarily because of the relatively high levels of cash that still exist in some of those economies.

If you take out the Nordics, where cash is actually very small, to come to Germany or France, it is still an overwhelming majority that is in cash.

And those are very attractive markets.

We have a good position.

We have been gaining share; that is absolutely correct.

We are doing a lot of things with data analytics, with contactless, with fraud early warning systems, with inControl.

So all those help us win deals.

And now we are focused on trying to process more and more of the transactions in Europe as we go along.

So in this quarter, our processed transactions grew by 14% or so in Europe, in SEPA.

So that is a good thing for us, and we are focused on that.

A lot of the work we are doing with Provus and TREVICA are all aligned around that aspect.

Between digital and Advisors and data, in addition to what we already do in our core business, we have a decent line of sight to where Europe is going.

But Europe has a lotof challenges.

It has regulatory challenges that are unique to the way Europe is constructed and the way it functions.

I talked a little bit about those in the form of the EC legislation, as well as this recent ruling by the AG.

Now the AG's ruling doesn't impact anything directly because the rates were already there.

But could that spill over tomorrow into some other way of looking at regulatory arbitrage or thinking in that space in Europe?

Sure, it could.

That is something we are always conscious of, and we are always trying to make sure that we work well within that environment.

Thank you.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

Could you maybe give us a little bit of that give-and-take between the two pieces of the Chase relationship?

Like, how do you see the growth on the commercial side versus the risk of deconsolidation on the consumer side?

Tough to say, because I really can't give you that much detailed information about one set of plans and books.

But you should know that Chase is a very, very large consumer bank with a very large consumer portfolio, and they have got a strong corporate banking business that is growing.

But there is no way that those two are comparable.

I don't see us making up what we are losing in the consumer side -- if it goes away in 2014.

I have no way to estimate what will happen.

I am kind of assuming it is going away.

I have heard the earnings call that Visa had, where they talked about getting it.

So I am assuming that we are both thinking similarly that 2014 is the year that it goes from us to them.

Signing more deals in the current year isn't going to make up for that, but it will help, just as all the co-brands will help.

And there are co-brands that we haven't been able to announce because of certain circumstances with those retailers and those issuers, which will all become clearer to you over the next few months.

I am hoping that we will eventually come up in the right place, but 2014 is going to be the year of transition.

We have tried to factor that in when Martina said that we think the revenue could be at the lower-end of our long-term guidance.

Now, if it comes in better, that will be great.

Because if the attrition is slower or these co-brands come on quicker, that will be great as well.

But typically a co-brand, after we announce it, takes somewhere between a year, year and a half, to start onboarding and kicking in.

So there is a time lag in our business, and that is what we are providing for.

Look.

Underlying trends in our business in the US and elsewhere have been good in our fourth quarter.

Our gross revenue actually came in better than our plan.

What happened is we signed more deals, and I am actually happy to sign those deals.

That is what I am thinking about this whole circumstance, around how to think about where our revenues and our Company is going over the next couple of years.

Great.

Thank you.

Bob Napoli, William Blair.

Thank you.

Good morning.

Just wanted to follow up on some of your macro discussion, Ajay.

When I look at the payments volume and the purchase volume by region, it is a decent slowing in pretty much every market, except for Latin America.

I think you were suggesting that you thought you were seeing a little more strength incrementally.

I guess the January numbers do suggest that you see a pickup from the fourth quarter.

But do you think -- I mean, given the slowdown that you see across-the-board in payment and purchase volume, doesn't that suggest that the economy at best is stable, and at worst maybe we are seeing a little bit of global weakening?

You know, I actually don't see it that way.

I see the US as the -- if you just look at the US as a whole, you look at the drags on US economic growth that contributed to whatever happened in 2013, and 2013 turned out to end in a stronger way than people expected.

But there were lots of drags, right?

From the sequester, to all the other kinds of stuff that happened there.

So I don't see the US as being slowing in any way.

I see it improving.

I actually see Europe showing signs of life, as well.

Northern Europe, even the UK which a year ago people talked about as being in very difficult and dire circumstances, has clearly shown a recovery in where it is headed.

That brings us to Asia, and Asia is dominated by what happens between China, Japan, Australia and India.

If you think about China, yes, China's growth has slowed; but China's growth has slowed first in domestic expenditure, which impacts us very little because we don't get to play in the domestic processing yet, right?

Japan is actually beginning to show signs of life.

Australia depends a great deal on what happens with China, because Australia's economy relies a great deal on the exports into China.

And India is just India.

India is being India right now.

It's going through all that it's doing with its elections and all that is underlying it.

But India's economy is two-thirds consumption, and that consumption is still growing.

While China and India may be growing slower than in the past, they are still growing into very attractive numbers beyond the 10.

So that's the question about slowdown.

You've got to remember the number of days in the fourth quarter, number of processing days.

Martina went a couple of times to explain that if you took out the impact of the short, smaller number of days and look at the normalized data, you will find it's kind of similar growth.

But if you went to Asia and you went back four quarters in Asia, you would find Asia today is a little slower in PCE growth than it was four quarters ago.

That is what I am addressing when talking to you.

I am not addressing specifics of the processed transactions, because I think Martina addressed those a couple of times in her opening remarks.

Great, thank you.

David Togut, Evercore.

Thank you.

Two questions.

First, Martina, you said that OpEx would probably grow a little less than 9% this year.

Could you give us a sense of where you guys have the most operating leverage this year?

David, what we are doing is -- I didn't say a little less; I actually said less than 9%.

There is a little bit of a difference on those kind of numbers.

What we are really doing is, as we said, that we opportunistically put some more money into the business in the third quarter and in fourth quarter.

When we look at our budget going forward, we are not assuming that we are going to have a repeat of that.

But as we have said before, depending on how our top line will develop -- and our top line is subject to what we just discussed on the potential migration of cards from the Chase portfolio -- we might be putting extra money into the Company if we can do it, but it all depends on how we see the top line developing and the bottom.

At this point in time, the budget basically just says operating expenses will grow less than 9%.

Operator, next question, please.

Darrin Peller, Barclays.

Thanks.

Just to dive a little deeper on the underlying trends in volume, and we saw in the fourth quarter the trend shift from about 9% down to 7.5%; then back to 9%, again, you're saying in January.

If you could just explain a little bit of what is driving that, first?

And then really going forward, we're seeing underwriting standards loosen a little more at the banks, which I think should support more credit growth going forward as well.

When you couple that with the trends you are talking about with all these deals, is that helpful for you on pricing?

If Chase comes off, I imagine the pricing on that, given the size, was a little bit tougher than what you are bringing on.

Is that a fair way to look at that?

And then just one quick follow-up.

What drove other revenues up 22%?

Guys, can we please just respect the one question?

Okay.

Let me take the easy one first, which is what drove other revenues up.

Other revenues were predominantly driven by our Advisors revenues, as well as Access Prepaid.

The other things that we are really focusing on from a service point of view, and Ajay had already said something, that we are really focusing on putting Advisors out on the globe, and you are actually seeing a really great benefit from that.

And that is why you see a 20% increase in other revenues going up.

Got it, all right.

That tends to be fee-based revenues, just to be clear.

Yes.

Not volume or transaction-based, this is all fee-based revenues.

Darrin, you are asking us one tough question on the underlying trends, okay?

In terms of really figuring out why a quarter moves up and down for 1 or 2 percentage points is pretty tough to do.

All we can see is when we triangulated with the data that Ajay was already referencing from a GDP and from a PCE number, we actually felt that the fourth quarter, both in the United States, as well as in Europe, was pretty healthy.

Even though we had some move in the gross numbers, it was pretty healthy.

You can see that on the credit side and you could see that on the debit side.

Now, Latin America, Asia Pacific, we know that there was some impact given what is happening from a China production point of view.

And hopefully if the world gets into a better footing, that will resolve itself.

But it is very tough to be putting that down to very specific changes.

Dan Perlin, RBC Capital Markets.

Thanks, so just quickly on the G&A.

You mentioned, Ajay, MasterPass and tokenization were two of the key reasons for that to be up.

But there's a lot of incremental people that are put into that, and that seems to be disproportionate for those kind of technologies.

So I am wondering.

Is this back half ramp of, call it $161 million or so, is that a function of also putting more feet on the street with these deals that you have done in order to get to local market processing?

Thanks.

We are adding people in different areas.

It is not just in MasterPass and tokenization, although that did add a fair number of engineers and development teams.

But we are adding people in sales.

We are adding people in client delivery.

We have added people in product management.

And when as we open new countries, we try and have people in the control functions so they open in a way that is well handled for the future.

All those things add up.

We have opened a number of new offices around the world as well over the last couple of years.

All that tends to add up.

What we are really doing is adding people who bring to us a different perspective on how we look at our business.

So we are adding people not just from banking and consulting, although that still is a good source of people.

We are also adding people from consumer product companies and from technology companies and from marketing organizations and from government background and experience.

When you put all that together, that is the kind of people we are hiring.

It is not anything specific in the fourth quarter or in the third quarter or the second quarter.

We have been adding people consistently over the last couple of years as we have tried to create the ability for us to have the right footprint and the right infrastructure to go into so many new areas.

When you see us talk about Advisors and generating fee revenues from Advisors, I can't get them without a certain quantum of people.

There are feet on the street as well as people who are doing analytics.

When you talk about Access Prepaid Worldwide, that didn't exist in our book a couple of years back.

When you add all that together, our Company is changing and morphing; and in that change what I am trying to do is to maintain our operating margin at a very healthy level, but put money back into building the skills, capabilities and technologies that are going to be required for this digital-physical convergence, combined with the data opportunity that our Company is talking about.

That is what I am trying to do.

Thank you.

Kevin McVeigh, Macquarie.

Great, thanks.

I wonder if you gave a sense -- just the uptick in data breaches, how that is impacting the value proposition as you go out to clients.

Ultimately, what has been the feedback on that?

Great question.

Right now, fortunately I haven't seen a great deal of impact coming out of that.

As we just told you, our first few days of January looked like they are actually a little better than the quarter that went by, or similar.

It is a little better in some cases.

But, you know, there is no one specific data breach that causes trouble.

It is an ongoing feeling that consumers get about their safety and their security of their information.

These recent data breaches are not just about cards.

They were about other consumer data.

Tens of millions of stuff that went away, and that creates its own angst in everyone's mind.

Fortunately, our technology, the technology of our competitor networks, combined with some of the great tools that the banks and merchants have built along with us over the years, has meant that people are trying to keep fraud under control and trying to help the consumer.

So I am really -- that is less of the issue.

I am far more concerned about getting the right thing done so we get ahead of this as we go forward.

Otherwise we're going to have this keep coming.

And the more often it happens, the worse it feels.

That is what I am looking at.

And it is not about who did what and it is not about finger-pointing and it is not about I said this and they said that.

I really want to get past all that nonsense to the real stuff, which is: we need to get EMV in place.

In January, Chris McWilton issued a letter to all our issuers and the merchant partners saying we are standing by our deadline.

We need to get this going, and everyone needs to be on the bandwagon.

Banks need to be there.

Merchants need to be there.

Governments are clearly there.

We need to get the networks there and the acquirers there.

And I think there is a lot of progress on that front.

I know a large number of the big merchants are very committed to their new terminals and new terminalization.

I know that the terminal manufacturers have geared up for that.

I know there are a number of banks have begun to issue chip cards already.

You can see people are making all the right efforts.

This should only redouble our desire to get this done quickly.

That is what I am talking about.

Thank you.

Bryan Keane, Deutsche Bank.

Hi, just wanted to follow up on the Chase migration.

Has Chase told you guys how much to expect to come off and when?

Because I am just trying to figure out how much (multiple speakers)?

No, no.

Bryan, no.

That is why we said that we are assuming some impact in 2014.

And I actually said that we assumed that something would have happened in 2013, and it did not.

Okay.

Then just how much are you expecting in 2014?

Like 2 to 4 points of revenue, or how much?

Good try, good try.

(laughter) I've got to give you marks for trying.

All right.

Thanks.

Thanks so much.

Chris Donat, Sandler O'Neill.

Thanks for taking my question.

I wanted to ask, getting back to the fraud issue, with your experience and what you have seen around the world, the move to EMV, how significant is that in reducing either the sorts of things we've had in the United States or just really the fraud that existed in places like Europe before they went EMV, or even Canada?

Very significant.

It very significantly reduces the impact of breaches.

Look, every time a chip card is used, it uses the technology inside to create a unique data point for that transaction.

That bolsters the security and the stability of that transaction.

That is why chip transactions are virtually impossible to fraudulently replicate.

And of course because the darn chip is there, it makes it hard to counterfeit the card in the first place.

If I tell you differently, EMV would not prevent a data breach.

Look, in the Target case there was stuff with cards, there was stuff with data that happened in the Target system.

EMV is not going to protect from that data breach.

What it will do, it makes that any data stolen much, much, much less valuable to a fraudster because it is tough to counterfeit the cards and it is almost impossible to duplicate all the unique data that flows for that transaction to get approved.

It is kind of a double layer of protection inside it.

That is what it is about.

But you need to understand that while it is good at addressing counterfeit fraud, it is not the only solution.

There's not a single solution to drive security in the payment space, there has got to be a lot of things that happen with how data is secured, how it is kept, how it is encrypted in motion and addressed.

Things that we all do, things that very often you cannot expect small merchants to do the same way, or smaller acquirers to do in the same way.

That is one of the reasons why in the future with digital technology, tokenization is actually a key.

Because in tokenization that data doesn't even go to be stored in that location.

It is encrypted with a key that only the network from the banks recognize.

And therefore the concept of that data lying in the weakest link in the chain will go way.

It is both EMV, tokenization, fraud tools, all the things that are going on.

It's not one a thing, but EMV is a really big arrow in the quiver.

Thank you.

Ken Bruce, Bank of America.

Thank you.

Good morning.

You have pointed out on a number of occasions that you're moving into processing.

I would like to ask specifically what you see as the strategic imperative and the financial implications, beyond the EPS dilution that Martina mentioned, as you are looking at the issuer and acquirer processing.

The strategic implications really are back to what Gary and all of us talked about at Investor Day.

Obviously if you switch the transaction, as you know, we only get to do a little, around 50% of our transactions.

And I would love to be able to get beyond that.

Because as you switch the transaction, first of all, you are in a much stronger position in the system.

Second, you see all aspects of it, coming and going.

In addition, even if you don't switch it but you see it pass through, because you're either helping the acquirer's process or helping the issuer's process, you still have a lot of data that you can then use for developing fraud scores, behavioral scores, the Advisors fee revenue, all that kind of stuff.

Getting in front or behind the transaction is useful for someone like us.

I don't want to be just a payment switch.

That is not the business that long-term can give us the ability -- and by long-term I mean out a decade.

I am not -- I am targeting more than that.

I want to be using our data to create the right revenue streams from data.

I want to be able to use in the digital world all the things we can do from before, during and after the payment.

You can't do all that if you aren't a little smarter about processing.

That is what we are trying to do.

Now, in countries like the United States and Brazil, we process almost all of our transactions.

However, when you get into some of the emerging markets -- and of course as you know, in China we don't process domestic transactions.

When you get to places in the emerging markets or the high-growth markets of Europe, that is where these things can help us.

As you know, SEPA opened up the ability for us to reenter the processing market in the developed countries of Europe, which we are trying our best to do.

And we're making very steady progress on that as well.

It is a long way to answer that being in the center of the transaction and being there before, during and after the transaction, being on both sides of it, are very, very useful for this Company.

Just to add to this, we already own a processer in Poland, which is called TREVICA.

Now we own the processor, the independent processor in Turkey, Provus.

And when you look at these processors on an isolated basis, of course they have a lower margin profile than our business.

But what we found with all the work that we did around TREVICA in the last couple of years, that that really helps our main business and that we are able to win deals; that the deals are more sticky; and that we are actually able to give more services to the clients because we actually saw the transaction.

We really think from a strategic and from a financial point of view this is a very good way to go.

Before we take the next question, I just got an email from somebody in our fraud area.

Going back to Chris' question about how significant has EMV been in reducing fraud when it has been adopted, we have seen anywhere between 60% and 80% decrease in counterfeit fraud after EMV has been installed in markets.

Next question.

David Hochstim, Buckingham Research.

Hi, thanks.

Can you just clarify?

Is the Chase consumer portfolio you are talking about the old Continental co-brand or something else?

No.

We are talking about the entire Chase consumer portfolio.

Continental co-brand is different.

Continental co-brand actually has cards that are issued on MasterCard are protected through the life of those cards.

That's different.

But you know, when Chase did the relationship that they did with Visa on the network, at that time one of the items that Visa and Chase both announced was this migration of the consumer book inside of Chase, the rest of it, to our competitor.

That didn't happen in 2013.

That is what we are referring to.

Okay, thanks.

Sanjay Sakhrani, KBW.

Thank you.

I don't want to mean to beat a dead horse, but I just want to make sure I understand the Chase assumption that you guys are making.

For 2014, you're basically assuming some piece of that goes away; and there may be residual impacts as we look out to 2015 and onward?

No, I am assuming that it goes away in 2014.

Okay.

By the way, who did you call a dead horse?

(laughter) No one.

Thank you.

Tom McCrohan, Janney.

Hi, to close the loop on EMV, I think people are aware that it reduces counterfeit fraud, but as fraud migrates to the online channel.

I am just wondering if the tokenization efforts that you are working on, are they going to be packaged with any EMV implementation?

Because apparently it doesn't really address that, and that is what I think merchants are digging their heels in on.

They want some line of sight into protecting the online as well.

Thanks.

Yes, absolutely.

That is what we are doing with tokenization, and that is exactly why we're at it.

We're actually hopeful that it will all get done and start being out there in the marketplace, as we said, sometime in 2014.

And then it will keep rolling along from there.

It is going to accept everything from secure elements to SIM-based solutions to other kind of efforts to get secured information into MasterPass and the tokenization.

We are very committed to that.

Operator, we have time for one last question.

Don Fandetti, Citi.

Yes, Ajay, just to wrap up on the strategic side, we have seen Apple and Amazon talk a little bit more about payments.

I was just curious what your perspective is, how that might change the payment landscape.

Is it in line with your expectation and timeline of what those companies might be doing?

Sure.

Don, thank you.

It is exactly what I expected.

You all know that they are all thinking about this.

And the fact that Google is out there first with doing something didn't mean that the others weren't working on it.

They are all working on it.

They are all trying to figure out what the right role to play for their respective strengths and weaknesses are, as this payments opportunity evolves.

It is not just payments.

We talk to most of them.

They will tell you it is about the before, during and after the transaction.

Google tends to think about it as a method to look at enhancing their advertising and consumer outreach business, not really as a payments business.

Others think differently; and everybody comes at it from a different perspective.

That is why what we are trying to do is to partner with as many of them as we can.

And we have managed, I think well, to shift the dialogue from one of disintermediation to one of partnership.

Because we bring some very strong assets to the table in terms of what we have and possess and also what we are investing in.

That is where we are going with it.

I'm not in the least surprised.

I believe it is the right thing to do anyway, that all the strong players in the digital world will have a role to play in some way to enable payments for their consumers.

It is the right thing to do.

Thank you.

Let me leave you with a few closing thoughts.

We had a very good 2013.

We delivered on our expectations; we saw strong revenue and EPS growth.

We continued to invest that into our products, our technology and our people.

Overall, it seems like the economic environment is improving, especially in the US and Europe.

I understand that emerging markets are going through a bumpy patch, which we will continue to watch.

But remember, they are starting any much better place than they were in previous crises.

I believe that over a period of time that should stabilize.

Now, looking ahead for the next couple of years, the world generally seems to be headed towards a better economic cycle than what we have seen in the recent past.

And I am hopeful they are not famous last words, but that is kind of where my head is.

Our business continues to have strong momentum, as is shown in our GDV and our gross revenue numbers in the fourth quarter.

We have focused on driving the conversion from cash to electronic payments, and at the same time very, very focused on creating solutions and working with governments and other partners to advance financial inclusion.

Investing in our core solutions remains important, so we're making investments in new products as well, in new services and new capabilities, all of which will help expand our presence in the area around payments.

Not just the payment, but before, during and after.

And for sure we will continue our efforts to ensure that we make the best possible impact on ensuring safety and security for everyone in the physical payments space, while carrying those competencies into the digital world as the two invariably converge over the next few years.

Thank you for your support and thank you for joining us on today's call.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.