萬事達 (MA) 2014 Q4 法說會逐字稿

Welcome to the MasterCard fourth-quarter and full-year 2014 earnings conference call.

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

(Operator Instructions)

Please note that this conference is being recorded.

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

Ms. Gasper, you may begin.

Thank you, Heather.

And good morning, everyone.

Thank you for joining us for a discussion about our fourth-quarter and full-year 2014 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.

Even if you think you have already dialed into the queue for the Q&A, you will need to register again following our prepared comments.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website at MasterCard.com.

We've added a new table in the slide appendix to the deck that breaks out the impact of various items to our financial results as an easy reference for those of you who track that detail.

These documents have also been attached to an 8-K that we filed with the SEC filed earlier this morning.

A replay of this call will be posted on our website for one week through February 6.

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 Ajay.

Thank you, Barbara.

Good morning, everybody.

I'm very pleased that we were able to deliver strong results for both our full-quarter and the full-year performance, despite what everybody knows is a mixed.

In the fourth quarter, after adjusting for currency, we had net revenue growth of 17% and EPS growth of 25%, driven by solid underlying metrics.

For the full year, we saw net revenue growth of 14% and EPS growth of 19%.

Both EPS growth figures exclude the impact of last year's special item for a charge related to the US Merchant litigation.

So in total, we have a good year, where we were able to continue to meaningfully invest in growth initiatives that I think will position us very well for the future.

And those initiatives included actions resulting in a restructuring charge in this past year's fourth quarter, which Martina is going to go through in some detail later.

Moving on to look at some of the current underlying global economic trends, let's start with the United States, which is in relatively decent shape.

Our SpendingPulse data showed US retail sales growth ex auto was 2.9% in the fourth quarter.

Now, that's down from the third quarter growth of 4.2%.

And most of that deceleration is due to lower gas prices.

Excluding auto and gas, retail sales growth was 4.1% for the fourth quarter versus 4.8% for the third quarter, showing just a modest deceleration in spending.

And even though 4% growth is nothing to sneeze at, we haven't yet seen the extra savings from lower gas prices translate into additional discretionary consumer spending.

So all in all, retail spending growth softer in the quarter, underlying economic indicators that remain positive, with our employment levels and consumer sentiment both showing some improvement.

Looking at our own US business, as we have said for the past couple of quarters, the shares de-conversion is having an impact on our US GDV growth rate.

But if you take that out, the underlying growth remained roughly the same over the course of 2014.

Outside of the US, Europe's recovery slowed somewhat in the fourth quarter.

It still remains challenged.

Across the region, consumer confidence and economic sentiment decelerated slightly.

And while unemployment levels were high, they remained steady with the prior quarter.

But there were a few bright spots, and the UK experienced good momentum in the quarter.

SpendingPulse for the UK is showing fourth-quarter regional sales growth of 3.6%, up from 2.9% in the third quarter.

Even in Spain, preliminary indicators are showing some early signs of recovery.

MasterCard's total European volume growth for the fourth quarter was in the mid-teens and process transaction growth in the low 20%s, both of which increased from the last quarter, due in part to a number of our recent wins across several European markets.

Latin America -- a number of indicators there that highlighted the sluggish economic performance across the region.

And our fourth-quarter spending [posited up] for Brazil show retail sales growth of just 0.9%, down from the 2.4% growth that Brazil saw in the third quarter.

For the entire region, annual GDV growth is now expected to be around 1%, down slightly from earlier projections of 1.3%.

Mexico, however, is an exception.

It continues to benefit from improving [exposed] to the US, and actually is undergoing a slow recovery.

Our business in the region remained solid.

Our fourth-quarter GDV and process transaction growth is in the mid-teens, about the same as the last quarter.

Across Asia-Pacific, overall business sentiment actually improved in the fourth quarter.

Optimism from Indian companies following the recent elections has driven some of that.

But it's tempered a bit by lingering concerns over the slowing economic growth in China.

Consumer confidence across the reason holding steady our business in the region continues to do well.

GDV growth in the mid-teens, process transaction growth in the mid-20%s.

About the same as the last quarter.

So overall, the economic environment hasn't changed much from last quarter.

The US looks to be in a little better shape.

Challenges remaining for Continental Europe, for Brazil, parts of Asia.

But despite all of this, you can see the strong fundamentals of our business have not changed.

Before we go to our business highlights, there has been some recent news about European regulatory matters and Russia.

So let me touch on those a little bit first.

And let me start with the proposed European legislation related to card payments.

The European Parliament, the Council of Ministers and the Commission have reached agreement in December, and we are waiting for formal adoption and publication of the final text.

As expected, [as we got] interchanged caps that are now been established for consumer credit and consumer debit cards; commercial cards are excluded.

The regulation provides for a level playing field by imposing interchanged caps on three-party net worth when they operate similarly to a four-party network.

There are some possible exceptions to this, but overall, we are pleased with the outcome at this point, because it's an important win for us.

Also, [in-network] will no longer be allowed to charge a co-badging fee if it does not process the transaction.

And finally, the regulation requires the functional rather than legal separation of scheme and processing functions, an outcome that we had thought once it became clear, that some form of separation would be required.

We are working to build [birth] separation, the functional separation, into our operations.

The next formal step is for the language of the agreement to be endorsed by Parliament and by the member states.

Our best estimate is, it's [locker] in the first half of 2015.

Interchanged caps will become effective six months after that.

All of the parts of legislation will apply to us starting 12 months after the endorsement, so that's probably sometime in 2016.

So now a little bit about Russia.

We've been working through the challenges of connecting to [NS steak-how], which is the domestic processing switch of the Russian Central Bank, in order to meet a late March -- March 31 -- deadline.

And going forward, by the way, nothing has changed in terms of being able to issue MasterCard-branded cards to use in the Russian market.

In terms of the financial impact to our business, our best estimate is still something less than $15 million on an annualized basis.

It will now hit our G&A line -- the expense line -- as a data processing expense, rather than the revenue line, as we've previously shared.

Moving on to some of our recent business activity.

We've expanded relationships with a couple of our large global customers, and that's great news.

We renewed our multi-year global partnership with Bank of America that will expand share opportunities for us, both domestically and outside of the US, and primarily on the commercial side.

We recently won new business [ledgers DC], which involves converting the remainder of the US consumer credit portfolio to MasterCard in the first half of this year.

In the Middle East and Africa, we signed a number of new business agreements in the quarter that should help us increase our credit, debit, commercial and prepaid businesses in countries such as Nigeria, Tanzania, Rwanda, Jordan, Kuwait and the UAE, over the course of 2015.

And we will build up a strong momentum that we've developed in the region.

Over the last two years, we've signed close to 100 new business agreements.

We now have an acceptance footprint in 50 out of Africa's 55 markets.

We feel strongly about activities that take our services to people who were previously excluded from access to the financial system.

In Africa, close to 95% of the region's transactions have filled out in cash; 80% of adults don't have access to a bank account.

And working around on that whole aspect and reflecting our current footprint to what's going on in Africa, we've also launched a number of financial inclusion initiatives.

And today, I'm going to pick on two of those.

First, last week, we announced the start of a collaboration with the African Development Bank to broaden access to financial services.

We're going to do that in partnership with local governments in Africa and private sector companies.

We are the expertise for design, and to scale financial solutions.

And the African Development Bank is a major source of funding for the economic development of its 54 member countries.

So we believe together we can help drive financial inclusion and economic development across Africa over the next few years.

Secondly, last September, in partnership with the Bill and Melinda Gates Foundation, we announced that we will be reopening a MasterCard Lab for financial inclusion in Kenya.

This is our seventh global innovation hub, but it's the first that we have in Africa.

It's also the first to receive outside funding.

The lab will be dedicated specifically to creating and incubating programs that are targeted to more than 100 million people in this part of the world who are financially excluded or underserved.

Now I have put some innovation -- by the way, I'm not limited to one region, like results discussing Africa, not only to the labs, but also opening up our technology to external developers, something we've been trying to do for a while now.

The most recent example is the ten-city hackathon competition that starts next month in Sydney in Australia, and will go on to Hong Kong, Singapore, Israel, Brazil, Canada, the UK and the United States.

This competition, which is already being planned for most of these [BR&Bs], will bring together developers and entrepreneurs using MasterCard APIs to create a new generation of commerce applications that leverages our platforms, our product capabilities -- such as those from our information services business of MasterPass and our prepaid, our loyalty and our fraud solutions.

And in the meanwhile, we're continuing with the global expansion of MasterPass.

Since its introduction in the spring of 2013, we now have the platform launched in 16 countries, and just recently signed on a number of new merchants -- Neiman Marcus, Office Depot, Blue Nile, Broadway.com -- just some new names in the merchant list.

We're also creating some new and noteworthy partnerships.

One example is with Paylib in France.

Paylib was initially formed by [being paid by the bar], Le Bank Postar and Societe Generale, who are, by the way, mainly customers of one of our key competitors.

And yet they've chosen to partner with MasterPass because of what we believe is our global reach in handling all of their cross-border e-commerce transactions, as well as some of their domestic transactions too.

With this partnership, up to 40 million people will have access to MasterPass Acceptance, with Paylib [forward] linked to a card from their bank.

And so before I turn it over to Martina, let me quickly update you on two recent acquisitions.

In December, we acquired the payment gateway services business of Transaction Network Services, TNS.

That deal gives us the ability to expand our payment gateway to the US and Mexico, and to position ourselves more competitively around the rest of the world.

Whereas, you know, with dealer cash and our original mixed platform, we only had a presence.

And so, for example, in Asia-Pacific and the Middle East-Africa, we will add new capabilities to organization, fraud management, and we will also be able to leverage what I think are highly skilled product and software teams that have now recently joined the Company with this transaction.

Additionally, we acquired 5one Marketing Limited.

That's a marketing, analytics and consulting firm, and their clients are basically large retailers across many different consumer sectors.

5one has some proprietary software.

They've used that to develop insights from a retailer's own data that can be used for marketing, for merchandising and for operational decisions.

You take that and you combine that kind of in-depth merchant understanding with our existing advisors capabilities, and I think that will allow us to provide greater insight to retailers and the ability to expand our business opportunities with the merchant community.

So with that, Martina, for an update on financial results and operational metrics.

Thanks, Ajay, and good morning, everyone.

As Ajay already said, we are very pleased with our 2014 full-year performance, which delivered net revenue growth of 14% and EPS growth of 19%.

I'll now turn to the details of our fourth-quarter results.

So let me begin on page 3 of our slide deck.

And where you see that the difference between as-reported and FX-adjusted growth rates for this quarter is more significant than it has been in the recent past.

This is primarily due to the headwinds from the euro-US dollar exchange rate, especially with what we saw in the FX markets during the last 45 days of the quarter, and its continuation into this quarter.

These figures also exclude the impact of the special item related to the US Merchant litigation taken in the fourth quarter of 2013.

I'd like to highlight three things while on this slide, and then dive into the details of the major P&L line items in subsequent lines.

So first, EPS growth was 25% after adjusted for currency, and share repurchases contributed $0.03 per share.

During the fourth quarter, we repurchased 2.1 million shares at a cost of approximately $155 million.

Through January 23, we repurchased an additional 2.5 million shares at a cost of approximately $215 million, and we now have $3.8 billion remaining under the current authorization.

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

Second, part of the EPS growth is the result of a very favorable tax rate of 20.3% in the quarter, as some initiatives only came together within the last couple of months to better align our tax structure to our European business footprint between Belgium and the UK.

We took some of that benefit to re-invest back into the business, which I'll discuss on the operating expense slide.

And third, cash flow from operations was $725 million.

We ended the quarter with cash, cash equivalents and other liquid investments of about $6.4 billion.

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

Our worldwide gross dollar volume, or GDV, was up 13% on a local currency basis -- up slightly from last quarter.

Overall, our US GDV grew 8%, similar to last quarter.

Credit growth was 7% and debit growth was 8% -- both the same as last quarter.

Outside of the US, volume growth was 15% on a low concurrency basis, and primarily driven by Europe.

Gross dollar volume grew 19% on a local currency basis, higher than the 15% we saw in the third quarter, primarily driven by Europe.

Growth in Europe was in the low 20%s.

Key contributors to this growth included the UK, Italy, Germany and Sweden.

All regions except the US saw an increase in cross-border volume growth in the fourth quarter.

Let me turn to page 5, and here you can see processed transactions grew 11% globally to $11.6 billion.

We continue to see double-digit growth in most regions.

Growth increased from the 10% we saw in the third quarter, primarily due to Europe, driven by Russia, Sweden, Poland and the Netherlands.

Globally, the number of cards grew 9%, with 2.1 billion MasterCard and Maestro-branded cards.

Now let's turn to page 6 for highlights on a few of our revenue line items.

Overall net revenue growth was 14% as reported, or 17% FX-adjusted, due to currency headwinds, primarily from the euro exchange rate.

Additionally, the impact of local currency exchange rates to the functional currency billing rates was a little more than 1PPT.

In total, acquisitions contributed 3PPT to our net revenue growth.

So after excluding the impacts of both local and functional currencies, as well as the impact of acquisitions, we saw a very strong underlying growth of 15%.

Looking at the individual revenue line items on an FX-adjusted basis, domestic assessments grew 7%, while worldwide GDV grew 13%.

This 6PPT gap is primarily due to the impact of local currency and lower-than-average revenue yields in some markets outside of the US, similar to prior quarters.

Cross-border volume fees grew 8%, while cross-border volume grew 19%.

Of the 11PPT gap, about 7PPT is due to the impact of local currency.

The remaining portion of the difference is mainly due to the higher mix of intra-European activity.

Transaction processing fees grew 15%, primarily driven by the 11% growth in processed transactions.

This line item also benefited from additional revenue not driven by transaction count in some pricing, partially offset by mix.

Other revenues grew 28%, driven largely by contributions from our Pinpoint acquisition, as well as our advisors [visit].

Moving on to page 7, you can see that total operating expenses were up 26% in the quarter, or 29% on an FX-adjusted basis.

Of this growth, 9PPT was due to expenses related to our acquisitions.

The other big driver was the restructuring charge, which contributed 8PPT to the growth.

So let me focus on that a bit more.

Specifically, we took an $87 million restructuring charge to cover a series of actions.

First, as you know, we have made a number of acquisitions in the processing space, and we are now consolidating all of our processing assets under one organization, thus driving significant synergies.

Second, we are realigning some roads within the Company's business groups and redeploying resources geographically in order to invest in and enhance our capabilities in new product areas and technology, such as digital and mobile.

Overall, these actions will impact over 500 people, but our total headcount will decline by a smaller amount, given the re-investment that I just mentioned.

The remaining OpEx growth of 12% was primarily driven by some opportunistic spend, such as adding a [lent] spend around our Apple Pay and prices initiatives, as well is continuing our digital investments, such as MasterPass and tokenization, similar to prior quarters.

Let me turn to slide 8, and here we discuss what we've seen in January through the 21st.

Most of our business drivers are similar to what we experienced in the fourth quarter after excluding the impact of lower gas prices, particularly in the US.

So the numbers through January 21 are as follows.

Starting with processed volume, we saw global growth of 9%, down PPT from the fourth quarter.

In the US, our processed volume grew 3%, down 2PPT from what we saw last quarter, primarily driven by lower gas prices.

Processed volume outside of the US grew 16%, about 1PPT lower than the fourth quarter, with growth of mid- to high-teens in each region.

Globally processed transaction growth was 11%, similar to what we saw in the fourth quarter, with double-digit growth in all regions except the US, which grew in the low single-digits.

With respect to cross-border, our volume grew at 19% globally, the same as our fourth-quarter growth.

We continued to see high growth in major European markets, including the UK, Italy and Sweden.

Looking ahead, let me start with some commentary about full-year 2015.

Given what's happening with currency rates and the impact being seen by US multi-nationals across a number of industries, I'm going to start with that.

Especially since it was back in 2012 that MasterCard last faced such a big impact from FX.

Remember that currency impacts us in two ways.

First, we have the impact of local currency rates, relative to the functional currencies.

And this is the FX exposure that we actively hedge, normally on a rolling 12-month basis.

Typically, as you know, we hedge about 50% to 75% of our total net exposure for about 30 currency pairs.

And given that many currencies have depreciated against the US dollar and the euro, new hedge contracts will come on at lower rates over the year.

Thus, we continue to expect some net headwind throughout the year, both to revenue and the bottom line.

Based on the current rates, this is likely to be around 2PPT, in the 2PPT range.

And this is already included in our FX-adjusted guidance.

Second, we have the impact of the translation of our major functional currencies, which are [off], particularly the euro and the Brazilian real, into US dollars, to consolidate our financials.

We do not hedge those exposures.

When we talk about FX-adjusted growth rates, we are only adjusting for the impact of these two functional exchange rates.

If the rates for our functional currencies remain similar to where they are today -- so that's the euro trading at the $1.13 level and the Brazilian real at the $2.58 level for the rest of the year -- the net impact of the euro and the real would be a 4PPT to 6PPT headwind.

And it's actually driven mostly from the euro to our as-reported results for the full year, depending on which line item we are talking about -- revenue, net income or EPS.

And I will get into that a little bit more.

With that backdrop, now let me get into some of the P&L line items.

We expect high-single-digit net revenue growth for 2015 on an FX-adjusted basis.

And that will be before and after a roughly 2PPT contribution from last year's M&A transactions.

Our underlying business remains strong, and we are seeing traction from many of our recent portfolio wins and new product initiatives.

However, this year's FX-adjusted revenue growth will be impacted by some items specific to 2015.

And that's including the remaining case portfolio attrition -- it's mostly impacting the first half of the year.

As well as the local currency headwinds I just talked about.

Also included are a couple of expected significant contract renewals, some of which will likely have more front-loaded rebates and incentives than our typical agreements.

But these renewals provide the foundation for future growth.

On an as-reported basis, the net revenue growth rate will likely be in the mid-single-digit range, as a result of strong FX headwinds, primarily from the euro functional translation.

Based on current FX rates, this would be about a 4PPT to 5PPT impact.

Overall, we project a growth rate for total operating expense for full-year 2015 to be in the high-single-digit's on an FX-adjusted basis.

This clause is predominantly due to a roughly 6PPT impact from our previously announced acquisitions, with more of that impact occurring in the first half of the year.

The as-reported growth will likely be in the mid-single-digit range after considering a roughly 2PPT to 3PPT range impact mostly, again, from the euro translation.

Let me give you an update on potential dilution from last year's acquisitions.

Now that we've done a few more deals like TNS, and 5one that Ajay just mentioned, we now expect total EPS dilution to be about $0.08 to $0.10 for the full-year 2015.

And a little less than half of the expected dilution is actually due to the amortization of acquired intangibles.

You should now assume a full-year 2015 tax rate of about 28%, due to the continued benefits we expect from the tax initiative I discussed earlier.

This is a sustainable tax benefit for future years.

Now, given all the detail that I just went through, let me step back and summarize for you.

We expect solid fundamentals to drive our business in 2015, despite the mixed economic environment and significant headwinds from FX and gas prices.

We continue to sign customer contracts and invest in the right strategic areas, while managing our expenses prudently.

So finally, let me move on to our long-term performance objectives for the 2013 to 2015 period.

Given our expectations for 2015 revenue growth, we now believe that we will deliver at the low end of our 11% to 14% net revenue CAGR.

We continue to expect at least 20% EPS CAGR for the three-year period, due to continued expense management, as well as benefits from our lower tax rate and share repurchases.

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

Remember, these objectives are on a constant currency basis, and exclude our 2014 M&A activities, as well as any new ones that may occur this year.

As a reference point for your modeling, when looking at our performance from a two-year CAGR perspective -- so that's for 2013 and 2014 on a constant currency basis -- we have delivered a net revenue CAGR of 12.5% and an EPS CAGR of 21.1%, which is based on the 2012 normalized EPS of $2.14 per shared that we provided to you earlier.

Many of you have asked when we will be rolling our performance object forward.

As you can see, the underlying drivers of our business are in good shape and we are expanding our reach in areas that we are strategically targeting, such as processing, loyalty, information services and all things digital.

The overall growth process for the payments industry have not changed.

And for now, we have given you some clarity around 2015, as this is the last year of our current 2013 to 2015 performance period.

Once we have worked through the many moving parts, including the impact of those resulting from the final European payment regulations, and the new payments environment in Russia -- both from a revenue and an expense perspective -- we will provide you with our new long-term objectives before the end of this year.

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

Barbara?

Thank you, Martina.

We're now ready to start the Q&A session.

I would just remind everyone that in order to reach as many people as possible, we ask that you limit yourself to a single question, and then queue back in for additional questions.

Heather?

Thank you.

We will now begin the question and answer session.

(Operator Instructions)

Sanjay Sakhrani, KBW.

I had a question on the quote Ajay had in the press release.

It mentioned new wins and renewals in the pipeline.

Is it both wins and renewals?

Because I know you guys talked about the renewals.

And just on the tax rate, Martina, that 28%, can that come down further in future years?

Thanks.

It is wins and renewals.

If you heard my earlier comments, I talked to Bank of America, commercial and some consumers [felt] those are actually wins.

[That shows BC] is a win.

We're actually converting first the portfolio, but renewals as well.

But some of the pipeline -- there's a combination of renewals with a deeper expansion into other markets, which I will count as a part-win.

So they're a mix of both, and all that's happening as we speak actually.

Sanjay, as you know, we are very much committed to be aligning our business operations to our tax infrastructure.

And over the last couple of years, we've been able to work down the tax rate quite considerably.

In fact, for 2014, we're ending up at 28.8%.

We're planning that, that will go down to 28% in 2015.

And over a longer period point of time we believe that we will have even more work that we can do in order to lower the tax rate.

Thank you.

Operator, next question?

Tien-tsin Huang, JPMorgan.

Just want to follow up on Sanjay's question.

The small rise in rebate was surprising this quarter, given your comments on the deals.

So just curious if there are any unusual items within that?

And then can you give us some, Martina, some context on where rebates could trend this year?

It sounds like, like you just said, there'll be some renewals and wins.

Yes.

So first of all, in the prior-year quarter in 2013, we actually had some relatively large contracts coming to fruition, both from a new and from a renewal point of view.

This is just the year-over-year cadence; there's nothing unusual that is going on in the Q4 of 2014.

Looking forward, when you talk about 2015, as I mentioned in my prepared remarks, we are expecting a number of customer renewals that will have more front-loaded rebates and incentives into the front part of the year, not smoothed over the entire years of a contract.

And so we will have a more considerable impact on rebates and incentives in 2015.

And that is all baked into our net revenue guidance of the high-single-digits, FX-adjusted.

And to be clear, it's renewals and wins, as I said.

It's not just renewals.

Andrew Jeffrey, SunTrust.

Ajay, I wonder just from a high level if you could step back and describe the acquisition strategy in the context of your long-term growth?

It seems like you're ramping up some of your acquisition activity.

And I wonder if there are some specific criteria you evaluate when you look to do a deal?

And also just whether or not there's an overall or overarching narrative that we might think about in terms of how MasterCard is augmenting its robust organic revenue growth and position?

This particular year, we actually ended up doing six acquisitions and one JV.

And we had TNS, 5one, Pinpoint, ACSC 7 [produce] starting in January through December, and then the HomeSend JV.

But that's -- I wouldn't say you should take that as the norm.

Deals are deals, and they happen.

You cannot look at 25, 30 deals in a year, and then sometimes in the previous two years, one or two worked out.

It so happened that a number of these were in the hopper, so to say, and they began to close at different times of the year.

So the first thing I'd say is, don't take this [with transcendental heart happen], it's just the way deals work out.

Now, your deeper question was around what we are doing and where we are going forward.

What's the -- big picture -- here?

And the -- big picture -- here is, we're trying to expand our presence in the payment value chain.

Not just in being in the clearing, authorization and settlement business, but even in lieu of before, during and after a transaction.

How can we expand our presence?

We can be stickier, and we can therefore extract better value from the offer.

And that provides us with some new capabilities, and hopefully gives us some space to become bigger leaders or better leaders in key growth areas.

So what could those areas be?

Data and analytics, which is what the information services is about.

So 5one, for example, is right in that space.

Processing, which is what we're doing with, say, Provus and with ECS, and TNS, also does fit in there.

They've had the e-commerce gateway businesses bought over time.

All of these things that all tie back to processing.

And why are we doing processing?

Because the idea is to be able to see more of the transactions around the world.

Because that allows me to use that knowledge in my data analytics business.

So it's all interconnected to that space.

And then the third area is safety and security.

So David [Gash] got us some great fraud management solutions that are similar ones to some of these.

The HomeSend JV could actually be very useful, not just for moving money around the world, but also for safety and security.

And then, loyalty, which is why Pinpoint came into it with its true access some years ago.

So these are all in that bailiwick of data and analytics, processing, safety, security and loyalty.

And mostly, we try and figure out if there's a good strategic fit.

Are these companies giving us some critical capabilities we didn't have all along -- technology, product, distribution, some geographic reach maybe?

And do they have the right kind of risk profile?

And are we getting some balance and skills we would not have been able to get easily?

C-SAM, for example, brought us a number of very highly qualified mobile payment technicians.

Hiring hundreds of them organically would be a very slow build.

This gave us the ability to get with it much quicker.

It's kind of a mix of those reasons.

And that's what we're trying to do.

In addition to the strategic evaluation, we obviously do a high financial evaluation, and we do an integration possibility valuation.

On the financials, first of all, we differentiate between those acquisitions, as Ajay said, that are really bringing a skill set that don't necessarily bring us in the immediate-term revenues.

That would be built over time, but it brings a skill sets.

And then we have acquisitions that are more the traditional acquisitions, like Pinpoint or TNS, that are bringing us all the revenues.

We do the very traditional cash flow modeling, with the right kind of hurdle rates, varied by the type of business, the riskiness of the business, where the business is located.

And then beyond that analysis, we obviously also do an analysis on the integration possibility of this particular business with our Company, so that we can drive some synergies on the bottom line.

Thank you.

Kevin McVeigh, Macquarie.

I would if you could just give us a sense of the advertising marketing line in Q4, and then how we should think about that over the course of 2015 as well?

First of all, in Q4, as I said, we took actually advantage of some of the goodness that we had on the tax side, to be re-investing that.

And we did specifically re-invest that in Apple Pay, as well as in our pricing initiative.

So you saw a little bit of a higher number in A&M than you otherwise would expect in Q4.

I think for the full year of 2015, the A&M spend is really embedded in my comments that I said about operating expenses.

And I don't think you should be expecting too big of a difference from an overall A&M spend number for 2015 than what we had in 2014.

Thank you.

Bob Napoli, William Blair.

I just wanted to follow up on the growth in local currency of the debit and credit businesses internationally.

It's pretty impressive, that 17% going to 23% in debit, and a little bit of acceleration in credit.

I was just trying to get a little more color and what your outlook is for those pieces of the business, given that the global economy doesn't seem so hot right now outside of the US.

Well, Bob, as you heard Ajay speak, actually a big part of this is due to the terrific work that our European colleagues have been doing.

And a number of the countries that we called out -- the UK, Sweden and some others -- have been growing terrifically in these kind of businesses, and then obviously contribute to our bottom-line growth, despite where the economic environment is at this point in time.

Economic environment translates into consumer confidence translates into spending, and that does impact quickly.

But we also have what grew on the other share growth in some of these markets.

What's also going on here is conversion from cash to electronic, and it's kind of a mixed bag of all three that come out into the numbers you're seeing.

And you can actually make that work faster and harder for you if you've got the right marketing and the right approaches.

So it's a lot of blocking and tackling that's going on to help us get to where we're heading.

Great, thank you.

Jason Kupferberg, Jefferies.

I was just curious in terms of what series you might have, as to why we haven't seen the pick-up in discretionary spending from US consumers, given the magnitude of the drop in gas prices?

And separately, can you just clarify your pricing assumptions in the 2015 guide?

Jason, that's actually a really good question.

I myself am kind of stumped with what's going on there.

I think about the fact that it's $800 a month, or whatever it is to a middle-class family -- the gas prices are down 12% over this same time the previous year, and that's not a small number here.

So we put all that into context.

You would have thought it would flow through.

But the way I think about it, when I was in [Dallas], we talked to so many other fields about this.

I just feel that maybe it is that's it's going to take three or four months for the US consumers to feel that this is something that's going to be with them for a little while.

If you have a longer-term perspective on the price of gas, not going back to $100, but maybe settling at 3588.

That's what we're thinking.

I don't think the US consumer knows whether to expect this to be staying around or not.

I think there's some degree of, let's say, the desire to see that through, before they really start spending that kind of money.

That's kind of where I think this is.

If you were to ask my opinion, then I would say probably a month or two or three away, if this price stays where it is, from them saying -- you know what?

I do have $800 a month more in my pocket, and I could afford to go and buy X. That's what I think about it.

But on pricing, Martina?

On the pricing side, for 2014, and actually for the whole year, we had about a 1% price increase.

So, relatively small.

And we think that what we have out there for 2015, it will be relatively similar.

Thank you.

Glenn Greene, Oppenheimer.

Martina, I know you like to level-set us in terms of expectations, and there was a lot of commentary on guidance.

But I just wanted to clarify and make sure I heard it right.

In terms of revenue, you talked about high-single-digit net revenue on an FX-adjusted basis, including M&As.

The first question would be, how much M&A benefit is there?

And I was unclear exactly what you said in terms of the expense expectation, given the FX impact and the M&A.

Okay, well let me just go through it --

Just take care -- she is very good at level-setting expectations inside the Company, too.

So don't feel (laughter)

You're absolutely right.

FX-adjusted high-single-digit on that revenue growth for 2015.

That includes about 2 PPT of M&A transactions.

But by the way, even when you pull these 2 PPT of M&A transactions out, you still get to high single-digit growth on the underlying business.

So you can probably get a good sense on the numbers on that one.

On the expense side, what I said is, also on an FX-adjusted basis, you have operating expense of high-single-digits, and actually, most of that -- 6 PPT -- is due to the acquisitions.

So the underlying growth of our underlying expenses is relatively small.

Okay?

Now, when you put the FX translation into it, you have to deduct about 2 to 3 percentage points, so you're getting for the as-reported OpEx growth into the mid-single-digit range.

So you get a benefit from the euro and expenses, just so you get a headwind on the revenue, that's what's going on.

You know, the M&A transactions, what's happening is, you typically get -- the first year or two, you tend to get the expenses that you've got to totally either get them up to speed at our systems or with our security or the investment you're putting in to do things with that technology or their geography or their distribution.

And then you get the revenue that comes in a little later.

Or you get things like C-SAM, which are really mobiling our capacity, on mobile and digital, and doesn't really give you a lot of revenue in the first year or two or three.

That's the mix that's going on inside our Company.

Don Fandetti, Citigroup.

Yes, Ajay, I had a question around tokenization.

I was wondering if you can help us understand the time line for tokenization for online browser-based purchases.

I think VISA had mentioned there could be some products over the next few quarters.

How will that play out?

This whole digital space, if you bust it up between in-app, contactless and online browser, as you think through it.

Contactless is still relatively small in the US.

Online browsing tends to be the large amount.

And a number of the merchants and retailers have been launching their own apps in an effort to get people to come straight to their widget.

And then hopefully control more of the transaction as well, as to the relationship with the consumer when they're inside their app, as compared to done in the usual way.

So it depends who you believe.

But everybody is making projections based on -- well, whatever they think about where these three will go over the next few years.

My senses says you're going to get [NFC] growing decently, but it could be terminalization.

I believe terminalization will happen with all of the EMV and chip migration, as well as the fact that our new terminals are coming contactless-equipped.

So you're probably seeing a two- or three-year cycle of a fairly dramatic increase in contactless-equipped terminals in the United States.

That's only happening, by the way, in Australia and Canada and Turkey and some other countries.

But the US, which is a large one, I think you'll see that.

In terms of browsing, browsing tends to be the large chunk.

And I still believe that online browsing will remain a pretty large number for a few years to come.

And I think you'll get two or three kinds of effort there.

You'll get a lot of effort made around improving the kind of file experience.

You'll get a lot of effort made around improving the use of easy-use check-out wallets, whether it be MasterPass or VISA's offering or PayPal or other such offerings.

I think you'll get all of those getting a degree of capabilities built with tokenization, just making it safer and safer over the next few quarters.

So we're all working on similar things.

And I don't think you should read too much into a quarter here or a quarter there.

These things are slow burns.

You saw Apple Pay talk about their mobile payment growth.

And at the end of the day, yes, they're doing a great job and it has excited the market.

But it's still a very small percentage of what the total number of transactions are.

So I would take all of this in that context, and not drive to the races with more than that.

We're very focused on tokenization and [stuff] just to make sure I don't miss that aspect.

It's a very important aspect of where we're going for safety and security.

Apple Pay was the first version of that to come out.

We're putting it into MasterPass, just regular MasterPass, over the next few -- [eight out] of time, let me put it that way, so I don't give you information that's beyond what is likely.

And that will be -- you'll see -- a year or two's time.

Tokenization will become kind of [table steaks] in the game on e-commerce.

And that's the right way to go.

James Friedman, Susquehanna.

I was hoping you could share some perspective on the relative performance of debit and credit domestically, excluding the gasoline vector.

Is there any evidence of steering in the market?

Thank you.

No.

I don't -- the last part of your question is about, is there either steering or secular change going on in the behavior around credit and debit?

And I'd say there's no evidence of that.

But you should know this, that the growth rate of debit versus credit does changes that are going on between them over time.

And there's no doubt as credit histories and credit positions are improving, banks are becoming more willing to go out and push credit acquisitions again.

And that will itself change over a period of time, some degree of behavior between debit and credit.

But there's no real pushing or steering or anything going on, that I can see.

Not in our numbers anyway.

Bill Carcache, Nomura.

Martina, you talked about how you actively had -- I believe you said 50% or 75% of your FX exposure.

Can you discuss some of the trade-offs behind why you wouldn't hedge an even greater percentage?

Wouldn't forward contracts be relatively inexpensive?

And then finally, if you could offer any thoughts at a high level on some of the more significant differences between your hedging strategies versus that of your large competitor?

Which last night, discussed how they layer in their hedges on a rolling 12-month basis.

Yes, first of all, with that last comment, of course, you know, we listen to each other's comments from time to time, and I would believe that we do a hedging strategy and have a hedging philosophy that is extremely similar.

We layer in our hedges over a 12-month voting period.

So we never, one, so to speak, make it during any type of period.

But we do it for the most significant currency periods, right?

You know that we're doing actually business in 150-plus currencies.

But we will pick the most significant currency pairs in order to do our hedging.

In order to do hedging, you have to have really appropriate exposure for cash coming out over the next 12 months rolling period.

And that is where you typically take a step back and take a little bit more conservative view, and don't layer in 100% of the exposure in terms of hedges.

You do 50% to 75%.

So we don't take a view -- the 50% to 75% is not taking a view in terms of hedging a particular currency pair.

But it is in terms of making sure that, between the exposure that we know and the hedges that we lay on, that we have the right kind of balance.

The one other thing that I wanted to let you know is just to make sure -- we're hedging things on a net basis.

Which means we take revenues in that particular currency and we deduct the operating expenses that we spend in that particular currency.

And then we do an add-hedge on that.

And you would not see the gain or the loss of the hedge showing up in the revenue line; most of that is actually reflected in our G&A line item.

By the way, this layered hedging is the way that I use to work it, even in my previous job in the banking industry.

When you go to companies, that's exactly what you do,.

You go in and you tend to hedge more of the exposure in the immediate quarter of a little less than the quarter after, a little less in the quarter after, and a little even lesser in the quarter after.

And so when Martina talks to you about the 50% to 75%, you're probably looking at a higher level hedged in the immediate quarter, because you have more certainty of that net exposure.

We're seeing both currency pairs, [pressures a ref or two].

You hedge a little less out four quarters, because you have less certainty in those currency pairs that she's referring to.

Also remember, the euro and the real are not being discussed in those currency pairs.

The two percentage-point headwind that we've only been in our revenue growth has [in it] for next year, is from these currency pairs.

The euro and the real comes over and beyond that, and could be a far more significant one, particularly because of the euro, as Martina was pointing out.

That's extremely helpful, thank you.

Tom McCrohan, Sterne Agee.

Ajay, you talked about the commercial business in the past as having some good momentum.

Can you just give an update how the year ended out?

And what your prospects are looking at 2015?

Thanks.

That business is exciting.

We're doing well.

And it's across the world, by the way.

The US has got the most traction in some ways, but there's good growth in Europe, there's good growth in Latin America, Asia, and Middle East, Africa remain real opportunities for us.

I'm not going to give you separate numbers for that.

But you should know that it still is a big focus.

It's focused on TNE, it's focused on fleet cards, it's focused on purchasing, it's focused on some B2B payment streams.

It's not just our own effort with individual clients like Bank of America and Chase and Citi that you heard me talk about -- other global clients.

But it's also focused on partnerships with companies in the travel space, partnership with companies in the fleet management spaces.

All of these are giving us opportunities and [promotions].

Actually, you know, from a growth perspective, [just a joke] in a year, it's really a nice mid-teens kind of growth worldwide.

There you go.

Martinez willing to give you more information than I am -- that's an exception.

Isn't that interesting?

Dan Perlin, RBC Capital Markets.

Can you just speak a little bit to the nuances that we might expect to see as you get more and more of this mix shift at e-commerce?

Inherently, it seems a little more credit-centric.

The interchange categories are quite a bit different, so maybe there's a bigger pool from which everyone can draw from.

I just want to be thinking about this, you know, as this makeshift accelerates.

The other thing -- if you could just explain the $50 million shift into G&A versus revenue from Russia.

How did that come about?

And then I'll hop off.

Thanks.

Yes, Dan, so let me take the Russia question first.

So what actually happened in the last legs of the legislation in Russia is that we continue to be a direct partner to our clients.

And that we actually will be phrasing our clients on all products and services that our clients need.

And that we then sub-contract, in particular, off clear and switching, to the local processing entity.

And therefore, we still get the revenues from our clients, but we have to pay a servicing fee, which will be showing up in the data processing line to the local entity that would switch out of that.

Ajay, on e-commerce?

I don't know how to answer that in a way that's different, I would say to you that what's going on in e-commerce right now is that you've got -- as you grow, there's no doubt that credit has a greater share than debit in e-commerce.

Although, I'd say that's also because the US is a larger e-commerce market than most other parts of the world.

In Europe, it's not as similar as it is in US.

Remember, the UK and Spain-Portugal are more credit-sensitive.

Northern Europe is more debit-sensitive.

So a lot of it depends on the originating market from where the transaction is placed into the e-commerce system.

What you're seeing right now is also a functional mix, and I wouldn't try and draw more conclusions than that right now.

Okay, thank you.

Bryan Keane, Deutsche Bank

Now that the European regs -- the agreement seems to be in place between the three parties.

Just trying to get an idea of -- you guys are probably looked at it for 2016.

What kind of an impact might there be?

And then secondly, Martina, just on operating margins for the year, there's a lot of moving pieces.

Should we expect FY15 operating margins to increase?

And then, what does that all total out to be for EPS growth as reported for fiscal year 2015?

Just want to make sure I have that right.

On your first question, the European regulations, the text is finalized.

But there is a lot of work that has to be done in order to implement that.

So I'm not prepared to be giving you guidelines for 2016 at this point in time.

And that's why you are going to hear only later this year about our long-term performance targets, that we are going to be renewing them for a period.

Secondly, on the operating margin, of course when you have high-single-digit revenue growth and high-single-digit OpEx growth, on FX-adjusted basis, you should basically assume that the operating margin -- which is terrific for 2014 -- will be roughly a similar operating margin in 2015.

We're not giving guidance for the bottom line.

Let me now turn the call over to a Ajay Banga for causing remarks.

Thank you all for those questions.

And I'll just leave you with a few closing thoughts.

We ended what I think was a very good year, on a strong note.

17% revenue growth in the fourth quarter ex FX 2014 -- that's not a bad place to be.

Volumes, shares, innovation, deals -- we've done all of that while navigating through what I would say was a little more complex economic and political years that I've seen over the last decade.

And aside from the actual couple of years of the financial crisis, this is probably one of the more difficult years.

For 2015, we see the same underlying trends, economically and for our own business.

We believe that we will deliver our trio of objectives, and that means that net revenue growth this year will be in the high-single-digit range at constant currency.

So your question would be why is that growth lower than 2014?

Because, one, we have those local FX headwinds that we were just discussing in the Q&A, and those 30 currency pairs.

That's before the euro-, by the way, and the real-translation impact.

Which, as you know, is larger.

But just those local FX headwinds.

And because we have some very good deals in the pipeline, both renewals and wins, that are probably going to have an up-front load.

But they're good deals; they're good for us.

And if you look at all of that, at the same time, we plan to keep investing in our business and our capabilities.

We know how to dial our expenses up and down, and we're going to keep a very close eye on that, if needed.

I just don't want to do that through a short-term cycle.

We took advantage of the tax benefits that, while sustainable, as Martina talked about, they came to us in the latter part of the quarter and got finalized.

She and I sat down and said -- you know what?

This is a good time.

Apple Pay is out in the market, prices initiatives are out in the market.

It's a good seasonal quarter for us.

Let's take some of this benefit and put it back into the system.

Those kind of decisions are taken every week and every day by us together as a team.

So overall, we haven't changed our thinking about our business prospects from what we indicated at our Investor Day a few months ago, [nor other] the two Investor Days.

The payment space is a terrific place be.

We are very confident in our ability to guide this Company through the current mix environment.

We're going to keep growing share, and we're going to keep driving the conversion of cash to electronic payments around the world.

I think we can expect to continue to deliver strong financial performance in the foreseeable future.

So thank you so much for your continued support of our Company.

Thank you for taking the time to join us today.

Thank you, ladies and gentlemen, for participating.

This concludes today's conference.

You may now disconnect.