萬事達 (MA) 2016 Q3 法說會逐字稿

Good day. My name is Jack and I will be your conference operator today. At this time, I would like to welcome everyone to the Mastercard third-quarter 2016 earnings call.

(Operator Instructions)

I would now like to turn the call over to Barbara Gasper, Head of Investor Relations. You may begin.

Thank you, Jack. Good morning, everyone, and thanks for joining us for a discussion about our third-quarter 2016 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. I would like to welcome Warren Kneeshaw, my successor to his first Mastercard earnings call.

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 Q&A, you will need to register again following our prepared comments.

This morning's earnings call and the slide deck that will be referenced on the call can be found in the Investor Relations section of our website, Mastercard.com. Additionally, the release was 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 30 days.

Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents. We've also added a table at the end of both documents, which provides additional information about the impact of Article 8 of the EU's recent Payments Regulation on our GDV and purchase volume growth rates.

Since we are no longer charging de minimus fees on co-badged domestic volume that doesn't use our network in markets such as France, this volume is no longer included in our reported volume statistics. We saw the partial impact of this in the second quarter and now have a full quarter of impact in Q3.

The table adjusts growth rates for the impact by eliminating the related co-badged volume in prior periods so that you can see the underlying run rate of our business. Our comments on the call today will be on the basis of these adjusted rates.

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. Now with that, I will turn the call over to Ajay.

Thank you, Barbara. And Barbara, thank you once again for your outstanding decade of work for us and Warren, welcome to the Company. Good morning, everybody. Business continues to perform well. We are very pleased with our strong results this quarter.

As you have seen, we delivered net revenue growth of 14% and an EPS growth of 19%, after excluding last year's special items which was related to the terminations of our US employee pension plan.

Our perspective of the global economy remains largely unchanged since last quarter. You have all seen the US GDP growth report this morning. We continue to believe, like we said in the previous quarter, that the US [is on a] steady growth path with consumer confidence, unemployment and wages holding firm. Of course, I've left something unforeseen outcomes coming out of the upcoming elections but basically, the US is on a steady growth path.

Many markets across Europe are showing a gradual recovery, led by Germany as economic sentiment holds steady; unemployment rates are continuing to decline. Although uncertainty from Brexit and it's impact on Europe remain a concern. I think it's going to take a few years to understand the full implications. Again, you saw the British GDP report, which kind of sees it holding steady.

Interestingly, underlying UK consumer demand remains stable and in fact as a result of the weaker pound, inbound travel to the UK is picking up over this last quarter. In Asia, the picture is still mixed. In China, both exports and imports were down sharply and we all know the concerns over inflated asset values. In Australia, however, business confidence is up, and India continues its relatively strong growth trajectory.

In Latin America, Brazil, even though it's expected to remain in a recession for the near future, seems to be bottoming out and the political environment seems to be stabilizing, which should hopefully improve the economic conditions over the next 6 to 12 months. In Venezuela, the political and fiscal crisis is deepening. In Mexico the economy continues to expand for there is an increasing dependence on consumer spending growth.

So in sum, the outlook from the economy side remains mixed; even so, we continue to grow. We are seeing double-digit volume in transaction growth across most of our markets. We are continuing to win deals as we execute against our long-term strategy.

So let me provide you with a brief update about our planned acquisition of VocaLink. The first step is now complete. The European Commission has referred the transaction back to the UK Regulator to perform the antitrust review.

The second step, which will be led by the UK Regulator, generally has two phases. We have offered a complete review in the first preliminary phase but it's always possible that this could go into a more detailed second phase. We continue to believe that we can complete this acquisition by about the middle of 2017.

So before we go on to our business highlights, let me just touch on a few regulatory and litigation items that you all ask us about from time to time. So starting with the United States, as you know, the Merchant Litigation is now back in the Brooklyn Court.

In the status conference held last week, the court heard arguments on the appointment of class counsel for merchants. Now once the court appoints that counsel, we expect the litigation to proceed and we intend to resume the settlement negotiations. But given its complexity, we think this (inaudible) will take some years to resolve.

In the UK, as many of you know, a proposed class action was filed in September on behalf of UK consumers seeking damages related to interchange fees. The court will set up a timeline for the case soon. We have had good experience addressing similar claims in the United States and we believe strongly that, in fact, far from being harmed by interchange, UK consumers have, in fact, benefited significantly.

Finally, following legal submissions and an oral hearing this past summer, we continue to be in conversations with the European Commission to find a resolution to the 2015 case around our interchange rates on inter-regional transported transactions and the central acquiring rules. Moving on to some of our recent businesses activity, you heard a great deal of all of this from our us at the recent Investor Day. You had an opportunity to see firsthand a number of the product and service innovations we are rolling out so I'm going to stick to very few items at this time.

We continue to make solid progress in our US Consumer Business, building on our recent momentum in debit. We are actually excited to highlight two new deals that deepen and strengthen our existing relationships with both US Bank and Regions Bank, which have now been expanded to include Preferred Mastercard Routing for their PIN/Debit businesses.

Outside of the US, we're actually pleased to have flipped a number of portfolios by continuing to leverage services as a key strategic differentiator. Let me give you a couple of examples in Europe. We're building on the long-term debit deals we announced last year in Italy with Poste Italiane. We are now expanding our partnership by converting a significant portion of their prepaid portfolio. This deal also includes a number of our services, such as advisors, to help drive their financial inclusions and innovation agendas.

Another example with DenizBank, which is one of the market leaders in Turkey to flip that credit business, which also leverages advisors.

Now, the domestic opportunity in China. We are awaiting on more detailed interpretation of the final PDOC regulations, particularly around the newly introduced security provisions and how these would impact our implementation of [all sole] switching while protecting our systems and our data. We hope these will be available over the next couple of months.

We continue to speak with regulators to clarify our options on how best to enter the market. In the meanwhile, we continue to make progress in China by winning a number of new deals with banks, including HSBC, China Construction Bank, ICBC and Postal Savings Bank.

As part of these deals they will be issuing new single-branded cards targeted at the country's growing affluent customers' segment and to drive growth [modest spend]. We highlighted several key renewals in our commercial business, including V-Card and WEX, both of whom are driving B2B and growth product spend in unique and innovative ways by leveraging virtual cards.

We just added two new deals in Europe, one with Credit Suisse, which is focused on the small and medium enterprise segment where Mastercard is the exclusive card provider. The other with UBS, where we are looking forward to deepening our relationship within their Corporate Banking Business.

So now onto digital strategy and over the last several quarters, including at the recent Investor Day, we have given you a number of updates on the significant progress we're making with MasterPass. And just to recall, we are taking two [battle] paths. The first is our digital by default strategy, which enables issuers to auto-enroll cardholders through their online banking app and helps to drive scale for us while keeping issuers at the center of bank and consumer relationships. I'm pleased that more than 18 million accounts will be automatically enabled over the next few months.

The second is to deliver a digital payment service that works across all devices, all channels, whether that is in-app, online or in-store and the idea then is to keep growing acceptance by being ubiquitous.

So today, I will discuss a couple of use cases to give an idea about some of the unique ways we're using MasterPass with our partners around the world. In South Africa, we are working with MTN and Vodacom, two telecom providers who, by the way, put together a market share of about 70% to allow their customers to securely pay for airtime minutes from their mobile device using MasterPass.

Prior to this, subscribers would either have to stand in long lines at a third-party service location, or go to an ATM to transfer funds to the telecom provider and then wait for their accounts to be updated. Since its launch, more than 4.5 million users have registered for the service and airtime distribution costs for the mobile network operators have been reduced by as much as 15%.

Another example in Europe, we partnered with Czech Railways, the largest rail operator in that country, to integrate MasterPass into their booking app to better complete the new entrance in this [classic space] and to modernize mobile ticketing. Again, prior to this, users would have had to enter their card details for each purchase.

Since its launch in early 2015, users have grown significantly and MasterPass now accounts for nearly 8% of all Czech Railways transactions. Both of these examples, I hope, demonstrates to you that, through MasterPass, we aren't just enabling digital payments. We are actually trying to create a better consumer experience.

From an acceptance standpoint, MasterPass continues to grow and is now available more than 300,000 merchants online and in-app as well as more than 6 million locations in 77 countries that allow contacts (inaudible). We are continuing to add new merchants, and for example, United Airlines in the US, Domino's Pizza, and Trenitalia in Europe, KFC in Asia.

In addition to last week we signed a memorandum of understanding with the Ecobank Group to load our MasterPass QR in mobile, person-to-person merchant service -- sorry, the mobile person-to-merchant service across 33 African countries. This solution will be integrated with their mobile banking platform and will enable users to safely pay for purchases directly from their bank account using a QR code.

Again, millions of micro, small and medium enterprises across Africa will now be able to accept secure digital payments quickly and without the expense of a traditional POS terminal. So our MasterPass partners centric approach, because you heard Garry Lyons talk about at Investor Day, which is aimed at delivering a seamless consumer experience benefits issuers, digital players and merchants.

So earlier this week, we highlighted that issuers like Capital One, who are already leveraging our Digital-by-Default approach are further integrating MasterPass into their wallet offering. Users of the Capital One Wallet can now shop online and in-app and check out using that same [F-S] tokenized login credentials at the hundreds of thousands of merchants around the world where MasterPass is accepted.

Similarly, at Money 20/20, we highlighted an important expansion of our digital partnerships and starting sometime early next year, Samsung Pay, Android Pay and Microsoft Wallet will also enable the same online and in-app consumer experience that I just mentioned. And finally clearly, merchants also benefit from this.

Since they have already integrated MasterPass, there is no additional development work required. It gives them access to the millions of consumers who already use these other wallet services or will in the future. Meanwhile, we continue to support our partners to extend their reach globally, actually we recently had Android Pay move into Poland, in fact, as Apple Pay expanded into Japan and Russia, both currently exclusive with Mastercard.

Finally, we highlighted our recent partnership with Green Dot and Uber as well as Stripe and Lyft at Investor Day and are leveraging the Mastercard Send platform to make the meaning of secure payments to drivers, delivery people and others. We just added Allstate, who would leverage Mastercard Send to make claims payments to their customers via debit card, providing nearly instant access to their funds. So with that, let me turn the call over to Martina for an update on our financial results and operational metrics. Martina?

Thanks, Ajay, and good morning, everyone. Starting with page 3, you see there are minimal differences this quarter between non-GAAP reported and currency neutral growth rates. This figure excludes the impact of a special item related to the termination of the US designed pension plan taken last year.

As you can see from our numbers, we have delivered another strong quarter. Here are a few highlights. Net revenue growth was 14%. Operating expenses grew 12%, as we continued to invest in our strategic initiatives. EPS was up $1.08, up 19% year over year, driven primarily by our strong operating performance and a slightly lower tax rate.

Also share repurchases contributed $0.03 per share. As of October 25, we have $1.8 billion remaining under our current authorization. Lastly, cash flow from operations was $1.4 billion. We ended the quarter with cash, cash equivalents and other liquid investments of about $7 billion.

So let's turn to page 4, where you can see the operational metrics for the third quarter. Just a reminder, as Barbara mentioned, the growth rates I am quoting are adjusted for the impact of the new EU regulations. Our Worldwide Gross Dollar Volume, or GDV, growth was 11% on a local currency basis, down 2 PPT from the prior quarter.

Overall, our US GDV grew 5%, made up of credit and debit growth of 4% and 6%, respectively. As expected, this includes the impact of the USAA roll-off. Total US GDV had less than 1 PPT headwind from lower gas prices.

And outside of the US, volume growth was 14% on a local currency basis. This is down 1 PPT versus last quarter due to slightly lower growth in each region. Cross-border volume grew 12% on a local currency basis, about 2 PPT higher than the 10% we saw in the second quarter and driven primarily by commercial travel programs in Europe.

Let me turn here to page 5, and here you see processed transactions grew 18% globally to $14.5 billion, which is a 4 PPT increase from last quarter, driven primarily by increased pin routing in the US. Globally, the number of cards grew 6%, with $2.3 billion Mastercard and Maestro-branded cards issued.

Let's turn to page 6 for highlights of the few of the revenue line items. Unless otherwise stated, the growth numbers I call out, both here and on the next slide are on a currency neutral basis. The net revenue growth was 14%; we saw strong volume and transaction growth, plus a higher contribution from some of our services businesses.

Rebates and incentives grew 21% due to higher volume in new and renewed deals. Looking quickly at the individual revenue line items on a currency neutral basis. Domestic assessments grew 10%, essentially in line with Worldwide GDV growth. Gross Dollar Volumes fees grew 15% while cross-border volumes grew 12%.

The 3 PPT gap is due to some pricing actions, partially offset by a higher mix of intra-Europe activity. Transaction processing fees grew 19%, in line with processed transaction growth. And finally, other revenue grew 23%, predominantly driven by advisors, safety and security, and loyalty.

Moving to page 7, you can see that excluding last year's special item, total operating expenses increased 12% in the quarter, of which more than 2 PPT is due to the impact of foreign-exchange activity and balance sheet remeasurement. The remainder of the increase was primarily due to higher personnel cost, as we continue to invest in digital, services, and geographic expansion, as well as higher data processing costs, in line with our transaction growth and Russian domestic processing cost to (inaudible).

Turning to slide 8, let's discuss what we have seen in October through the 21st. Most of our drivers are similar to Q3, except for the US. The numbers through October 21 are as follows. Starting with processed volume, we saw global growth of 10% and that is equivalent to what we saw in the third quarter, the double-digit growth in each region outside of the US.

In the US, our processed volume grew 3%, down more than 3 PPT from the third quarter with the same growth in credit programs but lower growth in debit programs primarily due to the deconversions I mentioned earlier. Excluding that, our October growth was similar to the third quarter. GAAP did not have an impact on our October growth rate. Processed volume outside the US grew 16% and that's actually up 1 PPT from the first quarter with higher growth in each region.

Globally processed transaction growth was 17%, down 1 PPT from what we saw in the third quarter. Processed transaction growth outside the US was similar to Q3, while the US growth was down 3 PPT. And with respect to cross-border our volumes grew 13% globally up almost 1 PPT from the third quarter, with faster growth in Europe, driven by a combination of consumer and commercial usage.

Now looking at the full-year 2016, there is really no change in our business outlook from what I have discussed at Investor Day back in September. We continue to expect revenue growth in the low double digits on a currency neutral basis.

When you model on an as-reported basis, adjusting for the impact of all currencies, we now estimate that there would be about a 1 PPT headwind to net revenue growth and the bottom line. This is less of a headwind than what we had said in September, given the continued moderation of exchange rates.

Let me call out a few other items that you should consider when modeling 2016. On expenses, we now expect total operating expense growth in the low double-digit range for our as-reported results, excluding special items. On a currency neutral basis, we continue to expect low double-digit growth. As discussed at Investor Day, we expect to see positive operating leverage for the year.

And you should now assume a 2016 tax rate towards the lower end of the 28% to 29% range that I talked about in September. As is our normal practice, we will defer any comments about our 2017 outlook until our year-end call in January. Now let me turn the call back to Barbara to begin the Q&A session. Barbara?

Thanks, Martina. We are now ready to begin the question-and-answer period and in order to get to as many people as possible, we ask that you limit yourself to a single question and then queue back in for additional questions. Jack?

(Operator Instructions)

Jim Schneider with Goldman Sachs.

I was wondering if you could maybe give us an update on the B2B payment space and the opportunity that you see there? And specifically, can you talk about how [zell] and MasterCard Send fit into the strategy for you?

Sure. I think this whole commercial business continues to be an area of pretty good growth, and you just heard me talk a little bit about V-Card and WEX and virtual cards, and I gave you the example of UBS and Credit Suisse. But what we are basically seeing in addition to the transaction side of this is it's seeing an adoption of some of our products: Smart Data, which is our reporting and reconciliation tool, as well as In Control, which is the virtual cards system. For commercial payments, it is getting well embedded.

I'm also starting to see some increasing interest beyond the typical bank card users: technology providers and bank commercial payment solutions into their software and their type forms and payment aggregators and verticals, such as construction, insurance; you see these guys coming into play as well. So there's a series of things we are doing in the B2B space, in the T&E space, in the SME space that are all connected to this effort to drive our commercial efforts.

The MasterCard Send part that you just heard us talk about again: what this is, is a payment service that facilitates the delivery of funds very quickly and very securely for consumers, both domestically and internationally. If we take a single connection into this platform, you could be a business, you could be a merchant, you could be a government, a nonprofit, an issuer, some other sender, and you can send by the consumers, whether they are banked or unbanked and most importantly, whether they are domestic or overseas as well. And that is what we are trying to do here, because in the overseas markets, we combine with a JV that we had launched some time ago called HomeSend, not to be confused with MasterCard Send. That's just an internal MasterCard confusion and I don't want you to get confused. And HomeSend is a unique asset for cross-border payments and it expands our reach to billions of bank accounts across more than 70 markets through their phone numbers and systems.

And so the combination of this ability to move money to any bank account in the US through MasterCard Send, whether it's a Visa debit card or a MasterCard debit card at the front end of the account, combined with HomeSend, which can connect to these billions of bank accounts across 70 markets using phone systems; that where we're at.

Tien-tsin Huang, JPMorgan.

Great growth here. I was wondering if you could give us your perspective on why your growth rate, on a reported or constant currency basis, has been growing at such a big premium to Visa. Any color there? Because obviously they have been boarding a lot of new clients, so I've been surprised by the magnitude of the premium?

Well, look, Tien-tsin, you know that we are extremely disciplined when we go to market and when we actually work with clients and the kinds of agreements that we are striking. And as we have discussed at Investor Day, we are not just doing a core product kind of deal where we look at a credit product or a debit product or prepaid product or commercial product, but we are also adding quite a lot of our services to that kind of agreement. And when you look at the growth rate in the other revenue line items, [where] most of these services are actually residing, that is where you are seeing the extra juice coming out from these kind of agreements. So I would say between the discipline that we have, and the services, the differentiated services that we can deliver to our clients, you can actually see that coming through.

I think you should, Tien-tsin, think about the fact that we don't -- both our companies are winning clients around the world from each other, but also the growth of geographic expansion, new issuers, new types of issuers coming into the system. It is not my impression that a great deal of growth comes for either of us just from winning a client from each other. I would rather focus on the opportunity that exists in this industry to grow versus so much more there is to do. Remember 85% of the world's retail transactions are still in cash and check.

And that's, I think, our focus is giving us the benefit of thinking that through. Whereas it's allowing us to build assets and capabilities to aim for the bigger buy and keep assets over a period of quarters. There will be quarters when we do better. I'm sure there will be quarters when somebody else does better and I'm fine with that. I'm more focused on where we are executing for the next few years.

Appreciate that. Thanks.

Jason Kupferberg with Jefferies.

Just want to build on Tien-tsin's question. Obviously, you've got 14% constant currency growth year to date, if I'm not mistaken, but still guiding to low double digits. Just doing the math on Q4 would imply a lot of decel; is there some rebate timing to consider? Or what other factors should we be building into the Q4 model? And does this put you at high end of low double digits, at the risk of putting too fine a point on it?

Jason, nice try. (laughter) No, it is still at the low double digits. But what you have to consider for the fourth quarter -- you are absolutely right. Year to date, it's 14%, so actually, this is the third quarter this year that we are producing a 14% net revenue growth rate and we are obviously extremely pleased with that.

But yes, you will see a slowdown in the fourth quarter and you have to consider two factors. One, you have the USAA roll-off and that will be pretty much complete by the end of the year, from what we understand. So of course, that's a bit more of an acceleration than what we had thought before earlier this year. And secondly, on the rebates and incentives side, it is normal for us in the fourth quarter just before year end to sign a whole bunch of new agreements and renewing agreements, actually nothing different than what we have seen in prior years, but you should expect that there will be more rebates and incentives coming in, in the fourth quarter. Both of these factors will weigh down on net revenues.

Don Fandetti with Citigroup.

Ajay, looks like cross-border is continuing to tick up here. Can you talk a little bit about the comment on the commercial improvement in Europe? Is that organic? Or are you seeing market share gains? And then also, what are you seeing in terms of outbound China? I know some of your competitors have talked about some stabilization or improvement.

So the second part, which is actually transactional piece of information in outbound China, I think you'll find growth through certain parts of the world but not to others. It is not coming into the US and Europe as it used to. It is actually going much more to the Asian markets, to Australia, to Japan, to those parts of the world. That's actually similar to what I may have said at Investor Day, but I don't fully recall if that question came up. That's what we're seeing on the China part of it.

The cross-border growth in Europe: remember when we pointed out commercial in Europe, because that's the one thing that is different from prior quarters. It's not as though that is the largest reason for our growth. So you've got to take it in context; it is the one thing that's different. And in that, yes, we are seeing the activation of a bunch of programs in commercial in Europe, but we had signed some deals earlier that come on-board. [There's a series of] activations going on but our cross-border growth is built off really blocking and tackling on a series of portfolios around the world where our accounting is engaged with the issuers and the merchant community to look at how to work on cross-border opportunities. And this is not a new thing. I can recall this for years now. It probably was being done before I even showed up seven years ago and I think it's just a series of focused items in MasterCard around cross-border.

Thank you.

Darrin Peller with Barclays.

Great results.

I just wanted a question on the thought process around incentive growth. We've had now, I think, two years of around 20% incentives and rebates growth and obviously outpacing gross revenues. Obviously, there's been a lot of deals and now, I think, Martina, you just mentioned Q4 probably has a step-up also. Can you just give us a little thought of process around what is happening in the industry around, is it competitive dynamics, or --? And then, really, with SunTrust and others, should we expect another type of year like that going forward? Thanks.

Sure, Darrin.

I don't think you have, for the last couple of years you are really seeing nothing. We are not seeing anything different than what we have seen in the last couple of years. Just to remind everybody, in 2015, we had a step-up in rebates and incentives given that we signed some fairly mega agreements. We signed an agreement with one customer for 10 years; another agreement with another customer for 20 years. And so we did talk in 2015 that we have to step up the incentives. The accounting was a little bit different, so in the early part of the year, as we are actually amortizing more of those incentives, you see that second year, so the 2016 number is going to be with us in 2017, et cetera. And you see the same kind of step up.

In addition to that, when you look at our results this year, you do see some better revenue rates coming in on the growth side. You will see some more [contracts] being tracked with that. What is happening in the fourth quarter from a renewal as well as from new agreements, in terms of what I am seeing from our business people, we are seeing nothing different in terms of how we are actually signing the agreements. It is just the normal activity and the normal terms and conditions, by the way, that we are seeing in the fourth quarter.

We actually incent issuers to give us a share of their wallet and that is built into this thinking. So if they grow well in numbers, in absolute numbers, and they also grow well in giving us some share, yes, she gets the higher percentage discount. So this is actually good for us and it's built, in many ways, to help with that.

All right. Thanks guys.

Sanjay Sakhrani with KBW.

Martina, when I look at the revenue yields for domestic assessments and cross-borders, those accelerated some and then transaction processing fees decelerated some. I know you mentioned last call that there was some anniversarying of fee increases, but how should we think about the trajectory of those yields going forward?

So on the domestic assessment yields, we typically say that they will be trending down over time, simply because of what we have been saying that when you sign larger agreements and you are assessing customers to be actually be given more volumes to you, that should be happening, so you would have to capture the (inaudible) into account. If you just look at the domestic assessments for this quarter and for the prior quarters, you have a little bit of a change in mix coming in. Remember, we have been talking a number of times that when you go and do work in a number of Asian countries, African countries, Russia, and Australia, et cetera, that those come typically with lower yields. And it depends which quarter, which part of the GDV is growing in which country in terms of how the mix is coming in. And in this quarter, we have a little bit better mix coming in.

That's all on domestic yield. What was your second question?

I guess even the cross-border number on an adjusted basis was up little bit. Does that just continue? And then the USAA impact, the numbers you quoted, does that include all of it rolling off? Or is there an additional drag that we should expect?

On the cross-border side, we did have a little bit of pricing action in that. And that will be anniversarying very soon. And on the USAA side, we believe that our comments are comprehensively assuming that USAA is rolling off by the end of the year. Now just you're going to have to take into account that's because this happened all this year, that you are going to have a knock on impact to the growth rates in 2017.

Thank you.

Chris Brendler with Stifel Nicolaus.

I have a question about Europe, [specifically around fee disclosure] on the co-badged transaction. But does that mean if we exclude these transactions have had very low revenue yields that your prior commentary on European revenue yield being in the high teens would actually be in the 20%s if you exclude these transactions? And then if you could just summarize, for PSD2, and all the changes that are taking place in Europe, can you summarize the fundamental impact of your business? It seems to be positive at this point, and if it is, give us a little color on why. Thanks.

So on the European revenue yield, first of all, just to make sure that everybody understands around European revenue yield is. Chris, can you please put us on mute, please? Thank you.

It sounds very exciting wherever you are. (laughter)

What we have said in the past, our global yield is around 21 basis points and we talked about our competitors' yields because the information was out there in the 10 and 9 basis points and we are somewhere in between. That revenue yield will not change whatsoever, by this particular change in terms of not charging de minimis fees on these co-badged transactions. There will be absolutely no impact to that. So you should not be assuming that our yield on GDV in Europe is changing. It is not.

Second question?

PSD2. Okay. So PSD2, the first thing we did was to, for the most part, was to enable access to the consumer bank cards through a series of what they call PSPs, payment system providers. I think that's going to lead to a series of some more competition, more innovation, and it's something we should expect to happen over the next few years. One thing is for sure, is the action becomes even more relevant in the PSD2 environment. As you know, that we've talked about that when we spoke to you about the reason that we were keen on getting into the ACS space, particularly into the [fast] ACS space.

There are other elements of PSD2. There's elements to do with strong customer authentication for a 24-online transaction, but depending on how it actually gets rolled out, it could actually create either a hindrance to the simplicity of an e-commerce checkout, or if it's done very smartly, it could actually make it smooth and safer. And obviously, we would want the latter, but there are many conversations to be had between Europe and the actual implementation of the stronger consumer authentication philosophy that PSD2 raises.

Great, thanks so much.

Andrew Jeffrey with SunTrust.

I think it's notable, Ajay, that you're calling out services, not the first time obviously, the differentiating point when you bid for business and win business. Given the success you've had over an increasingly standard period of time now, do you see competition, whether from traditional competitors or perhaps new entrants? I don't know off the top of my head who those might be, but do you see folks trying to replicate the services success you've had? And can you comment a little bit on the competitive barriers you think you have erected that can continue the share gains?

So actually, I do see people coming into the system, but our services are not services generically. They are services that very tightly connect back to the idea of an authentication, clearing, and settlement system, that gives us the insight into a payment transaction. So all our services, be it loyalty reward, be it safety and security, be it the data analytics business, or our managed services that we do with advisors, all of these connect back to that idea of being connected to the payment transaction, and the moment of truth when that happens.

So I think we do a relatively good job of tying the two things together when we speak in terms of the logic of why its service we provide will be incremental value add to the clearing authorization and settlement stream. In a number of ways, competitive values are only as good as the investment you keep putting into them. To keep staying ahead in terms of what technology and innovation. Take safety and security. Anybody who will tell you that they figured out safety and security is probably somebody you should run a mile from. Because there is no such right answer. There is a continuous effort of people trying to break into everyone's system. You read that all the time. You are only as good in safety and security as the effort you keep putting into it to keep your clients having products and capabilities that keep them -- keeping their promise to their consumers.

So we recently launched a series of products that use artificial intelligence and machine learning in the safety and security space. We've got to keep doing that. I would tell you [we're] in the first innings of a baseball game on that kind of space. We are a little better when it comes to organization. We are well into the middle of the game. We are better when it comes to EMV, we are better well into the latter part of the game. So different aspects of safety and security have got different levels of maturity in terms of what they're solving for, and therefore requires different levels of investment to keep them growing and competitive. And I think our competitive edge is that we have been allocating capital to these areas and expenses for the last seven years.

And it's one of the reasons why I keep telling you I'd like to make sure that you take the expansion of margin off the table as a permanent effort of this Company and instead, give you a really healthy margin but use the revenue growth of the Company to invest back in creating the competitive and frankly, great differentiator for future revenue for where they are going.

Great color. Thank you.

James Friedman with Susquehanna.

Martina, at the Investor Community Day in September you had discussed the same topic of services, and you had said that the services division did a 40% combined margin, if I'm remembering right. But the thing I wanted to get at is, you said that it would scale -- the services margin would scale over time. I was wondering if you could help dimensionalize that? What's going on with service margins? Did they just scale because this was a really good quarter? Or how we should be thinking about services margins over time?

So here we are, just a few weeks after ICM and you think there would be something different. (laughter) First of all, there is no such thing as a Services division, okay? There are many different services that we are actually providing and here I called out three, but we have a ton of other ones. So I don't want you to just bundle this together. We bundle it together because it's an easier way of contrasting it to our core business, right? So in terms of what I said on the margin, is that when you add all the services, where there many different margin profiles right back to what Ajay has been actually explaining on the safety and security side, together. If you were to add that together, the margin as a whole, at this point in time is 40%.

And what I also said is that, and by the way, this is not on a fully-loaded basis, right? So things like corporate cost, et cetera, are not in there. But I also said that over time, as we are scaling these services, that we would believe that the margin would increase, okay? And just to remind you that what this in one chart in ICM, where it actually showed which services are at a higher margin level versus which services are lower margin level, and the safety and security side was actually really at the higher level, and then we worked our way down. Advisors were the next one down, the loyalty was the next one down, processing was actually on the lowest side. So all of those services we are working to scale and risk scale, you will be getting some better margin on these businesses.

It's really interesting, I don't look at these as one unit. That's a really important issue. I don't look at the P&L that way. I don't look at the business that way. It is broken up among a bunch of different people. They come in and they talk to me on a monthly and quarterly business review. Each of them has a different connotation about they are doing with their independent units and their businesses and that's how it is constructed all the way.

What the real implication actually, is our sales force on the front-end is learning how to sell something that is way beyond our traditional credit, debit, prepaid, and even commercial aren't as traditional. But these are completely non-traditional in a selling process and some things they can do themselves; some of them they need experts to come help themselves. We have that kind of sales structure built and it's constantly changing as well to keep pace with where the state is going. It's a mix of many things that are going into services. I just feel that as long as we can keep it tightly connected to our authorizing, clearing, and settlement business, we are actually building yet another leg of a stool for our Company for the next couple of decades to come.

Thank you.

Dave Koning with Baird.

Mainly, my question is just around the PIN share gains that you mentioned; that's helped process transaction growth accelerate. First of all, is that share gain sustaining into Q3? And isn't that lower yielding? Because your transaction yield is actually up 1% sequentially but I would have thought this was lower yielding.

You are absolutely right. In the United States, PIN debit is lower yielding; absolutely, there is no question about it. How it actually came in and we already talked about this at the last earnings call is that we did win a couple of PIN agreements. Okay? So we showed up on the back of the card and then you have to remind -- you remember in the PIN debit market, the merchants are actually then aligning the routing. They are choosing the routing over which network to route, so there is a second thing that you have to think about in terms of yes, you can (inaudible) the back of the card but then do you actually get to see the transaction? And we have a very analytical methodology in terms of trying to see how many transactions we want to see and that actually influences the pricing that we put out in the market every day.

And so you will see our PIN share going up and down. You saw it in the third quarter going up, the new agreements coming in. You saw it in our third -- three weeks in October and it's coming a little bit down. That's why you're seeing a little bit less process transaction. So you should expect it goes up and down.

By the way, on the previous earnings call is somewhere I must explain that we go to some of the larger merchants, their level of sophistication that goes into the decision-making of the routing of a PIN debit transaction is way beyond the price. The price is interesting and it's stable state, but they do in enormously sophisticated thinking on the time taken for approval on the number of turn downs, on all kinds of aspects. And you can move up and down the routing table five times a day in some of these merchants depending on what is going on. So it's a little difficult to predict where that goes, where it's lower yield business, so the overall impact on the revenue stream of the Company tends to be buffered, or let's say, shock-absorbed, but it's an interesting learning for all of us.

Great. Thank you.

Tim Willi with Wells Fargo.

Just wanted to touch on the comments around loyalty and just in general, when you talk with merchants, with banks, about that topic, is there any new dynamic or way that they are thinking about approaching its, particularly with the continued evolution of mobile payments, shopping in-store? Just anything you might be able to add there? And how you think about the momentum around that business line?

There's actually a series of things that are going on in loyalty and rewards. One of those, you actually picked the correct topic, which is e-commerce, digital, mobility, and that whole space. If you think about this, it is almost like simple things like cash back become even more attractive. But even voucher management and the management of keeping track of your loyalty rewards card number and add all that cumulative in to that. All those become very important, even more so than in the physical world.

The loyalty business has got many elements to it. It's got the accumulation of rewards. It's got the offers every day that go into the system. It's got the aspect of what is funded by banks and what's funded by merchants. It's got the aspect of are you a complete program manager in some markets or are you only providing a portion of the service and only a portion of the value chain? As you know, we bought Pinpoint in Asia and Australia. Pinpoint is a complete program manager. Through Access on the other end, is a merchant-revolved generating engine, which is not a complete program manager. It's something we bought a couple of years before Pinpoint. So we've got a series of different capabilities now in the Company. And in some ways, we are probably one of the more interesting global players on loyalty and rewards. But you've got to package it very tightly with other clearing, authorizing, and settlement business whether it is digital or in the physical space.

Great. Thank you very much.

Tom McCrohan with CLSA.

I'm just trying to get a sense of trajectory of operating expense growth going forward and just looking at history that's averaging high single digits. It's a little higher than that this year, and I know you don't want to give forward guidance at all but maybe you can speak to maybe the intensity of investment spending? Has it gotten more intense recently given all the geographic expansion, all the digital changes? Everything that's going on in the space? Thanks.

Well, clearly, Tom, over the last couple of years, I would say over the last three years, the intensity of the investments have really taken off. Just imagine we have all [action] into the digital space, a significant amount of spend went into the digital space, but then in addition for us to be developing all of the services. So what we did from an advisor point of view, from a data analytics point of view, from a loyalty and from a safety and security investment point of view, some of the investments that Ajay was talking earlier about was very important for us to do.

Some of the numbers are masked in terms of when you look at the foreign exchange hedging activity that came in, in 2015, which actually was a benefit there for us. And in 2016, it was a drag. So when you actually take that out, our operating expense growth is relatively similar. We would continue to expect that we will have to invest; and yes, I am not going to go into 2017, but as you can see, for 2016, we really have not changed our forecast at all in terms of how we think we are rounding out this year, which is the low double-digit growth number that we gave on a currency neutral basis.

I'll add one element to that conversation. The discipline that Martina has in our Company around acquisitions is that at the end of two years, the acquisition becomes a part of our piece. When we talk to you, we are talking about our base expenses are up. The acquisitions, we are doing because it is the kind of industry we are in, don't exactly come fully loaded with revenue and unloaded in expense. They tend to come with capabilities that bring expenses and revenues that we need to build over a period of years by putting them together with what we sell. Typically, the lag in that, the timing lag of that, creates a higher growth rate of expenses, that and revenues, for first two years of owning that property. That's part of what we are talking about when we talk about putting investment capital and expense dollars to work.

The acquisitions are all in areas of strategic growth opportunity for us. A number of them are in the services space that Martina was loosely talking about a little while ago, and that's where we're putting our capital to work at. But a lot of our expenses, aside from the acquisitions, tend to go into the digital space because that's where a lot of opportunity will get laid out over the next decade. Revenues not as much as staking out capabilities right now.

Chris Donat with Sandler O'Neill.

Ajay, I wanted to go back to something you said in your prepared remarks about inbound cross-border volume into the UK being strong. I'm just trying to understand how sustainable this might be, and I'm wondering if you can comment on anything from historical examples of devaluation or the opposite case where the Swiss franc appreciated in January 2015 and how that affected outbound volumes with Switzerland? Just trying to understand if UK is going to see a lot of inbound volume for months or years here?

So Chris, I'm glad you called that them prepared remarks that Barbara [wrote them is nervous about them]. I am speaking because she's tracking all that I have said. I don't always follow the script. But I will use your comment as proof of my being relatively helpful. The second part is the UK. I'll still get to your real question. I am just cracking up. I'm taking it out on Barbara for 10 years of this.

So the UK. Be careful about assuming that a lower currency will necessarily lead to inbound travel, either tourist-related or business-related. It was from a place like the UK. It is one of the world's most attractive tourism destinations. If you drop the currency value in Venezuela, it doesn't [lead to anything]. What it does in the UK because of the nature of the UK being what it is, is an attractive location. And in addition, what I am seeing really in the third quarter, I don't know whether I can tell you right now off the top of my head, actually I don't know, whether the make-up is commercial traffic or tourist traffic. It sounds like Martina knows that. I don't know it today. But I do know that you can't assume that tourist traffic or even business traffic will necessarily follow the pattern of a currency moving around.

Right now, there's no doubt that in the UK, tourism is up, one. Two, there is a great deal of re-interest in acquiring assets in the United Kingdom. Because if you're sitting outside of the UK, the values of assets in the UK have not only gone down by the change in the currency, they have also gone down by the extreme reaction that the market had to the fears around Brexit. That has also created a level of interest in people traveling in to look at assets in the UK. Again, I don't know if that will persist because the latest UK GDP report actually shows the Brexit response to be terrible. I think it will take time to come; it will happen this quarter in terms of real GDP change. And so this may change the valuation of market assets in the UK. I would not draw too many conclusions either from the past or in the UK, preferably, more where this is going.

So just one thing to add for the main travel destinations, we are seeing some of this over the last 10 years. So when you look, for instance, where the dollar is trading versus where the pound is trading versus where the euro is trading, tourists are actually relatively sophisticated to go to these kind of locations and we have seen that the tourism travel is getting adjusted. If people are coming to the New York or people coming to London or people going to Paris, that people are adjusting their travel plans because of some of the facets of the currency. We have seen that over the last 10 years. But as Ajay said, that does not expand to many other countries. It is really for the top tourist destinations.

Or shopping destinations. For the UK -- the US right now, inward tourist traffic is down due to the dollar being strong, whereas outward travel by Americans is quite strong. So (inaudible) natural thing we all do as well.

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

Lisa Ellis with Bernstein.

One quick, Martina, question.

It did look like underneath the covers, Asia volumes were a little bit unusually low this quarter; was curious what was driving that? And then for Ajay, it looks with this flurry of announcements around wallet interoperability and convergence, it gets a little bit complicated in terms of what is going to be accepted where. How do you just envision how MasterPass will play into the overall wallet landscape and how you see it evolving? Thanks.

Lisa, first on the volumes, you are absolutely right. On Asia-Pacific, the volumes year over year are a little bit lower. China plays into that. We are now at low single digits over China, from a growth point of view. That was higher last year. Australia, India, and Indonesia also had a little bit of lower growth.

MasterPass. MasterPass: my view is that, on a small mobile screen, it is unlikely that merchants on their checkout page for browsers, from company browser right now, which is still the largest portion of digital e-commerce, and probably will be a very large portion for the next four, five years. It is very unlikely that you're going to find them putting many different wallets up in the checkout page. Because the total space available on a mobile phone is relatively restricted. And therefore, there is going to be some kind of trend towards creating the right infrastructure and wallet acceptance over time. I think you will find the kind of things we are trying to do, we are trying to ensure that one of the brands in the checkout page is MasterPass, because if you could put your digital wallet as well as your user wallet to all using MasterPass as an accepted brand, then that's a good thing.

In our view, and I've said this many times, MasterPass is not a B2C effort. It is a B2B effort. What I am doing is not just building wallets. Because a bank could have their own wallet; a merchant could have their own wallet or they could take a wallet from us private label to open APIs; that doesn't matter. It all could come through in a safe, secure way using tokens come through a MasterPass acceptance [plan]. And the idea is to build all our services capabilities to open APIs and we have already done that in a substantial way. If you go to mastercard.developer.com, or developer.mastercard.com, I think I'm mixing up what came first and what came later. But I think developer.mastercard.com, you'll find that it's relatively easy if you do strike a deal with us to get the cryptogram to unlock the API to then connect it to your capabilities, either as a merchant or an issuer.

So I've seen MasterPass not as a wallet but for a long time, I see MasterPass as a digital strategy and as a future brand for our Company. I see the MasterPass system as an acceptance system that enabled safe secure payments that enables open APIs to be connected through that for services. And that is the offering, which is very partner-centric and enables issuers to own their consumer experience by making digital by default and connecting it to their online banking app. It enables digital giants to create a seamless acceptance system and it enables merchants to not have to repeat their acceptance capability time after time, because once they are on MasterPass, they can accept the others. That is what we are trying to do.

Perfect. Thank you.

Ajay, some closing comments?

A couple of closing thoughts and just to sum up, I think our business continues to perform well. I think you see that reflected in our strong revenue earnings growth and that is despite the usual uneven global economy that everyone talks about. I think we are executing well against our strategy. We have our ups and downs but we are executing consistently, growing our share, continuing to leverage services as a strategic differentiator to further drive our core business around the world. We are in a very dynamic industry and just a strong believer, we are working very hard to drive a secure a digital payment experience for consumers, using MasterPass across all devices, all channels. Of course, I continue to believe in the long run, where we are driven by strong secular growth opportunities that we have, and we continue to hopefully position ourselves well for that future.

Thank you for your continued support of the Company. Thank you for joining us today.

This concludes today's conference call. All participants may now disconnect.