萬事達 (MA) 2017 Q2 法說會逐字稿

Good morning.

My name is Teshaun, and I will be your conference operator today.

At this time, I'd like to welcome everyone to the MasterCard Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) Thank you.

I would now like to turn the call over to Warren Kneeshaw, Head of Investor Relations.

Mr. Kneeshaw, you may begin.

Thank you, Teshaun.

Good morning, everyone, and thank you for joining us for our second quarter 2017 earnings call.

With me 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.

It is only then that the queue will open to accept registrations.

You can access our earnings release, supplemental performance data and the slide deck that accompany this call in the Investor Relations section of our website, mastercard.com.

Additionally, the release was furnished with the SEC earlier this morning.

Our comments today regarding our financial results will be on a currency-neutral basis, and excludes special items and the impact of acquisitions, unless otherwise noted.

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

As a reminder, we've added a table at the end of both documents, which provide additional information about the impact of Article 8 of the EU's payments regulation on our GDV and purchase volume growth rates.

Our comments on the call will be on the basis of rates adjusted for these impacts.

Finally, as set forth in more detail in our earnings release, you -- I would like to remind you that today's call will include forward-looking statements regarding MasterCard's future performance.

Actual performance could differ materially from these forward-looking statements.

Information about the factors that could affect future performance are summarized at the end of our earnings release and in our recent SEC filings.

A replay of this call will be posted on our website for 30 days.

With that, I will now turn the call over to our President and Chief Executive Officer, Ajay Banga.

Ajay?

Thank you, Warren.

Good morning, everybody.

So we continue to execute well against our strategy.

You can see that in our strong second quarter financial and operational performance.

We're really pleased with delivering net revenue growth of 14%, and if you exclude the special items related to a legal provision that we took last year in the same quarter, EPS growth is 16%, both of these numbers on a currency-neutral basis.

In terms of the global economic environment, not much has changed since the last quarter.

The U.S. economy just continues its steady growth trajectory, low unemployment, low inflation, healthy consumer confidence.

And if you look at our SpendingPulse data, retail sales ex auto, were up 3.6%.

That's kind of similar to last quarter.

In Europe, real GDV is expected to grow by about 2% this year in 2017.

Consumer confidence is continuing to improve, and that's primarily driven by Germany and Spain, but of course, unemployment does remain relatively high in some of the EU countries.

Now in the U.K., interestingly, despite ongoing concerns around Brexit, SpendingPulse showed solid overall retail sales growth of 5% in the quarter, and that's partly driven by higher consumer spending due to rising inflation, the lower pound basically.

In Asia, we continue to see strong economic growth in India and several of the ASEAN countries.

In Latin America, despite all the recent political turmoil and sustained high unemployment, Brazil is showing both consumer and business confidence improving.

Economic growth in Mexico has been solid, driven by consumer spending.

Venezuela, of course, continues to deteriorate, tripled its inflation, high foreign exchange volatility.

With this backdrop, we're kind of pleased with the growth we're seeing across our business.

We've seen double-digit volume and transaction growth across most of our markets.

We're continuing to win deals by differentiating with services, and of course, by leveraging the work we're doing in digital.

In terms of key business updates, as you know, we recently closed the VocaLink acquisition.

We're just pleased that we now have the ability to offer both card and bank account-based payment solutions to our customers.

If you look at the payment flows, in the top 50 countries around the world, a significant portion of the payments are being made via ACH.

With Fast ACH, in particular, we have the ability to now enable payments to and from any bank account in realtime.

That expands our reach to more endpoints, including businesses, governments and consumers, who may only have a bank account and not a card.

And as you can imagine, for consumers, that's not that infrequent in many markets around the world.

Further, VocaLink's Fast ACH is well suited for certain use cases.

And why is that?

That's because of its enhanced data and messaging capabilities.

So for instance, it can connect to ERP systems to facilitate B2B payables and receivables management, but it can also support build pay through its request-to-pay messaging capability.

As of now, over 25 countries are actively pursuing Fast ACH networks, a number of which have already launched.

VocaLink currently provides those capabilities to the U.K., Sweden, Singapore, Thailand, and of course, in the United States with the clearinghouse, and it's also engaged in many other such opportunities.

Now VocaLink and Fast ACH complement our MasterCard send push payment service.

Now what that does is it facilitates the delivery of funds in near realtime, not realtime, to virtually all debit card accounts in the United States.

In addition, by leveraging the exclusive capabilities from what we have with our Home Send JV, we can enable cross-border payments to over 85 markets now by connecting into cash-in and cash-out locations by connecting into mobile wallets and bank accounts.

So what we have now is a unique combination of product offerings that we believe will allow us to better facilitate consumer choice, and through that process, capture an even greater set of new payment flows.

What we will have is card rails, which we had for years.

We have Mastercard Send, and now Fast ACH rails.

With this, MasterCard can become a one-stop shop for our customers, banks, merchants and governments.

We're looking forward to talking to you more about our strategy around Fast ACH and our other network capabilities during our upcoming Investor Day.

Now on the safety and security space, we recently announced our agreement to acquire Brighterion, whose artificial intelligence-based technology enables more accurate decision-making and fraud scoring at the time of the transaction, obviously, to mitigate risk and also reduce false declines.

Now adding that capability expands our advanced suite of security products and expertise in fraud migration, in authentication and decision intelligence, while trying to make sure that the consumer has a seamless payment experience.

So with that, I will move on to some of our recent deal activity, and in the U.S., we continue to have success in the co-brand space.

This quarter, we're pleased to announce Kroger, the largest grocery chain in the world, will be converting their credit portfolio with U.S. Bank to MasterCard, still with U.S. Bank.

That's our partner in this co-brand.

In addition, we won a new co-brand program with Belk, a department store chain with about 300 locations throughout the United States, and renewed our credit co-brand agreement with Toys"R"Us.

We also renewed Santander in the U.S. for their credit and debit business, which includes our decision intelligence fraud solutions and gateway processing services.

In each of these deals, our innovative solutions and value-added services were key differentiators for us.

Building on the agreements we announced in the U.S. last year, we are pleased to extend our partnership with PayPal into Asia Pacific, which brings similar features and benefits to this region.

In fact, we've just announced and signed that in the last 24 hours.

We've been working with PayPal around the world for a long time, as most of their co-brand cards globally are MasterCard-branded.

And just for an example, in Europe, we have multiple co-brands with them, including a prepaid program in Italy, commercial debit in the U.K. And by the way, they've also been a licensed issuer in the region since 2011.

Now talking about Europe.

We continue to drive strong performance and renew deals there.

I'm going to give you a couple of examples.

We have renewed and expanded our agreement with Intesa Sanpaolo in Italy, which is one of the largest banks in the country for their credit, debit and prepaid business, and that includes advisor services.

We're also pleased with some recent progress in the U.K. debit space.

This quarter, we announced a deal with TSB to flip their entire debit portfolio to MasterCard, building on our existing relationship with them in credit.

Now this is significant win for us because TSB's customers represent over 4% of all debit customers in the United Kingdom.

The partnership also includes their commercial business, and will leverage our expertise in digital, in fraud, data analytics and even our priceless sponsorship assets to deliver an even better payment experience for TSB's customers.

China.

As you know, we've been deeply engaged in navigating the potential opening of their domestic payments market.

Back in March of this year, we actually submitted a draft application for a domestic bank card clearing institution.

That early draft was informed by active considerations and conversations with the People's Bank of China, and actually, a number of potential partners as well in the market over the last 2 years.

Now more recent set of regulation got published, as you know, on June 30, so we're now finalizing our next application based on that new set of regulations.

We are working through all our options for either a 100% MasterCard application or for a joint venture.

We're going to make a decision on this, and then file our next application.

Obviously, what's really important here is to get it right out of the gate, because remember, this is just another step in the process that will likely play out over the next 12 to 18 months as there are several review cycles from the Chinese regulators between now and that point of time.

At the same time, we've also been working on developing our technology network solution for China, which considers both national and fiber security standards, and we are progressing well in that regard.

Now in the meanwhile, what we're doing is continuing to make progress with single-branded cards, and we have nearly quadrupled year-over-year single-brand card issuance, launched a total of 18 new programs in the first half of this year, including the first single-branded EMV debit card in China, with Bank of China, and a world card with ICBC, which has targeted their affluent customer base.

So finally, we're continuing to see growth in our commercial business, as driven by a combination of innovation and some new deals on the product front.

We just recently announced the launch of the MasterCard B2B Hub, which is an innovative solution that enables small and medium-size businesses in the United States to automate their invoice and payment processes.

As you know, more than 50% of all B2B payments in the U.S. are still made via checks.

And if you can integrate this with more than 130 accounting and back-office systems, and also into inControl, our virtual card platform, then we believe the solution helps buyers and suppliers reduce the burden and the costs associated with manual payment processes, and helps us to accelerate the conversion from check to electronic payment.

The idea, clearly, is to capture new payment flows.

And in terms of new commercial payment deals in the space, we are pleased to have renewed and expanded our agreement with Citibank in the UAE for their commercial business.

I think that then was basically driven by our virtual card platform, as well as our ability to help drive B2B acceptance in the market.

We're also expanding our global partnership with Amadeus, which I spoke about last quarter, to the United States with U.S. Bank as their exclusive issuer.

As we continue to pursue the more than $300 billion in annual global payments that travel agencies make to airlines, hotels and other travel providers, which, by the way, today are largely made via bank transfers and checks.

So turning to digital.

We're making good progress with the execution of our digital-by-default strategy with issuers.

We now have over 90 million enabled accounts, and we're actually pleased to have partnered in the launch last week of Citi Pay in the U.S., which is powered by Masterpass.

This wallet enables customers and consumers of Citibank to use their Citibank online login credentials to make seamless payments across all channels online, in-app, in-store with their card number, which is protected through our MDES tokenization service.

We've also added U.S. Bank and SunTrust in the U.S. We've also added Davivienda in Columbia.

That's the progress we are making.

We're continuing our momentum on the digital acceptance side.

We now have more than 340,000 online merchants across 38 markets, in addition to the 6 million contact list locations in 96 countries where Masterpass can be used.

This quarter, we're really pleased to have added Ann Taylor, Loft, Hulu, Air Canada, Costco Canada, and we've integrated Vodafone in Turkey, which is the second largest mobile network operator in that market to enable their more than 22 million subscribers to pay for mobile airtime minutes and other services using Masterpass.

And finally, a good example of our partner leadership in driving the convergence from physical or digital can be seen in our partnership with EMVCo and other industry participants to enable greater choice in retail payments by creating a new global standard to ensure consistency -- industry consistency in QR codes, and this builds on our momentum with the rollout of QR technology in Africa and India.

In addition to the launch of BharatQR in India, which is now live with 4 large banks in the country, we have partnered with the Bank of Thailand and the government of Thailand in support of their goal of creating cashless society.

So with that, I'm going to turn the call back to Martina for an update on our financial results and operational metrics.

Martina?

Thanks, Ajay, and good morning, everyone.

As you can see in the highlights on Page 3, we have delivered another strong quarter ahead of our expectations.

Unless otherwise stated, the gross numbers I call out will be on a currency-neutral basis, excluding a special item related to a legal provision taken last year.

The FX impact was less of a headwind than expected at about 1 ppt, primarily due to the strength of the euro.

Net revenue growth was 14% due to strong underlying drivers and growth across our services, and includes approximately a 2 ppt benefit from the VocaLink acquisition.

Operating expenses increased by 17%, which includes a 6 ppt impact due to acquisitions, primarily VocaLink, and a 4 ppt impact due to FX-related charges.

Operating income was up 12% and EPS was $1.10, up 16% year-over-year, driven primarily by our strong operating performance, with share repurchases contributing $0.03 per share.

During the quarter, we repurchased $931 million worth of stock, and an additional $226 million through July 24.

So let me turn to Page 4, where you can see the operational metrics for the second quarter.

Worldwide gross dollar volume or GDV growth was 9% on a local currency basis, up 1 ppt from last quarter.

U.S. GDV grew 3% and was made up of credit and debit growth of 7% and 1%, respectively.

Outside of the U.S., volume growth was 11%, similar to last quarter.

Cross-border volume grew 14% on a local currency basis.

Areas of real strength continue to be Europe, where we are seeing strong U.K. inbound and outbound volumes, as well as Russia, Italy and France.

Latin America continues its recovery, with Brazil and Mexico leading the way, and in Asia Pacific, we see strong growth from South Korea, China and Japan.

We have also seen higher cross-border growth rates to and from the United States.

Turning to Page 5. Switched transactions continue to show solid growth at 17% globally again this quarter, with double-digit growth in all regions outside of the U.S. We saw continued strength in Brazil, Russia and India.

Globally, there are 2.4 billion MasterCard and Maestro-branded cards issued.

Now let me turn to Page 6 for highlights on a few of the revenue line items, again, described on a currency-neutral basis, unless otherwise noted.

Net revenue grew 14%, driven by continued strong volume, transaction and services growth, with VocaLink contributing about 2 ppt to this growth.

Rebates and incentives grew 22%, reflecting higher volumes and incentives for new and renewed deals, in line with expectations.

Looking quickly at the individual revenue line items.

So you may recall that last quarter, I said the difference between fees charged and volumes in the domestic assessments and cross-border categories were mainly due to pricing, which was essentially offset in rebates and incentives, as well as some mix.

This continues to be the case this quarter.

Domestic assessments grew 14%, while worldwide GDV grew 9%.

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

Transaction processing fees grew 18%, in line with the 17% growth in switched transactions, and finally, other revenues grew 18%.

Most of the VocaLink revenues show up in this line.

This is more than offset -- this more than offset the 5 ppt effect of the changes we made to our loyalty business in Asia that I had discussed with you last quarter.

Moving on, on page -- to Page 7. So here, you can see the total operating expenses increased 17% on a currency-neutral basis, excluding a special item taken last year.

So this includes 6 ppt impact from acquisitions.

That's primarily from VocaLink, including the impact of purchase accounting and integration-related cost, and then there is a 4 ppt impact from higher FX charges related to hedging losses due to the weakening U.S. dollar and balance sheet remeasurement effects as a result of the devaluation of the Venezuelan bolivar.

And excluding these items, operating expenses grew 7% as we continue to invest in digital, geographic expansion and advisers' capability.

This also includes a 2 ppt impact from accelerated A&M spend related to the Masterpass awareness campaign.

Turning to Slide 8. Let's discuss what we have seen in July through the 21st, where most of our drivers are similar or slightly lower than in Q2.

The numbers through July 21 are as follows.

So let me start with switched volume.

We saw global growth of 10%, the same as what we saw in the second quarter, with double-digit growth in all regions outside of the U.S. And in the U.S., our switched volume grew 2%, down a bit from the second quarter, with higher growth in credit, but lower switched volume in debit, as we are lapping a number of 2016 PIN wins, and gas had really no impact on our July numbers.

Switched volume outside the U.S. grew 18%, up a bit from the second quarter.

Globally, switched transactions growth was 15%, down 2 ppt from what we saw in the second quarter, with similar growth outside the U.S. and the U.S. slowed 4 ppt due to lower PIN growth that I was just mentioning under switched volume.

With respect to cross-border, our volumes remain strong, up 14% globally.

That's very similar to what we saw in the second quarter.

So let me look ahead, and our underlying business fundamentals remain strong.

We continue to grow our business through a combination of new and renewed agreements, as well as our expanded set of service offerings.

We had a strong first half, and we are particularly pleased with the progress we are making in Europe and in Latin America.

As we look forward to the second half of the year, we are forecasting this momentum to continue.

Based on current foreign exchange rates, we now anticipate FX headwinds will subside, primarily due to the weakening U.S. dollar.

For the year, we continue to expect net revenue will grow at a low double-digit year-over-year rate on a currency-neutral basis, excluding acquisitions, and for Q3, we expect net revenue growth to be similar to what we saw in Q2, again, on a currency-neutral basis, excluding acquisitions.

On expenses, we expect year-over-year total operating expenses to continue to grow in the high-single-digit range on a currency-neutral basis, excluding acquisition and special items.

Also of note, we're extending our support of the rollout of Masterpass through the acceleration of A&M spend in the third quarter.

So in particular, we expect A&M spending to be up by about $35 million versus the year-ago quarter.

And we continue to forecast recent acquisitions, and that's notably VocaLink, will be about $0.05 to $0.06 dilutive in 2017, driven primarily by purchase accounting and integration-related costs.

Separately, you should assume a tax rate of about 28% based on our current expectations of regional mix.

So with that, let me turn the call back to Warren to begin the Q&A session.

Warren?

Thank you, Martina.

We're now ready to begin the question-and-answer session.

(Operator Instructions) Operator, we're ready.

(Operator Instructions) Your first question comes from the line of Bryan Keane with Deutsche Bank.

Ajay, just want to ask on the whole push payments opportunity, seems like it's a big market for a lot of folks.

And thinking about one of your competitors was recently talking about that they didn't need to purchase an ACH network or anything with ACH capability.

They had it already with their capability with Visa Direct.

Just wanted to get your analysis on that on why the VocaLink acquisition was necessary.

So I think that Mastercard Send is similar in a way to other offerings in the marketplace.

We could have taken that, combined it with our HomeSend JV, extended its reach to mobile wallets and cash-in and cash-out points around the world.

That's one way to have built it.

There will be some challenges still left with that to really enable that to compete, the way Fast ACH is growing around the world.

Those challenges are actually quite interesting and require a real solution to solve for.

I'm not saying you can't solve for it organically and try and build it.

I just think that's more expensive and a longer solution, with less credibility of working than if you pick up a unit, like VocaLink, with its enormous reputation in the U.K. where it operates the payments infrastructure, but also its ability in multiple countries around the world.

ACH has been a country-by-country business.

VocaLink is one of the only players in the world that has demonstrated the ability to take its software and apply it in markets as diverse as Sweden and the U.K. and the United States and Singapore and Thailand and so on.

So that's the first point.

And the second point is the nature of the data flows.

Now this is a little bit more in the commercial B2B payment space, the nature of the data flows that come back and forth over VocaLink's B2B payment-enabled system is such that you get their ISO 20022 data centers.

So what they get is far more information that allows them to integrate seamlessly with B2B ERP systems, with e-commerce systems and cross-border payments are also built in there as standard.

They have directories, which combines the VocaLink IPS system with these directories, simplifies the flow of payments, simplifies payment requests.

So that aspects in the B2B space and I think with the richer data set and the better connectivity of VocaLink Fast ACH that I think are actually quite important to be able to play a good role in that space.

So the combination of these 2 is kind of what prompted us some time back during a scan across the world of the opportunity to enter Fast ACH.

We kind of took the decision that if this property were not available, we probably would've tried to build something organically with these opportunities and risks and costs and time frame.

But as it so turned out, the opportunity with VocaLink came along, and we were trying our best to leap on it and take it and move forward.

That's broadly what we're trying to do.

And your next question comes from the line of David Togut with Evercore.

Could you update us on your progress in signing Pan-European deals?

In particular, I'm thinking about the new merchant routing regulations that went into effect in June of '16, and how you're doing versus some of these local and sort of national payment schemes?

Well, I'll tell you this much that what we are looking at is the fact that all the new regulations that went in, the one part of them were the routing regulations.

The other part was the actual, as you know, level of interchange.

There were other parts about co-branding and co-badging and separation of switch and processing -- switch and scheme.

There were a series of these that went in.

I will tell you this, the expansion of acceptance that is going on for brands like us across Europe is actually, for the first time, encouraging.

As you can see, even in Germany, where Martina hails from, even in Germany, and I'm not holding it against her, but that's where she hails from.

Even the Germans are using cards.

Even the Germans are beginning to use these payment systems in these stores, which earlier, they did not.

They basically paid through the gyro, through their bank accounts.

You can see a change coming from the merchant community, as well as the consumers, which I think is a function, not just of one aspect of the regulation, but of the totality, which I think is what the EC wanted to do.

They wanted to create fresh momentum and fresh competition in the market, both for us and against what we do, and I think that's fine.

That's a competitive marketplace.

Yes.

I mean, we are seeing real progress on the acceptance side, but we're also really seeing progress on our winning European deals, predominantly, of course, because we have a fantastic digital suite of products and we have great consulting services, and we're seeing that a lot of the banks that have been grappling with a lot of these issues, especially as PSD2 is coming down the road, how we could be servicing them, and that is -- we called out some wins last time.

We have a couple of wins that Ajay called out this time.

That is really adding to the progress in terms of our European payments volume, which, as you can see, even this quarter, again, it's at 15%.

And your next question comes from the line of Sanjay Sakhrani with KBW.

I guess, on a related European note, obviously, a little bit more time has passed with Visa's acquisition of Europe.

Ajay, I was wondering if you've noticed any discernible trends since maybe impacting MasterCard.

Sanjay, not yet directly, although as I said, we are winning some deals, and that's because the market's a little more open to now having these conversations as compared to prior to the acquisition when everybody was waiting for that to happen with all their obvious benefits that were tied up in that.

But I would say, remember, even that Visa is still sorting through, as they themselves say, all their agreements with their customers.

So you've got to let this play out for a little while, but we're seeing progress.

We're winning deals, and I'm just giving you a couple of examples.

I'm trying not to give you a list, but we are winning deals along the way.

This will become, as I said, over time, you should get past this couple of years and then think about this as settling into a regular competitive marketplace where 1 of 2 or 3 things will happen, either the yields of that market, which tend to be lower than global yields, will begin to come up a little bit, maybe, maybe not.

We'll see, or the opportunity to win more deals and volume will present itself.

One of those 2 will fall into place.

Right now, it feels more the latter than the former, but it's early days.

In addition to really driving secular trend in Europe, as you know, it's really only the U.K. that is very much enabled from an electronic payments point of view, and it just presents an enormous opportunity in many of the other countries to take advantage of this secular trend from cash and check to electronic forms of payments.

That's why to that earlier question, I'm so delighted about the expansion and acceptance even in Germany.

And your next question comes from the line of Lisa Ellis with Bernstein.

Ajay, you mentioned working with EMV Co.

on this global standard around QR codes and driving that.

Can you elaborate a bit exactly sort of what that solution looks and feels like for the merchant and the consumer and what's required to enable that globally?

Like what's the solution on the acquiring side?

And is the acquiring environment activating around that?

And then also, on the consumer side, is this Masterpass or is these bank wallets?

And how do you see that playing out?

And to me, first of all, the last part -- I mean, Masterpass and bank wallets are one and the same thing.

I'm not into building Masterpass, as I said, as a B2C solution.

It's really a B2B2C solution.

Banks can take a wallet container from us or build their own, and then ride our rails, which is what a number of them are doing.

Someone like Citi Pay uses Masterpass more extensively than others.

I'm fine with that.

That, to me, is -- our model is a open engagement model with banks and others who are authorized to have financial accounts, so that we can enable the path through digitization as compared to trying to build our own wallet.

That's not what I'm trying to do.

The standards topic is a really interesting one.

To me, if we're going to make progress in expanding acceptance, and QR code is a little bit about expanding acceptance into markets, where infrastructure and the cost of having terminals, as well as running cost of managing those terminals are challenging.

So you've taken Africa, you take parts of India, you take Pakistan or other such markets or even parts of China, at the end of the day, QR codes represent real opportunity to enable electronic payments in smaller and more remote shops.

What essentially you're doing, you can put or you can push their payment, meaning, you can have a QR code that is unique to the merchant, in which case, a consumer walks in using a phone with a camera, can actually focus on that QR code, and enable their money to be transferred to that merchant for the potatoes and onions and bicycle tires they bought or it could be the other way around, where the consumer carries around a QR code, which is unique to them, and it can connect into the merchants' system to enable the money to be sent from the consumers' account to the merchants' account.

Both are possible.

Both are feasible.

Both have been tried in different markets in the world.

The idea of standardizing them across EMVCo is to ensure that banks and merchants don't end up with complicated multiple standards between us and the other participants in the EMVCo, which include Visa and Amex and the others.

So that's the purpose of what we're trying to get done.

We've actually done that, and issued standardized guidelines, so that the acquirers and the merchants and the banks can find a simpler way to connect to what I think would be a transformative way of growing acceptance in a number of these markets.

And your next question comes from the line of James Schneider with Goldman Sachs.

I was wondering maybe you could talk philosophically about your approach from -- to margins from here on out.

Is the philosophy still to kind of make sure that you maximize revenue growth and get EPS tracking with that?

Or post the acquisition of VocaLink, is there a desire to kind of potentially get a little bit more operating leverage over the next few quarters until you lap that acquisition?

James, it's Martina.

We have not changed our view in terms of how we are looking at operating margin.

First and foremost, as you said, we are growing the company with top line performance and net revenue growth and bottom line performance, both on the net income line, as well as on the EPS line.

We continue to believe that our operating margin should be, including buying VocaLink, at a 50%-plus margin.

We are not driving the company in such a way that we're expanding it.

So it might expand from time to time as we are today at actually 56%, when you exclude VocaLink, 54% when you include VocaLink.

But we are already above that 50% threshold.

But what we're really doing with the company is we're taking certain amounts of money that we're earning on the top line, and we are investing it in those critical areas in order to get top line and bottom line performance to continue to work.

Just remember, VocaLink, when you actually look at them from a stand-alone point of view, you can look at their 2016 financials and then you exclude one particular investment that they have made in push payments, which is the Zapp product or the Pay by Bank product in the U.K. VocaLink has a 32% EBITDA margin.

So obviously, they have a much lower margin than what MasterCard as a whole has.

And despite that, we are capable and able of taking in, and we are still holding firm with our operating margin level of a minimum of 50% plus.

And your next question comes from the line of James Friedman with Susquehanna.

I just wanted to ask you about that Kroger win that you announced in your prepared remarks, Ajay.

If you don't want to speak about the merchant specifically, maybe more comments in general about grocer.

Kroger is a massive company.

I was -- how should we be timing that in terms of modeling it in, and was that a flip?

Some color on the grocer would be helpful.

Sure.

I'm glad you called them prepared remarks.

There are days when Warren and Martina worry about what I might say compared to the prepared remarks, but I will note that for my future.

So the Kroger.

Kroger was a co-brand that many years ago actually used to be with MasterCard.

I think it flipped out of MasterCard, either the year before I joined or 2 years.

I actually don't remember correctly, but I know about 8, 9, 10 years ago, it moved away.

And it was with our competitor, largest competitor, with Visa.

U.S. Bank is their issuer and their primary banking relationship.

Kroger went through a relatively detailed process of figuring out how to renew and what to renew, and we all went through and made our usual pitches for it.

And it ended up with U.S. Bank and us as being the partners for their co-brand platform, going forward.

We haven't yet finalized the dates of the migration of the portfolio.

That work is happening as we scope out the different aspects of this.

Over the next few months, I'm pretty certain we'll be able to give you a better date and a better guideline, and Martina will be able to help you with that.

And your next question comes from the line of Dan Perlin with RBC Capital Markets.

The question I have is on operating expenses.

So you had 7% growth in OpEx once you take out the acquisitions and FX.

You called out another 2 points of impact related for Masterpass spending.

So I guess, net, it's 5%.

So the question I have is twofold.

One is -- and I heard your comments for a second ago, Martina, but I mean, is the run rate of kind of core business, OpEx growth around 5%?

And then secondly, you're calling out another $35 million of A&M spending for Masterpass in the third quarter.

I'm wondering if you could just help us balance the investments you've been making there for the past 3 quarters that have accelerated to some of the early-stage benefits as to how that's driving your top line.

So Dan, first of all, for the whole year, we gave a guidance that we would be at the high single digits on a currency-neutral basis for operating expense growth, right?

And that continues to be true.

And that is excluding acquisitions, okay?

So steady-state company with the investments that we're making is high single digit for the whole year.

That includes any of the FX charges.

That includes any of the Masterpass cost on the A&M side, which quite frankly, quite a bit of the cost is being accelerated from the fourth quarter into the first 3 quarters of the year.

So we have absolutely no change for that.

In terms of driving growth, when you look at that high single-digit investment that we are making on the OpEx line, that is when you look in the detail of it is a number of things.

One is obviously digital.

We continue to invest in digital.

Number two, so this is both on the technology side that is on helping our customers to getting up and running.

That is where the A&M is going up, so that is digital.

Secondly, we're doing quite a bit of geographic expansion.

You can look at what Ajay said about China.

Of course, we're building the technology backbone there.

So that is expense.

In India, given the demonetization, we're investing quite a bit there.

In Africa, there are a number of those things going on.

So geographic expansion is another big bucket.

The third bucket that drives growth, which we have been calling out in a number of quarters is, of course, what we're doing in safety and security, right?

So a number of the things we are actually doing, and until very recently from an organic investment point of view, look at safety -- the SafetyNet feature that we had shown to you a number of times, that was actually an organic investment that this company has been making.

Recently, we've been adding a few inorganic acquisitions to it, but that is a very keen investment area for us.

And then last but not least, as we called out this quarter, we are continuing to invest in our advisers' capability, which is really 2 things.

One, what we're doing on the consulting side with our customers, which does pay back in spades because of better portfolio performance, additional things that our customers might be doing that really benefit our volume and transaction, but also, it's what we're doing on the data analytics side that goes way beyond financial institution.

That is where we're helping a lot the merchants to be very successful with what they need to do to sell to consumers.

And your next question comes from the line of Bob Napoli with William Blair.

Question just on U.S. credit, I guess, one area that has been a bit of a challenge for MasterCard over the past couple of years has been market share and growth in U.S. credit.

It does seem to have -- that you have some momentum and have lapped some losses, lapping some losses.

Can you maybe give a little color on your thoughts on the market position in U.S. credit market share trends and growth outlook?

So first of all, you're correct.

We are lapping some of those losses, and there is an improvement in both our consumer and commercial credit in the U.S. performance.

You got to remember, we've got a good presence in commercial credit as well, and we look at both as part of our credit business in the United States.

In consumer, which is I think where your question was coming from and compared to the commercial side, in consumer, we're in the market, as I've just said, are looking for opportunities to grow.

Those opportunities have, over the last few years, largely been through merchant-driven co-brand decisions, and we win some, and we don't win some.

This quarter, we've got a couple we told you about that we won.

There are couple of others that we won that we won't announce for another year or so till the deals become visible in the marketplace, but there are others we didn't win.

We didn't win Costco in the United States some quarters ago.

So we won Costco in Canada, but we didn't win it in the U.S. We have a relationship with Costco and other markets around the world, and so there are deals we'll win and there are deals we'll not win.

We will try and do them in a way that makes economic sense to our bottom line.

That's the principle behind those deals.

It's the same for winning more credit share with issuers and for looking at them as part of participating in their growth.

One of our biggest partners, as you know, is Citibank, and you know that Citibank has begun to reinvest very wisely in their credit business over the last few quarters.

And honestly, their own performance, as a result, is improving, and their performance, which is improving, is driving our improvement because they're one of our best partners.

Now that's kind of how this works for us, and we're trying to work our way through this in a sensible way and support our principal customers and work with them on growth, while we try and win as many deals as we can when and if they come up in the marketplace.

And your next question comes from the line of Tien-tsin Huang with JPMorgan.

Just I guess I'll ask about the TSB win.

What drove the switch there?

I know I think Sanjay asked about Europe and whatnot in general, but just given its opening up in the U.K., was this tied in any way to the Visa Europe transition?

Is there a pipeline of new stuff maybe with challenger banks that you're excited about?

Yes.

Well, the TSB conversation honestly have started before the Visa European transition.

I remember talking to them some time ago.

It so happened that the Visa Europe transition happened in between, but is there pipeline in the marketplace from large, medium and small-sized banks that we are pursuing?

Absolutely, but I'm not going to say much more about it.

And your next question comes from the line of Craig Maurer with Autonomous.

We've now had a Pay by Bank in the market in the U.K. for, I believe, a full quarter.

Even though I know that availability to consumers is still very small versus where it will be by year-end, I was hoping you could talk about early returns in terms of things like fraud and uptake.

Craig, it's very tiny yet, and you're correct that it's early days.

Its availability is limited.

It's a couple of banks, and I'm actually looking at Martina to try to figure out whether it's 2 or 3 banks.

No, it's 2 banks, but it's 3 stores, and it's -- if you want to buy pizza in the U.K., then you can use it.

Yes.

So right now, it's very early.

But I'll tell you a different picture about it that I think you'll be more interested in.

My view is that a consumer must get choice at the front end of their decision of how to pay, and that choice should be connected back to where their bank relationship comes from.

And if that choice is to pay by direct debit to their bank account or by the inward receipt of a remittance through a friend, a relative or a government disbursement or with a debit card or a prepaid card or a credit card, that concept of choice is what we're trying to put together when I was describing the opportunity with Fast ACH, as well as what we have, which is Mastercard Send and HomeSend and our card rails.

Whether you -- Pay by Bank has only one way of choosing right now, which is from your bank account.

I visualize that as being important and an interesting application, not just in the U.K., but in other markets as well.

It can lead to some good volume growth, but what I also visualize over time is the choice coming across to a consumer at the point of sale on their phone or from the terminals, whichever way, a choice to make payments from these alternative funding sources.

That's what I think is where all this is going.

And your next question comes from the line of Jason Deleeuw with Piper Jaffray.

Just a question on B2B payments and how you think about the opportunity there for VocaLink versus Mastercard Send.

Is it -- can you size it up?

Is one bigger opportunity for the other?

Just kind of help us think about that.

I continue to believe that the opportunity in B2B for ACH, and therefore, VocaLink type of Fast ACH payments is enormous.

It's way beyond what a Mastercard Send or card rails can address.

Why is that?

Card rails requires you to have card acceptance with all these merchants on both side of the business and both sides of a B2B transaction.

And while you can attempt to build that acceptance and we have built it over the years, we are actually building in a number of markets around the world.

But I would say, while that addresses a portion of the opportunity, there is a much bigger opportunity that lies outside of that portion.

That outside of that portion opportunity, you can address a part of it through the tools of a Mastercard Send combined with a HomeSend because you've got multiple distribution points you could reach.

But even now, you don't have the right data and connectivity to the ERP systems of these B2B businesses that you can get with an ISO 20022 certified data center system like VocaLink.

That's the real difference.

So think of this as layering a cake.

There is what you can do with card.

I love it.

We're going to do it.

There is what you can do by adding on send.

I love it.

We're going to do it.

There's a little more I can do than most other people there by adding on the HomeSend capability.

I love it.

We're going to do it, but boy, what I really love is the capability with Fast ACH.

So I'll give you a number for the United Kingdom.

In the U.K. alone, VocaLink's domestic real-time platform carried as of last year about 1.4 billion transactions per annum.

And the combined value of that is $1.5 trillion.

Whatever you can look at addressing through card rails and through the equivalent of Mastercard Send rails would be a fraction of that number.

Now to be clear, the revenue dynamics and the challenges of building this out, I'm not discounting any of those.

Don't -- please don't assume that by next quarter, I'm going to have the world's answer to B2B payments.

I'm going to build it, but what I've got now is the right set of tools between card rails, Send, HomeSend and Fast ACH.

And as we get together and roll these out sensibly in sensible, profitable ways across the world, you should see us bringing choice and data capability through this -- to the front end of a B2B business.

Yes, and Jason, that is exactly also what we're doing with the MasterCard B2B payment hub, right?

Our investment in avid exchange, we were basically enabling smaller medium-sized businesses to automate the invoicing payment processes.

And one way to do it is, as Ajay said, to give a card offer, which you can -- which we are doing obviously through our virtual card offering, which will get linked into that system.

But in addition to that, those businesses want to have ACH capabilities, and what's called ACHplus capabilities, which is an ACH transfer with more data.

And what is wonderful with this B2B hub is that we will be connected into over 130 ERP system, which allows those businesses, both buyers and sellers, to be easily putting the data into their back-end systems so that they can reconcile those kind of payments with the goods delivered or sent.

Just keep this in mind, it's about choice.

For commercial enterprises as well as for consumers.

And I'll I'm trying to do is to have the repertoire that allows us to do that in a sensible, practical way.

And your next question comes from the line of George Mihalos with Cowen.

Ajay, I guess, lastly, an obligatory India question.

I know it's early days, but when you look at the market structure there, heavy on debit, obviously, you can do the local processing.

Is there any reason why structurally the revenue yield in India shouldn't be superior to Europe?

And can you envision needing to take a more direct role from an acquiring perspective, a la what MasterCard and Visa did in Brazil years ago?

So Martina didn't send you an e-mail on the side asking you to ask me an India question because of my poking her on Germany, right?

I'm just guessing.

But the big India opportunity, so there are close to 800 plus 850 million debit cards in that market.

A large number of them, by the way, are still used essentially for taking cash out from an ATM.

It's only a smaller number of them that are used at the point-of-sale, and credit cards are way smaller than the debit cards.

We're talking about a fraction of those.

Those are, of course, used at point-of-sale.

There's little cash take out on those, although there is some.

And when you put that together, you get a market that has lots of cards, more than they ever had, but still with a huge opportunity in the front of it.

The second side of it is the acceptance methodology.

Whether it's card payment or pay by QR code or pay via phone or a fingerprint, and all those options are being developed by different players in India, including us, I think what you'll find is that this is only as good as how the acceptance market in India evolves.

Now the acceptance market is growing rapidly in the sense that over the course of this last 8, 9 months, you've had a 70%, 80% growth in merchants.

When it comes to 2.5 million, 2.6 million merchants, depending on who you're counting.

If you look at the total number of merchants in India, the confederation of all India traders, with whom we have a very deep partnership, estimates there are 60 million merchants.

Now a large number of those are going to be fruit sellers and casual merchants, who I don't yet know how we will get to, to create electronification, although we probably could over time.

But there's still a large number there that should get into acceptance expansion.

Now the acquiring community in India is actually pretty good at growing the acceptance.

Their challenge has been in the past, the risk underwriting capability compared to their business model because all the acquirers in India are actually issuing banks as well, and their business model is not clear until the revenue dynamics of their business model is clarified by the Reserve Bank of India.

For the last few months now, since the demonetization, there has been a dispute going on about the level of MDR that the banks will make out of the system.

If you don't clarify that, you're going to find a lack of appetite on the part of the players there to grow acceptance.

It's got nothing to do with Visa and MasterCard going into the market, acquiring or not.

We ourselves won't know what our revenue model will be or what our profitability model will be till we get clarity on the pricing model in the marketplace.

That pricing model was supposed to have been clarified a couple of months back.

I think there have been recommendations made by the Reserve Bank of India to the Indian government.

We're still waiting for them to finalize that.

I'm hopeful they will finalize that.

I raised that recently in a public meeting with the Prime Minister as well.

I know they're working through a number of puts and takes to figure it out.

They will.

Once they do, I think back to the earlier question Lisa asking about QR codes, I think you will see between traditional terminals, mobile as a point-of-sale and QR codes with dongles, I mean, mobile as a point-of-sale with dongles and QR codes, I think you'll see a reasonably strong expansion of acceptance in India.

And people like us and our competitors, we can focus on enabling banks and merchants to make sense out of this opportunity.

Remember, there's one big impetus coming, which is the implementation of a goods and services tax, called GST, in India.

That GST has levels and slabs, but most commodities are at 28%.

People will be paying that 28% when they receive goods in a merchant shop.

A merchant is no longer incented to help a consumer not pay taxes because they are most likely to have paid a relatively high tax rate on receiving those goods from their supplier.

And therefore, subsidizing that to a consumer by helping to avoid taxes is probably something that we should see reducing over the next few years.

And that, to me, is the real change in the secular tradewind in this case.

So if we can get our stuff together in the MDR, get the acceptance expansion going, build the right digital tools and QR tools and roll those out, while also not losing focus on cards, I think that's a really interesting opportunity over the next 5 to 7 years in India.

I see that we've got to the end of our allotted time.

Ajay, do you have any final comments to make?

All right.

So thank you for all your questions, and I'm going to leave you with a couple of closing thoughts.

We've had a strong first half of the year.

We're just really pleased to have delivered record revenue and earnings per share in this quarter.

I believe we're executing well against our strategy.

We have added a number of new capabilities, which we were talking about during the Q&A, which I think differentiate us from competition and they add real value to our merchant and bank customers.

With Fast ACH, we now have the ability to offer even greater choice for our customers, with both card and bank account-based payment solutions.

With the MasterCard B2B Hub, we think we're continuing to deliver innovative solutions to help companies manage their businesses more efficiently.

And with Brighterion, another company acquired this quarter, we're extending our capabilities in artificial intelligence to create an even better and safer payment experience for consumers.

So I'm looking forward to having a number of you join us at our upcoming Investor Day in New York.

You'll have an opportunity to hear about our strategic areas of focus, and our -- and you can get a chance to touch and feel and experience the various ways that we're working to capture new payment flows and help to shape the future of where payments are going.

Thank you for your support, and thank you for joining us today.

And this concludes today's conference call.

You may now disconnect.