Mastercard Incorporated Q3 2010 Earnings Call Transcript

Mastercard Incorporated (MA)

Q3 2010 Earnings Call

November 02, 2010 9:00 am ET

Executives

Barbara Gasper - IR

Compare to:
Previous Statements by MA
» Mastercard Incorporated Q2 2010 Earnings Call Transcript
» Mastercard Incorporated Q1 2010 Earnings Call Transcript
» MasterCard Q4 2009 Earnings Call Transcript

Ajay Banga - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of MasterCard International and President of Mastercard International

Martina Hund-Mejean - Chief Financial Officer and Member of Executive Committee

Analysts

Adam Frisch - Morgan Stanley

Craig Maurer - Credit Agricole Securities (USA) Inc.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Tien-Tsin Huang - JP Morgan Chase & Co

Rod Bourgeois - Bernstein Research

Andrew Jeffrey - SunTrust Robinson Humphrey Capital Markets

David Hochstim - Buckingham Research Group, Inc.

Jason Kupferberg - UBS Investment Bank

Timothy Willi - Wells Fargo Securities, LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter MasterCard Inc's. Earnings Conference Call. My name is Jeremy, and I will be your coordinator for today. [Operator Instructions] At this time, I'd like to turn the presentation over to your host for today's call, Ms. Barbara Gasper, Head of Investor Relations. Ma'am, you may proceed.

Barbara Gasper

Thank you, Jeremy. Good morning, everyone, and thank you for joining us today, either by phone or webcast, for a discussion about our third quarter 2010 financial results.

With me on the call today are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer. Following some comments from Ajay and Martina, highlighting some key points about the business and our third quarter results, we will open up the call for your questions.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website at mastercard.com. The earnings release and slide deck have also been attached to an 8-K that we filed with the SEC earlier today. A dial-in replay of this call will be available for one week through November 9 as well as posted on our website for 30 days.

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 here today. Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings.

With that, I will now turn the call over to Ajay Banga. Ajay?

Ajay Banga

Thanks, Barbara, and good morning, everyone. Before Martina gets into the details of the results, I thought I would comment on some of the operational drivers in the quarter as well as some recent business highlights.

So in this third quarter, we saw net revenue growth of 4.7% on an as-reported basis or 7.3% on a constant currency basis. GDV, gross dollar volume, grew 8.45% on a local currency basis, and cross-border volume grew 15.4%, continuing the momentum from the first half of the year. Processed transaction growth was slightly positive for the quarter. And there, we are tempered by the continued roll-off of several U.S. and U.K. debit portfolios. But excluding those deconversions, underlying transaction growth was about 13%. These factors and cost savings are kind of put together would allow us to deliver an operating margin of 53.6% this quarter, a four percentage point expansion over last year's third quarter. And all of this have fueled net income growth of 14.6% or about 19% on a constant currency basis.

Reflecting relative economic growth trends, our volume growth outside the U.S. outpaced growth in the U.S. The Asia/Pacific and Latin America regions just continue to deliver strong double-digit growth, driven by both domestic and cross-border volumes as the economic expansion is persisting in these markets. And while it's true that a number of the Asian and Latin American economies are showing good growth in domestic demand, the fact is that consumption in the U.S. and Europe still accounts for more than half of global PCE [personal consumption expenditure]. And so for Asia and Latin America to keep growing at these rates for an extended period, we really need to see consumption pick up again in the U.S. and in Europe.

Now aside from that, purchase volumes in Europe remain relatively healthy despite what we all read about the continued macroeconomic situation in the continent. In general, European did not accelerate their spending to the same extent as the other markets did a few years ago, and their response over the last couple of years is also, therefore, more muted. And during the summer holiday season, we continue to see them traveling. And as many of these countries continue to move away from a relatively high percentage of cash transactions, the shift to electronic forms of payment just continues to generate new volume for us.

In the U.S., while the market is looking healthier than it did this time last year, the economy continues to show conflicting signals with the Fed [Federal Reserve System] predicting modest improvements until the second half of next year of 2011. U.S. consumer spending appears to be following those very mixed signals even when looking at our own data. And while our U.S. credit volume growth trend continued to improve, it is being driven by commercial credit. Consumer credit growth remained about flat with the second quarter. This is also consistent with our U.S. SpendingPulse data, where September retail sales showed discretionary spend remained largely in check. And that's in contrast to U.S. debit volumes, which, excluding the debit portfolio roll-off, continued to see growth in the mid-teens.

So now let me touch a little briefly on two regulatory developments here in the U.S. First, we're pleased to have reached a settlement with the U.S. Department of Justice late in the third quarter. After two years of investigation, the DOJ required us to simply clarify the rules that we already had in practice everyday, which allow merchants to discount.

Second, turning to the financial reform bill, we have little more to report beyond what we communicated at our investor community meeting day on September 15. We're awaiting the Fed's ruling. And until we see it, it's impossible to predict the outcome to either MasterCard or the entire payments industry. At our recent meetings with the Fed, we have continued to have a constructive dialogue as we work to gather a complete picture of the U.S. payments industry. Consistent with what we believe you are hearing, we expect the first drop of the Fed's position sometime in December, and we are planning for the range of outcomes that we talked about earlier. Given our U.S. debit share and as some level of exclusivity will go away, we see upside potential for MasterCard. However, we will have to wait for the Fed's decision to determine the true nature of the impact on our business.

Read the rest of this transcript for free on seekingalpha.com