(Adds additional details from earnings conference call, analyst comments and updated stock price.)PURCHASE, N.Y. ( TheStreet.com) -- MasterCard ( MA) charged past analyst expectations for the second quarter, but like its rival Visa ( V), the electronic payments network is not immune to the global economic recession. MasterCard reported a 26.4% increase in net income to $349 million, or $2.67 per diluted share, vs. the year-ago period, excluding a special item from last year. Net revenue jumped 2.7% to $1.27 billion, fueled by higher pricing, increased transactions on debit cards and decreases in the number of rebates and incentives it doled out during the quarter. In the year-earlier quarter, MasterCard recorded a $1.65 billion charge related to litigation settlements. MasterCard recorded an additional $500,000 charge last quarter also for litigation. Analysts polled by Thomson Financial had expected earnings of $2.42 a share on revenue of $1.25 billion. Excluding special items, MasterCard's operating expenses fell 13% to $722 million, mainly due to decreased advertising and marketing costs, the company said. "We are very pleased with our second-quarter financial performance and are adapting well to the challenging economic environment," CEO Robert Selander said. "The thoughtful actions we've taken to realign our resources and priorities to match customer and local market needs, as well as our sharp focus on expense management, have enabled us to deliver strong operating margin and net income improvements. "At the same time, we continue to invest in the future so that we are solidly positioned once the economic tide begins to turn," Selander said. "We operate a global, flexible and resilient business that will continue to benefit from the ongoing shift toward electronic payments, which consumers, businesses and governments find more efficient, secure and easier to manage."
Visa also beat Wall Street's earnings expectations when it reported its fiscal third-quarter results after the bell on Wednesday. MasterCard shares were adding 4.9% to $197.78 in recent trading. Visa shares were up 2.5% to $68.45. But the news was not all rosy. Due to the global recession, MasterCard's total gross dollar volume fell 9.3% on a U.S. dollar basis to $595 billion, while purchase volume on a U.S. dollar basis declined 8.6% to $450 billion, as consumers spent less on their credit cards. MasterCard's U.S. credit card usage dropped 18.7% to $120 billion. Debit usage made decent gains in the quarter. Worldwide debit usage rose 11.1% in the second quarter to $113 billion. The economic slowdown around the world "continues to prove challenging for consumers, our customers and for us," Selander said during a conference call with analysts Thursday. "We see no reason to change our view that the economy will not begin to improve until 2010." As a result of the continued challenges in the economy, Selander said that the company expects its minimum annual net revenue growth to fall below 12%. The company had previously made similar comments. In order for the company to achieve at least 22% growth in net income, revenue growth would need to be somewhere in the low-single digits, along with lower expenses and excluding any impact of severance charges, he said. MasterCard's second-quarter profit was fueled by large reductions in advertising expenses, which are unlikely to be sustainable, analysts say.
The company cut just over $100 million in the quarter as compared to the year-earlier period, which "contributed nearly 30% of the profit for the quarter," says Bart Narter, senior vice president of the banking group at Celent, a Boston-based financial research and consulting firm. "One of the main value propositions of MasterCard is its brand and cutting advertising from $281 million to $180 million might be expedient this quarter, but not sustainable in the long run." But MasterCard, like Visa's management team, said there are some encouraging signs of improvement. He noted new U.S. home sales rose more than expected in June as well as three months of gains in the Conference Board's index of leading economic indicators. In MasterCard specifically, Selander pointed to monthly U.S. spending in the retail sector in June was consistent with May's results "indicating generally stable conditions and point to a more stable environment for the second half of this year," he said. MasterCard said that cross border volumes for processed volume and transactions through the first four weeks of July continued to stabilize across most regions. Processed volume, while continuing to decline in the U.S., the rate of decline slowed in July, the firm also said. -- Reported by Laurie Kulikowski in New York.