MasterCard Q1 2007 Earnings Call Transcript

May. 2.07 | About: MasterCard Incorporated (MA)
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MasterCard Income. (NYSE:MA)

Q1, 2007, Earnings Call

May 2, 2007 9.00 am ET

Executives

Barbara Gasper - IR

Chris McWilton - CFO

Tara Maguire - Corporate Controller

Analysts

Craig Maurer - Calyon Securities

Chris Mammone - Deutsche Bank

Liz Grausam - Goldman Sachs

Pat Burton - Citigroup

Chris Brendler - Stifel Nicolaus

Tien-Tsin Huang - J.P. Morgan

Bruce Harting - Lehman Brothers

Robert Dodd - Morgan, Keegan

Greg Smith - Merrill Lynch

Andrew Jeffrey - Robertson & Humphrey

Sanjay Sakhrani - Keefe Bruyette & Woods

Moshe Katri - Cowen & Co.

Chris Brendler - Stifel Nicolaus

Matthew Park - Prudential

Presentation

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2007 MasterCard Earnings Call. My name is Natasha and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to Miss Barbara Gasper, Head of Investor Relations. Please proceed.

Barbara Gasper

Thank you, Natasha. Good morning, and thank all for joining us today either by phone or webcast for a discussion about our first quarter 2007 financial results. With me on the call this morning are Chris McWilton, MasterCard's Chief Financial Officer and Tara Maguire, Corporate Controller.

Following comments by Chris, highlighting some key points about the quarter we will open up the call for your questions. In total, the call will last up to one hour. For your reference 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 www.mastercard.com. These documents have also been attached to an 8-K that we filed this morning with the SEC. A replay of this call will be posted on our website for one week until May 9th.

Finally, as set forth in more detail in today's earning's 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 your recent SEC filings. With that, I would now like to turn the call over to Chris McWilton. Chris?

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Chris McWilton

Thank you, Barbara. Good morning, everyone. Let me start by saying we are very pleased with this quarter's results as we spelled out in press release. These are not only record results for a first quarter, but record results for any quarter in the Company's history.

The outstanding financials are testimony to the strength of our customer focused business model, the secular movement from cash to electronic forms of payment in all corners of the globe. Fundamentals of the business are currently very strong and our first quarter results providing solid foundation, plus to deliver on our business objectives for 2007.

Turning to page two of the slide deck, we delivered record net income of $215 million or $1.57 per share on a diluted basis. Revenue growth was 23.9% driven primarily by strong GDV growth, processed transactions growth and the continued impact of restructured cross-border pricing implemented in April 2006.

Revenue growth combined with our ongoing focus on costs resulted in significant operating margin improvements 34.3% from 24.7% in 2006. In addition to the financial results we had several recent significant business developments. Most recently we announced an agreement with Lloyds TSB in the UK. The results of this deal, which became effective in March, Lloyds will issue a majority of their credit card portfolio through MasterCard.

The deal enhances our existing strong relationship with Lloyd's. We are pleased that Lloyd's recognized our value proposition. Strictly the capabilities and analytical insides provided by our MasterCard Advisors group often a differentiator for us with our customers.

In April we announced the launch of a new World Elite program with Sotheby's and GE Money. As you may remember that MasterCard's World Elite program allows our customers to target executives and elite affluent customers by delivering significant benefits and rewards including premium travel services. The Sotheby's World Elite card expands our position to affluent segment by its card holders with exclusive access to card world, partnerships with prestigious museums and a suite of luxury rewards.

Finally we continue to make progress with our PayPass initiative. We now have over 14 million cards and devices just to be used at over 51,000 merchant locations worldwide, and the acceptance environment such as vending, taxis, phone booths in transit. Last quarter we expanded our PayPass efforts within Europe and Asia Pacific.

In the U.S. we equipped 6,000 vending machines that offer the nations leading brands such as Coca-Cola and Cadbury Schweppes, plus electronic forms of payment including PayPass. We also have one new update with regard to litigations, trial date for our Amex Discover litigation has been set for September 9, 2008.

With that let's turn to page 3 of the slide desk for more details on the financials. As you can see net revenue for the quarter was $915 million a 23.9% increase over 2006. Currency fluctuation of the Euro relative to the U.S. dollar contributed 2.5 percentage points of the revenue increase. A 525% point attributable to a restructuring and placing primarily in cross-border transactions implemented in April of 2006.

With the fluctuation of the Euro relative to the US dollar contributed approximately 1.9% points resulting in an increase in expenses for the quarter. We experienced a 9.6% point improvement in our operating margins for the quarter demonstrating our leveragable business model. There are no special items in the first quarter of either 2007 or 2006 making year-over-year comparisons quite simple.

Moving to page four, in the first quarter we experienced continued growth in both GDV and in processed transactions. GDV grew 16.4% on a local currency basis and 19.1% on a US dollar converted basis to $509 billion.

What we have not shown on page four, purchase volume was up 18.0% on a local currency basis and cash volume was up 12.1% on a local currency basis. Well, the United States remains our largest region in terms of both volume and revenue; regions outside of the US such as EMEA and Latin America continue to grow with faster rates demonstrating the global strength of our business.

Noted in our press release that GDV and cash volume in the Asia Pacific region are lower than previously reported and we decided to remove commercial funds transfers in China from these volumes versus funds transfers adjoining transactions that facilitate exchange of funds between bank branches but do not involve traditional withdrawals or balance transfers. We believe this is a more accurate reflection of our cash volume in Asia Pacific and correlates more directly to the revenues we generate in that region.

The adjusted historical volumes in Asia Pacific enable you to perform year-over-year comparisons. As discussed in the past, one of the metrics we focused on is the revenue yield were net revenue per $1,000 of GDV. This metric was 18.0 basis points in the quarter versus 17.3 basis points in the first quarter of last year. Calculation incorporates the adjustment in Asia Pacific which I just mentioned is driven by printing changes and strong focused transaction growth in the quarter.

Office transactions or those transactions processed across our network increased 19.4% to $4.2 billion for the quarter. Additional details about our operating performance could be found in page 7 of our earnings press release, on the IR section of our website.

Page 5, showed a net assessment increased $18 million or 7.4%, $262 million. Gross assessments increased $49 million or 11.9% over 2006 due to increased GDV offset by the reclassification we discussed on prior calls implemented in Europe during April 2006 to address safer requirements. As a result of these changes, certain assessment fees totaling $31 million were reclassified with a currency conversion at cross-border component with an operation speed. Net assessments as a percentage of gross assessments declined due to increased incentives primarily from new and renewed customer and merchant agreement.

Turning to page 6, you can see the net operations speed increased to $158 million or 31.9% to $653 million. Both operation fees increased to $181 million or 33.3%. This growth was driven in part by two factors; first, growth in profit transactions and gross dollar volume that I've previously described on slide 4. Second, an increase in currency conversion and cross-border revenues driven by fee restructuring which took place in April 2006.

International volumes were up 18.3% year-over-year with an increase in global travel and tourist in total year-over-year increased in currency conversion at cross-border revenue the re-classification of $31 million from assessments to operation fees which I just mentioned on slide 5.

Please turn now to page 7 for some detail on expenses. Total operating expenses increased 8.2% to $601 million during the first quarter. The increase was primarily driven by a 14.6% increase in general and administrative expenses primarily due to two factors; first, an increase in personnel cost due to the hiring of additional sales staff, as well as, increased performance incentive and contractor fee.

Second, an increase in professional fees primarily related to legal cost to defend outstanding litigations and other strategic initiatives. Offsetting the increase in G&A was a 2.3% decrease. Advertising and marketing expenses causing a shift in planned spending to later quarters this year versus last year.

Turning to page 8; we ended the quarter with $2.5 billion in cash, cash equivalents and available for sale security. We also had 2.6 billion in stockholder's equity. Prepaid expense increased $60 million primarily due to the timing of payments related to advertising and amounts paid to customers under incentive agreements.

Accrued expenses decreased by $134 million, mainly due to payments in 2006 of fully performance incentives and advertising, generating $71 million in cash flow from operations during the quarter, the first quarter is traditionally accretive of large cash outflows due to employee performance incentives and advertising expenses, both of which were accrued in the fourth quarter of 2006.

Turning to page 9, there are a few items I would like to highlight for you and to refine and update your models for the second quarter of 2007. First as I previously mentioned we will no longer see the grow-over revenue growth impact resulting from the restructuring of the cross-border transaction pricing implemented in April last year.

Second in the second quarter of 2006 we incurred certain costs related to a large debit portfolio conversion. In second quarter of 2007, we will not incur these costs or they will be partially offset by rebates and incentives related to the new volume activity on these cards.

Next, as I mentioned in the past we anticipate very modest growth in A&M in 2007 in response to competitive opportunities and to leverage momentum in the business. We expect the second quarter of A&M as a percentage of full year A&M spend to be slightly higher than our traditional [non rule club] year and lower than 2006.

Finally, there are three special items in the second quarter of 2006; first the $23 million expense for litigation settlements, second a $395 million non-cash charge toward contribution of stock to the MasterCard Foundation, last $7 million in interest income and IPO proceeds held for redemption.

In summary we are very pleased with our record performance in the quarter and believe the business has great momentum. We are well on our way towards achieving strong financial results for 2007.

Barbara Gasper

We are now ready to begin the question and answer period and in order to get to as many as possible in our one hour timeframe, we ask that you limit yourself to a single question with one follow-up and then re-queue if you have additional questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Craig Maurer. Please proceed sir.

Craig Maurer - Calyon Securities

Yes, good morning great quarter.

Chris McWilton

Thank you.

Craig Maurer - Calyon Securities

I was hoping you could expand upon the discussion on first quarter marketing. You were in line with the industry in terms of pulling back or marketing in the quarter. I was just hoping you could add some color as into why you didn’t see the same level of opportunity in the quarter that you have seen in the past despite the exceptionally strong growth in all your volume numbers. Thanks.

Chris McWilton

I think what we want to do is keep a little bit of our power drive for the second quarter. We have some competitors who are cutting back on advertising and marketing, right now. We have some competitors who could be a little bit distracted with the internal organizational matters. And we think we can be more effective with moving some of the advertising and marketing in a really impactable way in Q2. So take a look at our spend during the quarter and again wanted to keep some of our power drive for latter in the year.

Craig Maurer - Calyon Securities

Good, thanks.

Barbara Gasper

Operator next question please.

Operator

Sure one moment. And your next question comes from the line of Chris Mammone with Deutsche Bank. Please proceed.

Chris Mammone - Deutsche Bank

Thanks. We are hearing that Bank of America is going to start issuing MasterCards in late August. Can you talk a little bit about go for that deals with Signature and new account openings only?

Chris McWilton

As you know, we filed an 8-K with respect to that agreement earlier in the year. Obviously we are very happy to have that arrangement in place with Bank of America. I can't comment specifically on a customer arrangement other than what is in that filing, obviously for customer confidentiality purposes. I will say that we have a great relationship with MBNA prior to the acquisitions by BoA and we hope to leverage that by putting some of our sponsorship assets and properties as BoA expands its debit portfolio.

Chris Mammone - Deutsche Bank

Okay, thanks. And then just as a follow-up. Can you just give us an update on SEPA with what’s happening in Belgium. I think they have changed their mind on using Maestro?

Chris McWilton

Belgium is an interesting situation they have the Belgian Banking Federation which was basically acting as a collective bargaining agent for all the banks in Belgium. And under SEPA interchange was going to for the first time being introduced for domestic transactions in Belgium. Merchants did not like that and in response to merchant pushback the BBF basically withdrew their collective bargaining position.

We don’t look at it as a setback. Basically we are in a position now to negotiate with each one of those banks individually and actually you are probably in a better position to customize and tailor a program that needs to their needs.

Maestro is very strong in Europe. We have over 300 million Maestro cards and it’s quite for long time. They are on the cards that aim for international acceptance, the Maestro brand. So we still feel very strong about SEPA opportunities and again don’t view Belgium as any sort of setback.

Chris Mammone - Deutsche Bank

Okay thanks.

Operator

Your next question comes from the line of Liz Grausam with Goldman Sachs. Please proceed.

Liz Grausam - Goldman Sachs

Thank you. Your revenue momentum is pretty stunning right now. Chris if you could help us understand on two parts. One the process transaction in GDV growth continues to accelerate and has in a quarter-to-quarter basis for sometime, some perspective on what’s really driving that. And secondly your incentives are not growing as quickly as they have in the last 2 years. So help us understand, how are you driving all this international growth yet your incentives seem to have abated a bit, relative to you where you have been?

Chris McWilton

Well Liz, as I mentioned in my remarks this is a global momentum. If you look at the operational statistics that are in the filings and you look at the growth rate in Latin America and Asia-Pacific and the Middle East, they are just really phenomenal. I think a lot of us who live here in the US, sort of get accustomed to the fact that everybody has credit cards and they use it on a regular basis. But there are large parts of the world over where cash is still the dominant form of payment. In India, people go to the ATM machine, pull out cash and then walk into the store and pay the merchant. So we are seeing exceptional growth overseas.

We continue to see strong international travel, and as we’ve explained in the past, we make a lot of money when people hop in an airplane, cross a border because we process that transactions, we receive currency conversion revenue from that. The volume goes on the card. Generally people are putting high-priced airline tickets and deals and entertainments on those cards. So the global travel is still doing very well and we are just seeing momentum across the board in all parts of the world.

In terms of the rebate and incentive, I think I have talked in the past -- don’t get tied up in looking at the rebates and incentives as a percentage of revenue quarter-over-quarter. When I look at this business, and what we evaluate deals are the effective revenue pricing, what’s the basis points per dollar of GDV.

And as I mentioned we have 18 basis point quarter versus 17.3 last quarter, full year, last year adjusted for the China volumes of 17.3 as well. So, we've enabled through selective pricing increases from doing things that aren’t volume related, such as our advisory business, maintain that effective basis point yield -- at levels we have talked about the general decline a long period of time also.

I feel pretty good about our ability to sustain that, and I mentioned in the business like I said it’s very strong right now.

Liz Grausam - Goldman Sachs

And in terms of the global diversification and the ramifications it may have on your added marketing spends, I noted some shift between geographies, but is there an opportunity you potentially are now in the second quarter, you said it might be a little bit more heavy to really use your advertising budget to increase usage to a consumer level of these products?

Chris McWilton

We're always looking at our ad and marketing budget, it's dynamic. The amount, as I have mentioned in the past, is going to be very modest growth for the full year, but we're constantly looking at whether replacing our ad and marketing in the markets to make the most sense, we can get expanded acceptance, we can get increased customer usage of the product. We can do some things either with issuers or with merchants. It will pick up the use of our card at the point-of-sale. So that is a dynamic advertising and marketing exercise, and we are constantly looking where the best opportunities are.

Liz Grausam - Goldman Sachs

Alright, thank you.

Operator

Your next question comes from the line of Pat Burton with Citigroup. Please proceed.

Pat Burton - Citigroup

Hi, congratulations as well on the fundamental results. Chris, I guess I'll ask about the litigation and regulatory environment, two parts in one question. Any updates there and any comments on some of the press reports coming out of these in Europe about potentially working something out with the EU? Thanks.

Chris McWilton

Pat nothing on the Amex and Discover cases or the interchange cases, and as I mentioned we now have a trial date set by a Judge Jones. I did read the press release coming out of Busy Europe, and I think it's consistent with what the Commission had said earlier in the year that they had taken a fairly radical fans on interchange, basically saying they want to abolish interchange across Europe quite earlier in their reviews of the industry. And in January came out with a -- I think a more moderate position, they did recognize there was some value to interchange and abolishing it wasn't considered the right answer.

So if I think the Visa statements were more consistent with that. I don't know whether Visa is in any sort of discussions with -- for that specific press release but, certainly we believe that interchange is a necessary part of a third-party payment system. We believe it's necessary to balance the cost between issuing and acquiring and to get that sort of robust pace of both acceptance and issuance that’s necessary for card growth and for consumers to enjoy the benefits of a new card itself.

We are looking forward to a day when this is settled and behind us because Europe is a big market, very important to us. You can see in our operational statistics, we are doing very well in Europe today, but I think there is a little trepidation inspiring our customers until they know the platform on which they are going to be playing with respect to interchange.

Pat Burton - Citigroup

Thank you. Look forward to the Investor Day.

Chris McWilton

Thanks. Thanks Pat

Operator

You next question comes from the line of Chris Brendler with Stifel Nicolaus. Please proceed?

Chris Brendler - Stifel Nicolaus

Hi. Thanks, good morning. Chris, I was wondering if you just help us with something, if I look at the results this quarter, and even if I back out the 5% from currency, I am sorry, 5% from cross-border and 2.5 from currency looking at it very strong, you know, 60% or 70% revenue growth which is in line with your GDV, but I think your long-term guidance is 8% to 10% revenue growth. So, can help me think about what about the operating environment X where I think I can back out is driving such a strong growth and is it a makeshift towards small transactions indebted, is it international that’s driving the revenue growth? Help me think about why you are able to been have so successful on the top-line?

Chris McWilton

I think you hit the nail on the head. It’s strong fundamentals in the business, profits transactions, or it is GDV, and even if you back out the dual content impact and the cross-border pricing impact. I think you have an average of around 8% with GDV. People are traveling or going across borders. The volume growth is strong in emerging markets and international parts of the world we are not saying that perhaps some of the sub prime fall-off that you are seeing in the U.S. There is a lot of uptake in secular momentum moving out of cash and into our form of payments. So it's not one thing I can point to it just the whole business seems to be firing on all cylinders right now. I think our global presence and our unified global structure that we are one company dealing with customers around the world, it pays off.

Pat Burton - Citigroup

I guess one follow-up on the legal front. Do you, is there anything you can say in terms of the September '08, is there a time line there, do they need more time for discovery, where do we stand and what was the reason for the delay, and then does it change your, did it impact your decision on the buyback or does it impact your decision on the buyback?

Chris McWilton

As far as we are concerned there was no delay. I think internally we had always thought that the trial would take place some time in 2008. I imagine a lot of things going to a judges decision, and want to set a trial date (Technical Difficulty) it look like and how you see the jury and all sort of things. So September 2008 is sort of a non-event around here.

Obviously when we talk to the board about the buyback we have to be sure that they need to be taking responsibility about our ability to take care of any of the litigation matters and at the same time buy stock back and return surplus equity to stockholders. So they were certainly aware and constantly briefed on the litigation every time we need to give an update. So if we decide, it will influence our plans to proceed with the repurchase.

Pat Burton - Citigroup

Thanks so much for the color.

Chris McWilton

You are welcome.

Operator

Your next question comes from the line of Tien-Tsin Huang with J.P. Morgan. Please proceed.

Tien-Tsin Huang - J.P. Morgan

Hi, good morning it's Tien-Tsin.

Chris McWilton

Hi Tien, how are you?

Tien-Tsin Huang - J.P. Morgan

Good, congrats on the results. I have couple of questions first the timing on Llyod's conversion, how should we think about either that rolling into the P&L and are there any conversion fees or payment that we should consider?

Chris McWilton

Again, I can't comment on specific customer agreement details, but it'll take place probably towards the second half of the year by the time the cards actually have to be converted to start rolling out the marketing programs etcetera. These things are light switches and some are often. Mainly as you know, it doesn’t take time for the cards to get in to circulation and to start getting fees off the volume.

Tien-Tsin Huang - J.P. Morgan

Okay, got you.

Chris McWilton

I can't comment on anything on the payment.

Tien-Tsin Huang - J.P. Morgan

Fair enough, it sound likes it's more, it's not a one shot deal it will slowly lead into the P&L, okay. Then in terms of, I guess trying to get a better of sense of what inning we are in, in terms of adding sales staff and international account managers. I am not asking a question on pricing. More wondering about, when we'll see normal or stable growth in personal costs and G&A in general?

Chris McWilton

I think in markets that we are in the top of the SEPA phonics. I think we probably got a few more big houses in the books, but I think at least till 2008 we are going to continue to see fast buildup. One of the things I would look at to be above my job is to maintain personal costs and make sure we go hire ourselves. If you have got 23.9% revenue growth before saying I can do more, you can give me people, I have to think twice. I think Barbara has the same view.

Tien-Tsin Huang - J.P. Morgan

Very good, thank you.

Operator

Your next question comes from the line of Bruce Harting with Lehman Brothers. Please proceed.

Bruce Harting - Lehman Brothers

Can you talk about, you mentioned the Latin Americas growth, can you talk about the Brazil initiative and the processing you are doing there and maybe as a case study for wins in other areas? Thanks.

Chris McWilton

Yeah, Brazil is a case where, well then we have the ready to be amount. It’s just a ready card and we do plastic processing in Brazil, and as I mentioned that previously. Today we basically do processing in the Anglo American countries; the U.S., the UK, Canada and Australia and build especially the ready card operation we have there.

There are large blocks of the world where we are not processing, not many in settlements for domestic transactions. So it was a great example of that, we will process a cross-border transaction in our network but in a certain country there are domestic payment schemes operated by the banks or the source of the banks that are doing the processing. And these banks are starting to realize the need for a subscale operation.

We need to make investments in technology, to make sure to maintain a reliability and security and there are opportunities for them to have a transition that's [putting] and processing demands it that way. We have the same thing in the UK with the [Portugal] over years ago of course some of the banks are doing processing that realizes the economy to scale to having us do as much a brand crossing there.

So looking at these opportunities they are all over the world. They do tend to develop slowly [first some of our] banks and we have different interest (Technical Difficulty) some we look at walk away from because as the prices are too high. We love to process transactions. It has become more relevant to the transaction so data analytics offers transactions to process them. And obviously we'll be considering more revenue on a processed transaction the one that will match with that.

Barbara Gasper

Operator next question please.

Operator

And your next question comes from the line of Robert Dodd with Morgan, Keegan. Please proceed.

Robert Dodd - Morgan, Keegan

Hi, guys. Just going back to the rebate question if we can. It’s the net yield is not just stable let's put it that way. The increase year-over-year is pretty substantial, what are you customers asking for in exchange for basically not receiving larger rebates, because after all, last couple of years we basically were growing meaningfully grade of late then both net and gross revenue. What are they getting in exchange now and how -- what are they asking for in future?

Chris McWilton

Good morning. (inaudible) with respect to that, if you look at the base point yield in the first quarter was 18 basis point. But remember we had the impact of the cross-border pricing in there which throws that up.

Robert Dodd - Morgan, Keegan

Yes. But you had that impact in the fourth quarter, as well, and the yield was relatively flat?

Chris McWilton

(inaudible) in the fourth quarter period was very high of rebates and incentives, that's what retains a lot of things with merchants -- our customers, so the accounting techniques those were reported revenue and rebate in that period. So, be careful with the seasonality of the business. I have always emphasized that it’s really not a meaningful exercise. I think if you compare rebates and incentives sequentially, kind of sequential quarterly basis, and even on a quarter-over-quarter basis you are going to be subject to situations where you are going to have debit card portfolio conversion going for repaying card conversion costs and those costs are already baked in. For periods you have to look at this over time, and as said before, we experienced a gentle downward drift in that basis point deals. Reports on this quarter, we had currency conversion that benefited from the yield. I don’t (inaudible) MasterCard being anything different from the above, what I mentioned in the past.

Customers are still very aggressive. Look at some of the yield-curve pressures our major customers are under. They are trying to retrieve every penny they can out of their business. They sit across the tables for months. They are demanding a lot, and with consolidation going on, no we don’t see this winding up.

Robert Dodd - Morgan, Keegan

Thank you.

Operator

And your next question comes from the line of Greg Smith with Merrill Lynch. Please proceed.

Greg Smith - Merrill Lynch

Yeah. Hi. Is it possible to give us just the growth in cross-border transactions?

Chris McWilton

Yeah, I think we have it --

Greg Smith - Merrill Lynch

Today in the release?

Chris McWilton

We disclosed it in Q; I think I mentioned it on the script, basically 18%.

Barbara Gasper

Greg, do you have a follow-up question while we --

Greg Smith - Merrill Lynch

Yes, sure. Just -- you sort of alluded to this earlier with regards to the marketing spend, but I was just wondering if you're seeing any other kind of changes that Visa had of their restructuring in IPO, anything that could be a problem or a further opportunity for you over the next year?

Chris McWilton

Not specifically, I mean we had tremendous growth. You pick up anecdotes from the sales staff sometimes about either you are acting rationally or irrationally or increasing pricing or decreasing pricing, and no consistency that I can see. I think we are going to be a significant -- set of advantage fact that we have Europe as part of our global structure. Look at what's going on with ABN-Amro right now, and people there are chasing that bank. They pulled all of our customers and they all have operations in all parts of the world. So, we're looking forward to a chance to deal with these banks as one company rather than having to deal with MasterCard Europe and MasterCard Latin America, and MasterCard Asia. One company can deal with all these issues, I think we have construction behind it.

Greg Smith - Merrill Lynch

Great, thanks.

Chris McWilton

The international volume growth was 18.3% and that wasn't in the script.

Operator

Your next question comes from the line of Andrew Jeffrey with Robertson & Humphrey. Please proceed.

Andrew Jeffrey - Robertson & Humphrey

Thank you. Good morning. You obviously have a lot of levers that you can pull on pricing, could you talk a little bit about some of your pricing initiatives for the balance of this year as they may pertain to processors, for example, or any other area where you think you have some pricing leverage in the market place?

Chris McWilton

I wouldn't characterize that we have a lot of leverage that we can hold pricing. Our customers are diligent and thorough in their negotiations with us. But we do have, we have a global pricing community that meets regularly. What we are trying to do is make sure that we are extracting the appropriate price for the value provided to the customers on all of the different service and size. When we find that there’s a situation where we are not pricing effectively as we can -- those price increases, (inaudible) my desk on a regular basis. If nothing is planned for the rest of the year, significantly has, what we call as cross-border fees. And that is a need we sort of take a foot off the gas pedal and more of pricing altogether. If there is a strategic surgical way we can go in and extract a little bit more value under the relationship from that, but again, nothing of the same size and stock.

Andrew Jeffrey - Robertson & Humphrey

Okay. And recognizing that there is seasonality in the business, can you talk a little bit about where you think the long-term operating margins for this company could be, 34.3% was meaningfully ahead of a year ago, and I think meaningfully ahead of what most of us on the street had anticipated, and I understand there are some timing issues there but, just -- just broadly if you think about this business over the long term, what kind of profitability do you think you can drive?

Chris McWilton

We are going to try to maximize the margin. That's our job (inaudible) of the long-term factors out there (inaudible). Now, obviously this quarter was very strong from a margin standpoint. We have got a lot of scale in this business. We can keep our cost under control and grow the revenue at the base, immediately take out the current fee in the cross-border you can see the scalability. I caution you against looking at this quarter again, because as we have got a high margin and that's over at the end of the year, when we are heavily in to advertising and promotion and having rebates on the yield, probably come down. Certainly don’t extrapolate this yield from the margins for the rest of year. Certainly you saw in this quarter what the potential is for the company and I can't predict and that will be guided in long term objectives probably certainly after a great start and that allows [us to turn our} attention to our mind and the rest of the world as we compete in the area we get higher margins and will get them.

Andrew Jeffrey - Robertson & Humphrey

Terrific thank you very much.

Operator

And your next question comes from the line of Sanjay Sakhrani. Please proceed.

Sanjay Sakhrani - Keefe Bruyette & Woods

Alright thanks for taking my question. Most of my questions have been answered. If you could just remind us what that impact last year was on the payment made to the debit issuer, on the rebates and incentives line that will be great, thanks?

Chris McWilton

Yes, I can tell you what it was I can't tell you how much it was. Basic we had a customer, already a debit portfolio from a competitor to our brand and we paid for their market raising cost. Anytime you convert a card in advance with the normal expiration, the issuer is going to incur costs for producing the card, mailing the card, putting some hologram on the card and fax communication with the customer.

So in an effort to urge them to do that earlier rather than later we paid those card conversion costs. Their accounting polices dictated those card conversion costs to be quoted up front rather than spray them over the anticipated life of the card. That's something that we have done from day one and that not really changed our accounting policy. That did impact in the first and second quarters, as their demand of rebates and incentive, but I cannot disclose because of the customers confidentiality how much that was.

Sanjay Sakhrani - Keefe Bruyette & Woods

Okay, great. Thank you.

Operator

And your next question comes from the line of Moshe Katri with Cowen & Co. please proceed.

Moshe Katri - Cowen & Co.

Hi, thanks and nice quarter. Maybe you can talk a bit about, you mentioned something in the context of scale in the business, talk about some of the various factors in your view that could actually provide MasterCard with some more scale and obviously some of the future drivers for margin expansion, that’s number one. And then two, are you seeing any signs that actually tells you that there is anything different in terms of economic activity out there and given some of the, obviously that the results are very upbeat, but is there anything different that you are seeing out there in terms of market activity or economic activity? Thanks.

Chris McWilton

I'll take your scale question first. I think the thing that can drive more scale in this business and more margin expansion is more revenue. I think we've said clearly that we're not going to try to pave our way to prosperity here the business has great fundamentals right now. I think the people that can make meaningful impacts on our customers. So, in our advertising marketing, I said we're going to have very modest growth in there for '07. But we believe our brand is very important to us and we're going to maintain the strength of the brand around the world.

But we're not going to get more scale on operating margins, cost control, annual cost containment. We said something we think about all the time, but by reducing cost that's not how we plan to increase the margin, revenue gain. Obviously if we can process more transactions, get more in our networks that takes advantage of scale in the business. We have lots of capacity out there, (Technical Difficulty) offers more transactions and take advantage of the capacity there. So, now revenue growth and putting more transactions across our network that's picking up some of the plastic processing, processors around the world, obviously there are two areas that we are a bit focused on.

With respect to, are we seeing anything from an economic standpoint. That’s a broad question around the world. The revenue and the volume growth was very strong and I think it is too early to tell whether any of the sub prime fall out is going to impact to ripple through the U.S economy. But things still appear to be very strong. You have seen the earnings reports coming out in the past few weeks. The market seems to be thinking that the economy’s pretty [resilient] to get out of it. So we are not seeing anything here and if we signal broad based economic distrust.

Moshe Katri - Cowen & Co.

Thanks.

Operator

And your next question comes from the line of Chris Brendler with Stifel Nicolaus. Please proceed.

Chris Brendler - Stifel Nicolaus

Hi, Chris. One quick follow up if I could. Can you talk at all about the difference between margins and revenues on the debit versus credit and even more importantly International versus U.S.? I heard your commentary on rebate and incentives and how they are stabilizing. Is that partially driven by the success you are having internationally as you hid you’re the volume targets a little less over there?

Chris McWilton

You have to breakdown debit in turn, there's two forms of debit. There is signature and there is pin. In our signature based transaction basically your processes in our credit network of credit rails and basically carry the same pricing, less than in any credit transaction. A pin based debit not in probable to us as the signature based. If you look at our operational statistic and the growth in debit in U.S. in particular. We are getting a lot of traction there and you have seen of the success of that part of the portfolio conversion. I mentioned in the following question.

International volume is great for us as I mentioned somebody crosses the border it can't be processed on the domestic scheme, got to be processed in our network, and therefore we are getting not only the processing charge, but we are getting the currency charge by this, whether or not we convert to (inaudible) sales up. International volume really drives this business.

Chris Brendler - Stifel Nicolaus

And the margins as well, do you think that -- I think at the time of your IPO you broke out your international domestic revenue mix. Has that increased materially over the last year?

Chris McWilton

No. I don’t think we have broken it out in the past, and the revenue mix.

Chris Brendler - Stifel Nicolaus

Was at 35% or something like that, okay. That would be helpful in the future. Will see you on Investor Day. Thanks.

Operator

Your next question comes from the line of Matthew Park with Prudential. Please proceed.

Matthew Park - Prudential

Yes, good morning. You mentioned that you felt that there was opportunity for you to gain market share from your competitors as some of them may get distracted. Can you tell us how much of your growth at this point may be coming from any market share versus a market moving to the electronic payment? Thank you.

Chris McWilton

Let me clarify, I said, I didn’t say anything about market share when I was talking about, you know, our ad and marketing spend later in the year. I was thinking of ways -- the impactful way if we could make progress with our customers and have to do some things that merchant does (inaudible) so what's the percentage here? Good question.

As Bob mentioned a number of times in the past and I mentioned, we are not focusing on share. Company will focus on profitable shares, we are not out there trying to buy share, and doing things that could bring value to our customers (inaudible) offering amounts that effective basis point yield, able if possible. So, it’s been a share gain, there could be twins and roundabout on shares over the next from one sector of the (inaudible) over the general purpose credit cards and debit cards, international or U.S., measure it in a number of different ways and look at yields in due course; 83.9% revenue growth, if we focus on the right thing.

Matthew Park - Prudential

Great. And then my follow-up question is, how far do you think you have gotten in terms of differentiating MasterCard in terms of -- what kind of solutions you are providing and what kind of feedback you are getting from your card issuers? Thank you.

Chris McWilton

Well, our customers seem to be very happy because they are giving us a lot of business, and that we spend a lot of time on our customer-focused strategy, making sure we have people in place, that can be impactful to our customer’s business. They understand brand, they understand processing. They understand how to increase activation rates on cards, advisory capabilities, how to help them make money. But we're not just walking in with a plain sheet to the customers saying we could beat our customers walking with -- approach which says how can we help you make more money and then how can we both --. So, I think we made a difference there, and I think you'll see the difference also with one of our competitors forward and the fact that (inaudible) one company around the world, and not having to deal with different members of a Federation to get business.

Matthew Park - Prudential

Great. Thank you.

Operator

Sir, there are no further questions; I will now like to turn the call over to Mr. McWilton for closing remarks.

Chris McWilton

Thank you all for joining in today. Obviously, we're delighted with the quarter. We're very optimistic with respect to 2007. Like I said, the fundamentals are very good, and I think (inaudible). Thank you.

Barbara Gasper

If anyone has any additional questions, please feel free to reach out to either Investor Relations or Corporate Communications, your contacts there. Thank you, and have a good day.

Operator

This concludes the presentation. You may all now disconnect. Good day.

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