Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
MF logo

MasterCard Incorporated (NYSE:MA)

Q2 2007 Earnings Call

August 2007 9:00 am ET

Executives

Barbara Gasper - IR

Chris McWilton - CFO

Tara Maguire - Corporate Controller

Analysts

Liz Grausam - Goldman Sachs

Tim Willi - A. G. Edwards

Tien-Tsin Huang - J.P. Morgan

Adam Frisch - UBS

Ken Posner - Morgan Stanley

David Hochstim - Bear Stearns

Michael Cohen - Sunova Capital

Andrew Jeffrey - Robertson & Humphrey

Chris Brendler - Stifel Nicolaus

Robert Dodd - Morgan Keegan

Mark Sproule - Thomas Weisel Partners

Christopher Mammone - Deutsche Bank

Dan Perlin - Wachovia

David Parker - Merrill Lynch

Pat Burton - Citigroup

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2007 MasterCard Earnings Call. My name is Natasha and I will be your coordinator for today. At this time, all participants are in a 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 call over to Ms. Barbara Gasper, Head of Investor Relations. Please proceed.

Barbara Gasper

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

Following comments by Chris, highlighting some key points about the second quarter, we will open up the call for your questions. And 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 with the SEC this morning. A replay of this call will be posted on our website for one week until August the 8th.

And 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?

TRANSCRIPT SPONSOR

MF logo

What you WON'T hear on the call!

In 1957, a young couple named Bill and Carol Angle invested half their life savings in Berkshire Hathaway. According to Forbes magazine, today it’s worth over $300 million. What if you could do even half or a third as well?

One stock looks uncannily similar to an early investment in Berkshire Hathaway. Get its name now in a new FREE report from The Motley Fool.

Read the complete report courtesy of Seeking Alpha FREE.

To sponsor a Seeking Alpha transcript click here.

Chris McWilton

Thank you, Barbara. Good morning, everyone. We are really quite pleased with our second quarter results, epecially since this quarter’s net revenue represents record performance for any quarter in the company's history. Our financials demonstrate the underlying strength of our business and our ability to leverage the tremendous growth and opportunity in the overall payments business.

Turning to page two of the slide deck, we delivered net income of $195 million or $1.43 per share on a diluted basis, excluding special items. Including special items, we've recorded net income of $252 million or $1.85 per share on a diluted basis. Our record quarterly net revenue of $997 million was driven primarily by strong growth in GDV and processed transactions, including cross-border transaction volumes, which grew 17.3%.

Finally, we saw our operating margin improve 10.3 percentage points to 27.3% from 17.0% in 2006, adjusted for special items, demonstrating the leveragability of our business model. In addition to the financial results, there are a few business developments from the quarter that I’d like to highlight. In April, we announced that our Board had approved plans for certain accelerated Class B share conversions in 2007, and a $500 million Class A share repurchase, subject to shareholder approval of changes to our corporate charter.

In June, after receiving shareholder approval at our annual meeting, we provided some details about the mechanics of the Class B conversion process. As a reminder, the initial conversion window will extend from Saturday, August 4 through Friday, October 5. We expect to provide you with an update on the initial conversion and our share repurchase program as part of our third quarter earnings announcement.

Also in June, we announced that we reached an agreement to resolve our contract dispute related to sponsorship of the 2010 and 2014 World Cup soccer events. As you probably recall, we discontinued our sponsorship of the World Cup soccer events and received a total of $90 million in compensation. These funds will be used for general corporate purposes as business needs are identified.

We believe we now have greater flexibility to ship marketing resources originally earmarked for World Cup to drive and execute marketing programming at the regional and local levels.

Finally, I’m sure many of you have heard about the Redecard IPO that took place last month. Redecard had a merchant acquirer and processor in Brazil which up until last month was owned by three financial institutions in MasterCard.

Post IPO, we continue to hold a 4% stake in the company and the investment we made in 1996 is now appreciated substantially. We’ve entered into a lock of agreement for shares that if we elect to sell our shares, include some restrictions on timing and pricing of sales to non-qualified institutional buyers during the 12 months following the closing of Redecard’s IPO. If and when we decide to sell our Redecard shares, we will disclose the details of any sales in the ordinary course. I will emphasize that Redecard is an important customer of MasterCard, they continue to be a strong ally in the development of our business in Brazil.

With that let's turn to page 3 of the slide deck for more details on the financials. As I mentioned, net revenue for the quarter was $997 million, a 17.8% increase over 2006; currency fluctuation of the Euro relative to the U.S. dollar contributed approximately 2 percentage points of the revenue increase. There were two special items that we highlighted in the second quarter of 2007, first a 3.4 million reserve recorded for a litigation settlement and $90 million in other income related to the World Cup settlement I just mentioned.

We have several special items in the second quarter of 2006 relating to our IPO and the establishment of the MasterCard Foundation; Appendix A of slide deck provides the comprehensive summary of these special items.

Turning to page 4. In the second quarter, we experienced continued growth in both GDV and process transactions across all regions. GDV grew 13.3% on a local currency basis and 16.4% on a U.S. dollar converted basis to $555 billion. The second quarter was the thirteenth consecutive quarter of double-digit GDV growth on a local currency basis.

Although not shown on page 4, purchase volume was up 14.8% on a local currency basis and cash volume was up 9% on a local currency basis. Additionally, cross-border transaction volume, where the volume that had generated from cardholders who travel outside of the country where their card is issued, was up 17.3%.

While the United States remains our largest region in terms of both volume and revenue, regions outside of the U.S., such as South Asia, the Middle East, Africa and Latin America continue to grow at faster rates, demonstrating the global strength of our business.

As we discussed in the past, one of the metrics we focused on is revenue yield, or net revenue for $1,000 of GDV. This metric was 18 basis points in the quarter versus 17.8 basis points in the second quarter of last year. This metric has been relatively steady, it is flat versus the first quarter of 2007, but slightly higher on a year-over-year basis due principally to the strength in the international transaction volumes.

Processed transactions, or the transactions processed across MasterCard’s network, increased 15.2% to 14.6 billion in the quarter. You will note that this growth rate is down versus recent quarters due to the anniversary of a large debit issuer conversion that took place primarily in the second quarter of 2006. Additional details about our operating performance can be found on page nine of our earnings press release and on the IR section of our website.

On page five, we show that net assessments increased $34 million or 14.5% to $268 million. Gross assessments increased $59 million or 13.3% over 2006, due to strong GDV growth. Although we did not have the impact of conversion costs for a large debit issuer that occurred in the second quarter of 2006, our assessment rebates and incentives grew 12% versus last year; this is primarily due to approvals earlier in the year for certain merchant incentives, based upon MasterCard specific performance versus previous years.

Turning to page six, you can see the net operation fees increased $117 million with 19.1% to $729 million. Gross operation fees increased $132 million or 19.6%; this growth was driven by two factors. First, growth in processed transactions, gross dollar volume, and cross-border transaction volume that I previously described on slide four. And second, growth in authorization, settlement and switch revenue, which was driven by higher utilization of stand-in authorization services as well as pricing changes for these services.

Stand-in occurs when the issuers' primary authorization routing options fail and MasterCard can stand-in on behalf of the issuer and approve the request based upon issuer-defined parameters. Well, the price change for this service did not materially contribute to overall revenue growth, but it is an example of how we can increase prices in targeted areas based on the enhanced value that we bring to our customers.

We turn now to page seven for some detail on expenses. During the second quarter total operating expenses increased 3.2% to $725 million, excluding special items. This increase was mainly driven by an 18.2% increase in general and administrative expenses primarily due to two factors. First, an increase in personnel cost related to the planned hiring of additional staff and contractors to support our customer focus strategy. Second, an increase in professional fees related to external cost to advance our key strategic initiatives and legal cost to defend outstanding litigations.

Offsetting the increase in G&A was a 12.6% decrease in advertising and marketing expenses reflecting significant World Cup sponsorship activity in the second quarter of last year. As well as the planned shift A&M spending to the third and fourth quarters of this year.

Including special items, operating expenses decreased 35% to $728 million; currency fluctuation of the Euro relative to the US dollar negatively impacted the decrease in total operating expenses for approximately 0.7 percentage points for the quarter.

Moving to the cash flow and balance sheet highlights on page 8, we generated $446 million in cash flow from operations during the first six months of 2007. We ended the quarter with $2.8 billion in cash, cash equivalents and available-for-sale securities. We also had $2.9 billion in stockholders equity. Prepaid expenses increased $65 million primarily due to higher customer incentives and advertising expenses. Finally, $80 million of 10-year unsecured subordinated notes, which mature on June 30, 2008, where we classify it from long-term debt to short-term debt.

Turning to page 9. There are a few items I’d like to highlight for your consideration as you refine and update your model for the balance of 2007. First, there were no special items in the third quarter of 2006. In the fourth quarter of the 2006, we had $2 million of litigation settlements. Second, given our plans for the remainder of 2007, we believe in the second half of 2007 our G&A will grow at a rate similar to the rate we experienced in the first half of the year.

Third, as I’ve mentioned in the past, and would like to reiterate, we anticipate a very modest full year growth in A&M in 2007. Within this framework we expect the third quarter spend to be higher than the second quarter and the fourth quarter spend to be the highest of the year. This will also result in a more even distribution of A&M spend between the third and fourth quarters relative to prior years.

Finally, on a go-forward basis, our Redecard investment will be mark-to-market on our balance sheet, gains and losses will not be recognized in our P&L until, and unless, we sell the securities. Well to wrap up, we are quite pleased with our performance in the quarter and believe the business continues to show great momentum. Our second quarter results clearly demonstrate our success in penetrating the global payments opportunity and our ability to improve our business while focusing on delivering customized solutions for our customers and merchants.

Barbara Gasper

We are now ready to begin the question and answer period. In order to get to as many people as possible in our allotted 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.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from the line of Liz Grausam, with Goldman Sachs. Please proceed.

Liz Grausam - Goldman Sachs

Thanks, just wondering on your rebates and incentive line, this has been growing fairly rapidly in both growths and in both assessments and in your operations fees in 2005 and 2006 that really seems to slowdown. Could you help us understand some of the dynamics -- whether it would be a mix between U.S. and overseas and how that’s affecting your rebates and incentives? And also within the domestic market, how you might see pricing changing a bit over the course of the last two years?

Chris McWilton

Well, as I think we’ve talked about in the past, it can be a little challenging and daunting to analyze rebates and incentives, sequential growth or quarter-over-quarter growth, because of the way we conduct business, for instance, but we had a large debit card conversion that took place during the second quarter last year, which is going to impact your growth rates quarter-to-quarter. I continue to encourage you -- don’t over-torture these rebates and incentive numbers, we look at this in the business on a net revenue yield basis that I talked about in the past, the 18 basis points on volume that we experienced in the quarter. As we’ve said, we expect a gentle downdraft on those basis points yields over time

We've been very fortunate so far that we've been able to maintain that yield and were flat the last year and actually up 0.2 basis points versus the first quarter. So, again that’s the way we look at the business, we don't have the Vice President of Rebate and Incentives, we don't even have Vice President of Operations Fees, we don't have the Vice President of Assessments. We are trying to drive business to our customers in a way that maximizes the profit potential of their business and make sure that we maintain that revenue yield at acceptable levels.

Liz Grausam - Goldman Sachs

Great. And just a follow-up back on revenue and just the GDV trends you are seeing certainly very strong and stronger than we'd expected, particular in the first quarter and the second quarter, help us understand, are cross-border transactions outperforming your own internal expectations and what do you think that's driven by? The new account wins you've been able to bring on board, really this emerging market growth that is outsized relative to your expectations?

Chris McWilton

I think it’s all of the above really, I think we are definitely winning deals -- you heard it on our Investor Day, our Chief Operating Officer spoke about the number of deals we were winning vis-a-vis our major competitors. The travel markets do remain healthy, fortunately, knock on the wood, the geopolitical events, terrorist activities have slowed down on an international travel. And as you can see from the volume figures that we've put in the slide deck in our earnings release, the international markets are doing very well. Latin America, South Asia, the Middle East, Africa, Asia Pacific all doing very well and they mentioned on the call last time, these are the markets that are really driving a lot of the growth for the company and we are well positioned as a unified global company to take advantage of those trends. I am very happy on all fronts I think we had pretty much all the drivers list.

Liz Grausam - Goldman Sachs

Great, thanks Chris.

Chris McWilton

Thank you.

Tara Maguire

Before we go on to the next question I just want to clarify one point for the quarterly process 4.6 billion transactions. Next question operator.

Operator

The next question comes from the line of Tim Willi with A. G. Edwards. Please proceed.

Tim Willi - A. G. Edwards

Thank you, good morning a question about the US debit performance, it looks like on transactions per card the year-over-year growth rate dropped off pretty sharply, assuming a lot of that was just due to the annulations of the Washington mutual conversion , but I was wondering can you just maybe talk about that within that product and maybe even on prepaid within the US, sort of what you are doing or continuing to do with issuers to drive increased usage for a card account? Although that might be an institution, the financial institution, but anything that you are also doing with merchants to again drive acceptance and usage within that particular product basket?

Chris McWilton

Yeah, debit is obviously an area of focus for us and we were delighted to get that big debit conversion last year. You are seeing some discontinuity I think in the growth rates, because we are lapping the anniversary of that card conversion. We got a lot of capabilities in debit, we were delighted that Judge Jones overturned the Settlements Service Fee that Visa had imposed on issuers, with respect to switching to MasterCard and we are actively pursuing those customers today, so that's one of the things we are doing to win more debit work. Obviously at the cardholder level we are working with our financial institution customers to make sure that debit is a viable product for both the issuer and the customer looking at into PayPass opportunities as a convenience device to expand debit usage. Now you are going to see transaction size has come down with PayPass, so there would be some downward pressure on that but we still think we are very well positioned in debit and continue to see good growth potential.

Tim Willi - A. G. Edwards

Great, thank you.

Chris McWilton

Yes.

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.

Chris McWilton

Good morning Tien-Tsin, how are you?

Tien-Tsin Huang - J.P. Morgan

Good, a couple questions, first on G&A. I appreciate the guidance of second half, sounds like it's going to grow at a similar rate to the first half. Just to be clear Chris, your second half G&A from last year, if I recall, included some unusual items -- should we adjust the base for those items as we think about growing G&A?

Chris McWilton

G&A based in the second half of the year.

Tien-Tsin Huang - J.P. Morgan

Last year included some unusual items, if I recall severance and some other items. So, should we adjust that base?

Chris McWilton

Anything we didn't call out as a special item and adjust in our non-GAAP reconciliation Tien-Tsin, I would not pull out.

Tien-Tsin Huang - J.P. Morgan

Okay. You would not pull out. Okay. Understood, then secondly, only on ad and marketing we had given the loss of the World Cup sponsorship, do you expect to replace this marketing spend or is this a chance to moderate your ad and marketing spend overall?

Chris McWilton

As we've said in the past, we built our ad and marketing budget around the World Cup as a platform. So we didn't increase it's spend in the World Cup year or past World Cup years because the event was taking place. But we built it around the platform, so we integrated spend on to that sponsorship property.

Going forward we intend to leverage other sponsorship properties that we have or perhaps new sponsorship properties to replace the World Cup activity. So we are not sitting here and internally saying, oh boy we just saved x number of dollars of advertising money; our customers expected to support the brand around the world. We have other major sponsorship properties, whether it be UEFA Champions League or Copa, Major League Baseball here in the U.S. So we’ve got lots of leverage we can pull, we are not sitting here turning back the ad and marketing initiatives because of the World Cup.

Tien-Tsin Huang - J.P. Morgan

Okay. That’s helpful. I could speak on one more, just the transaction growth, still seeing some nice growth there. How much of this is from, as you talked about, average ticket moving down versus actually potentially gaining share overseas in terms of processing? Thank you.

Chris McWilton

Well, you know, ticket sizes are -- there is a down draft in ticket size and particular in the U.S. where there is a growth in debit which are tend to be used for smaller ticket items. I think if you look across the globe, ticket sizes are fairly stable. I don’t think we have ever published those numbers but they are fairly stable. So, I sort of lost my trend, I thought on your question there is, you are talking about ticket sizes and…

Tien-Tsin Huang - J.P. Morgan

Ticket size versus gaining process --

Chris McWilton

You know, Bob has mentioned, I’ve mentioned in the past that we are not focused on share for share sake. We are focused on profitable share. I know we are winning a lot of deals, as you heard at our investor day -- I know we are winning a lot of deals in Europe, in other parts of the word, so the global strength is there; and again we are not sitting around here watching every needle on the Nielson scale. What we are trying to make sure is that we drive the business in a profitable way and make sure we deliver the financial results like we delivered this quarter.

Tien-Tsin Huang - J.P. Morgan

Okay. Thanks gentlemen.

Chris McWilton

Okay.

Operator

Your next question comes from the line of Adam Frisch with UBS. Please proceed.

Adam Frisch - UBS

Thanks. Good morning. During the quarter there were some headlines with regard to European banks regarding building their own separate compliance debit team and M&A September launch date, this could prove to be a more solvent substance. But why don’t you give your thoughts and their efforts and also an update on how your discussions are going with the European banks?

Chris McWilton

Yeah. There were headlines around that, developing a European payment scheme. Adam, I think our Maestro brand and our platform in Europe is really ideal for solving the safer challenges. We’ve got about 300 million Maestro cards in circulation in Europe today. We’ve got Pan European acceptance, we got international acceptance, we got unsurpassed acceptance locations in that part of the world.

Now if selected banks decide to get together and create something from ground zero, there are obviously challenges with that, it’s very difficult to convince an issuer to go and issue cards to their valued customers and disrupt their relationship with customers, for cards that there may not be any acceptance for. And it’s also very difficult to get merchants to accept the card when there is no guarantee, there is going to be issuance of the card. So still a chicken and the egg, and we have a platform on the ground today which is not [vapor pay], it works, it’s on a lot of cards already and we think we are well positioned with that product platform to go forward.

As you heard Javier Perez, our European President, talking at the investor day, SEPA is not going to be linear progression here. You’ve got a lot of different constituencies, issuers, acquirers, merchants all starting from different spot and different geographies, there is the natural issues of sovereignty that play out in Europe, there is going to be starts and stops, but I think at the end of the day, we are going to be very successful here.

Adam Frisch - UBS

Okay. Thanks for that color Chris. There are two housekeeping items, first thanks for breaking out the cross border transaction growth, what was it in the first quarter and how is it tracking in June and July? And then other housekeeping was were there any major pricing changes which impacted revenue growths in the quarter?

Chris McWilton

Yes, well Tara is looking up the growth for me right now in Q1, but we do have bit of slight pricing modification around our stand-in fees that I mentioned on one of the slides, it was not significant to revenue growth in the quarter, I did want to call that out just as we had mentioned in the past that they are targeted areas where we can increase pricing going forward and are all look vigilant around that. So we are not taking our after bowl from a pricing standpoint. Nothing to the extent we have the currency conversation last year. Tara why don’t you get the last year’s --

Tara Maguire

There was 18.3% growth in the first quarter for our cross-border transaction.

Adam Frisch - UBS

And then how was it tracking in June and July?

Chris McWilton

We can't comment on July as you know, we are looking.

Adam Frisch - UBS

Okay. Thank you.

Chris McWilton

Okay.

Operator

Your next question comes from the line of Ken Posner with Morgan Stanley. Please proceed.

Ken Posner - Morgan Stanley

Good morning. The revenue growth in the quarter was a lot stronger than whatever we have modeled, so congratulations on that. What did you zero in on in the US, where the bill business growth was 10% lagging the rest of the world and the 10% growth was actually a down shift from 16% growth in the prior quarter year-over-year? So I'm just curious is that, I mean that we should draw the link from maybe a little bit of trimming in the advertising and marketing to a little bit of slow down in the US, which would seem to be a very rational move or is there another explanation for these?

Chris McWilton

Ken your observations are spot on, what you are seeing in the US is the lapping of the anniversary on the debit conversion that took place in 2006. So that is the key driver, I think if you look at the debit volumes statistics in the table you see the US volume dropping off significantly form a growth perspective. So, it's not related to any sort of conscious effort to trim back advertising, marketing in the US. The US as you know is a more mature plastic market than the rest of the world. So we are starting from a point where it's not growing as quickly and we see that our customers in the US they are challenged to grow their outstandings and their transaction volumes and that obviously went through to us. So, it's a slower growth market and then you layer in the effect of the debit conversion and you are going to see for the first time I think in a little bit the growth under 10%.

Ken Posner - Morgan Stanley

And can I just ask a follow up, the revenue growth rate was very, very strong. The expense growth rate as you pointed out was also on the upper double digit range. Now I think MasterCard is having a lot of fixed cost to the business model, are we just in a period of time when there is going to be a need to spend more to grow more?

Chris McWilton

Just to clarify, the G&A growth in the quarter it was 18.2%, the ad marketing was actually down 12.6, so overall it was in the 3% overall growth rate.

Ken Posner - Morgan Stanley

I mean just with the regard to the G&A.

Chris McWilton

G&A. One of the things that I look at and we’ll step back for a minute, it’s not appropriate to extrapolate but I’m going to phase it as to the remainder of the year, but if you look at our six months results, we have grown our revenue just north of 20%, we've grown our expense just north of 5% back to leverage, and there aren’t a lot of companies out there that can demonstrate those kind of results.

Now, as you all know, the fourth quarter is a period of lowest profitability but we are not taking our [assets] from an expense standpoint , we are going to repair it, as I've said, we were building out account teams. We are adding capabilities around product, we are adding abilities around advisory, capabilities, and adding people, and we are going to see that growth that we've experienced in the first half of the year continue through the second half. So people are important, we've said people are important to our business, we think it differentiates us, I am hearing anecdotes where customers are very excited about our advisory capabilities, we're winning deals not just because we're walking with a price list and we happen to be the lowest, but because we really know their business and are focused on helping them driving with people who really know the cards industry, so we are in a period to build and that will continue through the rest of the year.

Ken Posner - Morgan Stanley

Thank you.

Chris McWilton

Yeah.

Operator

Your next question comes from the line of David Hochstim with Bear Stearns. Please proceed.

David Hochstim - Bear Stearns

Yeah, hi, sort of following up on Tien's question, maybe another way to think about this is should we continue to see $25 million to $30 million sequential increases in G&A, and I mean beyond this year or are you in a building process that kind of runs through the end of this year and then we should see more modest G&A growth?

Chris McWilton

I think clearly through the -- as I mentioned and on my prepared remarks, when I continue to see the growth in the second half of the year near where we saw in the first day you can do the math in terms of sequential increases in G&A, you will start to see some moderation of G&A in 2008 just as we lap we start to reach anniversary of some of the hires we have made. We are going to be going through a budget process with our business teams in the next several months and we are going to be evaluating whether some of the expectations we have around continuing the pace of hires it necessary in 2008. At this time I think it’s too early to tell, where that's going to head. But obviously something that I am very focused on as a CFO is to make sure we don’t get ahead of ourselves with that.

David Hochstim - Bear Stearns

Is there any way to sort of quantify the breakdown of the increase in dollar spend between personnel additions and the consulting and strategic initiatives?

Chris McWilton

That is broken out, I mean just see when we filed the Q later and today we breakdown personnel, we breakdown professional fees, we breakdown travel and entertainment etcetera. But the biggest bulk of the growth in G&A is on the personnel line.

David Hochstim - Bear Stearns

Okay. And then could you --

Chris McWilton

You know we are a growing company and we need resources. So it’s not necessarily an evil thing to be in a position where you can add people and show the kind of leverage we’ve shown to the first six months of the year.

David Hochstim - Bear Stearns

Right, and then could you just maybe give us update on your view of the general down draft in the average revenue margin, the 18 basis points, I mean your down draft this quarter as you pointed out was positive?

Chris McWilton

It’s up draft.

David Hochstim - Bear Stearns

Negative down draft, yeah?

Chris McWilton

Negative down draft. Yeah, some of that is moderated by international volumes, Tara will give you the growth in the international volumes over time and when that volume is strong, as I’ve said in the past, we are able to generate basically higher margin in those types of higher yield -- on those types of transactions. We are processing the transaction, because it’s across the border. We are generating currency conversion fees to make it to get that currency back to the home country of the card holder.

Whether or not we actually converted it at the point of sale or not, we are able to make sure that happens. Generally, when people travel, they are putting big ticket items on their cards, they are putting airplane tickets, they are putting hotel stays and hopefully nice meals with their families as they travel around the world or go on business. So when that revenue growth is up, it provides buoyancy to the effective yield. And as I said, over a long-term horizon we expect gentle down draft on that, but as I caution literally year around quarter-to-quarter, it might bounce around a little bit.

David Hochstim - Bear Stearns

Okay. And then, whether stand-in price change at the end of the quarter or during the middle of the quarter?

Chris McWilton

It was toward the mid to tail end of the quarter.

David Hochstim - Bear Stearns

So I see next quarter we might actually see some affect that you point to?

Chris McWilton

I am sorry, that will role into the next quarter.

David Hochstim - Bear Stearns

Alright. Okay. Thank you.

Operator

Your next question comes from the line Michael Cohen with Sunova Capital. Please proceed.

Michael Cohen - Sunova Capital

Hi. Thanks for taking my question. You mentioned something about front loading some of your assessment rebates. Could you clarify that, I wasn’t entirely clear as to what that meant?

Chris McWilton

Yeah, what we are trying to point out there is -- last year in the second quarter we had a lot of card conversion cost related to that debit issuer conversions we chatted about, and we wanted to sort of amplify the fact that, despite the fact we didn’t have that same experience this year, we have a lot of merchant programs in place, where the performance of the merchant relative to MasterCard specific criteria issuance or volume of sales they do on MasterCard cards or new acceptance categories versus warehouse, clubs, etcetera, those kicked in earlier in the year. So if you are modeling and we are accepting a large decrease in the rebates and incentives, on the effective line might not have seen in this quarter, one have to just provide some color around that.

Michael Cohen - Sunova Capital

I’m sorry, so just to clarify, so does that mean that it’s kicked in early in the year, so therefore, rather than to be recognized randomly through the year it’s more front-end loaded than back-end loaded or it just started earlier?

Chris McWilton

That’s started earlier.

Michael Cohen - Sunova Capital

Okay. Great, thank you.

Chris McWilton

Okay.

Operator

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

Andrew Jeffrey - Robertson & Humphrey

Hi, good morning. Chris, can you talk a little bit about market share, especially in Europe or any accounts in the US. And whether or not you see yourself continuing to take share and whether there are any portfolio conversions in the pipeline that we should expect to hit in the next several quarters?

Chris McWilton

Well, I think if you have listened to Bob and I over the past year or so, we are not focused on share, we do not sit around senior management tables, pouring over the Nielsen Reports and looking for shares swings in different geographies, in different products, etcetera. We are focused on profitable share and delivering financial results, like we delivered this quarter. We are constantly looking for new deals, in fact the deal flow I think is very healthy right now, we are seeing a lot of deals coming through Europe.

A lot of them cross my desk. And Javier Perez and his team are quite energetic and quite optimistic about what they are seeing in Europe. We are well positioned, we're on the ground, we have got great products. And you are going to have ups and downs, and swing, and roundabouts in share from one geography to the next from quarter-to-quarter. But again, we are focused on driving the bottom-line and making sure we maximize the value to the shareholders.

Andrew Jeffrey - Robertson & Humphrey

Okay. Are there any portfolio conversions strongly in the pipeline?

Chris McWilton

There are all the deals going on. That's what our sales force is out there doing, whether it be a segment deal or brand flip, but I can't comment on specific transactions that are underway right now obviously for confidentiality reasons.

Andrew Jeffrey - Robertson & Humphrey

Okay. Thanks a lot.

Operator

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

Chris Brendler - Stifel Nicolaus

Hi, thanks good morning. Chris I wanted to – could you get that mostly, but just to follow-up a little bit more on the rebates incentives I know you don't have a manager of those arrangements but consistently in your Q’s and K’s and regulatory filings you state that your revenue growth was moderated by the demand for our customers for a better pricing ranges and greater rebates and incentives and my understanding is that’s a key part of your value proposition to the merchants. So, and we definitely have seen a deceleration relative to the prior two years in the first two quarters of the year. So can you just give us a little more color on is that a deceleration, is it more of a seasonal impact? I’m backing out of the (inaudible) I know it's not (inaudible), any more color you can give on sort of the pricing dynamics and your relationships with your customers.

Chris McWilton

Yeah, I think we've said in the past that our customers are very tough. They sit across the table from us and we are under pressure. First of all we're dealing with that inverted yield curve and now we are dealing with sub prime issues and they are trying to squeeze every penny they can out of every supplier and business advisor that they deal with, so you are going to have quarter to quarter acceleration or deceleration. One of this -- I think the natural things you see in rebates and incentives is the growth of the base.

And when you are starting from zero and all the time you are providing rebates and incentives to a merchant category, but you didn’t provide before, you are going to see a very high growth in rebates and incentives as that comes up over time and stabilizes you are going to see the deceleration occurring, you also see some around seasonality of the business. We tend to have more rebates and incentives with merchants and the back half of the year as we promote around the holiday season, so I think a good part of it is based -- a good part of the seasonality but again I want to reiterate we don't expect the net revenue yield on GDV to be spiraling upward that again point down draft.

Chris Brendler - Stifel Nicolaus

I will ask a separate question real quick, just give me – I know you are giving me an update on the buyback on the third quarter call, any other timeline or your excess capital position is there anything else you anticipate this year in knowing a dividend or buyback? It looks like the excess capital continues to build very nicely.

Chris McWilton

It does, you're absolutely right. It's something that we think about all the time, obviously the FIFA settlement put some additional cash on our balance sheet of -- and when we decide to do something with that Redecard, that may provide some additional liquidity as well, we haven’t decided quite yet what we are going to do with those securities. I think we demonstrated very early in our evolution as a public company, sometimes we forget we've only been public for a little over year, we've already announced a dividend increase and we've already announced a $500 million share repurchase I think that’s pretty remarkable and as we get further out in the year and we get the third quarter under our belt, we are going to be constantly updating the Board, in terms of different opportunities we have for the capital structure. A lot of flexibility there, we can increase the dividend, we can do another share repurchase if we need to, and obviously we are always looking at acquisitions that make sense to us. So nothing specific I can point you to today, but I just want to assure you that nobody has missed what you observe which is why we've got a lot of capital.

Chris Brendler - Stifel Nicolaus

That’s all I have. Thank you.

Chris McWilton

Yes. Thank you.

Operator

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 World Cup, what you are going to do on the sponsorships side there, I mean it was a pretty significant property where you had a lot of relationships who were co-branding cards for points to go that World Cup in Germany or whatever?

Chris McWilton

Yes.

Robert Dodd - Morgan Keegan

What's been the reaction from the customers that who had those co-branded MasterCards? And then are you getting any kind of blow back from them in terms of potentially losing share to Visa given the sponsorship shifting?

Chris McWilton

No, we haven’t done blow back, obviously it was a nice property for us and we were involved in it for a long period of time and, you said something about relationships on there, but I think our customers understand and that is if you are going to have a partnership with somebody who involves the kind of money that we spend on FIFA and with FIFA around the World Cup, you have to trust your business partner.

And at the end of the day, we couldn’t get there. And I think our customers understand that they -- I don’t think they are going to penalize us for walking away from a situation that didn't meet our standards. So, we are very good with working with other sponsorship assets and properties in the US, to be candid FIFA is not that big of a deal.

I think people are just not that close to soccer events, etcetera; in other parts of the world, it is a bigger deal but we do have other properties. I mean the Champions League in Europe draws as much attention and fever as the World Cup. In Copa, the Argentina/Brazil game gets as much fever as the World Cup event. So, we haven’t got any backlash yet, it’s still early, I mean there could be some I am not going to pretend that that’s not a possibility, but so far so good.

Robert Dodd - Morgan Keegan

Okay. Thank you.

Chris McWilton

Yeah.

Operator

Your next question comes from the line of Mark Sproule with Thomas Weisel Partners. Please proceed.

Mark Sproule - Thomas Weisel Partners

Thanks. Just really quickly, I guess, I'll go back a little bit on the US GDV growth. Are you seeing any, I guess shift within consumer base and margin perspective quotient may be toward the PIN debit side and effecting your debit volume? Is there any down side to that?

Barbara Gasper

Mark, can you speak up a little closer to the phone, we can barely hear your question.

Mark Sproule - Thomas Weisel Partners

Sorry. I apologize. Can you hear me better now?

Chris McWilton

Yeah.

Mark Sproule - Thomas Weisel Partners

On the US GDV side, understanding that a little bit is the role over of the [warmer] stuff and when you look at the debit volumes there, is there a compliance and maybe, or maybe US consumer is spending less or is it a push out from merchants trying to drive consumers to PIN debit? Is there any sort of offset that you can push in there to drive growth upwards?

Chris McWilton

Yeah, obviously merchants encourage PIN debit at the point of sales they try to (inaudible) for PIN debit because they can run them on the ACH network, or one of the regional ATM networks that have better economics for them. But our issuers don’t necessarily get the same economics from a PIN debit deal, as they do from a signature debit or a credit transaction. So, whatever pressure the merchant is putting on, the issuer is putting on similar pressure to get the cardholder to either sign or use a credit card. So, you can't find too many PIN debit products these days that offer rewards, which is a major proposition when it comes to cardholder pulling out their card at a point of sale.

So I don’t think we are necessarily seeing the movement in the GDV in the U.S., now slightly below 10% as attributable to a fee obtained with respect to how people are using cards at the point of the sale, there is pressure from the merchant, I think it’s being counteracted by pressure at the issuer. What I think you are seeing in the U.S. is the fact that it is a fairly mature credit market and 9.8% growth isn’t bad in most parts of the world, but we are fortunate enough to be a global company, so we are seeing mid-teens in the international geographies.

The sub-prime mission and (inaudible) raised that yet, we are not seeing anything on a day-to-day basis, which would indicate that there is something calamitous from a spending perspective going on out there. I think in the past we weathered, whether it would be recessions, a stars event, 9/11 fairly well, I think you need some data out there that suggest that during economic slow times transactions and transaction volumes will actually pick up, so I think we are feeling pretty good about the U.S. overall, but we do have to moderate expectations given the market dynamics.

Mark Sproule - Thomas Weisel Partners

And then, if I could shift you a little bit, just a roll back towards the marketing discussion. Is there, some of your commentary and other than your Champion League may not apply to this but are you looking more at maybe small or localized events like the Copa events with the Brazil/Argentina events that’s there, but versus the global Olympics World Cup type events that you sort of pushed out of the short-term? Thanks.

Chris McWilton

Yeah, I think there are two large global properties from the sponsorship standpoint that have more key value that the World Cup is one of them, Olympics is the other, but we think we are able to do things on a much more tailored basis at local levels with local sponsorship as you mentioned, perhaps more customer specific advertising than we've done in the past. So we’ll have buttons to push and Larry Flanagan, our Chief Marketing Officer and his team never have a shortage of ideas on how we can continue to support the brand around the world. This was one of the major sponsorships, it’s unfortunate we weren't able to get FIFA to play by our standards. But I think we are going to continue to be able to support the brand and the recognition it's gotten and the strength that we've enjoyed over the past ten years and so.

Mark Sproule - Thomas Weisel Partners

Thanks a lot.

Chris McWilton

Yes.

Operator

And your next question comes from the line of Christopher Mammone with Deutsche Bank. Please proceed.

Christopher Mammone - Deutsche Bank

Hi, thanks. Most of my questions have been answered just quickly on the tax rate and then a little bit lower than we expected, what's your outlook for the full-year tax rate?

Chris McWilton

We don't give outlooks but what we are using internally is 36%. We did get a little bit of a benefit this quarter, New York state changed their tax rate, dropped it; it's unusual for New York state to drop anything from a tax standpoint and that, we’ll take it. That does has – that was mitigated by the fact that under your accounting rules and your tax rate comes down any differed tax assets you have on the balance sheet they got to be written up, a little counterintuitive but that did moderated it. But I think if you are modeling, 36% is a good number.

Christopher Mammone - Deutsche Bank

Great, thanks.

Chris McWilton

Okay.

Operator

Your next question comes from the line of Dan Perlin with Wachovia. Please proceed.

Dan Perlin - Wachovia

Thanks. Hi just a couple of quick questions. Third quarter A&M, you said it's going to increase I just want to make sure you are talking about absolute dollar increase sequentially?

Chris McWilton

Absolute dollar increase sequentially yes.

Dan Perlin - Wachovia

Okay. Secondly, U.S. dollar or just the total revenue growth when I try and reconcile that, and I take out the currency, is it safe to say that the kind of remaining delta is just mixed into the international market as opposed to maybe better pricing or the stand-in routing options?

Chris McWilton

Yeah, you will see in the filings this afternoon too, when you turn to the section of revenue growth there is a description of the impact of the stand-in fee change and the impact on that revenue line, but relative to the total revenue growth it's insignificant.

Dan Perlin - Wachovia

Okay. So then it's primarily a mix shift into the other?

Chris McWilton

It’s volume, international volume, and like you said the mix.

Dan Perlin - Wachovia

Have you ever talked about what just basis point deferential is, in general for international versus domestic?

Chris McWilton

No we never disclosed that, but I can give you some thought around that. We processed transactions in pretty much Anglo-American countries the US, UK, Canada and Australia. We process obviously -- we generate more revenue than if we simply asses based upon the volume, so the basis points for a domestic transactions, US transactions or in one of those countries is going to be higher than in the country, bigger country France, Germany, etcetera, where we don't process, we simply asses on the card volume for domestic transactions. So, you can assume that international volume, cross-border volume and volume in countries where we process domestically is going to be higher than otherwise.

Dan Perlin - Wachovia

Okay. And are there other pricing opportunities, besides from cross-border, be it card type, there is a lot of discussion about -- I guess debit/PIN debit this quarter in the call but within the PayPass is an area where you make more money than on a PIN debit transactions, is that fair to say?

Chris McWilton

PayPass is treated as a signature based transaction, even though the signature is waived under $25.

Dan Perlin - Wachovia

Right.

Chris McWilton

So we would generate more on those transactions than with the PIN debit transactions, that’s correct.

Dan Perlin - Wachovia

So as that becomes a larger percentage of your volume, that’s kind of a weighted average increase?

Chris McWilton

Yeah, that would help us out. We love PayPass.

Dan Perlin - Wachovia

I think the banks do too. All right, thanks.

Operator

Your next question comes from the line of David Parker with Merrill Lynch. Please proceed.

David Parker - Merrill Lynch

Good morning Chris.

Chris McWilton

Good morning.

David Parker - Merrill Lynch

Could you just provide us an update on your efforts to increase your acceptance into new categories like healthcare or bill payment?

Chris McWilton

Sure, I think there was some time spent around new acceptance categories and opportunities at the Investor Day. I am not the one to talk about some of the technical implications, for instance mobile payments systems, the telephony based areas. But we did spend a lot of time on that, we do have some initiatives in healthcare going on, and Wendy Murdock, our Chief Product Officer's organization, we have been successful in the past of opening up new acceptance categories at the merchant location, we announced the Sam's Club deal last fall, which is the first time ever that general purpose cards were accepted at a warehouse location.

Personally, as I travel around the United States and overseas I see more and more places that I can use my card than I couldn’t in the past. Fast-food restaurants are another great example of how we open the acceptance category. So lots of things going on within the company, always thinking of ways to make it easier for people to pull out plastic and use it instead of currency. Obviously, healthcare is a big area, we look at the government sector as well, we look at telephony, PayPass, other remote forms of information flows etcetera RFid devices, so lots going on.

David Parker - Merrill Lynch

Okay, great, and then on a different subject the US House Judiciary Committee -- how they hearing regarding interchange face. Was there anything surprising that came out of some of those comments at that hearing or any thoughts on interchange fees in general that you can share with us?

Chris McWilton

Nothing, nothing is really too surprising. I think one of the things we are tying to do to our public policy efforts is make sure that the lawmakers understand what interchange is all about. And I think to some extent, interchanges characterizes just as a nasty thing and it's a indirect tax on consumers and its putting small merchants out of business. But, our position always has been, it is necessary to make the card system work. It’s the balancing mechanism. Issuers are not going to issue cards if they have to eat the cost of flow, a fraud, a processing etcetera.

And if you don’t have people issuing cards then the merchants aren’t going to be able to have as many people walk up to their registers and pull out their cards which has been shown to increase traffic and increase ticket sizes, etcetera. So, we spend a lot of time with the congress folks that are, and the other legislators that are involved and regulators around the world in educating them about what interchange is.

A great example of how you can get a major reactions interchanges is Australia, where the regulators arbitrarily cut interchange in half. And what happened was rewards were cut back, fees were tagged onto the consumer, and somebody has got to balance the economics. Interchange is the balancing mechanism, if you have regulators just walk in and arbitrarily reduce interchange, it falls out simply. It's like squeezing one end of the balloon, it’s got to come out of the other side, it’s kind of like price controls into that mix in administration, just as the work at the end of the day.

David Parker - Merrill Lynch

Great. Thanks Chris.

Chris McWilton

Okay.

Barbara Gasper

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

Operator

Okay. And your final question comes from the line of Pat Burton with Citi. Please proceed.

Pat Burton - Citigroup

Hi. Thanks for taking the call. Chris, could you give us an update on the share conversion program, if there is one to be given in terms of the banks interest and how the mechanism will work? Thanks.

Chris McWilton

Yeah. We actually sent some information now I think publicly and how that works, there is 13.4 million shares that will be eligible for conversion. The conversion will run from August 2 through August 4, I’m getting some hand signals here, to October 5. And simultaneous with that will be executing the 500 million share repurchase to take some of the supply pressure out of the system.

We will be providing an update on how that conversion is going in the third quarter earnings call. I can’t comment on an activity within the B shares themselves, because that market is not public at this point in time, so anything that’s going on today between shareholders selling and buying. I can’t really comment on that, but we are optimistic that a number of banks will take advantage of the opportunity to convert and we stand ready all the infrastructures in place to make that happen and shareholder services had been involved and we’ve got to broker and everything so it’s all set and ready to go, it's on the runway.

Pat Burton - Citigroup

I don't know if you can comment, but would you expect the full 13.4 million shares to be subscribed?

Chris McWilton

I can't tell Pat, I’m hopeful it will. One of the things, if you look at the way we structured this is in terms of the mechanics, what we are hopeful is a lot of the smaller shareholders located in remote parts of the world that are licensed member and do hold shares, we’ll use this to sort of -- almost as a cleanup provision. We have a small number of balances, this conversion has probably waited a little bit to letting them exit and then later conversions will be a little bit more accommodating to the bigger banks to move bigger positions, but we incur a lot of cost internally to send out notices to communicate with these shareholders and some of them hold, it really dim in this levels of our shares, so we want to take this as a chance to clean that up and get some of our cost base down.

Pat Burton - Citigroup

Thank you.

Chris McWilton

Sure.

Chris McWilton

Okay. With that I think we are going to wrap up. Barbara, thank you. Thank you for all listening in and joining in this morning. We are really optimistic about the rest of the year, things seem to be going very well. And the management team obviously is very focused on continuing the momentum and delivering the kind of financial results that we delivered this quarter. So again thank you. And we'll sign off.

Operator

And this concludes the presentation. You may all now disconnect. Good day.

TRANSCRIPT SPONSOR

MF logo

What you WON'T hear on the call!

In 1957, a young couple named Bill and Carol Angle invested half their life savings in Berkshire Hathaway. According to Forbes magazine, today it’s worth over $300 million. What if you could do even half or a third as well?

One stock looks uncannily similar to an early investment in Berkshire Hathaway. Get its name now in a new FREE report from The Motley Fool.

Read the complete report courtesy of Seeking Alpha FREE.

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: MasterCard Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts