Mastercard Incorporated Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.31.12 | About: MasterCard Incorporated (MA)

Mastercard Incorporated (NYSE:MA)

Q3 2012 Earnings Call

October 31, 2012 10:00 am ET

Executives

Barbara L. Gasper - Director

Ajaypal S. Banga - Chief Executive Officer, President, President of Mastercard International, Chief Executive Officer of Mastercard International and Director

Martina Hund-Mejean - Chief Financial Officer

Noah J. Hanft - Chief Franchise Integrity Officer, General Counsel, Chief Compliance Officer and Corporate Secretary

Analysts

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

Craig J. Maurer - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Donald Fandetti - Citigroup Inc, Research Division

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

David Togut - Evercore Partners Inc., Research Division

Gil B. Luria - Wedbush Securities Inc., Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Operator

Welcome to the MasterCard's Third Quarter 2012 Earnings Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Barbara Gasper, Head of Investor Relations. Barbara, you may begin.

Barbara L. Gasper

Thank you, John. Good morning, everyone, and thank all you for joining us today, either by phone or webcast, for a discussion about our third quarter 2012 financial results. Hopefully, by postponing the call by an hour, we made it a little bit easier for folks on the East Coast to be able to access the call. With me on the call today are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer.

Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for our question-and-answer session. Up until then, no one is actually registered to ask a question. 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, mastercard.com.

The earnings release includes reconciliations of non-GAAP measures to their GAAP equivalent. The release and the slide deck were also attached to an 8-K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for 1 week through November 7.

Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about MasterCard's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings.

With that, I'll now turn the call over to our President and CEO, Ajay Banga. Ajay?

Ajaypal S. Banga

Thank you, Barbara. Good morning, everybody. Just some high-level comments. First, in the third quarter, we saw net revenue growth 5% as reported or 10% after adjusting for currency. Volume and transaction growth are behind that increase, as well as the increase of our net income growth of 8% and our EPS growth of 10%. It is a solid quarter despite the tough comparison to our exceptional performance in the third quarter of last year when we delivered 24% net revenue growth at constant currency. And actual performance, in fact, was right in line with the expectations we spoke about at last month's investor meeting, which took into consideration both this third quarter of last year performance but also the world's somewhat mixed economic picture.

In the U.S., we saw an improvement in consumer confidence, which resulted in an increase in consumer spending growth, although that growth is slower than 2011 or the numbers we saw in the first half of 2012. And according to our own SpendingPulse data, 8 of the 11 sectors we track showed positive results in September and retail sales x auto and gas grew 4.1% in September, although that's lower than the growth in July and August. And as we've been saying for the last few quarters now, housing-related categories of retail spending continued to perform well, which I think points to the underlying improvement in the housing markets that we are all beginning to see.

Our U.S. consumers, however, appear to be holding to their budgets with pretty tight and close controls on what they're spending on. We are seeing a rotation in their spending from sector-to-sector based mostly on their seasonal needs. So for example, during the recent back-to-school season, we saw a temporary increase in growth for the apparel sector better than August. But other sectors, such as electronics, did not fare that well that month. In September, consumer shifted their spend towards electronics and housing-related sector at the expense of apparel. So they're kind of moving back and forth. We will be watching consumer spending closely for the remainder of this year and going into 2013. And as we all know, a lot will depend on how our government responds to fiscal policy issues once the current elections are over.

In Europe, our processed volume and transaction growth continues, albeit with some deceleration in the third quarter. Softness in countries, such as Spain and Greece, continued to be more than offset by volume growth in the Northern and Eastern European markets. However, a couple of those markets, like the U.K. and Russia, did slow down in growth. Business sentiment continued to weaken in the third quarter, so the trend in Europe in consumer confidence has been somewhat more inconsistent. It is up in the second quarter, began to turn down in the third quarter, and just recently, has seen a very slight uptick. Therefore, as it has been for some quarters, Europe remains a complicated economic scenario. We're watching those signals, we'll be [ph] continuing to grow our business. And we're doing pretty well under the current circumstances.

Asia-Pacific and Latin America sustained double-digit processed volume growth in the third quarter despite several major economies in these regions showing the early signs of deceleration. There is no doubt that economic uncertainty in the U.S. and Europe is impacting the rest of the world. You all read the news about China and India. We see some of that in our data, too. Brazil, however, seems to be showing signs of improvement in both sentiment and spending, probably helped by tax cuts and other government stimulus programs.

So overall, we're just continuing to maintain a cautious outlook for the rest of this year and into 2013. We will continue to watch global macroeconomic indicators, in particular, the outcome of the U.S. election, the fiscal cliff debate that will no doubt follow, as well as the ongoing problems affecting the European economy. So while this economic climate remains complicated, we're navigating through these challenges by focusing on what we can influence and what we can control, which is really to remain focused on our business strategy.

So let's discuss some of the business highlights, starting with several deals from around the globe. Building on the momentum in credit [ph] with Swedbank, we recently signed an exclusive partnership with Nordea Bank for their consumer credit and co-brand products in the Nordics and extended this new partnership through debit and credit in the Baltics. This deal doubles MasterCard share of cards of Nordea, and along with other recent wins, we think we can double our market share in the Nordic and Baltic regions over the next 3 years, just further strengthening our presence in these markets that are actually doing relatively well.

In France, we recently renewed our agreement with Crédit Agricole, MasterCard's largest customer in that country. And with that behind us, we have no major contracts up globally for renewal until 2014.

In the Czech Republic, we signed a strategic cooperation agreement with CSOB bank, which is the second-largest card issuer in that market. And we think that, that deal will generate an incremental 20% share of cards for us, and most importantly, will enable the largest ever PayPass issuance in the Czech market to date.

Moving to the Middle East. We have just won a significant opportunity with the Commercial Bank of Qatar's private banking and mass affluent portfolios. We gained significant share in the credit book, and now we have exclusivity for debit. With this deal in place, Qatar is showing the most significant acceleration in share growth of any of our markets in the Middle East, Africa.

In China, MasterCard was selected as the exclusive foreign payments brand for Citibank's PremierMiles program. This is Citibank's flagship product. They're targeting it at affluent frequent fliers. Each cardholder will be given a U.S. dollar-denominated MasterCard card that can be used when traveling outside of China.

In Hong Kong, along with the Bank of China, we launched a MasterCard exclusive youth card program, called the i-card. This new program focuses on the most important spend categories for youth in Hong Kong, which are basically e-commerce, entertainment and travel, probably no different from other countries in the world. Previously, this youth card program was divided between 2 global networks. Now all these cards will be converted to MasterCard by 2014.

On governments. We continue to work with them to highlight the positive aspects of electronic payments. As of this quarter, let me give you 2 more examples, 1 from the U.S., 1 from Mexico. In the U.S., as I've mentioned over the past few quarters, we've won a number of public-sector programs, and we can now add the states of New Jersey and New Mexico to that list. And a number of municipalities are coming on to this as well, Columbus in Ohio, Hamilton County, Ohio, other municipalities in Virginia. Additionally, we have won programs with several federal agencies such as FEMA, OCC, the Department of Alcohol, Tobacco and Firearms and the District of Columbia Court System.

So moving to Mexico. MasterCard recently announced a partnership with a Mexican government-owned institution that provides credit to government and private-sector employees. Currently, this institution has 700,000 closed-loop credit cards that can be used at 30,000 affiliated merchant locations. By entering into the partnership with us, all of these closed-loop cards will be reissued as MasterCard-branded credit cards and expand their use to include all MasterCard-accepting locations across Mexico.

We're also continuing to work with merchants. And I'm just going to highlight one that's really interesting. MasterCard and Nakumatt Holdings, the largest supermarket chain in East Africa, have partnered with 2 banks, Diamond Trust Bank and Kenya Commercial Bank, to convert over 1 million propriety loyalty cards to multicurrency EMV, PayPass-enabled prepaid cards. Nakumatt has a presence in Kenya, Uganda, Rwanda and Tanzania that serve about 80 million shoppers every year. And this deal basically gives MasterCard very strong brand association at the local level in these countries, as well as preference at the point-of-sale. It's the largest prepaid merchant agreement for MasterCard in the Middle East and Africa region to date.

And while on prepaid, let's just move on to India and what we're doing there with Thomas Cook and Western Union. So let me start with Thomas Cook. They're launching a MasterCard-exclusive multicurrency foreign-exchange travel card. They're calling it the Borderless Prepaid Card. Thomas Cook is India's largest travel and travel-related financial services company, and they will become the first nonbanking entity in India to launch a prepaid foreign-exchange travel card. They will also be using Access Prepaid as the program manager. This Borderless Prepaid Card will allow travelers to load as many as 8 currencies on 1 card that got a ton of other consumer-friendly, fun features.

Western Union and ICICI Bank in India have just launched a MasterCard Prepaid Card with a focus on people who don't have a bank account and want to avoid carrying cash. So this new prepaid card offers the underbank [ph] a way to store and access the money. And the idea is that eventually, we will add remote top-ups and card-to-card transfers to this card.

On the debit front, we are continuing to see robust momentum in the U.S. with independent banks and credit unions. Adding to the more than 200 deals we completed this year, we had a number of wins and renewals with customers, such as C1 Credit Union [ph], Gulf Coast Bank, Home Federal Bank, Midland States Bank, Wintrust Financial. At our investor meeting last month, one of the things we touched on was our focus on and our confidence in our ability to gain momentum and share in the U.S. market for consumer credit and co-brands.

Over the past month, we've begun to hit some of the singles and doubles that Chris McWilton talked about during that meeting. We have renewed our sales co-brand program. We have won the co-brand portfolio of RCI, the world's largest timeshare company. And additionally, we have secured 4 significant consumer co-brand deals with one of our larger issuers. I'm just not at liberty to announce that deal yet, but we will as soon as we can. Just to let you know, these co-brand deals span several merchant verticals. We have a lot of work to do in this segment, but we have begun moving in the right direction.

Moving on to innovation and our activities around innovation and around mobile payments in particular. Let me just bring across a couple of new partnerships. Now we recently announced our partnership with NTT DoCoMo, Japan's leading mobile operator, where basically we are aiming to expand contactless payment options for Japanese consumers. The collaboration will connect DoCoMo's domestic payment network to the rest of the world, enabling consumers using their smartphones to make contactless payments outside of Japan anywhere that MasterCard PayPass is accepted. We also launched an exclusive 5-year partnership with Everything Everywhere, the U.K.'s largest mobile operator, to develop mobile and digital payment solutions for their customers.

In Poland, T-Mobile and MasterCard announced that PTC, the local operator of the T-Mobile network, will begin offering mobile payments based on our PayPass technology. The offer, which will be made available with 5 major banks in Poland, as part of its service called MyWallet, is one of the first advanced solutions commercially implemented in Europe. It's an expansion of the global cooperation between Deutsche Telekom, which owns T-Mobile, and us. And if you remember, we announced this collaboration a little earlier this year.

And also in Poland. MasterCard, Orange and mBank are launching a service called MasterCard Orange Cash, which is really a PayPass prepaid card in a mobile phone, kind of getting them a SIM access to their prepaid card that will support contactless payments.

Finally, over the last 2 quarters, I've talked about the progress we made on our DataCash business. This quarter, let me give you a few new highlights. In Brazil, DataCash and Redecard recently signed a deal to provide payment processing and fraud and risk management services. The deal, which is our first e-commerce gateway offering in Latin America, will be rolled out in the first half of 2013. Latin America, as you know, does not have a great deal of offering in this space, so we think this is actually quite a breakthrough.

In Europe, DataCash's home territory, we are continuing to make progress, signing agreements with varied clients as different as the National Bank of Greece on the one hand; Foxtons in the U.K., where almost 80% their payments are now being made online; and a contract renewal with Domino's Pizza, which is delightful, for their U.K., Ireland and Germany operations.

So now let me turn the call over to Martina for a detailed update on our financial results. Martina?

Martina Hund-Mejean

Thanks, Ajay, and good morning, everyone.

Let me begin on Page 3 of our slide deck. So for the third quarter, we saw good performance considering the very tough comps we were up against from the third quarter of last year. As Ajay already said, this performance is in line with the expectations that we spoke about our investor meeting in September.

Net revenue grew 5% or 10% after adjusting for currency, driven by volume and transaction growth, as well as new deals. Total operating expenses increased 5% or 8% after adjusting for currency.

So bottom line, we delivered net income of $772 million, up 8% or 13% after adjusting for currency, and diluted earnings per share of $6.17, up 10% or 15% after adjusting for currency.

As I mentioned last quarter, we continued to work on our tax planning strategies. And we were able to realize some benefits from these strategies in the third quarter. These benefits are primarily due to certain tax initiatives, some of which are discrete items in the period.

Cash flow from operations was $1 billion, and we ended the quarter with cash, cash equivalent and other liquid investments of about $5.6 billion. While not shown on this slide, during the third quarter, we purchased about 500,000 shares at a cost of approximately $216 million. And through October 25, we repurchased an additional 255,000 shares at a cost of $119 million. And we now have $1.1 billion remaining under the current authorization. And we will continue to look to repurchase shares on an opportunistic basis.

So let's turn to Page 4, where you can see the operational metrics for the third quarter of 2012. In general, the third quarter performance of our business drivers was in line with what we presented on a quarter-to-date basis at our investor meeting in September.

So let's turn to our volume metrics. First, worldwide gross dollar volume or GDV was up 14% on a local currency basis. U.S. GDV grew 7%. Debit growth in the U.S. remains healthy at 14%. Credit volumes in the U.S. grew about 1%. Commercial credit growth remains strong in the mid-teens. And as you know, we are still having work to do in U.S. consumer credit.

Outside of the U.S., volume growth was 17% on a local currency basis, including mid-teens growth in Europe and Latin America and more than 20% growth in APMEA. The growth rates outside of the U.S. were driven by the strength in both MasterCard credit and debit volumes, which were up 13% and 23%, respectively. Cross-border volume grew 14% on a local currency basis, including mid-teens growth in Latin America and Europe and high-teens growth in Asia-Pacific, Middle East, Africa.

So turning to Slide 5. Here, you can see processed transactions were up 24%, slightly lower than the growth rates that we saw in the first and the second quarter. As expected, this deceleration was mainly driven by the lapping of our processing win in the Netherlands, which was fully lapped by the end of this year. Drilling down further, about half of the 24% growth comes from the new PIN debit transactions in the U.S., leaving about 12% as the underlying growth rate. Now globally, the number of cards grew 8% to 1.9 billion MasterCard and Maestro branded cards.

Now let's turn to Page 6. And here, we can discuss our revenue growth in a bit more detail. Domestic assessments and cross-border fees grew both 8% on an as-reported basis and 12% after adjusting for currency. Transaction processing fees grew 10%, driven mainly by the 24% growth in processed transactions. The gap between these 2 growth rates continues to be in the 13 to 14 percentage point range. As we've mentioned previously, the majority of this gap is caused by U.S. PIN debit transactions and non-U.S. transactions that both come with a lower-than-average revenue yield. The remainder of the gap is primarily explained by FX. Other revenues grew 11%. And finally, rebates and incentives increased 20%, driven by the impact of new and renewed deals, as well as volume growth.

Moving to Page 7 for some detail on expenses. And here, you can see total operating expenses. And within that, general and administrative expenses increased 10% due to higher personnel costs in support of our strategic growth initiatives. So very similar to last quarter, these include on-the-ground resources for prepaid, commercial and mobile, as well as supporting the growth in various markets and expansion into additional countries.

Advertising and marketing expense was 12% lower than last year's third quarter on an as-reported basis and 8% lower on an FX adjusted basis. This increase was mainly due to the nonrecurrence of expenses related to last year's Rugby World Cup, as well as the timing of certain initiatives this year. Depreciation, amortization increased 14% due primarily to increased capitalized software associated with our strategic projects.

So turning to Slide 8. Let me discuss 2012 and really starting with an update of what we have seen for the fourth quarter through October 28. Globally, our cross-border volumes grew about 17%, roughly 3 percentage points higher than what we saw in the third quarter. This was primarily driven by Europe, where cross-border growth improved from the mid-teens to the high-teens.

In the U.S., our processed volume proxy for GDV grew 7%, and that's pretty similar to our growth in the third quarter. Processed volume growth outside of the U.S. grew to about 15%, which is just a bit higher than the 13% growth we saw in the third quarter. And in Europe, processed volume growth through October 28 was in the mid-teens versus the low-teens we saw in the third quarter. Globally, processed transaction growth was about 22%, down from the 24% we saw in the third quarter, and that's primarily due to the lapping of the PIN processing wins in the U.S. and in the Netherlands.

So now I'd like to share with you our thoughts for the rest of 2012, which remains fairly consistent with what we shared with you at our recent investor day meeting on September 20. We continue to expect second half revenue growth to be somewhat lower than the 13% FX adjusted growth rates we saw in the second quarter due to timing of new deals, tougher comps and continued global economic uncertainty.

You saw the impact of these items on our third quarter results. However, some of what we expected in the third quarter for rebates and incentives will now likely materialize in the fourth quarter. We remain committed to achieving a minimum 50% annual operating margin. And we continue to expect only a small operating margin expansion in 2012 relative to 2011.

For the fourth quarter, G&A expense growth will be about the same as the growth rate we saw in the second and in the third quarter on an FX adjusted basis. We continue to invest on our strategic growth initiative, including the expansion of our Access Prepaid and DataCash acquisition, which has now fully lapped. As we have said before, our 2012 A&M spend is expected to be lower than 2011 on an FX adjusted and on an as-reported basis. In addition, the quarterly spend as a percentage of the full year will be very similar to 2011.

So regarding FX rates, if you assume the euro continues to trade around $1.30 and Brazilian real continues to trade around the $2 level for the rest of the year, we would expect about a 2 to 3 percentage point headwind to net revenue, net income and EPS in the fourth quarter.

Based on some additional tax benefits, we were able to record -- that we were able to record in the third quarter, we now expect our full year 2012 tax rate to be about 30%. Going forward, as we said at investor day, in order to calculate our 2013 to 2015 EPS objective CAGR, you would need to use starting tax rate of 32%, not 30%.

So finally, as we outlined at our investor day meeting last month, our new performance objective for the 2013 to 2015 period are: a net revenue CAGR of 11% to 14%, a minimum annual operating margin of 50% and an earnings per share CAGR of at least 20%. As you know, these objectives are all on a constant-currency basis and exclude any new acquisitions. Our assumptions also do not contemplate at this point a more pronounced deterioration in the U.S. economy or more significant problems within the Eurozone than what we're already seeing. And as I said at last month's investor meeting, while we have a 3-year CAGR objective, in any given year, the actual net revenue growth could be above or below our 11% to 14% range.

Based on our current expectations of the economic environment, we expect that net revenue and EPS growth in the early part of this year might be slightly below the range. In later years, assuming the world returns to a more stable environment, we believe net revenue growth could be at the higher end of the range and that could also benefit EPS growth in that particular period.

Now let me turn the call back to Barbara to begin the Q&A session.

Barbara L. Gasper

Thank you, Martina. We're now ready to begin the question-and-answer period. [Operator Instructions] John?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Sanjay Sakhrani.

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

I was hoping to get some clarification on the European wins with Nordea and CSOB. Could you just clarify the specifics on the expansion of those relationships? For example, does debit now move exclusively to you? And also, can you just touch on the timing of those -- of when those wins ramp into your numbers? And then just secondarily, on the rebates line, if Martina, you could just clarify what you guys are expecting for the fourth quarter.

Ajaypal S. Banga

Okay, Sanjay. So Nordea, we have signed in the Nordics. We have signed Swedbank some time ago, right? And what Nordea really is, first, is the signing of their consumer credit and the co-brand portfolios, which are primarily driven off credit in the Nordics. What we've also done is that they have expanded into the Baltics as a bank. And in the Baltics, we've got both debit and credit with them. So in the Nordics, we don't have debit with them, we have credit and co-brand. In the Baltics, we have debit and credit. And so when you put all that together, that I said, we'll kind of double our market share across credit and debit in the Nordic and Baltic regions over the next 3 years. Now why 3 years? Because these are phased and we're not doing a master flip on 1 day. It's kind of a phased-in reissuance when the cards come up for reissuing over there. In the Czech Republic, with CSOB, so that one is actually what we're doing there is to flip them into getting more cards with us. We think that because it's such a large player there, we could get a 20% increase in our share of cards in the Czech Republic. This will kind of take between 8 months and 2 years to complete. It's not an overnight flip either.

Martina Hund-Mejean

So Sanjay, with respect to your second question on the rebate line. So what I was just saying is that we did actually expect to have a little bit higher rebates than the incentive line in the third quarter than what we have, and that simply what happened is that a number of the deals that we expected to sign in the third quarter are slipping into the fourth quarter. And as you know, from a seasonal perspective, our fourth quarter is typically the highest quarter from a rebates and incentives point of view simply because at that point in time, you have the holiday season going on, you have a number of merchant initiatives and incentives going on. So I just want to make sure that everybody captures that.

Ajaypal S. Banga

And we've got a pretty full deal pipeline. So that's kind of why she is so careful about this point.

Operator

Our next question comes from Craig Maurer from CLSA.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

I actually had 2 questions. One is have you heard any rumblings out of Brazil in terms of the regulatory environment, potential changes down there? And secondly, in terms of U.S. credit, you said you continue to look at initiatives. But my only question there is, is there really anything to do other than continue to support your existing partners and wait for deals to come up for possible renewal wins?

Ajaypal S. Banga

So Brazil, nothing new that I've heard in the rumblings other than what's been there for a while with imposing taxes in foreign purchases and the like. But I haven't picked up anything new. The part about credit in the U.S. Commercial credit in the U.S., we're actually doing really well. Strong growth, mid-teens. It's consumer credit that we were talking about. And there are 2 parts to it. One part is clearly the part of our working with existing issuers. We've got a mix of issuers, and you know who those are and you know who our competitive brands, has got a mix of issuers. You also know which banks are coming out of the cycle faster, in some cases, than the others. There's only so much we can do on that other than work with the existing portfolios, as you said, to see if there's opportunity for those banks that could exist to work that portfolio harder. But the other part of it has got a lot to do with kind of getting small wins going, whether it be independent banks and credit unions, which we've been doing consistently for the 1.5 years, 2 years but kind of focusing on that. And the other part is co-brands. And co-brands keep coming up. And as they come up, we work with them. But there's also geographic expansions on new products. So a number of the regional banks are going into different kinds of new products in the credit space, so their balance sheet, as you know, was somewhat better than those of some of the larger banks. And those all come up for being available for a discussion. Almost all these banks are in dialogue with us at some stage or the other. So it's a slow fix. It doesn't happen overnight unless you get some big change in the portfolio. But if we do it systematically and we're doing it systematically with the independent banks and credit unions and working with our current customers and looking at all the co-brands, then I'm convinced that over a period of a couple of years, we can make a really big difference to this number.

Operator

Our next question comes from Don Fandetti from Citigroup.

Donald Fandetti - Citigroup Inc, Research Division

Ajay, it looks like the cross-border started to accelerate nicely in October, particularly around Europe. Can you just talk a little bit more on what you're seeing on the ground in Europe? It seems like maybe the worst is behind you.

Ajaypal S. Banga

Yes. Don, I don't know that I'd go that far about being the worst behind. I, honestly -- I'm as surprised as you are, by the first 4 weeks of this quarter. Mind you, it is there in the first 3 weeks, too. So if you look at this data as of October 21, you'll discover a similar trend. So it feels like the fourth week is similar to the first 3. And I don't know if that makes a trend, but in another month or so, I'll feel a little differently. Right now, I just see a complicated economic environment out there. I see, and I've said this openly, I think of the U.S. as being in actually a relatively better shape as an economy than a lot of people give it credit for, both between individuals and corporate balance sheets. I think if the government was able to show some degree of clarity and leadership around solving for the cliff, I suspect the U.S. economy could provide a surprise on upside to almost every kind of company. But that has to happen before you can say that. And nobody knows what will actually come out of that over the next month or 2. Now you go to Europe. And like it's been, we feel fortunate as a company. The mix of our business is biased towards Northern Europe and towards the emerging economies of Europe. And that has really seen us in good stead while Russia has slowed in growth a little bit. But when you slow in growth from a large double-digit number to a slightly less large double-digit number, I'll take that every day of the week. And so that's helped us. We are less exposed to Portugal and Ireland and Greece and Spain. We've kind of said in the past that only 5% of our revenue as a company comes from the PIGS economies and that kind of helped us. So I think that part of what you're seeing in our numbers is our relatively high exposure to the economies that seemed to be doing better. In the last 2 or 3 months, I have been in the Nordics, I've been in Germany. So I've actually seen a couple of these economies firsthand. And yes, they do look different from what you see in Southern Europe. As we come to Asia and Latin America. In Asia, China is showing some impact and you read about it. But remember, we don't do domestic processing in China, we do cross-border. Cross-border is just fine, thank you, and that's been helpful. And then you look at India. And India, yes, the economy is slowing, but it's 66% driven by domestic consumption, which is still doing pretty well. And so our mix of business is what is allowing us to weather this storm in the way we are doing it, and that's what's factored into all our thinking when we spoke to you at investor day about how we think about the next 3 years. We think of 2013 as being probably more complicated than 2014 and '15. And 2013 may well bring, as Martina said, our revenue and our EPS somewhere lower than the range we gave you. But remember, it's a cumulative average growth rate we're talking about. We'll probably end up somewhere better in the next 2 years, and that's how we look at our business and its mix. It's a long answer to a simple question. But actually, that ain't a simple question, Don.

Operator

Our next question comes from Chris Brendler from Stifel, Nicolaus.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Can you comment on the U.S. domestic debit market? You provided some helpful disclosures there, about half of the growth rate of 24% coming from the PIN debit side. Just wondering, are we completely through the portfolio conversions? Do you have any insight into your pipeline? You've had some nice U.S. wins on the debit side, seemed to have slowed over the last year. I think we're almost full lapping of that, so the 12% -- I guess, my question is, is the 12% for the core growth rate absent those portfolio conversions? And also, where is the track and the trend on the PIN debit side? Are you maintaining your share gains? Has Visa's PIN-authenticated Visa Debit had any impact on your debit wins on the PIN side? Any color would be helpful.

Martina Hund-Mejean

So Chris, let me take this. First of all, for the quarter, yes, the 12% was the underlying growth rate when you strip out -- most of the differential to the 24% was really related to the new debit PIN business in the United States. I think I want to differentiate between the PIN business and the signature debit business. On the PIN business, as you know, because of the regulatory changes that have to happen in the U.S., there was a big push in the first -- in the second -- really in the second and the third quarter, and that is what we saw into the numbers. Having said that, we're going to continued work on the PIN business, but I don't think you should be expecting going forward to have a similar push to what have to happen, leading up to April 15 of this year. On the signature debit side, again, you should be expecting that we're working those portfolios in a fairly significant way. So we have deal pipelines and you should just expect that you will see these kind of more normal cadence that we enjoyed during time. So whether the 12% underlying growth rate is going to persist, that depends. We have it now for a number of quarters. As you know, it really depends on how consumers are using their debit cards going forward. I think the one other question that you had was in terms of are we seeing any particular losses on the PIN business. Again, as you know, it's a complicated business. So far, we've been able to get a nice share on this. We have not seen any material deterioration on that versus the last quarter, and we'll be continuing to work this space as we see fit.

Ajaypal S. Banga

Chris, the only thing I'd add to that is that you asked specifically about Visa's pricing strategy. And yes, they've got that pricing strategy rolled out over there. We are not playing the game the way they are. This is my own understanding. I think they are impacting the regional networks more right now with that pricing strategy than the wins that we've got, but that could change. So we are very carefully watching it. We've got great MIS now. We've got great ability to track this stuff by merchant, by geography. And our team is very conscious of keeping our head above water on what we are doing here. So that's what we are up to.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Can I ask a quick follow-up? On the acquiring side, there was, I think, a licensing fee. I think, Martina, you actually characterized it as a pricing change in the U.S. in your last public comments. I just wanted to confirm that, that was fully impacting this quarter. My understanding was it kicked in July 1, but I didn't see it.

Martina Hund-Mejean

Yes, there was a full impact this quarter.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

But I just didn't see any sequential change in your growth rates in domestic assessments or rebates or anything like that, so I guess...

Martina Hund-Mejean

No, it's not in domestic assessment, it's in other revenues.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

And so your comments that it was relatively small...

Martina Hund-Mejean

It is relatively small.

Ajaypal S. Banga

Now you're into 5 questions, Chris. That's 1, 2, 3, 4, 5. But yes, it is relatively small.

Operator

Next question comes from David Turgut from Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

Could you update us on your appeal of the European Commission pricing structure on cross-border debit and credit within the EU? And then just in connection with that, we're hearing that the EC wants to regulate domestic interchange in the EU. Do you have any reaction to that? And what might be any impact on your own pricing strategy?

Ajaypal S. Banga

Well, I've got Noah sitting next to me right here, so Noah is going to chat with you about that. Go ahead, Noah.

Noah J. Hanft

Yes. So as you know, we filed our appeal as to the general court decision against the European Commission. That's going to play out over some time. So we have nothing else to add on that, other than the fact that the appeal is pending. And as to the question about the European Commission and domestic interchange, I think it remains to be seen as to the positions they're going to take. I mean, that also is in play, but time will tell as to whether ultimately they cease to regulate in that space.

David Togut - Evercore Partners Inc., Research Division

And if the EC does regulate domestic interchange, do you expect to maintain your own network pricing within the EU?

Ajaypal S. Banga

Well, who knows, right? But I mean, at the end of the day, you've got to remember, we don't make money out of the interchange. And so we've got -- as what exactly we've discussed in many countries around the world, pricing, our ability to price our work with issuers, our work with merchants, yes, the entire market moves around with interchange in terms of economics between merchants and banks. But the impact on us comes more from what happens to total payment volumes and the interest that issuers have in expanding the payments business and the interest that merchants have in accepting electronic payments. And that's the way we look at it, rather than, "Oh, if interchange changes, what happens to my pricing?" It hasn't proven to work that way for many years now. So we keep getting the same question, I keep giving the same answer. So hopefully, I'm consistent with that one, buddy.

Operator

Our next question comes from Gil Luria from Wedbush Securities.

Gil B. Luria - Wedbush Securities Inc., Research Division

I wanted to ask about what impact you expect from the new retailer joint venture that they referred to MCX. They've tried legislating against you, Durbin ended up being a net positive. Litigating, you seemed to be selling on pretty decent terms. So now they're trying to compete with you, do you think they have the resources and the will to build an alternative payment network? And in the shorter term, do you think the fact that they'll capture a lot of aggregate data means that they will have less demand for the data you sell from MasterCard Advisors?

Ajaypal S. Banga

So you've got 2 or 3 questions in there. And the first part is this whole MCX has got very little detail on what they are doing, what they intend to do. It's very difficult for me to give you much specific commentary on that. Do they have the resources and the will to do something about MCX? Yes. Does that add up to real payments network? Not really, if you think of what a payments network brings, if you look at the totality of it. So I think there are 2 very different angles in there. We have looked -- a number of them are already business partners of ours, and those are important retailers. And we're always talking with them about what we could do with them and for them. So that dialogue is ongoing. I think the aspect of data, yes, some of them will be collecting more data. But remember this, that the data we have cuts across millions of merchants in lots of geographies. The ability for our data to be somewhat, therefore, more predictive than that of any group of retailers is still very strong. What we do not do, which we don't do even today, we do not collect SKU level data and we do not collect individual names. One of the best parts about our data is that we are not collecting your name. In fact, your name doesn't come to us in the transaction. What comes to is a card number, a merchant code, a dollar value and a time of the transaction. And I think that still remains in our benefit that we aren't actually crossing the line into an individual's name. So our way of using our data is different. And I think there's enough space in this growing big data market for us and some others to be competing. So I'm less concerned about that aspect of it.

Operator

Our next question comes from Jason Kupferberg from Jefferies.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Any way to get a sense of potential impacts from Hurricane Sandy on your U.S., your cross-border volumes? I'm sure a lot of international trips probably got canceled or postponed by the storm. Anything that you would suggest could end up being material, understanding you wouldn't have any kind of specific numbers at this point?

Martina Hund-Mejean

So Jason, when we did the analysis on other of such storms in other parts of the country or in the world, net-net, in the end of the day, you see very little impact, so we might be. When we see our weekly data for this week, we might be. We definitely we'll be seeing some impact, but usually over time, that evens out. And so what you have to understand, if you were in New York City on Saturday and Sunday, first of all, everybody went to the shops, and I am surprised that the shops have any type of food still on the shelves because everybody was buying like crazy and stocking up. This is obviously a benefit because I saw a lot of MasterCards coming out of the wallets to be used for that. Then we probably have a little bit of a down period and, of course, people were not dining. Of course, you have tourists probably laying low in the hotels. Hopefully, they did some good spending there. And then after the storm, you have people starting to come out again. And unless -- I mean, I hope some of the food was spoiled, so they're going to have to stock back up again. And they have some pent-up demand. I believe this weekend, you will see some of that coming in. So in the end, when we look at these kind of storms -- and this was a 2-, 3-day kind of event, so it was actually a relatively defined event. We believe that over the quarter, you are not going to see some impact. And obviously, we're wishing well for everybody who had to go through this terrible storm.

Ajaypal S. Banga

The other angle, Jason, is that a lot of foreign tourists were also stuck here. Others may not have been able to come in, so it's kind of worked both ways. It's tough to predict, but there's no doubt that it creates a whole new element of uncertainty in so many people's lives with all they've been through.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Right. Okay. No, all that color makes sense. And just for a follow-up, on the merchant litigation, since you guys have Noah there, any concerns on the opt-outs getting to 25% of total or any other circumstances you can foresee as you go through this multistep process towards finalizing or truly finalizing the settlement? Anything that could potentially derail it? Or is your level of confidence in having it go forward with essentially the same terms that we first heard about in July, is that level of confidence intact?

Ajaypal S. Banga

So Noah actually ran out of the room as soon as you started your question. He's here right now. Go ahead, Noah.

Noah J. Hanft

Thanks for the opportunity to respond to him. Let me say that, as you know, Judge Gleeson issued his order as far as preliminary approval is concerned. And we're pleased that he indicated that despite request for a protracted briefing efforts in so far as the approval is concerned, he set a short date for a hearing and indicated that preliminary approval is appropriate, where we have a situation where the proposal is the result of serious negotiation between the parties. So we feel pretty good about that moving forward in a rapid manner. At this point, there have been some merchants, as you know, that are objecting to the settlement. But I would point out that of the original merchants in the class, setting aside the trade associations, a majority of those merchants actually signed the settlement agreement. And that's in addition to the 22 individual merchants that were plaintiffs that also agreed to the terms. So at the end of the day, we think the prospects are good. But really, it's up to the judge, who will openly determine the fairness of the settlement. At the end of the day, there can be opt-outs. And if even that 25% number is reached, it's still up to the defense -- defendants to decide whether to go forward with the settlement. So we believe we feel good about the prospects. And again, it's up to the judge to determine the ultimate fairness of the settlement.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

I think you feel pretty good about the appeal process, assuming that, that occurs post Judge Gleeson's ruling.

Noah J. Hanft

Absolutely.

Operator

Our next question comes from Rod Bourgeois from Bernstein.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

I wanted to inquire about the SEPA situation. I mean, you had some pretty good SEPA wins in recent years. Can you give us an update on the latest process for additional domestic processing wins in Europe? Recognizing that the EU is pushing pretty aggressively for regulation in Europe, does that regulatory push in Europe at all, maybe in the next 6 months, alter your ability to win SEPA deals in Europe? And does it make it more likely that future SEPA wins are further down the road rather than over the next 2 or 3 quarters?

Ajaypal S. Banga

So not really. There's actually many different parts in Europe, like everything else in Europe, right? And the fact is that if you look to the third quarter, our domestic transactions, now that they're lapping all those humongous wins in the Netherlands, still grew 26%. We're still growing pretty handsomely in the Netherlands per se. And we grew by an enormous number in Belgium. We are beginning to grow in Austria. We are growing domestic transactions in Germany. We've been able to implement a Maestro Fraud Shield in Germany to help reduce fraud and protect all our international Maestro acceptance. And in fact, we think that by the end of the year, 80% of all German Maestro cards, which is a number well in the excess of tens of millions of cards, will be on this tool, which is a derivative of inControl. We are sort of -- we are working with ING to be issuing PayPass-enabled cards in Netherlands starting January. I've talked to you about the Nordea win. I've talked to you about Swedbank. We've got a pipeline of deals across SEPA in this space, both in terms of traditional wins, as well as processing. So I would say to you there's different parts going on. This all the day-to-day business, where there is all the effect of SEPA and the payment systems directive that is still flowing through. There is the issue of what's going to happen with the appeal, as Noah said, and what's going to happen with the green paper. But guys, every bank is moving forward and we are all moving forward with that business. There's no doubt that continued regulatory uncertainty always makes people uncomfortable. But Europe's been having some of this uncertainty for quite a while now. It's not a new event in Europe. So that's kind of where we are right now with all this. Having said that, winning domestic processing in Europe is not something that happens in 3 months. Any one deal takes quite a while to happen. So I'm not sitting and fretting about that issue right now in my numbers for the next few months or quarters.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Great. And then just really quick as a follow-up on a related note. It's good to hear that you don't have any major renewals until 2014. On the deal that you -- the large client that you recently renewed, did the European push for regulation have any effect on your sort of new contract with this bank in Europe?

Ajaypal S. Banga

Crédit Agricole, you're talking about. No, nothing at all. I mean, listen, every big bank in every part of the world negotiates hard to protect their interest and negotiates hard to protect their growth, as with every big merchant whom we talk to. So there's always that pressure with every institution each and every time. It's been that way since 25 years, so that's there. But I can tell you that there's no difference in our conversations with these institutions that's coming out of this. They all want to know what's going on with the green paper. They want to understand our strategy compared to that of our largest competitors. They want to comprehend what our approach is in terms of affluent cards and nonaffluent cards. They want to make sure that they understand what we are doing. But beyond that, it's a pretty healthy dialogue.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Great. So there's no terms in that contract that are contingent upon regulatory outcomes. You were able to get everything etched in stone despite...

Ajaypal S. Banga

No. And that's question number 3, Rod. No.

Operator

Our next question comes from Bill Carcache from Nomura.

Bill Carcache - Nomura Securities Co. Ltd., Research Division

There's been a lot of focus and a lot of attention on mobile acceptance technologies in the U.S., like Square and similar offerings. I wonder if you could talk a little bit about what you're seeing, I guess, in terms of mobile acceptance, similar types of mobile acceptance technologies in emerging markets and whether -- I guess, just thinking about the potential for there to be kind of a step change in electronic payment, penetration rates in the emerging markets as a result of not having to kind of have the traditional point-of-sale infrastructure laid out. Anything that you're seeing there? And secondly, as a follow-up, if you could also talk about from the standpoint of your conversations with other mobile network operators, whether sorting out or hashing through the economics of partnerships, it seems like it's something that is taking place on a case-by-case basis. But I wonder if you could give any comment as to whether that's a sticking point or any color around that.

Ajaypal S. Banga

So I mean, I'll answer the second one a little bit quickly, and then we'll go to the first one. In the second one, it's absolutely correct that there is a case-by-case approach right now. And the reason for that is no one's clear how this will develop over a period of time. So the traditional role of an operator versus a hardware manufacturer versus the bank versus the merchant versus the network is still moving around. And the one big difference is that everybody's there playing. A little while back, we used to all talk about how the mobile networks would be able to do all this without the banks and the payment network. So I think you've seen that dialogue completely change through the efforts we've put in. We now have 30 of these partnerships around the world. I talked about it a few -- a little while ago today. But if you add up what we've been doing over a period of time, there are a ton of these around the world. I remain convinced these will take time to come to fruition. I remain convinced that infrastructure has to be built, that these economic terms have to be agreed to, that consumer behavior has to adjust and adapt for it to come to fruition. One of the aspects of infrastructure that could help, which has not to do with mobile payments, it has to do with the other side of this, which is your first part, which is the mobile as a point-of-sale, which could transform the acceptance of casual merchants, smaller merchants and merchants with inadequate fixed line infrastructure in countries like India and South Africa and different parts of the world. There's momentum. We've invested in a company like iZettle, for example, which is out there trying to build this. We've got a great partnership with Square. We're actually talking to them about going to countries outside of the U.S. There's other players. There's Rev. There's a couple of other players out there that are trying to think about how to use alternative methods to enhance the experience of using a mobile as a point-of-sale. We ourselves are doing stuff as well, which is in MasterCard Labs, that some of you have seen, that also works with using tablets and mobility devices as a point-of-sale. These are all -- they're happening, but they're far out there. What I was talking about in India, for example, with the unique identification authority, with fingerprinting that I've talked about a few quarters ago, that relies on the mobile being -- having a fingerprint reader attached to it in a small village shop, which can then be used to enable transactions from the bank accounts into which a direct deposit of subsidies is made. So there's a lot of work going on. We have developed that technology. It is in our system because we have 1 release around the world. We don't have 1 part of the world as an association. We've got everything together. We've got 1 release around the world. We kind of have this done. And we are ready to bring it into different countries as it rolls along. So we're working very hard on it at the front end. But I'd say it's not going to happen tomorrow. It's going to be a slow build over the course of a few years.

Operator

Our next question comes from Andrew Jeffrey from SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Martina, could you just clarify in terms of the rebates and incentive commentary with regard to the fourth quarter, is the higher level specifically tied to current period deal signings? Or is it related also to the higher volume within existing contracts?

Martina Hund-Mejean

Well, first of all, as you know, our fourth quarter has always enjoyed the highest level of rebates and incentives, right? So I'd say you've got to have -- so if you look at our quarterly cadence over the last 10 years, it always was higher in the fourth quarter. And as we told you before, it was really higher in the fourth quarter primarily due to what's going on around the holidays and what we might be doing from a merchant initiative point to view, right? So now secondly, what you're having going on in the fourth quarter is that we have a very robust deal pipeline, as Ajay said. And some of the deals we did not sign in the third quarter, I fully expect them to come through in the fourth quarter, and then you would see a little bit of an up there, too. Lastly, you have just seen for October that our volumes are just a tad higher, not in the United States but outside of the United States, as well as with cross-border. So depending on whether that will persist for the remaining 2 months of the quarter, you might see a little bit of an uptick there, too.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And that's helpful. And as a follow-up, it sounds like you're being very disciplined in your PIN debit share strategy. Is there anything, Ajay, that you've seen intrinsically change with regard to PIN debit profitability? I know you've always mentioned that the revenue yield is lower, but they're still very profitable transactions. Is there anything that's at all been altered by the pricing environment with regard to the ROI on PIN debit or just the incremental profitability?

Ajaypal S. Banga

No, Andrew. Nothing has changed on that front. In fact, as time goes by, as we see more of these transactions, I'm kind of hoping that I'll be able to do something with that data to help my Advisors business. But typically, you need to see some years of real data to make that predictability improve even further. So that's not a 2013 event. But seeing more data is really important to our company. It makes a big difference to the values of what we sell in addition to just being a network. And so it's important, and we are working very hard. Whether it be to the SEPA question that Rod was asking or your question right now, it really matters.

Operator

We have a question from Tien-Tsin Huang from JPMorgan.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Just 2 quick clarifications. Is this the small operating benefit expected for the year? In the past, you said that you could spend, I guess, some more on incremental growth investments. I didn't hear that this quarter. I'm curious of the change. And to the extent that there are incremental growth investments, will they be organic, in the form of hiring people, or inorganic, like buying tech assets? Just trying to assess where G&A could shake out as we get through the end of the year.

Ajaypal S. Banga

So you're stealing my closing comments. But that is kind of -- I have every intention to keep using opportunities to put money back in. Frankly, one of the things I'm trying to do very clearly and concisely is truly look at the company's tax profile. We used to pay a much higher tax rate. We are working very hard in the company to bring that tax rate down through 2 things. One is consistent proper tax planning in terms of where our different assets are located and how the revenue reaches those assets compared to the tax rates in that geography and considering the tax rates across the United States and that geography. The second is all the clearing up of one-timers that Martina and Tim have done -- and Tim Berger have done an outstanding job on. So my attitude is to use those 2 in addition to business growth that I feel may give me better margins at different points of time and keep putting that back into short-term opportunities. But I also want to put our cash back into longer-term opportunities, whether it'd be the acquisitions of the type, Tien-Tsin, that be it DataCash access or Truaxis or be it the purchasing of patent portfolios from Vivotech recently, which we also announced, I don't know, Noah, for a month or so ago, 1.5 months, 2 months ago? So I'm trying to do a bunch of things that are both short-term and medium-term in nature by using these opportunities. And that's not changed at all.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Okay. No, that makes sense. The other clarification, I'll let you go, just the October trends for U.S.A. credit and debit, did you give that, Martina? Or did I miss it?

Martina Hund-Mejean

Yes. What I did is I basically talked about our processed volume proxy for GDV and the U.S. And I said it grew up to October 28 at 7%, which is very similar to what you saw in the third quarter.

Ajaypal S. Banga

The improvement, Tien-Tsin, in the 4 quarters -- 4 weeks of October, has been mostly outside of the U.S., and has been in every region outside of the U.S. But in the U.S., it's been kind of the same number as we saw during the third quarter.

Barbara L. Gasper

Okay. Ajay, you've got some closing comments?

Ajaypal S. Banga

Yes, now that Tien-Tsin has stolen them. But guys thanks to all your questions. And we've basically delivered a solid third quarter. And I want to make this point that it's right in line with the expectations that we had as we lapped that exceptional third quarter of last year. We believe the markets are going to stay unpredictable for the next, I don't know, 12, 18 months. But dialing any -- barring any significant deterioration in global economic conditions, we are very committed to our new performance objectives for the 2013 to '15 period. And as Martina indicated and we spoke of in our recent investor day and I just said so again in answer to one of the questions, our net revenue and EPS growth could be slightly below the range early in that 3-year period. Now my view is unchanged. The payments space is a great business to be in. 85% of the world's transactions are still being conducted using cash. That provides us a strong driver for revenue even during periods of overall economic uncertainty that impacts per capita expenditure. We continue to look at targeted investments and partnership opportunities to help drive our strategic focus areas for short- and long-term growth. That's the Tien-Tsin portion. And with that, thank you, all, for your time today, and thank you for your faith in the company.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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