Earnings Call: Q4 2014

Jan 30, 2015

Welcome to the Mastercard 4th Quarter and Full Year 2014 Earnings Conference Call. My name is Heather, and I will be your operator for today's call. Quarter. Please note that this conference is being recorded. I will now turn the call over to Ms. Barbara Gasper, Head of Investor Relations. Ms. Gasper, you may begin. Quarter. Thank you, Heather, and good morning, everyone. Thank you for joining us for a discussion about our 4th quarter and full year 2014 Financial Results. With me on the call today are Ajay Banga, our President and Chief Executive Officer quarter and Martina Hungmajon, our Chief Financial Officer. Following comments from Ajay and Martina, the operator will announce your opportunity to get into the quarter. Up until then, no one is actually registered to ask a question. Quarter. Even if you think you have already dialed into the queue for the Q and A, you will need to register again following our prepared comments. Quarter. 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 quarter atmastercard.com. We've added a new table in the slide appendix to the deck that breaks out the quarter. We will now begin the presentation of the Q4 of 2019. Quarter. These documents have also been attached to an 8 ks that we filed with the SEC earlier this morning. A replay quarter. This call will be posted on our website for 1 week through February 6. 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. Quarter. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect quarter. Our future performance are summarized at the end of our press release as well as contained in our recent SEC filings. Quarter. With that, I will now turn the call over to Ajay. Thank you, Barbara. Good morning, everybody. Quarter. I'm very pleased that we were able to deliver strong results for both our 4th quarter and the full year performance despite what everybody knows is a quarter mix economic environment. In the 4th quarter, after adjusting for currency, we had net revenue growth of 17% quarter and EPS growth of 25% driven by solid underlying metrics. For the full year, quarter. We saw net revenue growth of 14% and EPS growth of 19%. Both EPS growth figures quarter. Exclude the impact of last year's special item for a charge related to the U. S. Merchant litigation. Quarter. So in total, we had another good year where we were able to continue to meaningfully invest in growth initiatives quarter that I think will position us very well for the future. And those initiatives included actions resulting in a restructuring charge quarter, which Martina is going to go through in some detail later. So moving on to look at some of the current underlying global economic trends. Let's start with the United States, which is in relatively decent shape. Quarter. Our spending pulse data showed U. S. Retail sales growth ex auto was 2.9% in the 4th quarter. Quarter. Now that's down from the 3rd quarter growth of 4.2%. And most of that deceleration quarter is due to lower gas prices. Now excluding auto and gas, retail sales growth was 4.1% for the Q4 versus 4.8% for the 3rd quarter showing just a modest deceleration quarter. And even though 4% growth is nothing to sneeze at, we haven't yet seen the extra savings quarter from lower gas prices translate into additional discretionary consumer spending. Quarter. So while overall retail spending growth softened in the quarter, underlying economic indicators did remain positive with unemployment levels quarter and consumer sentiment both showing some improvement. Looking at our own U. S. Business, quarter. As we have said for the past couple of quarters, the JSB conversion is having an impact on our U. S. GDV growth rate. But if you take that out, quarter. The underlying growth remained roughly the same over the course of 2014. Outside of the U. S, quarter. Europe's recovery slowed somewhat in the 4th quarter. It still remains challenged. And across the region, consumer confidence quarter. And economic sentiment decelerated slightly. And while unemployment levels were high, they remained steady versus the prior quarter. But there were a few bright spots and the U. K. Experienced good momentum in the quarter. Spending positive for the U. K. Quarter. It's showing 4th quarter retail sales growth of 3.6%, up from 2.9% in the 3rd quarter. Even in Spain, quarter. Preliminary indicators are showing some early signs of recovery. Mastercard's total European volume growth for the 4th quarter was in the mid teens and process quarter. Transaction growth in the low 20s, both of which increased from the last quarter due in part to a number of our recent wins across quarter. Latin America, number of indicators there that highlighted the sluggish economic performance across the region quarter. And our 4th quarter spending post sale for Brazil showed retail sales growth of just 0.9%, down from the 2.4% growth quarter. For the entire region, annual GDP growth is now expected to be around 1%, quarter, down slightly from earlier projections of 1.3%. Mexico, however, is an exception. It continues to benefit from improving exports to the U. S. And actually is undergoing a slow recovery. And our business in the region remains solid. Quarter. Our 4th quarter GDV and process transaction growth is in the mid teens, about the same as the last quarter. Quarter. Across Asia Pacific, overall business sentiment actually improved in the 4th quarter. Optimism from Indian companies following recent elections has driven quarter. But it's tempered a bit by lingering concerns over the slowing economic growth in China. Consumer confidence across the region holding steady. Quarter. Our business in the region continues to do well. GDV growth in the mid teens, process transaction growth in the mid-20s, quarter. So overall, the economic environment hasn't changed much from last quarter. The U. S. Looks to be in a little better shape, quarter. Challenges remaining for Continental Europe, for Brazil, parts of Asia. But despite all of this, you can see the strong fundamentals of our business have not changed. Quarter. So before we go to our business highlights, there has been some recent news about European regulatory matters and Russia. So let me touch on those a little bit first. And quarter. Let me start with the proposed European legislation related to card payments. The European Parliament, the Council of Ministers and the Commission quarter. We have reached agreement in December and we are now waiting for the formal adoption and publication of the final text. As expected, quarter. We've got interchange caps that have now been established for consumer credit and consumer debit cards. Commercial cards are excluded. Quarter. The regulation provides for a level playing field by imposing interchange caps on 3 party networks when they operate similarly quarter to a 4 party network. There are some possible exceptions to this, but overall we are pleased with the outcome on this point. It is an important one for us. Quarter. Also, a network will no longer be allowed to charge a co badging fee if it does not process the transaction. And finally, quarter. The regulation requires a functional rather than legal separation of scheme and processing functions, an outcome that we had sought quarter. Once it became clear that some form of separation would be required, we're now working to build this separation, the functional separation into our operations. Quarter. The next formal step is for the language of the agreement to be endorsed by Parliament and by the member states. Quarter. Our best estimate is this will occur in the first half of twenty fifteen. Interchange caps will become effective 6 months after that. Quarter. All of the parts of the legislation will apply to us starting 12 months after the endorsement. Quarter. So that's probably sometime in 2016. So now a little bit about Russia. We've been working through the challenges of connecting quarter, which is the domestic processing switch of the Russian Central Bank in order to meet their late March, March 31 deadline. Quarter. Going forward, by the way, nothing has changed in terms of being able to issue Mastercard branded cards for use quarter in the Russian market. In terms of the financial impact to our business, our best estimate is still something less than $50,000,000 On an annualized basis, it will now hit our G and A line, the expense line as a data processing expense rather than the revenue line as we previously shared. So moving on to some of our recent business activity. Quarter. We've expanded relationships with a couple of our large global customers and that's great news. We renewed our multi year global partnership quarter with Bank of America that will expand share opportunity for us both domestically and outside of the U. S. Quarter and primarily on the commercial side. We recently won new business with HSBC, which involves converting the remainder of their U. S. Quarter consumer credit portfolio to Mastercard in the first half of this year. In the Middle East and Africa, we signed quarter. A number of new business agreements in the quarter that should help us increase our credit, debit, commercial and prepaid businesses quarter in countries such as Nigeria, Tanzania, Rwanda, Jordan, Kuwait and the UAE over the course of 2015. Quarter. I think we've built the strong momentum that we've developed in the region. Over the last 2 years, we've signed close to 100 new business agreements. Quarter. We now have an acceptance footprint in 50 out of Africa's 55 markets. You know we feel strongly about activities that quarter services to people who were previously excluded from access to the financial system. In Africa, close to 95% of the region's transactions quarter. Reflecting our commitment to what's going on in Africa, we've also launched a number of financial inclusion initiatives. And today, I'm going to pick on 2 of those. Quarter. First, last week, we announced the start of a collaboration with the African Development Bank to broaden access to financial services. Quarter. We're going to do that in partnership with local governments in Africa and private sector companies. We have the expertise to design and to scale quarter financial solutions and the African Development Bank is a major source of funding for the economic development of its 54 member countries. So we believe together we can help drive financial inclusion and economic development across Africa over the next few years. Quarter. Secondly, last December, in partnership with the Bill and Melinda Gates Foundation, we announced that we will be opening a Mastercard lab quarter. This is our 7th global innovation hub, but it's the first that we have in Africa. It's also the first to receive outside funding. The lab will be dedicated specifically to creating and incubating programs quarter that are targeted to more than 100,000,000 people in this part of the world who are financially excluded or underserved. Now efforts on innovation, by the way, are not limited to one region like we were discussing Africa or only to the labs. We're also opening up our technology to external developers, something we've been trying to do for a while now. The most recent example is a 10 quarter. Competition that starts next month in Sydney in Australia and will go on to Hong Kong, Singapore, Israel, Brazil, quarter. And this competition which is already being planned for some more cities beyond these quarter. We'll bring together developers and entrepreneurs using Mastercard APIs to create a new generation of commerce applications quarter that leverages our platforms, our product capabilities such as those from our information services business, our Masterpass and our prepaid, quarter. And in the meanwhile, we're continuing with the global expansion of Masterpass. Quarter. Since its introduction in the spring of 2013, we now have the platform launched in 16 countries and just recently signed on a number of new merchants quarter. Neiman Marcus, Office Depot, Blue Nile, broadway.com, just some new names in the merchant list. We're also creating some new and noteworthy partnerships. Quarter. One example is with Payliv in France. Payliv was initially formed by BNP Paribas, La Banque Postale and Societe Generale, quarter. By the way, mainly customers are one of our key competitors. And yet they've chosen to partner with Mastercard because of what we believe is our global reach quarter in handling all of their cross border e commerce transactions as well as some of their domestic transactions too. Quarter. With this partnership, up to 40,000,000 people will have access to Mastercard's acceptance with a PayLift Wallet linked to a card from their bank. Quarter. And so before I turn it over to Martina, let me quickly update you on 2 recent acquisitions. In December, we acquired the payment gateway services business quarter of Transaction Network Services, TNS. And that deal gives us the ability to expand our payment gateway to the U. S. And Mexico quarter. And to position ourselves more competitively around the rest of the world where as you know with data cash and our original mix platform we only had a presence. Quarter. So for example, in Asia Pacific and the Middle East Africa, we will add new capabilities, tokenization, fraud management, and we'll also be able to leverage quarter, what I think are highly skilled product and software teams that have now recently joined the company with this transaction. Quarter. Additionally, we acquired 51 Marketing Limited. That's a marketing analytics and consulting firm and their clients are basically large retailers quarter across many different consumer sectors. FiveOne has some proprietary software. They use that to develop insights from a retailer's own data quarter that can be used for marketing, for merchandising and for operational decisions. You take that and you combine That kind of in-depth merchant understanding with our existing advisors' capabilities, I think that will allow us to provide quarter. We have greater insights to retailers and the ability to expand our business opportunities with the merchant community. Quarter. So with that, Martina, for an update on financial results and operational metrics. Thanks, Ajay, and good morning, everyone. Quarter. As Ajay already said, we're very pleased with our 2014 full year performance, which delivered net revenue growth of quarter and EPS growth of 19%. I'll now turn to the details of our 4th quarter results. So let me quarter. We're seeing on page 3 of our slide deck and where you see that the difference between as reported and FX adjusted growth rates for this quarter is more quarter. This is primarily due to the headwinds from the euro quarter, especially with what we saw in the FX markets during the last 45 days of the quarter quarter and its continuation into this quarter. These figures also exclude the impact of the special item related to the U. S. Merchant litigation quarter taken in the Q4 of 2013. I'd like to highlight 3 things while on this slide and then dive quarter. Let's move into the details of the major P and L line items and subsequent slides. So first, EPS growth was quarter. 25% after adjusted for currency and share repurchases contributed $0.03 per share. During the 4th quarter, we repurchased 2,100,000 shares at a cost of approximately $155,000,000 quarter. And through January 23, we repurchased an additional 2,500,000 shares at a cost of quarter. $215,000,000 and we now have $3,800,000,000 remaining under the current authorizations. Quarter. We continue to look to repurchase shares on an opportunistic basis. 2nd, part of the EPS growth is the result of a very quarter. Favorable tax rate of 20.3 percent in the quarter as some initiatives only came together within the last couple of months to better align quarter. Our tax structure to our European business footprint between Belgium and the U. K. We took some of that benefit to reinvest quarter. Back into the business, which I discuss on the operating expense slide. And third, cash flow from operations quarter. We ended the quarter with cash, cash equivalents and other liquid investments of about quarter $6,400,000,000 So let's turn to Page 4, where you can see the operational metrics for the 4th quarter. Quarter. Our worldwide gross dollar volume or GDV was up 13% on a local currency basis, up quarter. Overall, our U. S. GDV grew 8% similar to last quarter. Credit growth quarter. Quarter. Outside of the U. S, volume growth was 15% on a local currency basis and primarily driven by Europe. Quarter. Gross border volume grew 19% on a local currency basis, higher than the 15% we saw in the 3rd quarter, primarily driven by Europe. Growth in Europe was in the low 20s. Key contributors to this growth quarter. Included the U. K, Italy, Germany and Sweden, all regions except the U. Quarter. So an increase in cross border volume growth in the 4th quarter. Let me turn to page quarter. And here you can see process transactions grew 11% globally to 11,600,000,000. Quarter. We continue to see double digit growth in most regions. Growth increased from the 10% we saw in the 3rd quarter, quarter, primarily due to Europe, driven by Russia, Sweden, Poland and the Netherlands. Globally, the number of cards grew 9% quarter with €2,100,000,000 Mastercard and Maestro branded cards. Now let's turn to Page 6 quarter for highlights on a few of our revenue line items. Overall net revenue growth was 14% as reported quarter or 17% FX adjusted due to currency headwinds primarily from the euro exchange rate. Quarter. Additionally, the impact of local currency exchange rates to the functional currency billing rates was a little more than 1 ppt. Quarter. In total, acquisitions contributed 3 ppt to our net revenue growth. Quarter. So after excluding the impact of both local and functional currencies as well as the impact of acquisitions, quarter. We saw a very strong underlying growth of 15%. Looking at the individual revenue line quarter. Domestic assessments grew 7%, while worldwide GDV grew quarter 13%. This 6 ppt gap is primarily due to the impact of local currency and lower than average quarter. Quarter. Grew 8%, while cross border volume grew 19%. Of the 11 ppt quarter. About 7 ppt is due to the impact of local currency. The remaining portion of the difference is quarter. Due to the higher mix of intra European activity. Transaction processing fees grew 15%, primarily quarter. Quarter. Quarter. Other revenues grew 28%, driven largely by contributions from our pinpoint acquisition You can see that total operating expenses were up 26% in the quarter or 29% on an FX adjusted basis. Quarter. Which contributed 8 ppt to the growth. So let me focus on that a bit more. So specifically, quarter. We took an $87,000,000 restructuring charge to cover a series of actions. First, quarter. As you know, we have made a number of acquisitions in the processing space and we are now consolidating all of our processing assets quarter under one organization, thus driving significant synergies. 2nd, we are realigning quarter. Within the company's business groups and redeploying resources geographically in order to invest in and enhance our capabilities quarter. The quarter. Given the reinvestment that I just mentioned. The remaining OpEx growth of 12% was quarter, primarily driven by some opportunistic spend, such as adding A and M spend around our Apple Pay and Craigslist initiatives as well as continuing our digital investments such as MasterPath and tokenization similar to prior quarters. Quarter. Let me turn to Slide 8. And here we discuss what we've seen quarter in January through 21st. Most of our business drivers are similar to what we experienced in the 4th quarter after quarter. Excluding the impact of lower gas prices, particularly in the U. S. So the numbers through January 21 are as follows. Quarter. Starting with processed volume, we saw global growth of 9%, down 2 ppt from the 4th quarter. Quarter. In the U. S, our processed volume grew 3%, down 2 ppt from what we saw last quarter, primarily driven by lower gas quarter. Processed volume outside the U. S. Grew 16%, about 1 ppt lower than the 4th quarter with growth of mid to quarter. Globally, process transaction growth was 11%, similar to what we saw in the 4th quarter quarter with double digit growth in all regions except the U. S, which grew in the low single digits. Quarter. With respect to cross border, our volume grew at 19% globally, the same as our 4th quarter growth. We continue to see high growth in major European markets including the U. K, Italy and Sweden. Quarter. Looking ahead, let me start with some commentary about full year 2015. Quarter. Given what's happening with currency rates and the impact being seen by U. S. Multinationals across a number of quarter. I'm going to start with that. Especially since it was back in 2012, the Mastercard last faced such a big quarter. Remember that currency impacts us in 2 ways. So first, we have the impact of local currency rates relative to the quarter. And this is the FX exposure that we actively hedge. Normally on a rolling 12 month basis and quarter. Typically, as you know, we hedge about 50% to 75% of our total net exposure for about 30 currency pairs. Quarter. And given that many currencies have depreciated against the U. S. Dollar and the euro, new hedge contracts will come on quarter at lower rates over the year. Thus, we continue to expect some net headwind throughout the year quarter, both to revenue and the bottom line. Based on currency rates, based on the current rates, this is likely to quarter. Around 2 ppt in the 2 ppt range and this is already included in our FX adjusted guidance. Quarter. 2nd, we have the impact of the translation of our major functional currencies, which are in particular the euro and quarter. The Brazilian real into U. S. Dollars to consolidate our financials and we do not hedge those exposures. When we talk about FX adjusted growth rates, we are only adjusting for the impact of these 2 functional exchange rates. Quarter. The rates for our functional currencies remain similar to where they are today. So that's the euro trading at the 1.13 level quarter and the Brazilian real at the 2.58 level for the rest of the year, the net impact quarter. The euro and the real would be a 4% to 6% ppt headwind and it's actually driven mostly from the quarter to our as reported results for the full year. Depending on which line item we are talking quarter. About revenue, net income or EPS, and I will get into that a little bit more. With that backdrop, now let me get into some of the P and L line items. Quarter. We expect high single digit net revenue growth for 2015 on an FX adjusted basis quarter. Quarter. Our underlying business remains strong and we are seeing traction from many of our recent portfolio wins in new product initiatives. Quarter. However, this year's FX adjusted revenue growth will be impacted by some items specific to 2015 quarter. And that's including the remaining Chase portfolio attrition, mostly impacting the first half of the year as well as the local currency headwinds I just talked about. Also included are a couple of expected quarter. Significant contract renewals, some of which will likely have more front loaded rebates and incentives than our typical agreements, quarter. But these renewals provide the foundation for future growth. On an as reported basis, quarter. The net revenue growth rate will likely be in the mid single digit range as a result of strong quarter. Headwinds primarily from the euro functional translation. Based on current FX rates, quarter. This would be about a 4% to 5% ppt impact. Quarter. Overall, we projected growth rate for total operating expense for full year 2015 to be in the high single digits quarter on an FX adjusted basis. This growth is predominantly due to a roughly 6 ppt impact quarter from our previously announced acquisitions with more of that impact occurring in the first half of the year. Quarter. The as reported growth will likely be in the mid single digit range after considering a roughly 2 to 3 PPT quarter. Let me give you an update on potential dilution from last year's acquisitions. Now that we've done a few more deals like TNS quarter. And 5, that Rajeev just mentioned, we now expect total EPS dilution to be about 0 point 0 quarter to $0.10 for the full year 2015. And a little less than half of the expected dilution is actually due to the amortization of acquired intangibles. Quarter. You should now assume a full year 2015 tax rate of about 28 quarter. Due to the continued benefits we expect from the tax initiatives I discussed earlier, so this is a sustainable tax quarter. Now given all the detail that I just went through, let me step back and summarize for you. Quarter. We expect solid fundamentals to drive our business in 2015 despite the mixed economic environment and significant headwinds quarter. We continue to sign customer contracts and invest in the right strategic areas, while managing our quarter. So finally, let me move on to our long term performance quarter. Objectives for the 2013 to 2015 period. Given our expectations for 20 15 Revenue Growth. We now believe that we will deliver at the low end of our 11% to 14% net revenue CAGR. Quarter. We continue to expect at least 20% EPS CAGR for the 3 year period due to continuous quarter. Thanks, management as well as benefits from our lower tax rate and share repurchases. We remain committed quarter to our annual operating margin target of at least 50%. Remember, these objectives are on a quarter. On a constant currency basis and exclude our 2014 M and A activities as well as quarter. As a reference point for your modeling, when looking at our performance from a 2 year CAGR perspective, quarter. So that's for 2013 2014 on a constant currency basis, we have delivered quarter. A net revenue CAGR of 12.5 percent and an EPS CAGR of 21.1 percent, which is based quarter. The 2012 normalized EPS of $2.14 per share that we provided to you earlier. Quarter. Now many of you have asked when we will be rolling our performance objectives forward. As you can see, the underlying drivers of our business quarter. We are in good shape and we are expanding our reach in areas that we're strategically targeting such as processing, quarter. And for now, we have given you some clarity around 2015 as this is the last year of our current 2013 15 Performance Period. Once we have worked through the many moving parts, including the impact of those resulting from the final European payment Regulations and the new payments environment in Russia, both from a revenue and an expense perspective, we will provide you with our new quarter. Now let me turn the call back to Barbara to begin the Q and A session. Quarter. Thank you, Martina. We're now ready to start the Q and A session. Quarter. And I would just remind everyone that in order to reach as many people as possible, we ask that you limit yourself quarter. Heather? Thank you. We will now Quarter quarter. Sanjay Sakhrani with KBW is online with a question. Quarter. Thank you. Good morning. I guess I had a question on the quote Ajay had in the press release. It mentioned new wins quarter. Are there is it both wins and renewals? Because I know you guys talked about the renewals. And then just on the tax rate, Martina, That 28%, I mean can that come down further in future years? Thanks. Quarter. Hi, Sanjay. Good morning. It is ZYN's annuals. I mean, if even in my earlier comments, I talked to Bank of America's commercial And some consumer stuff, those are actually wins. HSBC is a win. We're actually converting the rest of the portfolio. There's renewals as well. Quarter. There's some in the pipeline that is a combination of renewals with a deeper extension into other markets, which I would count as a part win. So kind of mix of both and quarter. All that's happening as we speak actually. So on the current tax rate Sanjay, as you know, we are very much committed to be quarter. And over the last couple of years, we've been able to work down the tax rate quite considerably. So in fact for 20 quarter. We are ending up in 28.8%. We're planning that that will go down to 28% in 2015. And over a longer period point of quarter. We believe that we will have even more work that we can do in order to lower the tax rate. Quarter. Thanks. Operator, next question. Jinjin Wang is online with a question from JPMorgan. Good morning. Great, thanks. Just want to follow-up on Sanjay's question. Just the small rise in rebate was surprising this quarter given your comments quarter. On the deals, so just curious if there are any unusual items within that? And then can you give us quarter. Some context on where rebates could trend this year. It sounds like this like you just said, there'll be some renewals and wins. Quarter. Yes. So first of all, in the prior year quarter in 2013, we actually had some relatively large quarter. Contracts coming to fruition both from a new and from a renewal point of view. So this is just a year over year cadence. There's nothing unusual that quarter. Going on in the Q4 of 2014. Looking forward, when you talk about 2015, as I mentioned quarter. In my prepared remarks, we have we are expecting a number of customer renewals that will have more front loaded rebates and incentives quarter. Into the front part of the year, not smooth over the entire years of a contract. And so we will have a more considerable quarter impact on rebates and incentives in 2015 and that is all baked into our net revenue guidance quarter. And to be clear, it's renewals and BIMs, as I said, it's not just renewals. Quarter. Andrew Jeffrey from SunTrust is online with a question. Hi, good morning. Thanks for taking the question. Quarter. Ajay, I wonder just from a high level if you could step back and kind of describe the acquisition strategy quarter. Just in the context of your long term growth, it seems like you're perhaps ramping up some of your acquisition quarter. And I wonder if there are some specific criteria you evaluate when you look to do a deal and also just sort of quarter. Whether or not there's an overall or overarching narrative that we might think about in terms of how Mastercard's augmenting its robust quarter. Okay. So we've this particular year, we've actually ended up doing quarter. 6 acquisitions and one JV. And we had this P and S 5.1 pinpoint ECS C7 Provos quarter starting in January through December and on the Olmstead JV. But that's I wouldn't say you should take that as the norm. Deals are deals when they happen. You cannot look at 25, 30 deals in a year and sometimes in the previous 2 years, 1 or 2 worked out. It so happened that a number of these were in the hopper, so to say, and they began to close at different times of the year. So quarter. The first thing I'd say is, don't take this as a trend line of how it happens. It's just the way deals work out. Now, your deeper question was around what we are doing and where we are going forward. Quarter. What's the big picture here? And the big picture here is that we are trying to expand our presence in the payments value chain, quarter. Not just in being in the clearing authorization and settlement business, but everything we do with before, during and after of a transaction. Quarter. How can we expand our presence? So we can be stickier and we can therefore extract better value for the services we offer And that provides us with some new capabilities and hopefully gives us some space to become bigger leaders or better leaders in key growth areas. So what could those areas be? Data and analytics, which is what the information service is about. So quarter. 51, for example, is right in that space. Processing, which is what we're doing with, say, quarter. With ECS and TNS also does fit in there. We've had the e commerce gateway businesses bought There's a ton of these things that all tie back to processing. And why are we doing processing? Because the idea is to be able to see More of the transactions around the world because that allows me to use that knowledge in my data analytics business. So It's all interconnected to that space. And then the 3rd area is safety and security. So, DataCash got us some great quarter. There are similar ones in some of these. The HomeSend JV could actually be very Not just for moving money around the world, but also for safety and security. And then loyalty, which is why Pinpoint came into it and quarter. We did True Access some years ago. And so these are all in that daily wake of data and analytics, processing, quarter. And mostly we try and figure out if there's a good strategic fit of these companies quarter. Giving us some critical capabilities. We didn't have our own technology, product, distribution, quarter. Some geographic reach maybe and do we have the right kind of risk profile and are we getting some talent and skills we would not have been able to quarter. Get easily. So CSAM, for example, brought us a number of very highly qualified mobile payments quarter. Hiring 100 of them organically would be a very slow build. This gave us The ability to get with it much bigger. It's kind of a mix of those reasons and that's what we're trying to do. Yes. In addition to the strategic Evaluation, we obviously do a financial evaluation and we do an integration possibility evaluation. So on the financials, quarter. First of all, we differentiate between those acquisitions, as Ajay said, that are really bringing us skill set. They don't necessarily bring us in the immediate term quarter revenues that will be built over time, but it brings our skill set. And then we have acquisitions that are more the traditional quarter. Like Ping Point or TNS that are bringing us also revenues. And we do the very traditional cash flow modeling with the right kind of hurdle rates quarter. It varies by the type of business, the riskiness of the business, where the business is located. And then beyond that analysis, we obviously also do an analysis on the quarter integration possibility of this particular business with our company so that we can drive some synergies on the bottom line. Quarter. Thank you. Kevin McVeigh with Macquarie is on the line with a question. Great. Thanks. I wonder if you could just give us a sense of quarter. The advertising and marketing line in Q4 and then how we should think about that over the course of 2015 as well? Quarter. Yes. So first of all, in Q4, as I said, we took actually advantage of some of the goodness that we had on the tax side to be reinvesting that. And we did specifically reinvest that in quarter. And we did specifically reinvest that in Apple Pay as well as in our priceless initiative. So you saw a little bit of a higher number in A and M than you otherwise would expect in Q4. I think for the quarter. Full year of 2015, the A and M spend is really embedded in my comments that I said about operating quarter. And I don't think you should be expecting too big of a difference from an overall A and M spend number for 2015 than what we had in 20 quarter. Thank you. Bob Napoli from William Blair is online with a question. Thank you. I just wanted to quarter. Follow-up on the growth in local currency of the debit and credit businesses internationally. Quarter. I mean, it's pretty impressive that 17% going to 23% in debit and a little bit of acceleration quarter. In credit, I just was trying to get a little more color and what your outlook is for those pieces of the business given that the global economy doesn't seem quarter. So hot right now outside of the U. S. Well, Bob, as you heard Ajay speak, it's actually a big part of this quarter. Due to the terrific work that our European colleagues have been doing and a number of the countries that we called out, the U. K, Sweden and some others quarter. We have been growing terrifically in these kind of businesses and that obviously contribute to our bottom line growth despite where the economic environment is at. Quarter. Yes. I think, economic environment translates into consumer confidence translates into spending and that does impact quarter. Quickly, but we also have what's going on here is share growth in some of these markets. And what's also going on here is conversion from cash to electronic. And it's quarter. Kind of a mixed bag of all three that come out into the numbers you're seeing. And you can actually make that work faster and harder for you quarter. If you've got the right marketing and the right approaches. So it's just a lot of blocking and tackling that's going on to help us get to where we're heading. Quarter. Great. Thank you. Jason Kupferberg from Jefferies is online with a question. Quarter. Yes. Hi, guys. I was just curious in terms of what theories you might have as to why we haven't seen the pickup in discretionary spending from U. S. Consumers given the magnitude of quarter. The drop in gas prices and separately can you just clarify your pricing assumptions in the 2015 guide? Quarter. So Jason, that's actually a really good question. I myself am kind of stumped with what's going on there. I think about quarter. The fact that it's $800 a month or whatever it is to a middle class family, the gas prices are down 12% over quarter. The same time the previous year and that's not a small number. So if we put all that into context, quarter. You would have thought it would flow through, but the way I think about it, rather than Davos, we talked to so many other CEOs about this. I just feel that maybe it is quarter. That's going to take 3 or 4 months for the U. S. Consumer to feel that this is something that's going to be with them for a little while. Quarter. If you have a longer term perspective of the price of gas, not going back to $100 but maybe settling in at 75, 80, quarter. That's what we are thinking. I don't think the U. S. Consumer knows whether to expect this to be sticking around or not. So I think there's some degree of, Let's say the desire to see that through before they really start spending that kind of money. That's kind of where quarter. I think this is so if you were to ask my opinion and a guess, I would say probably a month or 2 or 3 away if this price stays where it is From them saying, you know what, I do have $800 a month more in my pocket and I could afford to go and buy X. I think that's kind of what I think about. But on pricing, Martina? Yes. On the pricing side, so just quarter. For 2014, actually for the whole year, we had about 1% price increase, so relatively small. And quarter. We think that what we have out there for 2015, it will be relatively similar. Quarter. Thank you. Glenn Greene from Oppenheimer is online with a question. Thanks. Good morning. Martina, just I know you like to level set us terms of expectations, there was a lot of commentary on guidance. But just wanted to clarify and make sure I heard it right. So in terms of revenue, you talked about quarter. High single digit net revenue on an FX adjusted basis including M and A. So the first question would be how much M and A benefit is there? Quarter. I was unclear what exactly what you said in terms of the expense expectation given the FX impact and the M and A. Quarter. Okay. Well, let me just go through it. So again Vikkiya, she's very good at level setting expectations inside the company to us. So don't feel discriminated again. Quarter. You're absolutely right. FX adjusted house high single digit net revenue growth for 2015. Quarter. That includes about 2 ppt of M and A transactions. But by the way, even when you pull these 2 ppt of M and A transactions quarter. So you still get your high single digit growth on an underlying business. So you can probably get a good sense on the numbers on that one. Quarter. On the expense side, what I said is also on an FX adjusted basis, you have operating expenses high single digits. And actually, most of that 6 ppt is due to the acquisitions. So the underlying growth of our underlying expenses is relatively Small, okay. Now when you put the FX translation into it, you have to deduct about 2 to 3 So you're getting for the as reported OpEx growth into the mid single digit range. Quarter. So you're going to benefit from the euro and expenses just so you get a headwind on the revenue. That's kind of what's going on. The M and A transactions, what's happening is you quarter. The 1st year or 2, you tend to get the expenses that you've got to do to either get them up to speed with our systems or Without security or the investment you're putting in to do things with their technology or their geography or their distribution and then again the revenue that comes in a little later quarter. All you get things like CSAM, which are really more building by our capacity on mobile and digital and doesn't really give you a lot of revenue quarter. In the 1st year or 2 or 3, that's the mix that's going on inside our company. Sean Fandetti from Citigroup is online with a question. Yes. Ajay, I had a question around tokenization. If you could help us understand sort of the timeline for tokenization for online browser based purchases. I think quarter. Visa mentioned maybe there could be some products over the next few quarters. How will that sort of play out? Quarter. So this whole digital space, if you kind of bust it up between in app, quarter. Contactless and online browser as you think through it, contactless is still relatively small in the U. S. Quarter. Online browsing tends to be the large amount. A number of the merchants and retailers quarter. Have been launching their own apps in an effort to get people to come straight to their widget and then hopefully control more of the quarter transaction as well as the relationship with the consumer when they're inside their app as compared to coming the usual way. Quarter. So it depends who you believe, but everybody is making projections based on whatever they think quarter. About where these 3 will go over the next few years. And my sense is you're going to get NFC growing decently, particularly with terminalization. And I believe terminalization will happen with all the EMV and chip migration as well as the fact that all new terminals are coming quarter. So you're probably seeing a 2 or 3 year cycle of a fairly dramatic increase in contactless equipped terminals in the United States. That's going to be happening by the way in Australia and Canada, Turkey and some other countries. But the U. S, which is the large one, I think you'll see that. Quarter. In terms of browsing, browsing tends to be the large chunk and I still believe that online browsing will remain a pretty large number for a few years to come. And I I think you'll get 2 or 3 kinds of efforts there. You'll get a lot of effort made around improving the card and file experience. Quarter. You'll get a lot of efforts made around improving the use of easy use checkout wallets, whether it be Mastercard's or Visa's offering or quarter PayPal or other such offerings. And you'll get all of those getting a degree of capabilities built quarter. With tokenization just making it safer and safer over the next few quarters. So we're all working on similar things. And quarter. I don't think you should read too much into a quarter here or a quarter there. These things are slow burns. You saw Apple Pay talk about quarter. And at the end of the day, yes, they've done a great job and it's excited the market, but it's still a very small percentage What the total number of transactions are. So I would take all this in that context and not run to the races with more than that. Quarter. We're very focused on tokenization and specific just to make sure I don't miss that aspect. It's a very important aspect to where we're going quarter. For safety and security, Apple Pay was the first version of that to come out there. We're putting it into Masterpass, just regular Masterpass over the next few quarter. Period of time, let me put it that way. So I don't give you information that's beyond what is likely. And that will be you'll see in a year 2's time, quarter. Tokenization will become kind of table stakes in the game on e commerce. That's the right way to go. Quarter. James Friedman from Susquehanna is online with a question. Hi. I was hoping you could share some perspective on the relative quarter performance of debit and credit domestically excluding the gasoline vector. Is there any evidence of steering in the market? Thank you. Quarter. No, I don't the last part of your question is about, is there either steering or secular change going on in the behavior around credit and debit. Quarter. And I'd say there's no evidence for that, but you should know this that the growth rate of debit versus credit, There are changes that are going on between them over time. And there's no doubt that quarter. As credit histories and credit positions are improving, banks are becoming more willing to go out and push quarter. Credit acquisitions again. And that was a change over a period of time, some degree of behavior between debit and credit. But quarter. There's no real pushing or steering or anything going on that I can see, not in our numbers anyway. Quarter. Bill Kurokoski from Nomura is online with a question. Thank you. Good morning. Martina, you talked about how quarter. You actively hedged, I believe you said 50% to 75% of your FX exposure. Can you discuss some of the trade offs behind why you wouldn't hedge an even greater percentage? Quarter. Wouldn't forward contracts be relatively inexpensive? And then finally, if you could offer any thoughts at a high level on some of the more significant differences quarter between your hedging strategies versus that of your large competitor, which last night discussed how they layer in their hedges on a rolling 12 month basis? Quarter. Yes. So first of all, with the last comment, of course, we listen to each other's comments from time to time and I would quarter. We believe that we do a hedging strategy and have a hedging philosophy that is extremely similar. Quarter. We lay in our hedges over a 12 month rolling period. So we never run so to speak naked during any type of period. Quarter. We do it for the most significant currency pairs, right? You know that we are doing actually business in 150 plus currencies, quarter. We really take the most significant currency pairs in order to do our hedging. In order to do hedging, you have to have really appropriate quarter. Expose of Forecasts coming out over the next 12 months rolling period. And that is where you typically quarter. Take a step back and take a little bit of more conservative view and don't layer in 100% of the exposure in terms of hedges. Quarter. You do 50% to 75%. So we don't take a view. The 50% to 75% is not taking a view in terms of hedging a particular currency pair, quarter. But it is in terms of making sure that between the exposure that we know and the hedges that we lay on that we have the right quarter. The one other thing that I wanted to let you know is just to make sure we are hedging things on a net basis, quarter, which means we take revenues in that particular currency and we deduct the operating expenses that we spend in that quarter. And then we do a net hedge on that and you would not see the gain or the loss on the hedge quarter. Showing up in the revenue line, most of that is actually reflected in our G and A line item. By the way, this layered hedging is kind of the way that I used to work it even in my previous job at the banking industry. When you When you go to companies, that's exactly what you do. You go in and you tend to hedge more of the exposure in the immediate quarter out there, quarter. A little less than the quarter after and a little even lesser in the quarter after. And so quarter. When Martina talks to you about the 50% to 75%, you're probably looking at a higher level hedged in the immediate quarter because you have most certainty We're seeing those currency pairs that she just referred to. You hedge a little less out 4 quarters quarter. Because you have less certainty in those currency pairs that she's referring to. Also remember, the euro and the real are not being discussed in those currency pairs. The 2 percentage points headwind that we've already buried in our revenue growth estimate for next year is from these currency pairs. Quarter. The euro and the real comes over and beyond that and kind of could be a far more significant one, particularly because of the euro as Martina was pointing out. Quarter. That's extremely helpful. Thank you. Tom McCrohan from Stern AG is on the line with a question. Quarter. Hi, Ajay. You talked about the commercial business in the past as being it having some good momentum. Can you just give us an update how the year ended out and what quarter. That business is exciting. We're doing well. And quarter. It's across the world by the way. The U. S. Has got the most traction in some ways, but there's good growth in Europe, there's good growth in quarter. Latin America, Asia and the Middle East, Africa remain real opportunities for us. I'm not going to give you quarter. Separate numbers for that, but you should know that it still is a big focus. It's focused on T and E, it's focused on fleet cards, it's focused on quarter. Purchasing is focused on some B2B payment streams. It's not just our own effort with individual clients like Bank of America and quarter. Chase and Citi that you heard me talk about other global clients, but it's also focused on partnerships with companies in the travel space, quarter. Our partnership with companies in the fleet management spaces, all of these are giving us opportunities in commotion. Quarter. So actually from a growth perspective just to jump in here, it's really a nice mid teens kind of growth worldwide. Quarter. Martina is willing to give you more information than I am. Isn't that an that's an exception. Isn't that interesting? Quarter. Dan Harlan from RBC Capital Markets is online with a question. Thanks. Can you just speak a little bit to the nuances that we might expect to see as quarter. You get more and more of this mix shift in e commerce. Inherently, it seems a little more credit centric. The interchange Categories are quite a bit different, so maybe there's a bigger pool from which everyone could draw from. And I just want to be thinking about this quarter. As this mix shift accelerates. And then the other thing, if you could just kind of I guess explain the 50,000,000 quarter shift into G and A versus revenue from Russia. How did that come about? And I'll hop off. Thanks. Quarter. Yes, Dan, so let me take the Russia question first. So what actually happened in the last legs quarter of the legislation in Russia is that we continue to be a direct partner to our clients and that we actually will be phrasing our clients quarter. All products and services that our clients need. And then we then subcontract in particular off clear and switching quarter to the local processing entity. And therefore, we still get the revenues from our clients, quarter. But we have to pay a servicing fee, which will be showing up in the data processing line to the local entity that would switch quarter transaction. Ajay? Okay. And on e commerce? Quarter. I don't know how to answer that in a way that's different. I would say to you that what's going on in e commerce right now is that you've got quarter. As you grow, there's no doubt that credit has a greater share than debit in e commerce. Although, quarter. I'd say that's also because the U. S. Is a larger e commerce market than most of the parts of the world. In Europe, it's not as Similar as it is in the U. S. Now remember, the U. K. And Spain, Portugal are more credit sensitive. Quarter. Northern Europe is more debit sensitive. So a lot of it depends on the originating market from where the transaction is placed quarter. Into the e commerce system. So what you're seeing right now is also a function of mix. Okay. Thank you. Quarter. Brian Keane from Deutsche Bank is online with the question. Hi, guys. Just now that the European regs, the agreement seems to be in place quarter. Just trying to get an idea of you guys have probably looked at it for 2016, what kind of impact might there be? Quarter. And then secondly, Martina, just on operating margins for the year, there's a lot of moving pieces. Should we expect fiscal year 2015 operating margins quarter. And then what does that all total out to be for EPS growth as reported for fiscal year 2015? Just want to make sure I have that right. Thanks. On your first question, look, the European regulations, the text is finalized, but there is a lot of work that has to be done in order to implement quarter. So I'm not prepared to be giving you guidelines for 2016 at this point in time. And that's why you're going to quarter. Only later this year about our long term performance targets that we are going to be renewing then for a period. Quarter. Secondly, on the operating margin, of course, when you have high single digit revenue growth quarter. And high single digit OpEx growth on an FX adjusted basis, you should basically assume that the operating margin, which is quarter. Terrific for 2013 will be roughly a similar operating margin in 2015. We're not giving guidance quarter. Let me now turn the call over to Ajay Banga for closing remarks. Ajay? Quarter. Thank you all for those questions. And I'm going to just leave you with a few closing thoughts. We ended what I think was a very good year quarter. On a strong note, I mean 17% revenue growth in 4th quarter ex FX, 14% with FX, that's quarter. Volumes, share, innovation, deals, we've done all of that while navigating through What I would say was one of the more complex economic and political years that I've seen over the last decade. Quarter. And aside from the actual couple of years of the financial crisis, this was probably one of the more difficult years. Quarter. For 2015, we see the same underlying trends economically and for our home business. We believe that we will deliver our 3 year objectives quarter. And that means that net revenue growth this year will be in the high single digit range at constant currency. So your question will be why is that growth lower than 2014? Quarter. Because one, we have those local FX headwinds that we were just discussing in the Q and A in those 30 currency pairs. And so that's before the euro by the way and the real quarter. Translation impact, which as you know is larger, but just those local FX headwinds and because we have some very good deals in the pipeline, both renewals and wins They're probably going to have an upfront load. Those are good deals. They're good for us. And so if you look at all that at the same time, we quarter. We plan to keep investing in our business and our capabilities. We know how to dial our expenses up and down quarter. And we're going to keep a very close eye on that if needed. I just don't want to do that through a short term cycle. We took advantage quarter of the tax benefits that while sustainable as Martina talked about, they came to us in the latter part of the quarter and got finalized. And quarter. Sheena, I sat down and said, you know what, this is a good time. Apple Pay is out in the market. Price is in the market. It's a good seasonal quarter for us. Let's take some of this benefit and put it back into the system. Those kind of decisions are taken every week and every day by us together as a team. Quarter. So overall, we haven't changed our thinking about our business prospects from what we indicated at our Investor Day a few months ago quarter. The payment space is a terrific place to be. We are very confident in our ability quarter. To guide this company through the current mix environment, we're going to keep growing share and we're going to keep driving the conversion of cash quarter. I think we expect to continue to deliver strong financial performance in the foreseeable future. So thank you so much for quarter. Thank you, ladies and gentlemen, for participating.