Earnings Call: Q4 2013

Jan 31, 2014

Welcome to the Mastercard Fourth Quarter Full Year 2013 Earnings Conference Call. My name is Clifford and I will be your operator today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I would now like to turn the call over to Ms. Barbara Gaspar, Head of Investor Relations. Ms. Gaspar, you may begin. Thank you, Clifford, and good morning, everyone. Thank you for joining us for a discussion about our 4th quarter and year for the Q4 of 2019. With me on the call today are Ajay Bongo, our President and Chief Executive Officer and Martina Hungajan, our Chief Financial Officer. Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q and 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 Non GAAP measures to their GAAP equivalents, the release and the slide deck have also been attached to an 8 ks that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for 1 week through February 7. All of the EPS figures in our press release and those discussed on today's call are presented on a post Market open on January 22. In order to provide a bridge for you between the pre split and post split EPS figures, we have added a page in the appendix section of the slide deck that breaks out the 2013 EPS by quarter and full year as well as the 2012 figures recalculated on a pro form a basis. Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call All may include some forward looking statements about Mastercard's future performance. Actual performance could differ materially from what is suggested by our for your 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 CEO, Ajay Banga. Ajay? Thank you, Barbara. Good morning, everybody. So we're very pleased that we were able to deliver strong results in 2013. Those results basically were in line with Our net revenue growth was 13%, both as reported and adjusted for FX. It was driven by solid operational performance in process transactions, in gross dollar volume And cross border volume growth. And we were able to deliver some margin growth in spite of investing more back Into the business. For the full year 2013, excluding special items, we saw net income growth of 15% All 14% adjusted for currency and reported EPS growth of 19% or 18% on an FX adjusted basis. Looking at the Q4, we came in about where we thought we would even after Signing more agreements than we had anticipated, some of which I will talk about in a moment as well as putting some money and investing some money back into the business. But I'll let Martina get into the quarterly financial details a little later. So let's go to the global economic trends, Starting with the United States, where it feels like the economy is beginning to show a bit of forward momentum. Our spending pulse data showed that U. S. Retail sales growth ex auto for the Q4 was 3.9% And that includes the fact that holiday retail sales grew faster than last year with particular strength in the E and M Commerce space. Economic indicators such as housing and employment also showed some improvement during the quarter and consumer confidence bounced back From what was the low of October. We saw an increase in our United States business in the 4th quarter with volume growth of 7% driven by improvements in consumer credit and in debit. In Europe, overall economic growth In the Q4, remains subdued, although there are some indicators of a potential recovery, consumer sentiment continued a slow, but very steady climbed As did business sentiment across our major markets. Northern Europe continues in a solid footing. Southern Europe is moving up, While that's coming off a lower base, key contributors to our 14% 4th quarter volume growth in the region For Russia, Sweden, the Ukraine and Poland. In Asia Pacific, consumer and business sentiment level Declines in the Q4 across major markets including Australia. In addition, worries about slowing growth in China go beyond being just a domestic issue And I've brought our implications as you all know for other markets that depend on Chinese demand. In Latin America, economic growth slowed a bit in the 4th quarter With consumer confidence declining in both Brazil and Mexico, but across the rest of the region, it is fairly positive. So despite these sluggish Economic indicators in both regions. Our Asia Pacific, Middle East, Africa GDV growth was 20% and our Latin America growth was 17% in GDV with transaction growth in the high 20s and the high teens all for So high 20 for Asia Pacific, Middle East, Africa, high teens for Latin America, all relatively similar to previous quarters. The fact is that a significant proportion of our growth in emerging markets comes from the secular shift to electronic payments, Which I think is relatively uncorrelated to some of the economic cycles that we see the emerging markets currently going through. Overall, it feels like the U. S. And Western Europe markets where we generate well over half of our revenue are slowly starting to regain their economic The general consensus is the U. S. Should have a decent economic growth in 2014 and there is increasing optimism about Europe. As these developed It could be a catalyst to spark further growth in Asia and Latin America. So now before moving on to business highlights, let me say A few words on the legal and regulatory front. In December, as you know, Judge Gleeson issued final approval of the U. S. Merchant litigation settlement. We anticipate that most of the larger merchants who opted out will initiate separate actions and based on that analysis, We have taken a $95,000,000 pre tax charge in the Q4. The cases filed to date are in the early stages, but most have been consolidated under Judge Greson's court. Also in mid January, both the Federal Reserve and the merchant plaintiffs presented oral arguments to the appeals court In response to Judge Leon's July decision on the Fed's regulation around implementing the Durban amendment, the retail score will likely issue a ruling sometime in 2014. And with regards to the proposed European legislation, you've probably all seen the To the EC's initial proposal, but you should know that there are also more than 300 amendments submitted from other members of parliament. So the process is quite complicated. A committee of parliament will not deliberate and vote on all of this in late February And a vote by the full Parliament is currently scheduled for April. Also in late February, the Council of Ministers is expected to start a separate Parallel review of the legislation. So we kind of continue to believe that the timeline for final adoption occurs ambitious, So obviously, we're watching that situation very closely on the ground. We were disappointed to learn yesterday that the Advocate General Luxembourg They showed an opinion siding against our appeal of the European Commission's 2007 decision regarding our intra Europe cross border interchange rates. The court now has to rule and we'll find out what they say at some point this year. But keep in mind that we had already modified these interchange rates So 20 30 basis points for debit and credit respectively in mid-two 1009. So in effect this changes very, very little So in that space for either the banks or the merchants or us as of today. So now let me move on to some of our recent business activity. As I mentioned, we finished the year signing even more deals than we anticipated, which is good. It sets us up well for future growth. Let me just sort of call out a few of these that I personally found interesting. The first, we were very pleased to be able to continue and in fact Enhance our partnership with Citi on the American Airlines portfolio. That's an important co brand for both of us. As you know, Airline is now the world's largest airline after this recent merger. 2nd, we recently completed a new agreement with Chase For their U. S. Commercial card portfolio, providing corporate, purchasing and fleet cards for their customers across many industry sectors and these customers range from midsized companies all the way up through large multinational corporations. In December, we also renewed our agreement to the Bank of Montreal, Which for us is a very important partner in Canada and in the United States. And in fact in the U. S, we expanded our relationship to improve consumer credit. We also recently extended our agreement with Tesco Bank. And as you know, Tesco Bank is a part of the 3rd largest retailer in the world for their U. K. Consumer credit card portfolio. That's a very good partnership for us with lots of future scope for expansion. And finally, capping off a year of advancements in Africa from a $13,000,000 identity card pilot Being launched in Nigeria that we've talked about for the Nedbank conversion in South Africa, we've now recently signed an agreement with Eco Bank. Ecobank is the largest Pan African bank. It has a presence in 23 countries in Africa reaching 65% of Africa's population. The bank will now issue our debit, credit, prepaid and other payment solutions and also allows us to expand our acceptance in these markets. Meanwhile, MasterPath momentum around MasterPath continues. And by the end of last year of 2013, we are now live in 5 markets with actually many more in the pipeline. You probably saw our U. S. Advertising campaign with J. Crew and Masterpass over the holidays, but we also Sir, a number of other major global retailers agreed to accept pass to pass including Brooks Brothers, Alvest, Live Nation, Ticketmaster, Singapore Airlines. That brings the total number of merchants to more than 30,000 with most of them already live. We're continuing to add new banking Partners around the world as well including UniCredit in Italy, the 3 largest banks in Sweden, SEB, Swedbank in Nordea And Caixa in Brazil. And this adds on to the ones we signed up in previous quarters. So that's what's going on in Masterpass. Now another big area of focus for us Processing and that goes beyond our traditional role of switching transactions, but also includes providing processing services on either side of that switch to surround the transaction. As some of you heard from Gary Flood at Investor Day back in September, the more transactions we touch, the better our ability to deliver a wide range of services And generate additional revenue. Touching a transaction even if you don't switch it can be very valuable to us. So let me give you a flavor of a few recent initiatives In this area, we have now completed our acquisition of Provus, a provider of issuer and acquired processing, prepaid solution and ATM processing services in Turkey. That's going to enable us to increase our processing presence in the high growth markets in the European region. Trevika, our issuer and acquirer processor in Poland will provide processing services for the largest retailers in Portugal. In the first half of this year, that retail is expected to roll out a new store card that will be able to accommodate credit, prepaid, private label and installment payments. And We recently announced a partnership with BICS, a Belgian Telecom Company and E Serve Global, a mobile money solutions provider. We formed a joint venture that will enable their HomeSense platform to connect to any financial institution across the Mastercard network. That service is already offered in 50 countries with mobile network and money transfer operators. And as we build our P2P initiatives, This joint venture along with our relationship with Western Union gives consumers more places to send money both domestically and internationally. And finally, before I hand this over to Martina, let me talk about the topic of safety and security of payments, which has received a great deal of attention given all that's happened in the recent past on data breaches. Last quarter's call, we discussed safety and security in some depth. The fact is, this is fundamental to everything we do and it's What consumers expect and what they deserve. In the United States, migration to EMV is a necessary And critical step, it makes stealing data much more difficult and also it makes stolen data less valuable to a fraudster. That's why we announced 2 years ago our plan for the U. S. Migration from MagStripe the chip technology starting October 2014. Earlier this month, we reiterated that we are holding firm to that date, because we believe it's the right thing to do. Beyond the 0 liability protection for which our rules already provide, consumers should not be at risk of having their personal information stolen and face enormous inconveniences and distress as a result. While E and B works to protect In the physical space, we also do need to make sure that we are ahead of this issue in the digital space and that is why we announced localization standards with all our other partners back in October. What you would now like to see is that all players within the parent's ecosystem Come together with a sense of urgency to ensure that the highest payment security standards are put into place. This is not easy, but it's key to doing the right thing and sustaining consumer confidence and trust. So with that, let me turn the call over to Martina for a detailed update on our financial results and operational metrics. Martina? Thanks, Sanjay, and good morning, everyone. As Adi already said, we are very pleased with our 2013 performance of 13% net revenue growth. EPS growth was 21 Percent adjusted for foreign exchange and normalized for discrete tax benefits in 2012, which is consistent with the calculation of our long term EPS performance target. I will now focus on the details of the 4th quarter results, Excluding the $95,000,000 pre tax charge that we took this quarter related to the opt out in the U. S. Merchant Litigation. Let me begin on page 3 of our slide deck. And here you see the differences Between as reported and FX adjusted growth rates for this quarter ranging from 0 to 2 percentage points for And all of my comments today will pertain to the FX adjusted growth rates. So net revenue grew 11%, driven by Strong underlying operational metrics, but primarily offset by an increase in rebates and incentives as a result of signing a significant number of agreements in the quarter. Based on our net revenue and operating expense growth, net Income increased by 11%. EPS growth was 16%, benefiting from our share repurchase program. During the Q4, we purchased 9,800,000 shares of Class A common stock at a cost of approximately $750,000,000 Reported to date through Friday an additional 4,200,000 shares were repurchased at a cost of $350,000,000 with $3,300,000,000 remaining under our current authorization. We continue to look to repurchase shares on an opportunistic basis. And cash flow from operations was $1,200,000,000 and we ended the quarter with cash, cash equivalents and other liquid investments of $6,300,000,000 Now let's turn to page 4. And here you can see the operational metrics for the Q4. Our worldwide gross dollar volume or GDV was up 14% On a local currency basis to over $1,100,000,000,000 U. S. GDP grew 7% with credit volumes growing 6%. U. S. Commercial credit growth was in the low teens down from last quarter. U. S. Consumer credit growth of over 3% was about across our consumer and commercial debit and prepaid programs. Now outside of the U. S, volume growth was 17% on And this continues to be driven for Asia Pacific, Middle East, Africa with 20% growth and mid to high teens growth in both Europe and Latin America. First quarter volume We grew 18% on a local currency basis, including more than 20% in Latin America and Asia Pacific, Middle East, Africa And growth in the mid teens in Europe. Let's turn to Page 5. Here you can see process transactions growing 13% globally to more than $10,400,000,000 We saw double digit growth in most regions around the world with particular strength in our Asia Pacific, Middle East, Africa region driven by Australia and South Africa. And compared to last quarter, this growth rate was down slightly. However, by normalizing for the number of Processing days, process transaction growth for the Q4 was similar to what we saw in the Q3. Globally, the number of cards grew 9% to almost $2,000,000,000 Mastercard and Maestro branded cards. Now let's turn to page 6 for some insights on our revenue. We are very pleased with the 15% growth In gross revenues, which was in line with our expectations and driven by increased volume and transactions along with some contribution for pricing. In addition, beyond the 2 functional currencies that we adjust for, revenues were slightly impacted by the Strengthening of the U. S. Dollar and the euro versus other currencies. However, net revenue growth of 11% Came in a bit lower than expected as a result of signing more deals in the quarter, which Ajay already called out. So the rebates and incentives line increased by 23%, but we view this as a good thing for long term revenue growth. Growth in Domestic Assessments continues to be driven primarily by stronger volume growth outside of the United States, much of which comes at a lower yield. And one last note on revenue. Excluding pricing, cross quarter Revenue growth was 12%. The resulting gap between cross border volume and revenue growth continued to be mainly due to the higher mix Expenses were up 11% in the quarter as we took the opportunity to reinvest more back into the business, similar to what we did actually in the 3rd quarter. First, the 12% increase in G and A expenses continues to be primarily driven by investments related to all aspects of our growth strategy, including initiatives such as MasterPath and tokenization. Part of our investment was in people and we ended 2013 with approximately 8,200 Full time employees up 9% from year end 2012. But what's more interesting is that the people that we've been hiring for the last couple of years are coming from sectors such as technology, retail, consumer goods and government, which has been helping us to execute in these areas. 2nd, advertising and marketing was up by 8%, mainly due to higher customer marketing support and media spend. And while not on these slides, I would like to note that the other income expense line was $9,000,000 negative, I. E. It was an In line with our expectations and primarily due to a number of our joint ventures such as the 2 with Telefonica. As we ramp up these initiatives, you can expect this line to continue to be negative. Let me now turn to slide 8 and here we discuss first what we have seen in January through this past Tuesday. Each of our business drivers were were flat or slightly higher in the period compared to the Q4. So the numbers through January The 28 are as follows. Globally, our cross border volumes grew about 18% and that's about equal to our 4th quarter growth rate. In the U. S, our processed volume grew 9%, about 1 percentage points up from what we saw last quarter Due to improvements in consumer credit, processed volume growth outside of the U. S. Grew 17% And that's also a slight increase over the Q4. In particular, our European process volume growth was in the teens, A continuation of the growth rate that we saw throughout 2013. Globally, process Transaction growth was 14% and that was also up about 1 percentage point over what we saw as a growth rate in the 4th quarter Driven by higher growth in the U. S. And in Europe. Looking forward, Let me first start with our long term performance objectives for the 2013 to 2015 period. We remain confident That our business can deliver an 11% to 14% net revenue CAGR, which includes a modest contribution pricing over the 3 year period and at least 20% EPS greater. These growth rates are on a constant currency basis and Exclude new M and A activities. We also remain committed to our annual operating margin target of at least 50%. Just one other comment about our EPS CAGR objective, which we said was based on a normalized tax rate That excluded the impact of several one time benefits that we were able to achieve in 2012, Which you would recall resulted in a pro form a EPS number of $21.44 But after adjusting for our recent stock split, you should now be modeling EPS growth beyond 2012 Using a base of $2.14 So now I'd like to share with you some thoughts for about 2014. With respect to net revenue, we have signed as you just heard a significant numbers of deals Over the last couple of years and as the new deals onboard, they will provide a tailwind for However, we are also expecting a headwind from 1 portfolio conversion to a competitor. As you all know, back in 2012, we lost our portion of Chase's consumer credit portfolio and while we expected some Attrition would occur in 2013 that did not happen. We don't have any specifics on how these cards will migrate, But we are now assuming an impact in 2014. Given the size of this portfolio, we can offset some, But not all of this attrition was our wins unless we expect net revenue growth for 2014 to come in at the lower end of our 3 year range. We also expect a return to more normal growth rates And rebates and incentives in the 2nd and third quarter this year versus what we saw in 2013. We anticipate total 2014 operating expenses to grow less than the 9% that we saw in 20 As we have always said, any upside to top line growth may provide We continue to reinvest more back into the business as well as determine how much if any operating margin expansion we can deliver in 2014. As I just mentioned, the impact of new M and A activities is not reflected in our long term performance objectives. At Investor Day last September, I talked about how we are looking more actively at potential M and A opportunities that address our strategic priorities and provide us with critical capabilities. We're pleased that we recently completed the Provis and HomeScent deals, Both investments that add to our capabilities and they will contribute some revenue, but together with their base expenses and our integration work, We expect to see $0.01 to $0.02 dilution to our 2014 earnings per share figure. We will continue to update you as we go forward on these numbers as well as on the impact of any additional M and A activities we may have. For your modeling purposes, you should assume a full year tax rate of about 32%, Which does not recognize the impact of any discrete items such as what we've seen in the recent past. Finally, with respect to foreign If rates remain similar to where they are today, that is euro trading at about the €1.35 level and the Brazilian real At about the $2.42 level for the rest of the year, the net impact of the euro and the real would essentially offset each other for full year 2014. And as I mentioned earlier, foreign exchange had a slight impact on our 4th quarter Beyond adjusting for these 2 functional currencies that we typically call out. Given the current volatility in the FX markets, especially with Speeding U. S. Dollar and euro versus other currencies, we are carefully managing those exposures, but we could see some impact depending on how these currencies behave in 2014. Now let me turn the call back to Barbara to begin our Q and A session. Thank you, Martina. We're now ready to begin the question and answer period. In order to get as many people as possible the opportunity to ask Thank you. We'll now begin the question and answer session. With 1 on your touchtone phone. To pick up the handset first before pressing the numbers. Our first question comes from Chris Brendler from Stifel. You may go ahead. Hi, thanks. Good morning. Can you give us A little color on the progression in 2014 of the cross border price increase. I think you mentioned still about 1,000 basis points of benefit on On your cross border revenue growth, when does that start to anniversary? And is there any limiting impact from additional price increases on your cross border revenue Rose. Thanks. So Chris, we put the cross border acquiring price increase in place in April of 2013. So you will See that basically anniversary in our so at the end of the Q1 of 2014. Any additional pricing actions that could mitigate that? No. I said as part of our long term objectives, we will I see some modest pricing. So this is the big one that is basically going to anniversary. Thanks so much. Our next question comes from Craig Maurer from CLSA. You may go ahead. Yes, thanks. Good morning. The advertising and marketing, could you just provide some additional color on what drove that number Up in the Q4, what opportunities you saw? And does the Chase deal include the same kind of network separation as you're seeing From Visa. Thanks. Hey, Craig, it's Ajay. Not sure I understood the second part. You're talking about Chase A commercial deal and that's just a regular deal like we would do with any other institution in our commercial business. So that's how that's done. The part of our advertising and marketing, actually the 4th quarter is when the maximum transactions occur Across most parts of the world and we've been trying for some time to get our advertising and marketing to fit and match the right time periods So when it should be correlated to our transaction spend? It kind of depends how it works. In some cases, you get the right opportunities and others you didn't. In this particular one, we got a great deal of opportunity around the end of the year to sign up a few things to participate in activities on social media And physical media around the New Year's in different places. So it gave us a chance to put ourselves back into people's eyes and minds at the right time of the year. That's kind of what that is about. So it wasn't out of novel. If you look at our 4th quarter spend on advertising and marketing, We should be spending this kind of money to correlate back to the kind of revenues and transactions that happened in the Q4, gross revenues. Let me just add a comment for 2014 because I'm sure every one of you would like to know a little bit about the cadence of our A and And the cadence will be relatively similar to what you saw in 2013. The only thing that we're trying to do and as you already referenced that Maybe smooth out a little bit the first and the second quarter. So you might see a little bit more in the Q1, but we're talking just a bit more He is out of the Q4. The second and the third quarter should be from a cadence point of view very similar. Next question, please. Our next question comes from Jason Kupferberg from Jefferies. You may go ahead. Hey, thanks guys. So can we just get a little bit color and clarity on the full year 2014 rebates? I mean, do you think they'll be will they grow fast So, we're about in line versus gross revs. And do you guys think you can grow U. S. Consumer credit in 2014 with the Chase volumes coming off That you mentioned? Well, so first of all with your last question, we are obviously growing credit because otherwise we wouldn't be able to offset some of the losses that we might see from the Chase portfolio in 2014, right? That was in my prepared remarks. What was your first question? On the rebates and incentives. Yes, rebates and incentives. So let me just tell you, rebates and incentives, We think that it's from a cadence point of view, it's going to go back much more normal to what we have seen prior to 20 Right. So in the Q2 and in the Q3, you see normalized growth rates. It's very tough for us to be telling you what you should be thinking about as a percentage of gross revenues. But I would when I look forward, I would look at something not too different Reference to what you saw in 2013, which would also suggest that overall the annual growth rate is not too different for 2014. Understood. Thank you. Our next question comes from Bill Quirogi from Nomura Securities. You may go ahead. Thanks. Good morning. In Europe, you guys are significantly outperforming one of your key competitors who's still operating under an association structure. It seems like you're able to offer much greater value to both banks and merchants given your much more innovative offerings. Can you talk a little bit about Your confidence in your outlook for market share gains in Europe and perhaps just give us some color around competitively how you feel you're positioned there? So we look we enjoy our position in Europe and I've said a few times that I actually consider Europe to be a decent growth market for our company, Even the developed markets of Western Europe, primarily because of the relatively high levels of cash that still exist In some of those economies, if you take out the Nordics where cash is actually very small to come to Germany or France, it's Still a overwhelming majority that's in cash and those are very attractive markets. We have a good position. We've been gaining share. That's absolutely correct. We're doing a lot of things with data analytics, with contactless, with fraud early warning systems, with inControl. And so all those help us win deals and now we're focused on trying to process more and more of the transactions In Europe as we go along. So even this quarter our process transactions grew by 14% or so in Europe And Seppa, so that's a good thing for us. And we're focused on that. And a lot of the work we're doing with Provus and Trevika We're all aligned around that aspect. So between digital and advisers and data, In addition to what we already do in our core business, we have a decent line of sight to where Europe is going. But Europe is not without its challenges. It has regulatory Three challenges that are unique to the way Europe is constructed and the way it functions and I talked a little bit about those in the form of The EC legislation as well as this recent ruling by the AG. Now the AG's ruling doesn't impact anything directly because the rates were already there. But could that spill over tomorrow into some other way of looking at regulatory arbitrage or thinking in that space in Europe? Sure, it could. And That's something we are always conscious of and we're always trying to make sure that we work well within that environment. Thank you. Our next question comes from Moshe Orenbuch from Credit Suisse. Please go ahead. Great. Thanks. Could you maybe give us a little bit of the kind of give and take between the two pieces of the Chase Relationship like how do you see the growth on the commercial side versus the kind of the risk of as kind of deconsolidation on the consumer side. Tough to say because I really can't give you that much detailed information about one set of clients But you should know that Chase is a very, very large consumer bank with a very large consumer portfolio and We've got a strong corporate banking business that's growing, but there's no way that those 2 are comparable. So I don't see us making up What we are losing in the consumer side if it goes away in 2014, I have no real estimate what will happen. I'm kind of assuming it's going away. And I've heard the earnings call that Visa had where they talked about getting it. So I'm assuming that we're both thinking similarly that 2014 is the year that it goes from us to them. It's not going to make up for that, but it will help just as all the core brands will help. And There are co brands that we haven't been able to announce because of certain circumstances with those retailers and those issuers, Which will all become clearer to you over the next few months. So I'm hoping that we'll eventually come up in the right place, but 2014 is going to be the year of transition. Too. We've tried to factor that in when Martina said that we think revenue could be at the lower end of our long term guidance. So If it comes in better that'll be great because if the attrition is slower or these co brands come on quicker that'll be great as well. But typically a co brand after we announce it takes somewhere between a year, year and a half to start onboarding and kicking in. So there's a time lag in our business Listen, that's what we're providing for. Look, underlying trends in our business in the U. S. And elsewhere have been good in our 4th quarter. Our gross revenue actually came in better than our plan. And what happened is we signed more deals and I'm actually happy to sign those deals. And so That's what I'm thinking about the sole circumstance around how to think about where our revenues in our company is going over the next couple of years. Great. Thank you. Our next question comes from Bob Napoli from William Blair. You may go ahead. Thank you. Good morning. Just want to follow-up on some of your macro discussion, Ajay. When I look at the payments volume, the purchase volume by Tim, there's a decent slowing in pretty much every market except for Latin America. And I mean, I think you were suggesting that you were you thought you were seeing a little more strength incrementally. I guess the January numbers do I suggest you see a pickup from the Q4. But do you think I mean given the slowdown that you see across the board in payment and purchase volume, Doesn't that suggest that the economy at best is stable and at worst maybe we're seeing a little bit of global weakening? I actually don't see it that way. I see the U. S. As if you just look at the U. S. As a whole, you look at the drags on U. S. Economic growth that contributed So whatever happened in 2013 and 2013 turned out to end in a stronger way than people expected. But there were lots of drags, right? Right from the sequester to All the other kinds of stuff that happened there. So I don't see the U. S. As being slowing in any way. I see it improving. I actually see Europe Showing signs of life as well, not in Europe, even the U. K, which a year ago people talked about as being in very difficult in dire circumstances, That's clearly showing a recovery in where it's headed. And that brings us to Asia. And Asia is dominated by what happens between China, Japan, Australia and India. When you think about China, yes China's growth has slowed, but China's growth has slowed first in domestic expenditure, Which impacts us very little because we don't get to play in the domestic processing yet, right? Japan is actually bigger to show Australia depends a great deal on what happens with China because Australia's economy relies a great deal on the exports To China. And India is just India. India is being India right now. It's going through all that it's doing with its elections and all that's underlying it. But India's It's 2 thirds consumption and that consumption is still growing. And while China and India may be growing slower than in the past, They're still growing in the very attractive numbers beyond the 10%. So your specific question about slowdown, you got to remember the number of days In the Q4, number of processing days. And Martina went a couple of times to explain that if you took out the impact of the Short, smaller number of days and look at the normalized data, you will find it's kind of similar growth. But if you went to Asia and you went back Four quarters in Asia. You'd find Asia today is a little slower in PCE growth than it was 4 quarters ago. That's That's what I'm addressing when talking to you. I'm not addressing the specifics of the process transactions, because I think Martina addressed those a couple of times in her opening Thank you. Our next question comes from David Togut from Everclear. For Claire. You may go ahead. Thank you. Two questions. First, Martina you said that OpEx would probably grow a little less than 9% This year, can you give us a sense of where you might have post operating leverage this year? So David what we are doing is, I didn't say a little less. I actually said less than 9%. There's a little bit of a difference on those kind of Numbers. And what we are really doing is as we said that we opportunistically put some more money into the business in the Q3 and into the Q4. And when we look at our budget going forward, we are not assuming that we are going to have a repeat of that. But as we have said before, depending on how our top line will develop, right, and our top line is subject to what we just discussed on The potential migration of cards from the Chase portfolio, we might be putting extra money into the company if we can do it, Okay. But it all depends on how we see the top line developing and the bottom. So at this point in time, the budget basically just said operating expenses will grow less than 9%. Operator, next question please. Our next question comes from Darrin Peller from Barclays. Please go ahead. Thanks. Just to dive a little deeper on the underlying trends in volume and we saw in the Q4 the trend shift from about 9% down to 7 point Come back to 9 again you're saying in January. If you could just explain a little bit of what's driving that first? And then really going forward, I mean Seeing underwriting standards loosen a little more at the banks, which I think should support more credit growth going forward as well. And when you Couple that with the trends you're talking about with all these deals, does that is that helpful for you on pricing? If Chase comes off, I imagine the pricing on that given the size Was a little bit tougher than what you're bringing on. Is that a fair way to look at that? And then just one quick follow-up. What drove other revenues up 22%? Okay. Josh, can we please respect the one question? Okay. Let me take the easy one First, which is what drove other revenues up. Other revenues were predominantly driven by our advisers revenues, as well as excess prepaid. Okay. So the other things that we are really focusing on from a service point of view and Ajay had already said something that we are really focusing on putting advisors out On the globe and you're actually seeing a really great benefit from that and that's why you see a 20% increase in other revenues going up. All right. That tends to be fee based revenues just to be clear. Yes. Not volume or transaction basis, it's all fee based revenues, right? Darren, You're asking us one tough question on the underlying trends, okay? In terms of really figuring out why The quarter that moves up and down for 1 or 2 percentage points is pretty tough to do. All we can see is when we triangulate it The data that Ajay was already referencing from a GDP and from a PCE number that we actually felt that the Q4 both in the United States as well as in Europe It was pretty healthy, okay? So even though we had some move in the growth numbers, it was pretty healthy. And you could see On the credit side and you could see that on the debit side. Now Latin America, Asia Pacific, we know that there was some impact given what It's happening from a China production point of view. And hopefully, if the work gets into a better footing, that will resolve itself. But it's very We have to be putting that down to very specific changes. Our next question comes from Dan Perlin from RBC Capital Markets. You may go ahead. Thanks. So just quickly on the G and A, you mentioned, Ajay, Master Pass and tokenization were 2 of the key reasons for that to be But there's a lot of incremental people that are put into that and that seems to be disproportionate for those kind of technologies. So I'm wondering is this back half kind of ramp of call $161,000,000 or so. Is that a function of also putting more feet on the street with these deals that you've done in order to get to local market processing? So we are adding people in different areas. It's not just in Masterpass and tokenization, although that did add a fair number of Engineers and development teams. But we are adding people in sales. We're adding people in client delivery. We've added people in product management. And when we open new countries, we try and add people in the control functions, so they open in a way that is Well handled for the future. That's kind of all those things add up. We have opened a number of new offices around the world as well Over the last couple of years, all that tends to add up. What we're really doing is adding people who bring to us a different perspective on how we look And our business. So we're adding people not just from banking and consulting, although that still is a good source of people. We're also adding people from consumer product companies and From technology companies and from marketing organizations and from government background and experience. So, when you put all that together, That's the kind of people we're adding. It's not anything specific in the Q4 or in the Q3 or the Q2. We've been adding people consistently over the last couple of years as we've tried to create the ability for us to Have the right footprint and the right infrastructure to go into so many new areas. So when you see us talk about advisors And generating fee revenues from advisors, I can't get them without a certain quantum of people that are feet on the street as well as people who are doing analytics. When you talk about It's just prepaid worldwide. That didn't exist in our book a couple of years back. So when you sort of add all that together, our company is changing and morphing. And in that change and morph, what I'm trying to do is to maintain our operating margin at a very healthy level, but put money back into building the skills, capabilities and technologies that are going to be required for this digital physical convergence combined with the data opportunity That our company is talking about. So that's kind of what I'm trying to do. Thank you. Our next question comes from Kevin Faye for Macquarie. You may go ahead. Great. Thanks. Hey, I wonder if you could give a sense just the uptick in data breaches, how that's impacting the value proposition as you go out client. And ultimately, what's been the feedback on that? Great question. Right now, fortunately, I I haven't seen a great deal of impact coming out of that. And as we just told you, our 1st few days of January looked like they're actually a A little better than the quarter that went by or similar. It's a little better in some cases. But there's no one specific data breach that causes trouble. It's an ongoing feeling that consumers get about their safety and their security of their information. And These recent data breaches are not just about cards. They were about other consumer data, tens of millions of stuff that went today. And that creates its own angst in everyone's mind. Fortunately, our technology, the technology of our competitor networks combined with some of the great tools that the Banks and merchants have built along with us over the years has meant that people are trying to keep fraud under control and trying to help the consumer. So I'm really that's less of the issue. I'm far more concerned about getting the right thing done, so we get ahead of this as we go forward. Otherwise, You're going to have this keep coming and the more often it happens, the worse it feels. So that's what I'm looking at. And it's not about who did what and It's not about finger pointing and it's not about I said this and they said that. I really want to get past all that nonsense to the real stuff, which is We need to get EMV in place. In January, Chris McQuilton issued a letter to all our issuers and the merchant partners saying We are standing by our deadline. We need to get this going and everyone needs to be on the bandwagon. Banks need to be there. Merchants need to be there. Governments are clearly there. We We need to get the network set and the acquirers there. And I think there is a lot of progress on that front. I know a large number of the big merchants are very committed to New terminals and new terminalization. I know that the terminal manufacturers have geared up for that. I know that a number of the banks have begun to issue Chip cards are ready. You can see people are making all the right efforts. This should only redouble our desire to get this done quickly. That's what I'm talking about. Thank you. Our next question comes from Bryan Keane from Deutsche Bank. You may go ahead. Hi. Just wanted to follow-up on the Chase migration. Has Chase told you guys how much to expect to come off and when? So I'm just trying to figure out how much No. Brian, no. That's why we said that we are assuming some impact in 20 2014, I actually said that we assumed that something would have happened in 2013 and it did not. Okay. And then just how much are you expecting in 2014 like 2 to 4 points of revenue or how much? Good try. Good try. I'm going to give you marks for trying. All right. Thanks. Thanks so much. Our next question comes from Chris Donat from Sandler O'Neill. You may go ahead. Thanks for taking my question. I wanted to ask getting back to the fraud issue. With your experience and what you've seen around the world, the move to EMV, How significant is that in reducing the either the sorts of things we've had in the United States or just really the fraud that existed in places like Europe before they went EMV or even Canada? Very significant. It very significantly reduces the impact of breaches. Look every time a chip card is used, It uses the technology inside to create a unique data point which for that transaction that Bolsters the security and the certainty of that transaction. That's why chip transactions are virtually impossible to Fraudulently replicate. And of course because the down chip is there, it makes it hard to counterfeit the card in the 1st place. So if But this is differently. EMV would not prevent a data breach. I mean look in the Target case there was stuff with cards, there was It's tough to data that happened in the target system. E and B is not going to protect from that data breach. What it will do, it makes that any data stolen much, much, Much less valuable to a fraudster because it's tough to counterfeit the card and it's almost impossible to duplicate all the unique data that flows for that transaction to get approved. So it's kind of got double layers of protection inside it. That's what it's about. But you need to Understand that while it's good at addressing counterfeit fraud, it's not the only solution or not a single solution to drive security in the payment space. There's going to be a ton of Things that happen with our data as secure, how it's kept, how it's encrypted in motion and addressed things that we all do, things that very often you cannot expect small merchants to do in the same way. What's broader acquire us to do in the same way? That's one of the reasons why in the future with digital technology, tokenization is actually a key because in tokenization that data doesn't even go to be stored in that That data doesn't even go to be stored in that location. It's encrypted with a key that only the networks and the banks recognize. And therefore the concept of that data lying in the weakest link in the chain will go away. So it's both EMV, tokenization, Fraud tools, all the things that are going on. It's not one thing, but EMV is a really big arrow in the quiver. Thank you. Our next question comes from Ken Bruce from Bank of America. You may go ahead. Thank you. Good morning. You've pointed out on Number of occasions that you're moving into processing. I would like to ask specifically what you see as the strategic Imperative and the financial implications beyond the EPS solution that Martina mentioned as you are looking at The issuer and acquirer processing? So the strategic implications really are back to what Gary and Orest talked about at Investor Day. If you Of course, obviously, if you switch the transaction, as you know, we only get to do a little around 50% of our transactions. And I'd love to be able to get beyond that, because As you switch the transaction, 1st of all, you're in a much stronger position in the system. 2nd, you see all aspects of it coming and going. And if you In addition, even if you don't switch it, but you see it pass through because you're either helping the acquirers process or helping the Then you still have a lot of data that you can then use for developing fraud scores, behavioral scores, The adviser's fee revenue all that kind of stuff. So getting in front or behind of the transaction is useful For someone like us, I don't want to be just say payment switch. That's not the business that long term can give us the ability. And by long term, I mean A decade. I'm not I'm trying to be more than that. I want to be using our data to create the right revenue stream from data. I I want to be able to use in the digital world all the things we can do from before, during and after the payment. You can't do all that if you aren't a little smarter about processing. So So that's what we're trying to do. Now in countries like the United States and Brazil, we process almost all of our transactions. However, when you get into some of the emerging So of course, as you know in China, we don't process domestic transactions. When you get to places in the emerging markets or the high growth markets in Europe, That's where these things can help us. And as you know, SEPA opened up the ability for us to reenter the processing market in the developed countries of Europe, Which we are trying our best to do and we're making very steady progress on that as well. So it's a long way to answer that Being in the center of the transaction and being there before, during and after the transaction, being on both sides of Very, very useful for this company. And just to add to this, we already own a processor in Poland, which is called Trevika and now we are owning the processor, The independent processor in Turkey progress. And when you look at these processes on an isolated basis, of course, they have a lower margin profile our business, but what we found with all the work that we did around Treveka in the last couple of years that that really helps our main business and that we are able to win that the deals are more sticky and that we're actually able to give more services to the clients because we actually saw the transaction. So we really think from a strategic and from a financial point of view, this is a very good way to go. Before we take the next question, I just got an e mail from somebody in our fraud area. And going back to Chris' question about How significant has EMV been in reducing fraud when it's been adopted? We have seen anywhere between 60% 80% decrease in Counterfeit fraud, after EMV has been installed in market. Next question. Our next question comes from David Hodgson from Buckingham Research. You may go ahead. Hi, thanks. Could you just clarify is Chase consumer portfolio you're talking About the old Continental co brand or is it something else? No. We're talking about the entire Chase consumer portfolio Continental co brand is different. Continental co brand actually has cards that are issued on Mastercard are protected for the life Of those cards, that's different. But when Chase did the relationship with the debt of Visa on the network, at that time, one of the items that Visa and Chase both announced was this migration of the consumer book inside of Chase, the rest of it To our competitor. It didn't happen in 2013. That's what we're referring to. Okay. Thanks. Our next question comes from Sanjay Sakhrani from KBW. For you. You may go ahead. Thank you. I don't want to mean to beat dead horse, but I just want to make sure I understand the chase assumption that you guys are making. For 2014, you're basically assuming some piece of that goes away and there may be residual impacts as we look out to 2015 and onwards? No, I'm assuming that it goes away in 2014. Okay. And by the way, who did you call a dead horse? No one. Thank you. Our next question comes from Tim McGrohan from Janney. You may go ahead. Hi. The close loop on EMV, I think people are aware that it reduces traffic for all the fraud migrates to the online channel. I'm just wondering if the tokenization Efforts that you're working on, are they going to be packaged with any EMV implementation? Because currently, it doesn't really address that. And that's why I think what merchants Are kind of digging their eels in on. They want some sort of line of sight into protecting me online as well. Thanks. Yes, absolutely. That's what we're doing with tokenization and that's exactly why we're at it. And we're actually hopeful that it'll all get done And start being out there in the marketplace as we said sometime in 2014 and then it will keep rolling along from there. And it's going to accept everything from Secure elements to SIM based solutions to other kind of efforts To get secured information into Masterpass and the tokenization. We're very committed to that. Operator, we have time for one last question. Our last question comes from Don Fendetti from Citi. You may go ahead. Yes. A. J, just to kind of wrap up on the strategic side, we've seen on Amazon, talk a little bit more about payments. I was just curious what your perspective is, how that might change the payment landscape? And is it sort of in line with your expectation and Tom, thank you. I actually it's exactly what I expected. You all know that they're all thinking about this. And the fact that Google is out there first with actually doing something, didn't mean that the Others weren't working on it. They're all working on it. And they're all trying to figure out what the right role to play for their respective strengths And weaknesses are as this payments opportunity evolves. And it's not just payments, you talk to most of them. They will tell you it's about Before, during and after the transaction. So Google tends to think about it as a metric to look at enhancing their advertising and consumer outreach business, Not really as a payments business. Others think differently and everybody comes at it from a different perspective. So that's why what we are trying to do is to partner with as many of them as we can. And we've managed I think well to shift the dialogue from 1 off This intermediation to one of partnership because we bring some very strong assets to the table in terms of what we have and possess and also what they're investing in. And so that's kind of where we're going with it. That's our I'm not the least surprised. I believe it's the right thing to do anyway that all the strong players in the digital world will have a role to play in some way to enable payments We'll have a role to play in some way to enable payments for their consumers. That's the right thing to do. Thank you. So let me give you a few closing thoughts. We had a very good 2013. We delivered on our expectations. We saw strong revenue and EPS growth. We continue to invest back into our products, our technology and our people. Overall, it seems like the economic environment is improving, especially in the U. S. And Europe. I understand that emerging markets are going through a bumpy patch, which you will continue to But remember they are starting in a much better place than they were in previous crises. And so I believe that over a period of time that should stabilize. Now looking ahead for the next couple of years, the world generally seems to be headed towards a better economic cycle than what we have seen in the recent past and I hope those are not Famous last words. That's kind of where my head is. Our business continues to have strong momentum as it shows in our GDV and our gross revenue numbers in the 4th quarter. We are focused on driving the conversion from cash to electronic payments And at the same time very, very focused on creating solutions and working with governments and other partners to advance financial inclusion. Investing in our core solutions remains important. So we're making investments in new products as well and new services and new capabilities, all of which will help expand our presence In the area around payments as well, not just the payment, but before, during and after. And for sure, we will continue our efforts to ensure that we make the best Possible impact on ensuring safety and security for everyone in the physical payment space, while carrying those competencies into the digital world as the 2 invariably converge over the next few years. So thank you for your support and thank you for joining us on today's call. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.