Earnings Call: Q3 2013

Oct 31, 2013

Welcome to the Mastercard Third Quarter 2013 Earnings Conference Call. My name is Christine and I will be your operator for today's call. 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 will now turn the call over to Barbara Gasper, Head of Investor Relations. You may begin. Thank you, Christine. Good morning, everyone and thank you for joining us for discussion about our Q3 2013 financial results. With me on the call this morning are Ajay Banga, our President and Chief Executive Officer and Martina Hundejian, our Chief Financial Officer. Following comments from Ajay and Martina, the operator will announce your This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website at mastercard.com. The earnings release includes reconciliations of 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 November 7. Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward looking statements about Mastercard's future Actual performance could differ materially from what is suggested by our comments today. Information about the factors That could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings. And with that, I'd now like to turn the call over to our Chief Executive Officer, Ajay Banga. Ajay? Thank you, Baba and good morning everybody. We're very Pleased with our results this quarter. We've had a net revenue growth of 16% or 15% when adjusted for currency And that's been driven by solid volume and transaction growth in every region around the world. And I think that revenue growth allowed us to invest more back into the business in areas such as digital products and the safety and security around them. We were able to make these additional investments while still delivering a net income growth of 14% or 18% adjusted for currency and an EPS growth of 18% or 17% on an FX adjusted basis. So let's start in our normal way by looking at the underlying economic trends. And if you start with the United States, consumer spending was relatively flat From the 2nd quarter's better than expected growth, our spending pulse data for the 3rd quarter shows that U. S. Retail sales growth ex Automobiles is about 3.8%. Now that's down just slightly from the 4% of the 2nd quarter. Over the last 3 or 4 months, we've seen a slow steady decline in the confidence numbers and that's Probably the reason behind the slight deceleration of our spending pause data and of course the recent Circumstances in Washington have contributed I think to a sharp decline in October's consumer confidence. So what that means for consumer spending for the remainder of the year kind of remains to be seen as yet. The fact is that for us As a company, despite the relatively flat growth in overall consumer spending in the U. S, We saw an increase in our U. S. Business in the Q3 where volume grew 9%, up from last quarter driven by improvements In consumer credit, in Europe, overall economic growth was subdued in the 3rd quarter. I think we expect it to remain that way Through the end of the year, but European consumer confidence continued the recovery that it started in the Q2 and it's now back Up to the 2010 levels. Business sentiment has also improved over the quarter across Major European markets like Germany, France, the U. K. And even Italy and the combination Of an improved environment in some markets along with the continued secular shift and most importantly our business wins Have driven 3rd quarter volume growth of 17%, up from 14% last quarter with Poland, Russia, Sweden as some of the key contributors to those numbers. Now looking elsewhere in the world in Asia, consumer spending in the 3rd quarter increased in key Consumer confidence levels have remained by and large steady across the region. However, business sentiment continues to be mixed Because of lingering concerns about the global economy, our business in this region continues to do well. We had strong volume growth of 22%, Up from the 21% that we showed last quarter. In Latin America, consumer confidence in Brazil improved, But Mexico edged down slightly in September and across the region forecasts for the rest of the year seem to indicate That GDP growth will probably remain sluggish. Our business in the region continues at a healthy pace. We had a 17% growth this quarter similar to our growth rate of the last quarter. So overall, you step back from all this and it feels like the underlying Global economy is showing the right trends to get back onto a more solid footing. What we kind of need to see It's a more balanced and practical approach on the part of the political leadership to allow those underlying improving economic trends To take hold and bear fruit. But before moving on to business highlights, I'd like to say a few words on where things currently stand on the legal and regulatory front. First, on the U. S. Merchant litigation, nothing new to report. Judge Gleeson held the final settlement approval hearing as you know on September 12. We're all awaiting his ruling, which is expected sometime late this year. On the debit front, As you know the Federal Reserve appealed the district's court's July decision. The judge issued a stay of the existing rules Pending the outcome of an expedited appeal and the Fed recently filed a brief presenting their arguments in response To the judge's decision, the appeals court probably will issue their ruling sometime in 2014. The European Commission's proposed legislation is the 3rd one. Both the European Parliament and the Council of Ministers need to review, Potentially amend and finally vote on the Commissioner's proposal. The Parliament has begun the process and though it's still early days, They have now appointed what they call a rapporteur who has the responsibility for both drafting and then shepherding the legislation through their parliamentary process. Kia has announced a draft timeline that includes a session on the 5th November to officially kick it off. He will also be meeting with us next week. The commission has indicated they would like the proposal to be adopted before parliament goes into recess in the spring. As we said before that time line appears ambitious In light of what needs to be accomplished before vote can actually be taken in the European Parliament. So now let's move on to some of our recent business activity. You've heard enough from us at Investor Day relatively recently in September. You had an opportunity to see firsthand a number of the product innovations we were rolling out from our Simplify Commerce acceptance solution to social benefit programs To shop this with a 3 d avatar and so I'm not going to go into all that, but I'm going to talk about a couple of different items. And the first one is that last quarter There were several new partnerships established in the U. S. With merchants. In addition to the agreement with Virgin Atlantic that Chris McQuilton probably mentioned I think on Investor Day, We have now signed 3 more new credit co brand relationships and partnerships with Hawaiian Airlines being the largest of those 3. The second big area of focus for us and frankly it's true of everybody in the payments industry as you heard on the Visa call yesterday is safety and security, The importance of which is second to none as our physical and digital worlds converge. Historically, how this has worked is that When you develop industry standards and specs, we did it with traditional payments partners, banks, other networks. Today, we are working with those also, We'll kind of get to create better consumer, better merchant experiences and at the same time ensure safer and more secure transactions. And the drive to continually upgrade to newer technology is going to mean that all of us have to ensure that payment security standards Adapt more quickly to changing consumer and merchant needs than they have in the past. So one interesting new development in that area is tokenization. And as you know earlier this month, we along with Visa and American Express proposed global standards to replace these traditional account numbers With digital tokens for online and mobile transactions. What that ensures is that the cardholder's bank Has access to their card information and only the cardholders' bank has that access. It eases the merchant's requirement of having to keep that specific card information secure. What the merchant sees is a token. We can connect That's open back to that specific information with the bank. Work is being done in collaboration with issuers As well as other industry stakeholders. And the idea generally is all of us is to improve cardholder security, reduce the impact of fraud And yet provide a good consumer and merchant experience. So in addition to that, we've joined the Board of Fast Online Alliance, an industry consortium. Members there include Google and PayPal. The consortium promotes standards in support of authentication technologies such as biometrics and you've heard us talk about biometrics a number of times. But along with existing solutions like chip cards and NFC, I think doing this will help us to ensure that the development of standards That happens, which everybody can innovate in is in an environment that is safer and more secure for online commerce. But supporting safer and most secure transactions is more than just creating new standards. You can also do it at platforms such is what we are doing through our Data Cash business to provide a more secure environment for e commerce merchants. For example, in Brazil, Brazil is one of the largest and fastest We announced a new partnership last year with DataCash and Redicard, one of Brazil's largest acquirers. As a result of the partnership, Redicard recently launched an e commerce gateway with fraud and risk management services. They're the only ones by the way in the Brazilian market to offer payment processing and fraud tools together in one place, Making it much simpler for merchants to accept cards without the need to sign up with multiple vendors for these different needs of theirs. So finally on this topic, security can also be about using our technology, our data and the expertise around it To provide services that help reduce the cost of our customers in ways they sometimes cannot do themselves. So let me give you an example. We used our global network in data analytics and leveraged it and we're helping our customers right in data analytics and leveraged it and we're helping our customers right now by monitoring interregional activity on all of our cards in over 100 50 countries and at more than 1,000,000 ATMs around the world. What that allows us to do is gives us a chance to provide better insight to our issuers About potential fraud threats that go well beyond what they can see themselves just through their own card activity. So we introduced what's called fraud rule manager at ATMs in April and this resulted in significant reductions in inter regional ATM fraud on Maestro Got it. And that reduction is up to 70% in some regions. Now in the context of overall ATM volume, fraud is small. But that's not the point I'm trying to make. I'm trying to make the point that the level of improvement up to 70% represents What we can do with data and technology. So with that, let me turn the call over to Martina for a conversation on our Financial results and operational metrics. Madhida? Thanks, Ajay, and good morning, everyone. Let me begin on page 3 Our slide deck where you see that this quarter the difference between as reported and FX adjusted growth rates is 1 percentage point for each line item. All of my comments today will pertain to the FX adjusted growth rates. To reiterate what Ajay said, we continue to be pleased with our performance. Even with a relatively difficult economic environment, we're able to make progress on the conversion from cash to electronic forms of payments and Around the world. Net revenue grew 15%, which combined with operating expense growth of 13% resulted in net income growth of 13%. EPS growth was 17%, benefiting from our share repurchase program. During the Q3, we purchased almost 575,000 shares of Class A common stock at a Cost of approximately $345,000,000 with $912,000,000 remaining under our current authorization. We did not repurchase any additional shares in October given the parameters of the 10b5-1 plan that We said a couple of months ago. Our strategy remains unchanged. We will continue to look to repurchase shares on an opportunistic basis. Cash flow from operations was $1,300,000,000 and we ended the quarter with cash, cash equivalents and other liquid investments So let me now turn to Page 4, where you can see the operational metrics for the 3rd quarter. Our worldwide gross dollar volume or GDV was up 15% on a local currency basis To over $1,000,000,000,000 U. S. GDV grew 9% with credit volumes growing 7%. U. S. Commercial credit growth was in the mid teens higher than last quarter and U. S. Consumer credit growth was positive And a continued improvement over prior quarters. Our U. S. Debit growth was 11%, driven by growth From consumer, commercial debit and prepaid programs. And outside of the U. S, volume growth was 18% on a local currency basis And this continues to be driven by APMEA with a 22% growth rate and solid 17% growth in both Europe and Latin America. Cross border volume grew 19% on a local currency basis, including more than 25% in Latin America and APMEA And growth in the high teens in Europe. Turning to page 5, here you see process transactions grew 16% Globally to more than $10,000,000,000 for the first time. In the U. S, we saw good growth due to increases in debit And credit card transactions. And outside the U. S, process transactions grew 23%. We saw increased growth from the Q2 in all regions with particular strength in Europe driven by our business wins in Sweden and continued good growth in Russia and Poland. And globally, the number of cards grew to 8 grew 8% To almost $2,000,000,000 Mastercard and Maestro branded cards. Now let's turn to page 6 for some insights on our revenue. Within our net revenue growth of 15%, gross revenue grew 13%, in line with volume and transaction drivers Along with some contribution from pricing, rebates and incentives increased by 8%. As I said last quarter, The rebates and incentive line can move around on a quarter to quarter basis. Similar to what we saw last quarter, There were a couple of factors impacting the growth rate in the quarter. First, while we signed a significant number of contracts during the quarter, There were a few that we now expect to sign in the Q4 instead of the Q3. And second, We have a couple of contracts that paid out at a lower level of incentives than in the past, very similar to last quarter. Similar to the prior quarters, It's coming from the work we are doing in places like Russia and South Africa around financial inclusion. These countries will initially produce lower yielding transactions as people first use the cards at ATMs before beginning to use them at merchants. And just one last note on revenue. Excluding pricing, cross border revenue growth was 9%. The resulting gap So let me move to page 7, where you can see that total operating expenses were Up 13% in the quarter, growing significantly higher than in recent quarters. First, given the revenue growth As we saw in the Q3, we took the opportunity to increase our advertising and marketing. As a result, you can see that this line item is up by 16% Turning to slide 8. Let's discuss what we've seen in October through this past Monday. Each Our business drivers is slightly lower in this period compared to the Q3, but when we adjust for the extra processing day that we had in the Q3 of this year versus last year, the growth rates are actually very similar. For our processed volume and Transaction metrics only. That extra processing day provided a tailwind of about 1 to 2 percentage points To our growth in Q3. So here are the numbers through October 28. Globally, Our cross border volumes grew about 18%. In the U. S, our processed volume grew 9%. Process volume growth outside of the U. S. Grew 16%. And in particular, since I know you are all very Our European process volume growth continued in the teens, the range that we have seen throughout 2013. And globally, process transaction growth was 14%. Looking forward, let's start with our long term performance objectives for the 2013 to 2015 period, which have not changed. We remain confident that our business can deliver an 11% to 14% net revenue CAGR, Which still includes a modest contribution from pricing over the 3 year period and at least a 20% EPS CAGR. These growth rates are on a constant currency basis and exclude any new acquisitions. We also remain committed So our annual operating margin target of at least 50%. So now I'd like to share with you some thoughts about the rest of 2013, which is Slightly improved versus what we said at our September Investor Day. Given our strong our continued We now believe that second half net revenue growth will be slightly better than the 12% growth rate that we produced in the first half. This includes an assumption of a significantly higher growth rate in rebates and incentives in the Q4 versus what we have seen to date this year, at least in the mid to high teens range. We now anticipate total 2013 operating expenses to grow a bit And our G and A growth is proven to be more back end loaded than we originally expected. Even with this higher expense level, purposes, we continue to expect a full year tax rate of about 31%. So with respect to FX, If rates remain similar to where we are today, that is the euro trading at the 1.37 level and the Brazilian real At the 2.19 level for the rest of the year, the net impact of the euro and the real would be a slight tailwind for the full year of 2013. Now let me turn the call back to Barbara to begin the Q and A session. Barbara? Thank you, Martina. We're now ready to begin the question and answer period. And in order to get to as many people as possible, we ask that you limit yourself to a single question And then queue back in for additional questions. Thank you. We will now begin the question and answer session. And our first question is from Chris Brendler of Stifel. Please go ahead. Hi, thanks. Good morning. Can you maybe repeat? I wasn't quite sure what you said about cross border. I think you said that Revenue growth without pricing was only 9% compared to almost 20% transaction growth. Is that correct, Martina? That is Absolutely correct. And this is exactly the trend that we have seen in prior quarters. And this quarter was a bit more pronounced because actually our intra European cross border Activity grew fairly large versus the rest of the cross border activity as well as when you have the appreciation of the euro factored in, You see that the gap is widening. Got you. And so my other question on the same topic was can you give us any Color around domestic the cross border volume trend almost 20% growth is phenomenal. Is most of that sequential increase Europe? You mean on domestic assessment? No, still on cross border transactions. No, no, no, no, no. All regions contributed in a very significant way to the cross border volumes. But when you just look at the intra Peen volume just from a pure dollar point of view, it is larger than what you have in general across the world. Okay, got it. And then on a separate topic, I think you're Chris, we're going to try to limit it to one question just to get through people. So please do that again. Next question. Thank you. Our next question is from Jason Kupferberg of Jefferies. Please go ahead. Thanks guys. Just a question on a couple of metrics. Can you just go into a little more detail on the U. S. Credit side of the story because it was obviously great The acceleration there, I know you mentioned both commercial and consumer accelerated, but maybe you can parse that a little further which If the process transaction growth actually accelerated in the month of September because it looked like the full quarter number was quite a bit better than the July August mid quarter update. Thanks. So Jason, Ajay, on the first part, the part about U. S. Credit, Commercial credit of course did pick up well. But the good news is that even in consumer credit, we saw continued positive improvement. In fact, Last quarter we told you that our U. S. Consumer credit was actually a very small growth rate. This quarter it's better than that. I'm actually not going to give you the exact number, but it's headed in the right direction. It's not where I'd like it to be, but it's headed in the right direction. On Investor Day, we told you we'd won more than 60% of the core brands that have been up for bid in the U. S. Over the past 12 months. We haven't lost anywhere. We were the incumbent. That remains the case. In fact, we got a few extras I just announced as well. So we're kind of working on that. This is going to be as I said a Bunch of doubles and singles and stolen bases quite appropriate for yesterday's World Series game although Chris McQuilton is probably a happy boy given that his team won. It's a bunch of doubles and singles and stolen bases to get our share back to where it should be for We have in the past lost share in that space and I've said so, but we're making progress. And that's what's giving us our numbers here. Commercial credit just continues to do well and that's just a steady, steady growth in what we are doing in driving our Acceptance Advantage, our capabilities with smart data, we've put people on the street that actually go sell this product with our issuers To different corporate clients as well as small businesses and it's beginning to show the result of the effort. And Jason with respect to your second question, Actually when you look at the July, August September data, process transactions grew fairly similar. There was a little bit of an up one, down one point, but it was very similar through the whole quarter And it's very similar to what we're actually seeing in October. And it's in both in the United States as well as outside of the United States. We're seeing these kind of improvements Over last quarter. Okay. Thank you. Thank you. Our next question is from Sanjay Sakhrani of KBW. Please go ahead. Thank you. Good morning. Just a question for Martina. I guess when I look at the domestic assessment yield that's Coming down quite a bit over the last couple of years. And I was just wondering at what point it might stabilize Given the fact that you are seeing credit kind of pick up and I guess the mix shift has kind of played out a little bit? Thank you. Yes. I mean it's a good question, but We are doing this significant work around the globe, in particular in countries that have a lot of work to be happening on the financial inclusion When you look at these countries South Africa, Nigeria or even when you go back into Russia, you know how this starts first, right? If you're going to put Cards out to people first. They are going to get used to how to use these cards which will be at ATMs and that's where you're Be able to use the cards at merchants, which at that point in time you're starting to see some different pricing for those kind of transactions. So it's an evolution. And by the way Sanjay, if we Sanjay if we are doing our job correctly that means expanding in those countries in a significant way, we should Okay. Great. Thank you. Thank you. Our next question is from Bill Carcache of Nomura Securities. Please go ahead. Thanks. Good morning. Can you talk about how much of the strength that you saw in your U. S. Consumer Your U. S. Credit volume growth was driven by the success that you're having in the co brand space specifically. And how does the pipeline look for potential new co brand wins? Has that been given all the wins you've had recently? Or do you still see room for growth specifically in co brand? So There's room for growth definitely. The co brand business is a relatively large business in the U. S. And there's a constant cycle of brands that come up for renewal. We're in strong and continuous dialogue as are all our competitors in the space with a very large number of merchants as well as Airlines, hotels and banks. So that's I think there's a long runway here for growth and possibility. I'm not going to give you specific numbers on what came out of the growth specifically from the wins we had versus what came out of a general improvement Some of the underlying mix of our portfolios versus that of our consumers versus what came out from consumers going back to creditors, Those 3 are the big factors in there. And I'm not really going to give you specifics on that, but all three played a role. Our mix Some of our stronger issuers have had better sales volume growth recovering over a period of time. We have seen the consumer Using credit a little more than they used to, although debit is still clearly growing very handsomely as is prepaid. But we've also seen the results of our first Efforts around co brands as those cards are getting replaced and changed that their volumes are coming through. I would tell you that those volumes Are smaller than the impact of the first two topics just because it takes time after you win a deal to convert the cars onto our brand. Thank you. Thank you. Our next question is from Glenn Fodor of Autonomous Research. Please go ahead. Hi, good morning. Martina, just a quick question. Would you say a greater portion of the investments you made this quarter are related to initiatives that you expect To drive revenue growth by 2015 within your financial goals period? Or were they more heavily weighted to longer term type return Glenn, it's really a mixture. As you know, we always look at investments that are in the short term bucket, Which means that they're really returning over the next 12 to 18 months of return, the medium term bucket, which is more like a 3 to 4 year timeframe and the longer term bucket, which is kind of the 5 Plus return. And so there are a number of things in there as we did. But of course, when you see all of the comments that we made about digital convergence And all the investments that have to go in there from a security and a safety point of view from a consumer, how you put the product together from a consumer and merchant experience point of view, We do have of course some investments going in there and we'll see how that's going to play out for the future. I mean things like tokenization will probably only pay back in terms of better consumer experience and better fraud control out there in some period. When it's things like Simplify Commerce, if it gets picked up well in the marketplace, which we are very hopeful of, then you would find that to be a more Interesting item close-up in this period. So it's actually a mixed bag of stuff, but that's not just this quarter. What's going on in our G and A line It's the result of continued and sustained investments organically and then some inorganically We will then become organic in our base as we say after a period of time. So Access Prepaid is now in our base. The money we put into expanding the capabilities of of Provost that's going to show up for a while as separate from being in our base. So it's actually a very complicated question to answer. But The way we manage this inside the company is we look at our strategy, which we lay out for you on Investor Day. We make sure we've got adequate resources Going towards the basic elements in that strategy of new merchants, new consumers, digital physical convergence and All the spaces of safety and security and then we put a certain amount of energy into more short term kind of growth is from David Togut of Evercore Partners. Please go ahead. Thank you. Ajay, could you size for us David, we can hardly hear you. Could you speak up please? Is that better? Much better. Oh, yes, much better. Great. Could you size for us your European Processing pipeline and in particular are there any large transactions that we might see on the horizon? So, yes, you're talking about the whole stuff in Separ right and what goes on there. And the fact is that we're now seeing domestic volumes in virtually Every one of the SEPA countries and as you know a few years back we only saw cross border. So in this Q3, the processing of domestic Maestro transactions increased By 19% in the SEPA region. We've grown in the Netherlands. We've had very attractive percentage of growth in Austria and Belgium, but off a lower pace. The Netherlands is actually the much higher base as you remember from all the work we did. So we're kind of moving along in that range And we're going to keep I think getting breakthroughs in a number of countries in this space. Acquisitions of things like Provus Actually it could be helpful in driving this number as is all the work that we've done with a similar company that we built up in Poland over the last 4, 5 years. And those are the kind of things we're trying to do to get to a better play in those domestic transactions. And is that one Other region that you're really seeing or sub region that you're really going to see in our numbers as we already said is really the Nordics and in particular Sweden And that is on the debit portfolio too. Thank you. Thank you. Our next question is from Craig Maurer of CLSA. Please go ahead. Yes. Hi. Thanks for taking my question. Regarding the cross border Volume growth that really is separating itself from your largest competitor. The 13 consecutive wins you've had in China and the fact that that's only cross border, is that A major contributor to that separation, I obviously understand the intra Europe discussion. And also is The recent revelation regarding the NSA impacting any of your discussions with Issuers around the globe. Thanks. Hey, Greg. So there's no doubt that China as you know is a pretty attractive Spending market, I mean every country around the world is chaining is targeting Chinese tourists. And so that's a pretty obvious one. We have benefited certainly from that. But in the context of our overall numbers, I don't want to overstate the importance of China To our total numbers, we've got very good cross border volume growth in every region. And so China contributes to the Asian growth In terms of cross border, but there's a lot of other countries in Asia that are driving very attractive cross border. I mean countries like Australia and New Zealand are Standing and cross border volume growth. Countries across ASEAN are giving us good benefits. When you come to Latin America, you've got growth. You go to Europe. So It's a mixed bag. I'd be careful to overstate the importance of 1 country. But I love the position we're in, in China in terms of Winning those co brands and we're still winning some despite all the changes that are going on with the WTO ruling China, which as you know is still not completely clear where that's going, but we're still getting some brands there. The NSA discussion is a much deeper discussion way beyond just us. But Right now, we're not having a direct situation with any issuers in countries overseas that impact this. I think the Longer bigger term issue for a lot of global companies is that if the fears about privacy Go to a point where people would attempt to find ways to have more localization then that certainly impacts The way that you construct your business model over time. Now, we're a little more fortunate than some of our competitors in that when Bob Seelander built The technology system in our company, he built it in a distributed way. So more than 80% of our transactions In any country are approved at local servers in that country installed by us called MIPS and I have No idea what the damping stands for. It's Mastercard something. But there are black boxes lying in different banks and retailers. And I've been told the name what it stands for regularly. I keep forgetting it. It's basically a black box with drinking lights that helps you to clear transactions locally. And we download an intelligent logic into that regularly over the course of a day that enables us to say card number so and so tends to behave like this. And therefore transaction that comes in of that type gets approved locally on soil on the ground in that country. Very few transactions To come back to St. Louis in our case for being diagnosed and approved. And during the time that we had for example And undersea cable break between Taiwan and the U. S, we're able to dial that 80% to 100%. So our continuity of business It's also better than a number of our competitors. So we're using all those discussions as we're out there overseas, but you know that nationalistic tendencies Our tendency not just in our industry, but in a number of industries. So the NSA is just one small pimple on a dimple on the ant's left cheek on that issue. Thank you. Our next is from Dan Perlin of RBC Capital Markets. Please go ahead. How do I follow that comment? I was still laughing. I had to control myself. So I do just have a broad based question. Both yourselves and Visa put forth In prepared remarks on the calls, given the safety and security and the integrity of the network. And I'm just wondering, is this just a push For your tokenization agenda or is there something else that's happened over the course of the past year even Where other technology players have come in, they've seen how difficult it is. You guys act as the grown up in the room and so they're kind of gravitating back towards The security of the network? If you could just elaborate on that I'd appreciate it. So the timing of the fact that Visa had Yesterday's call, the fact that we're talking about it today is just crazy coincidence. And I don't even know how I think I should give Charlie a call after this and say was The president or what? But I have no idea, Ryan, about this. The fact is that tokenization happened in this quarter. And to us tokenization is a material change and move forward in the way that we believe as a industry, Not just Visa, us and Amex who put this out together, but even the issuing community with whom we've been in very good dialogue with Who frankly are very interested in this themselves. The idea is to find a way as you can clearly guess to find a way to protect The weakest link in the security chain, which is a smaller merchant who you cannot afford or you cannot expect them to spending the same kind of money as we would on Data encryption both at storage and in motion on the managing of that data and so on. So we're trying to as an industry find a responsible way To help control that, while at the same time allow for what I believe in the digital world will be the Holy Grail, Which is the least friction from a consumer's point of view in how to execute a transaction. Millennials these days don't like friction In hunting and shopping. And it's just a very important part of what we're trying to go at. So we talked about Safety and security because of the tokenization event this quarter, I would otherwise have chosen a different topic. I'm trying to pick one topic of interest every quarter to you guys And talk about that in some depth. And today I run out of topics and I'll start again. But that's kind of what I'm trying to do. And safety and security happened to be the one for this quarter. Now the aspect of our networks have great barriers of safety and security in terms of what we've built and invested Over a long period of time and there are a lot of others who said they could just do this business realized that being in payments business is more than having a network of some type that exchanges data. Yes, absolutely. For 3, 4 years now, we've been talking to mobile network operators. We've been talking to banks. We've talked to merchants. We've talked to others and said what we bring to the table are our assets, one of which It's the safety, security and reliability of our network. We've got other assets too like the one I just described about how 80% of our transactions are approved locally. And so some of our assets are common across the industry. Some of our assets are differentiated for us compared to others and we're certainly using all of them in our conversations. Thank you. Thank you. Our next question is from Glenn Greene of Oppenheimer. Please go ahead. Thank you. Good morning. Just a couple real quick. I mean, I guess from your comments Martina sort of talking about the extra processing day in the quarter, I just want to be real clear, because obviously it was a topic of conversation last night on Aviso's call. But did you see any slowdown in volume trends toward the end of the quarter And through October, it doesn't sound like it, but want to be clear on that. And then maybe you could just help us parse the acceleration in the European volume trends with some Particular is on the Eastern Europe part of the business, how fast the background, what's the proportion of the European pie from Eastern Central Europe at this point? Okay. So first of all for First question, yes, there was as I said an extra processing day in the Q3. But when I look at July, August and Kemba, other than what we saw from an oil price impact in the United States, we really haven't Seeing any significant impact from a change in the growth rates. It was relatively even. You could see September just being just a tad lower, but You see it quite coming up in October again. So truly even when you adjust for the processing day There wasn't really any impact on that. And then when you compare the Q3 versus October, So just to get a sense of how the Q4 is starting, again very, very similar growth case if you compare like for like, okay? So on your second question on the detail of growth in Eastern European U. S. And Europe, Eastern Europe for us, This is part of our European region includes a lot of very high growth markets such as Russia, Poland, A number of other countries that are sitting in Eastern Europe and a lot of things that are driving there is that you have a lot Of usage of cash, okay, quite frankly. And we are putting all of those cards out in the market and people are getting more used To be using card slots rather than cash, right, from a security point of view, from a convenience point of view, from an ease point of view, etcetera. And that is really what's driving our growth and we really have not seen any letting up in those kind of countries from a growth perspective. And as long as we continue to do our work there, you should see quite a bit of contribution from that secular trend coming. The economic environment is depending how it is. You guys know that we have 3 influences of growth. 1 is the economic environment, the 2nd is the secular trend and the 3rd is obviously market share. But we control the last two things and that's what you're seeing in particular in that region. We're really trying very hard to influence the second one which is the secular trend compared to just waiting for it to happen due to Population changes or urban demographics or middle class demographics and so on. That's why the financial inclusion angle is such an important part of what we're doing and We're spending so much time effort and energy on it. So that's what we're trying to influence there. The share yes that's what we're fighting for and fortunately we're doing okay there. It's the economic trend that we don't control. But yes, Eastern European countries are growing for all those reasons. Okay. Thank you. And then Somebody just e mailed me with exactly what MIP stands for. So Mastercard Integrated Processing Systems and let it be known that I now know what Next question please. Thank you. Our next question comes from Bryan Keane of Deutsche Bank. Please go ahead. Hi, guys. I was just thinking about rebates and incentives in the industry. I know Visa yesterday highlighted a pickup For their fiscal year 2014 in rebates and incentives, your rebate incentives growth rate for the 1st three quarters has been pretty modest. You talked about a little bit of a pickup in the 4th quarter. I guess the overriding question is, are you seeing a pickup in rebate and incentives in the industry? Because one of your comments was You thought rebates and incentives were lower in some contracts than in the past. So just trying to reconcile these comments. Thanks. No. So first of all, I don't expect a significant Change from a rebates and incentive line point of view when I look over the last 3 years and when I look in the future and by All my comments on rebates and incentives are always included when I talk about our net revenues, right? We don't really talk about growth And we did an incentive to talk about net revenues. So I don't see any major change. We just had an interesting development here For the last couple of quarters and in this year, which is that we had a couple of contracts where customers did not perform To what the performance hurdles were in the contract and therefore we didn't pay out the level of incentives that were agreed as part of the contract, okay? That was really what it was driving. When you pull that apart, Our rebates and incentive line is really going back to the kind of growth rates that we have produced over the last 3 years. And that's what I said now about the Q4. We're going right back to the kind of growth rates on Based on incentives as what you have seen in the past, so no difference. So really it's an in and out issue. Those couple of clients that We've had this conversation with about performance versus contracts that made adequate difference to the total numbers that you're seeing this change. You shouldn't expect that that should be something which will persist in the future, because the fact of what Martina is saying is the underlying conversations, the underlying Deals being signed, the kind of rebates that go into them, the construct of them may change from client to client. Some may be constructed one way, some the other way. But They're there and going on. And then the other big aspect of rebates and incentives, the damn thing is lumpy. You go sign a couple of big New deals a little lumpy. You will get things come in that quarter, which may not be quite what we expected. It is a challenge with that line in our P and L. Okay. Thanks very much. Thank you. Our next question is from Andrew Jeffrey of SunTrust. Please go ahead. Hi, good morning. Ajay, just a follow-up or maybe a point of clarification on on tokenization. I understand the rationale and it makes perfect sense to me and funding friction is increasingly an important topic In payments and P2P and other areas, I can't help but think a little bit in the back of my mind, the tokenization also offers kind of Path for payments and increased security on traditional card based payments and simultaneously potentially throw up a roadblock To some of the disruptors who might not be able to accommodate the tokenization technology that's being advanced by the established participants. Am I Way off in Westfield somewhere? Well, you have a more devious mind than I do here. So Perhaps that's too much time. Yes. No, honestly, it's not coming in I'll tell you it's a very simple issue. If you go back to the days of introducing standards and mandates around requiring A certain level of payment system integrity in the industry, which we put out. The idea was to enable issuers and merchants And not only enable, but ask them to raise their thinking, their quality and their capability in that space, so we could help provide Protection for consumer data. That's where this is coming from. And it's worked in some ways because a number of people have raised their bar. Frankly, it hasn't worked in others because smaller merchants, smaller banks, smaller acquirers are always going to find it more difficult to Keep pace with what is a very well funded industry, which is aiming at fraud. The digital world, The onset of a digital physical converging world creates a whole new challenge in that space in terms of the number of different players The way data moves around among those players. All we are trying to do is to find a way to use our capacity and our capability as Banks and networks to provide a protection filter in this process. Now if you Think back, Orviscom which we bought years ago and had the ability to create virtual card numbers or the virtual card number facility that say thank yous to offer when I was still working there for you to be able to purchase things online by using a different card number. These are all elements of tokenization, the early elements. What you're seeing us do now is a systemic methodological Process driven method sort of getting at tokenization where not only will you get your current payment instrument Be it a card or your account or a fingerprint that's connected to your card or whatever the heck it is some account number in the sky will remain in the skies protected and the data that will flow out will flow out differently to different mobile devices that you choose to interact with. So not only will your number never reach the last point in the chain, it will also reach differently for each device And therefore, it gives me yet another methodology of preventing people from using numbers on the wrong device, There's going to be a ton of open APIs and the light that we're working with. You look at MasterPath, it's full of open APIs. The idea is to allow players in the industry To get our standard as a fundamental system and then innovate on top of it. No differently by the way from what a lot of people do in Silicon Valley. You create a standard. You allow people to innovate on it. That's what we're trying to do. It's quite the opposite of what you're thinking. Okay. Thanks. Thank you. Our next question is from Darrin Peller of Barclays. Please go ahead. Thanks guys. Listen, I just want to touch on the other revenue line. It increased by a little more than we expected. And I think last quarter there were Fees in there, the staged wallet fee and I think the acquire fee, one of the acquire fees also that anniversaried. So I might have expected that growth rate to be a little bit lower this quarter. You just give us a sense of what's driving that segment or that line? Yes. So first of all, Dan, on the other income line other income and expense line, actually what we said at the beginning of the year is that you should be seeing a decrease actually going into negative on this simply because We had oh, I'm sorry. Other revenues. Yes, we had other revenues. I'm sorry. I just missed your question. So from an other revenues point of view, I thought I'd get 2 questions in one. Exactly. So from an other revenue point of view, you I should continue to see some of the things that are not really related to our volume based business and our transaction based business Going into here. So for instance, some of the acquisitions that we made from an access prepaid point of view, from a data cash point of view, etcetera, You would be seeing increases there. Pricing actually had a very, very, very little impact on this. But over time you should be seeing this number going up from a close-up perspective. Advisors revenue also comes in there. Yes, and Advisors revenue in there. We have a number of information Services we have in there. So we have a number of other things in there. Okay. So overall that line could be growing at a faster than corporate pace? It depends, right? It depends how these businesses are basically developing and in the care and the feed that we put into these businesses. There are more of our newer businesses, but all of that is pretty much included in our net revenue Performance objectives target for the next 3 years. But for sure, if we can build our data and analytics business the right way that's example that's one of the items in other And that should get a better percentage growth rate than the traditional transaction based business in the beginning at least till it Because of a certain size and scale. It's getting to a decent number these days. And so it's all there. These are all it's all behind that other revenue line. Great. Hi, thanks. Given that I went off the track on this question, I think you all get a free one here. So other income and Spences, we have been saying for a number of quarters now that you should really expect that line to be trending into negative territory because really we have Some of our joint venture activity and the investments that we make in those joint ventures, one of which is for instance the Telefonica JV that We have in Latin America, the 2 of them that we have. So you should be seeing that line trending down over time Into negative territory until we obviously get the return of the investments. However, that trend has been masked This quarter, we had a couple of items in there that basically increased this line item and you saw it in positive territory. There were really 2 things. 1, we had some gains on some bonds that we There were really 2 things. 1, we had some gains on some bonds that we sold, so on the investment side. And 2, we Actually had some reversal of interest related to our FIN 48. So this is our tax reserve accruals that we do from time to time. But other than that when you pull those items out you really should again see that line item trending down. This reminds me of being in college when no matter what people ask me I Thank you. Our next question is from David Hoxton of Buckingham Research. Please go ahead. Hi. Thanks. Could you give us a little more color on what you're Spending incrementally in advertising and marketing, what where you're finding opportunities? What you're doing differently? Yes, sure, sure. Actually In addition to the core basis, you're doing a lot of things in A and M around changing the way our money was spent. So a fair amount of money has gone into Activation oriented spending that's why the Priceless Cities campaign started and it's being built out in our 26 plus cities And headed for more that costs us some money to create both the asset base in those cities, but also the actual marketing locally In those cities. And we keep building the asset base. So as I get an opportunity, I spend some money and put another city onto the map on the Praisa City area. That's one kind of thing. Another one is we're changing the way we spend our money with sponsorships. And so earlier we would pay a lot of that money to the organization that facilitated the sponsorship. We've got to change that to say let's spend the money on activation in that location. So if you were watching the Red Sox game over the last 2 days with the Cardinals, you would have seen Stand Up to Cancer coming up with us a couple of times in there. That's the kind of thing we're trying to do. We're trying to get exposure and benefits of that Exposure through partnering with the right kind of elements and partners. And then we're doing some money on traditional media advertising. You probably saw some advertising on our Acceptance Matters campaign, because we believe we have a competitive advantage there over other players in the commercial and T and E card So these are very targeted. They're all under the priceless umbrella, but executed based on opportunities we see at that time. Okay. Thanks. Okay. Operator, I think we have time for one last question. Okay. Our last question is from Tien Tsin Huang from JPMorgan. Please go ahead. Hi, good morning. I'll try and keep it quick. Just one clarification, one follow-up. Just on G and A, it was up a little bit. How much of that was driven by Hey, Cam. Martina, just trying to gauge how sustainable that level is. And then just as a follow-up, just thinking about M and A, I know you talked about that a little bit at the Investor Meeting, Looking at PayPal buying Braintree, does Mastercard need to own a gateway in the U. S? I've been thinking about that topic a lot. I thought I'd ask it on the call. Thanks. Okay. I'll take the first question on G and A. So when you actually look, you know that most of our G and A number is really related to investments in Investments and people. I mean, you look at the trajectory that we are in terms of hiring rates in the United States since December 31, 2012, we hired about 500 people at this point in time. So you are seeing that coming into and you should expect To see that coming into the Q4 too. So we're hiring Tingent across the world. I mean it's not just in the U. S. We're hiring in different parts of the world. We're hiring in London and Singapore and so on and so forth to kind of get our footprint improved, but also our technical and technological capacities. One little number that will give you a hint on that front is 4 years ago the millennials in our population were 4%. They're now 30% Of our population in our employment population. Not all caused by hiring. Part of it is caused by the acquisitions, Data cash and access at a different age profile, true access at a different age profile, but also by the hiring. And All the founders and hiring isn't incremental. Some of it is to replace the people who leave for various reasons. So it's kind of a mixed bag. But there's a lot of money that's going into the people, but there's a lot of money going into technology. So tokenization requires investment. It's a real technological platform that's been invested and sustained and will require investment for a little period of time to come. So there's a lot of that going on. As far as the Gateway question is concerned. You're absolutely right. I'd love to get into a bigger gateway position in the United The fact is we've got now that we feel comfortable with where we are with TeraCash and MiX. We had MiX earlier as you remember. We bought DataCash put them together. We've got that management team pretty well organized. They are doing a very good job of executing. They've entered into Latin America. They've entered into a few global merchants including some in the U. S. But there are lots of ways to get into that space. And One of those could be not just through buying gateway, but buying adjacent businesses that allow our gateway capability to connect well with that adjacent business To get a footprint into the U. S. And so we're working on a ton of those ideas. It's just one of them hasn't rectified yet and Haven't commented the value that I'd be happy to pay for some of the things that have got acquired by other people. Okay. Ajay? You want to keep going after that brilliant comment on MIPS? Okay. So So I'll review the few closing thoughts that go beyond MIPS. We are pleased with our solid Q3 results. We are as Martina We've used the opportunity to put some money back into A and M, but we're also continuing to invest in the most sustained way in the longer term aspects of our business. And she and I talked about this in some detail. She in particular at the Investor Day when she laid out the manner of which our investments were going. Those investments can be organic in areas such as the convergence of physical and digital or in areas like technology that support safety and security, But they can also be through acquisitions like Truaxess and Axess Prepaid and we recently announced Provost which hasn't got As you know approved yet, hopefully, we'll get all sorted out in the Q4 and we can talk about it after that. But these are only a few examples of many initiatives that We're into that hope we should drive long term growth and it connects back to the kind of question Tien Tsin just asked for how we're trying to grow. Our business continues to have strong momentum. We're focused on delivering another good year. And I just want to thank you for your support Through this entire period and thank you for joining us on today's call. Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.