Earnings Call: Q2 2013

Jul 31, 2013

Welcome to the Mastercard Second Quarter 2013 Earnings Conference Call. My name is Cliff, and I'll 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 Gasper, Head of Investor Relations. Ms. Gasper, you may begin. Thank you, Cliff. Good morning, everyone, and thank you for joining us for a discussion about our Q2 2013 With me on the call this morning are Ajay Banga, our President and Chief Executive Officer and Martina Houn Mejgan, 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 A session. 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 Web site, mastercard.com. Both the earnings release and the slide deck include reconciliations of any non GAAP measures to their GAAP equivalents. All of these documents have also been attached to an 8 ks that we filed with the SEC earlier this morning. A A replay of this call will be posted on our website for 1 week through August 7. Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward looking statements about Mastercard's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings. With that, I will now turn the call over to our CEO, Ajay Banga. Ajay? Good morning, everybody. We are very pleased to report EPS growth of 23% for the Q2. Our net revenue growth of 15%, Operating expenses grew 5% and we continue to execute on our global strategy and navigate through what we all know as a somewhat uncertain economic environment. So let's take a look first at the U. S. Consumer spending was up last quarter. Retail sales growth was better than expected. Housing indicators continue to show Signs of recovery are spending pulse data for the 2nd quarter showed that growth in U. S. Retail sales ex auto was 4%, That is over the same quarter of the prior year and that was up from 2.6% as the same number for the Q1. So contributing to the growth was a steady improvement in consumer confidence and some stabilization in the employment levels in the country. Our own U. S. Business Reflected these improving trends with 6% volume growth, up from last quarter's 4% growth. Moving on to Europe. The environment is somewhat similar to what we saw. Over the last several quarters, there are a few upbeat notes there. Economic trends were similar for the And for parts of Continental Europe, during the Q2 consumer confidence increased there, business sentiment It was a little weak in the Q2 there, although recent PMI surveys indicate that business sentiment now may also be turning up. In spite of those mixed economic signals, we're still seeing opportunities to expand our business and take advantage of that secular shift from cash to electronic and that shows up in our solid second quarter volume growth of 14% in Europe. In Asia, consumer spending in the 2nd quarter was on the rise. In the majority of markets, consumer confidence levels are doing well Across the region with key markets like Korea and Japan seeing marked improvements. Business sentiment across the region was mixed That's kind of due to the lingering concerns about the effect of the sluggish Chinese and European markets may have on the broader Asian export dependent Our business in the region however continues to do well. We had volume growth of 21% in Asia. Latin America consumer confidence in both Brazil and Mexico is somewhat challenged for all the reasons you read about and expectation GDP growth in Mexico have recently been lower. But we're still growing our volume in Latin America at almost 17%, but clearly We are watching the wider economic trend there very carefully. So before we go on to some recent business highlights, I thought I'd spend a minute on the legal Regulatory front and particularly with regard to the U. S. Merchant litigation, the merchant opt out period ended in late May. And as most of you already know, about 8,000 merchants Decided to opt out of the cash settlement. That represents just marginally over 25% of the total purchase volume over the settlement timeframe. The defendants as a group had the right to terminate the settlement agreement because the volume threshold of 25 The consent was exceeded, but elected not to do so. We expect most of the larger merchants who opted out will file separate actions To recover damages and many of them have already started to do so, the final approval hearing is scheduled to begin on September 12th. We remain confident that the settlement will be approved. We are also pleased that the Canadian Competition Tribunal Recently upheld our no surcharge on all cards and no discrimination rules in Canada. And in Europe, I know that Javier and Noah were on a call with most of you last Thursday to discuss the EC's proposed legislation. So I'm going to spend less Simon, that's what I do want to offer a couple of thoughts that are in my mind on the topic. We partner with governments around the world in many areas related to But there will be times when the interest of some of our stakeholders required us to raise concerns about This is one of those times. We support the European Commission's goal of a secure, efficient, competitive, innovative European payments industry. We believe that they've made a good start towards recognizing the importance of a level playing field. It also appears that there is actually potential To further open up and get competition in place for domestic processing. However, we remain concerned that some of the proposed legislation could have Unintended consequences of entering competition and innovation and we remain concerned that it could be harmful to And so in the upcoming debate as this legislation the proposed legislation winds their way through the process, We're going to engage with all participants in the process. We will try and ensure the best possible outcome in the best possible way. Finally, I want to reiterate Javier's confidence that our model, our business model will adapt as necessary to allow us to compete effectively and continue Innovative payment products and services that our customers want to offer, consumers want to use, merchants want to accept and that's where we are focused on. So moving from there on to some recent business activity. You will get a chance to see a lot of things at our Investor Day in September. So I'm going to focus our progress here around a few key themes and keep it short. During the quarter, we continued to sign new agreements supporting the expansion of our credit and debit business. That's the first theme, including the following examples. In Europe, Danske Bank, The largest bank in Denmark will be issuing Mastercard consumer debit, credit and commercial cards in 10 countries. And together with what we did with Swedbank and Nordea, the wins We expect to grow our total market share by 50% in the Nordic and Baltic region over the next 5 years. In Korea, We have 2 new debit card wins to help lock in our debit market leadership position. First is the Booli Card, a recent spin off So the card division of 1 of Korea's largest retail banks and they're now issuing platinum debit cards with us. We also recently signed an agreement with Hana SK that will further increase our dominant share of their debit portfolio. In the U. S, we continue to aggressively pursue All opportunities in the consumer credit and co brand space as they arise, pretty confident in showing regular progress as and when they come up and we can announce them. Moving to cross border, which as you know is an important part of our business, that's the second theme. Let me give you a flavor of some of our new travel and affluent programs around the world. In the U. K, our Access Prepaid business recently launched 4 new multi currency cash passport program, all of which are available online. One example is British Airways launching their Executive Club Cash Passport Card, which is capable of having up to 7 currencies loaded on the card. South Africa, Absa Bank, the Barclays Bank in South Africa launched the country's first reloadable prepaid Travel multi currency card. This allows for 4 currencies to be loaded onto the card. And one of the largest financial institutions in the Middle East, Riyadh Bank in Saudi Arabia, This launched a gold plated world elite card for their private banking clients and these benefits include everything from unlimited lounge access and our Cross border rewards program and the like. So 3rd team leading the transition to digital payments. They're focused on creating better shopping experiences more value for the merchant. And let me give you a couple of examples. 1st, Masterpass Digital Wallet. That rollout has now expanded to 4 countries. Canada launched this past quarter. The U. K. Is launching as you've read in the media as we speak. With the addition of web.com that's a provider of services for small businesses in the U. S. And Canada, this wallet is now accepted at more than 20,000 merchants globally. In Singapore, with the addition of Singtel's recent launch of their m Cash program, all 3 telcos in Singapore, Singtel, StarHub and M1 now have wallets Mastercard as the only open loop payment card option. Last theme, IPS, our issuer processing platform for debit ATM and prepaid. IPS enables our consumers and our customers rather to decrease their reliance on their legacy system, increase their ability to drive innovation, get to market quicker, Reducing some of that cost of complying with some of the increasingly complex regulatory requirements. In the U. S, KeyBanc, Huntington and USAA all recently completed conversions to IPS. Wells Fargo is completing a conversion later this year for a commercial prepaid offering. IPS also partners with Access Prepaid, which is our prepaid program manager to support global travel programs such as the Qantas Multi currency card, which I talked about last quarter. So just to give you a headline on this, in the last couple of years, We have increased our IPS customer base from 5 to 16. We are now in 23 countries and 17 languages. We can scale and we will scale and we will expand this platform. So now let me turn that call over to Martina for a detailed update on our financial results and operational metrics. Martina? Thanks, Ajay, and good morning, everyone. Let me begin on Page 3 of our slide deck, where you can see this quarter the as as well as the FX adjusted growth rates are essentially the same. As Ashish said, we are very pleased with our performance this quarter given the continued slow growth economic environment. Net revenue growth of 15% combined with operating Expense growth of 5% supported our net income growth of 19%. And EPS growth of 23 percent also benefited from our share repurchase programs. Cash flow from operations was $742,000,000 And we ended the quarter with cash, cash equivalents and other liquid investments of about $5,100,000,000 During the quarter, we repurchased almost 1,100,000 shares of Class A common stock at a cost of Approximately $580,000,000 Through July 25, we repurchased almost 300,000 shares at a cost of $174,000,000 and we now have $1,100,000,000 remaining under the current Board authorization. We will continue to look to repurchase shares on an opportunistic basis. So let me turn to Page 4 And here you can see the operational metrics for the Q2. Our worldwide gross dollar volume or GDV was up 13% On a local currency basis to just over $1,000,000,000,000 U. S. GDV grew 6% with credit volumes Growing 3% and U. S. Commercial credit growth was in the low teens similar to last quarter. Consumer credit growth was slightly positive, also an improvement from last quarter. Our U. S. Debit growth was 9%, driven by Higher growth across all of our consumer and commercial debit as well as CPA's program. And outside of the U. S, Volume growth was 17% on a local currency basis. This continues to be driven by APMEA with more than 20% growth and Solid 14% 17% growth in Europe and LSB respectively. 1st quarter volume Good 17% on a local currency basis, including more than 20% in LAC and APMEA And growth in the high teens in Europe. So turning to Page 5, process transactions grew over 11% globally. In the U. S, we saw growth of 5%, which was lower than last quarter as we anniversary our PIN debit Processing Wins. As you know, we are managing PIN debit transactions to optimize our revenue and our transaction level has remained about the same over the past several quarters. Outside Grew 20%. We saw increased growth in all regions with particular strength in Brazil, Russia, Australia, Netherlands and South Africa. Globally, the number of cards grew 8 Percent to $1,900,000,000 Mastercard and Maestro branded cards. Let me now turn to Page 6 with some insights on our revenue. Within our net revenue growth of 15%, gross revenue grew 12%, in line with volume and transaction drivers as well as some pricing. Rebates and incentives only increased by 2%. As you know, the rebates and incentive This line can move around on a quarter to quarter basis depending on the timing of deals. Specifically in the second quarter, We had two factors that contributed to this relatively low growth rate. 1st, some contracts were not yet signed by quarter close And second, we had some lumpiness due to the performance of a few contracts. Overall, these factors represented about 2.5 percentage of our total 15% net revenue growth. Similar to the prior quarter, growth in domestic assessment was again driven by Strong growth outside of the U. S, which comes at a lower yield. And the gap between the growth in cross border volume and revenue continued to be due to a higher mix of intra Europe activity, excluding the impact of pricing. So let's look at the components of total operating expenses, which you see on page 7. The increase G and A expense was primarily driven by the impact of higher compensation costs as a result of the increase in the number of employees compared to the same last year to the same time last year to support our growth initiatives. The slight increase in advertising and marketing expense was mainly due to the impact of new and renewed sponsorship. Turning to slide 8, let's discuss what we have seen for the Q3 through July 28. Globally, our cross border volumes grew about 15%, so that's just slightly below of what we saw in the 2nd quarter. And this was primarily driven by slower growth outside the U. S. Due to the timing of Ramadan. In the U. S, our processed volume grew 9%, up from our 2nd quarter growth due to improvements in both credit and debit. Process volume growth outside of the U. S. Grew 16%. That's about equal to what we saw in the 2nd quarter. And in particular, our European process volume growth was in the mid teens, very similar to what we saw in the Q2. Globally, Process transaction growth was 14%, so up from the 11% that we saw in the 2nd quarter, driven by higher growth in the U. S. For bulk credit and debit. Looking forward, Let me start with our long term performance objectives, which have not changed. We remain confident that our business can deliver an 11% to 14% Net revenue CAGR and at least 20% EPS CAGR over the 2013 to 2015 period. And these growth rates are on a constant currency basis and they exclude any new acquisitions. We also remain committed to our annual operating margin target of at least 50%. However, assuming that the economic environment remains similar To where it is today, we now expect that net revenue and EPS growth in the early part Of this 3 year period will likely be at the low end of our stated ranges for net revenue growth and EPS growth and that is Slightly better than we previously anticipated. Now I'd like to share with you a few specific thoughts about 2013. So given our stronger than expected 2nd quarter net revenue growth and what we see for rebates and For the balance of the year, we now believe that second half net revenue growth will be similar to what we saw in the first half. We continue to anticipate total 2013 operating expenses to grow a bit below The 8% currency adjusted growth rate that we saw in 2012 as we continue to spend on the right things to support our growth initiatives while keeping an eye on more discretionary spending. We also continue to foresee some operating margin expansion in 2013. The amount of any improvement as you know would depend on both Top line growth and the investment opportunities that may surface during the year. And for your modeling purposes, we now think that you could see a full year tax rate of about 31%. With respect to FX, If rates remain the same as they are today, so that is the euro continues to trade at the 1.33 level And the Brazilian real at the 2.26 level for the rest of the year, the impact of the euro and the real will essentially set each other for full year 2013. So now let me turn the call back to Barbara to begin the Q and A session. Barbara? Thanks, Martina. We're now ready to begin the Q and A period. In order to get to as many people as possible, we ask that you limit yourself to a single question and And then 2 back in for additional questions. Operator? Thank you. We'll now begin the question and answer session. Our first question comes from Craig Maurer from CLSA. You may go ahead. Yes. Good morning. I wanted to ask a follow-up to the European discussion. In terms of EU Assessment revenue, what percentage of that is earned on a per volume on a volume basis Which is a card licensing basis as it would seem that there might be some rules preventing you from assessing on transactions where your scheme was not used to process even though your brand was present? Hey, Greg, it's Martina. I think I'll I'll take that question. So what 1st of all, what I presume that you're actually asking about Article 8 on co badging And the HD proposed legislation, right? So, look, we obviously know the number when you just strictly look at volume based assessment fees That we earn in Europe on domestic transactions that we do not process. And by the way, it's not material to our overall Mastercard Card numbers. But I'm a little bit reluctant to put out this number here at this point in time and really for a couple of reasons. 1, this is one of the sections of the proposal where the language is actually unclear. And second, There are a number of puts and takes in the entire legislation, which makes it fairly difficult for us at this point to estimate what Part of this revenue figure might actually be subject to this potential provision. It all is basically Wrapped up in terms of for us being difficult to understand the intent of this co patching provision. So imagine, When an issuer elects to put our brand on a card, they must have a reason for doing so, presumably because Their consumer recognizes and values of our brand and therefore uses his or her card with the Mastercard brand on it. That brings value to our stakeholders in the system. Of course, we are not going to provide our brands for free and we don't believe that that could be the intention of the EC. On the other hand, there are also some other provisions in the proposal, which could as you know allow for more competition in domestic processing, which we would certainly welcome. So once we get more From the EC, we think that we still have quite a bit of work to do, get our hands around the provision and how that could impact us Thank you. Our next question comes from Sanjay Stephane from KBW. You may go ahead. Thank you. I guess I had a question about the rebates and incentives line. It looks like there was some kind of restatement as well. It was about $21,000,000 or so for last year's number. I was wondering if Martina, you could just talk about that a little bit. And then just as far as your the assumption going forward on rebates, should we expect that those levels remain fairly low consistent with the Q2? Sanjay, so let me take the first one, which is really a reclassification. So we had some of our adviser services both reflected in the Gross revenue line and in the contra line, all we did is we collapsed them in the gross revenue line. So from a net revenue point of view, there's absolutely no difference. And all we did is we reclassed the numbers to And all we did is we reclassed the numbers to 2012, so that as the accounting change came in On January of 2013, you were looking at apples to apples, okay? So that's on the reclass. In terms of the rebates and incentives, what you saw in Q2 With really a much lower growth rate on the rebates and incentives than we would normally see, right? And I said there are 2 factors. One is, we didn't get to sign all of the Contracts that we thought we would sign by the end of the quarter, that those contracts will be showing up either in the Q3 or in the Q4. So you cannot assume this level of rebates incentives going forward. It will go back to our what you normally see with the lumpiness. This is a little bit more lumpy of course in the Q2 than we normally have. And then secondly, I think I did explain that we had a couple Full of performances on the number of contracts where we paid out lower incentives than otherwise anticipated. So do not take This increase in rebates in the centers for Q2 and apply it for the rest of the year, You really need to go back to my comments where I said that net revenues for the second half of the year will probably come in similar to what we saw in the first half of the year and that bakes in our assumptions on rebates and incentives. Perfect. Thank you. Our next question comes from Jason Kupferberg from Jefferies. You may go ahead. Thanks, guys. So just wanted to ask on the revenue side of things. It looks like both the purchase volume yield on domestic Assessments as well as the revenue per process transaction or I should say the TP revs per process transaction were both Down year over year, I think on the purchase volume yield on the domestic assessments, it was the lowest we've seen in a while. And on the transaction processing, revs per Process transaction, it was down year over year in Q2, I think almost as much as in Q1 despite the Durbin routing dynamics anniversarying. Can you just Comment on those metrics if there were any anomalies in those numbers or how we might think about them for the second half? Yes, Jason. First of all, this trend We had now for a number of quarters. First of all, let's talk about the domestic assessment, right? What we have, we have particular growth coming In terms of jurisdictions outside of the United States, often enough we have to obviously compete with what's going on from a domestic pricing point of So where we have the growth, they do come at a lower yield. That's number 1. Number 2, you also see when you look at our 6 that we put out that we have a relatively larger growth on cash transactions in those jurisdictions Versus POS transactions and those do impact the yield too. So by the way, this is nothing different. As we're going to grow in those kind of Continuing. From a transaction point of view, I think I said something as part of the transaction volume that we're seeing. We saw particular growth in Brazil, in Russia, in actually Poland, Netherlands still, some Australia And those actually do drive also that differential between what you see on transaction growth versus what you see from Exacton Hill's point of view. Again, nothing different than what we had before. Jason, it's Ajay. Just think about all the what I'll add to that first part of the question. Think about things like what we're doing in Nigeria and South Africa with social security What tends to happen is the consumer who gets an electronic card for the first time tends to in the beginning go even more for cash than the average consumer in our portfolio. So if we keep doing this well and we keep trying to intervene in the cash flow Between governments and consumers, which is a large part of where the cash comes from, you will first find them going to cash. Then all the efforts kick in around what we call the Five step program to take people from using cash at an ATM to eventually going more and more to delivering at a point of sale and that five That program takes certain number of years and a certain set of events to happen. So we're going to see this build and develop. I mean that's an important part Of the nature of what we're trying to drive. All right. So it's a mix shift during the transition. Okay. Thanks. Yeah, absolutely. And Jason, it's not even a transition that will happen in a year or 2. This thing You can imagine with 85% of the world's transaction in cash, there's a whole game to be played out here. So you're going to get This mix of cash and POS and then in some countries the POS picks up and others cash remains strong and it takes a certain time for that mix to go the right way. Okay. Understood. Thank you. Welcome. Our next question comes from Moshe Orenbuch from Credit Suisse. You may go ahead. Great. Thanks. I guess as we sort of kind of discussed on previous calls, U. S. Credit, you had said was Slightly positive and slightly better than the Q1, but obviously the Q1 was a weak quarter because of the comparison. And it seems like it kind of accelerated somewhat less even than kind of What you had cited as overall retail spending and as your debit spending, we've seen a little bit of success in what you've done with Bank of America on the credit side. Anything else that you can Got a point to in terms of strategies and tactics? And can you also give us an update on the American Airlines contract? So no update on American Airlines because it ain't anywhere where I can tell you anything about it. And if I knew anything you can appreciate, I wouldn't tell you on a call like this. So that one won't happen. The just we're in negotiations with them as is everybody else. So there's a lot going on there, but we're all in negotiation. The first part, nothing's changed. We know that U. S. Consumer credit is what we have to work on. We've got a series of things that we've been doing over the last period of time to try and improve the trajectory of our U. S. Consumer credit spend growth. Some of it is caused by deals we are winning, whether it be All the things we've announced over time. You talked to Bank of America doing things with us. So there's a series of other deals from Bass Pro and Intercontinental Hotel Group to other banks like KeyBanc and stuff we've done with Huntington and SunTrust and All that that's going on, but all those things take a certain time to begin accumulating in the book just as losses Take a certain time to reflect in the book as you know in the past. So we're kind of working our way through it. There's a number of Opportunities around co branding. There's a number of opportunities around things like we're doing with Bank of America where it's not wholesale flips, but it's the opportunity to work together in That's the carriers that we are working with. Some of those deals couldn't get enough because they weren't signed. Some of those got signed. And so That's one of the lumpiness in our numbers in Q2. So stuff's going on. And we will have ups and downs as we go along. But we've got a Pretty clear pathway to working on both co brands and the effort to win business with banks our currently higher market share with other competitors that's the work. The third aspect is that the nature of our book and its performance depends a little bit on the nature of our customers' book and their performance. And as the banking industry More and more of the banking industry comes back to a more normal keel on the credit book as the economy improves. I think we The net beneficiary of that as well. I don't think that showed up adequately as yet in our book. So we've kind of got these three things going on. Great. Thanks very much. Our next question comes from Darrin Peller from Barclays. You may go ahead. Thanks guys. You beat across A number of metrics clearly in the quarter including incentives and also your cross border yield came pretty strong. When you say you now raised expectations obviously versus the low end of Or to the low end of your range versus obviously the early years being below that previously. Can you just give us a sense specifically which metrics are coming in now Better than you initially anticipated at the beginning of the year to drive that. And then maybe more specifically on cross border, second part of the question, the volume growth of 17% versus Revenues of 20%, how much of that is actually pricing versus mix just because we want to especially since we've seen volume growth exceeding revenue growth over the last several quarters? Thanks a lot. So Darrin on the metrics, first of all, what we're seeing is that from a domestic volume point of view, we see Improvements in a number of regions versus what we have seen before. Just see what's going on in the U. S. Even though we would still think this is a Pretty slow growth environment. It is feeling a little bit better than earlier this year and certainly than late last year. Look at all of the press that is coming out of Europe, it's starting to feel better. In fact, all of our European countries grew That was Spain. Spain, there's a little bit of an issue, but you read the recent articles, it seems like that even that Countries start to feel a little bit better going forward. So I think we're just seeing a little bit of More robustness coming in than what we assumed before. In terms of your question on the cross border volume versus the revenue side. So what you really have to contrast is, our cross border volumes grew 17% And you saw that our revenues grew 19%. Really what we have in there is we had this quarter The U. S. Acquirer support fee coming in, that's the Q1 that is coming in. It will be with us for another 3 quarters. That reflects about 8 percentage points of that 20 percent of that 19%. So if you take that out, you compare 11 revenue growth to the 17% volume and that difference that 6 percentage points difference is exactly what we had For in all of our prior quarters in terms of what's happening from the intra Europe mix On cross border versus inter Europe mix. Remember inter Europe mix comes at a lower yield than inter. And so that's again nothing new Continuing trend and that's what we're seeing. So the only thing I'd add to that Darren is that, remember I've been saying for a while that I expected the second half in the U. S. To To be better than the first half. I've said that now for 3 quarters. I still believe that. The difference is The Q2 came in better in U. S. Spending than we thought it would when we first made that statement. So what's happening is A little bit of that improvement that we thought we'd get in the U. S. In the second half feels like it's come a couple of months before What we had already factored in for our thinking when we spoke to you about our estimates of how this year would go some time back. That little extra is what you're seeing us show up in the second quarter results, one of the things that's driving it. There's lots of others. There's cross border. There's stuff in other countries and all that. But the U. S. Is at the end of the day 40% of our revenue Give or take. And so that number still drives a change in what we think. And that's kind of an important part of the context. Thanks. Our next question comes from Smriti Srivatharaman from Morgan Stanley. You may go ahead. Yes. Hi. I was wondering if you can give us an update on what you expect to see happen in China. Our understanding was that the government over there was supposed to Respond to the WTO buyout actually today? Yes. So I think the way they're looking at it by census that they are supposed to clarify certain But their actual policy, I think they believe they still have a month or 2 to respond in. So we're kind of waiting for that to come out there, periodically talking to us as well as other players and clarifying that they have certain thoughts around how to open up. But in truth, we don't have enough of a Sure. To be able to give you a better answer. Just with that talking to them all the time and they're working their way through their thoughts. Got it. And maybe just a quick question. Anything else? Life carries on. There's the global issuance of Co branded cards going on. And as I've been telling you, we've been winning most of those deals. We're still in that same position. We just got a couple of approvals for co branded cards there. We've issued those. Work has started on those. You had the deals Alibaba that's kind of moving in the direction We wanted it to go. We've had that whole report about 1 cross border e commerce kind of player who used to do clearing In renminbi in Hong Kong, which the PBOC felt was not quite within what they want to do going forward, that one's held up. But everything else is carrying on. So China is going along where it is today, but everybody is waiting for the new policy. Operator, next question please. Our next question comes from Chris Brender from Stifel. You may go ahead. Hi, thanks. Good morning. Can you talk about I know you've hit this a lot on process transaction growth and transaction growth. But the numbers in Europe particularly look really strong, especially on a core basis accelerating sequentially. Is that macro or are you still seeing the benefits of deals like the Netherlands and Italy? And Are there new deals that you potentially are signing in Europe? Just the European transaction and core numbers look very strong. And just one additional question, if I could. I just Bloomberg headline about a judge rejecting the debit fee regulation from the Fed? Any color there would be helpful. Thanks. So the Bloomberg headlines, we're talking to you. So we don't have access to Bloomberg terminals yet. So I have no idea what that one's about. Noah, do you know anything about it? Don't know about it. Separate conversation. The Europe one, the best way to answer is both. You are getting some improvement in macro, but we continue as we've been telling you In our conversations, we've continued to win deals and win share both with institutions in Europe, but also remember, we continue to get some transactions There are different places as the SEPA migration allows us to win some domestic processing across the countries In Europe. Yes. Let me just add something to that Chris because Javier actually mentioned at last Thursday's conference call that we process well below 50% of the POS transactions done on our cards in the EEA. And Actually when you put all the numbers properly together and it's actually just below 40%. And by the way, if you include both POS and cash transactions, We only process about 25% of the transactions done on our card. And so that's why we're saying there's just absolutely plenty of opportunity for As to compete in domestic processing, we've done that over the last 4 or 5 years as Cepe came in. And hopefully with some Of the changes in the regulation, we might be able to do even more there. RJ, can I just ask real quickly your thoughts on whether or not The regulation in Europe would slow the progress on Mastercard's ability to gain processing share or somehow increase it? Or is it about the same? So what Martino was saying just would indicate that I don't believe it's going to slow it And that's kind of where we both are. We've kind of as you can imagine, we've had a fair series of discussions in the company around this. The fact is that until everything becomes really clear, until it goes through the next it could take a year, it could take 2 years for this to become really implemented. So I don't know how to answer that any better because that's just the way the European legislative process will work. In the meantime, We're counting on winning domestic processing business because there's so much space for us to win in. We were a very small portion of domestic processing still a few years ago. Excellent. Thank you. Thanks a lot. Our next question comes from Glenn Fodor from Autonomous Research. You may go ahead. Hi, good morning. Thanks for taking my question. Just wanted to dig into your financial goals just a little I mean, you made it very clear you're aggressively focusing on energizing the U. S. Credit portfolio, but that takes time, investment and obviously incentives. So can you just give a sense of how much improvement here such as new customer wins and such you have baked into these 3 year financial goals. Look, Glenn, you just have to go back to what we have put up at the last Investor Day. There's this one chart which clearly shows you the 3 drivers of our growth, right? One is PCE growth, right? And We assume 4% to 5% per year on average over long term. The second one is the secular growth, which is basically the Conversion from cash to check to electronic forms of payment, that's the 4% to 6% per annum And then in addition to that, you saw our 2, 3, 4 percentage points on top of it in terms of strategic investments. And strategic investments actually includes a number of things. It includes things that Actually includes a number of things. It includes things that we're doing in the digital space. It includes things that we might be doing from a market share Point of view. Those are all of the things that were baked in and that's out there and we haven't changed our view on that in one Iota. Okay. Thanks, Martina. Our next question comes from Brian Ken from Deutsche Bank. You may go ahead. Hi, guys. Most of my questions have been And answered, but just curious going back to the big news of last quarter around this Beast Chased deal. Has there been any new perspective you guys have gotten from other bank participants and how you guys are thinking about that Chip as with other potential banks how Mastercard works with that's kind of question A. And then question B, Still curious to know if you guys have any idea if Chase is going to move some volume off of Mastercard over to Visa as a result of this deal? Thanks. Hey, Brian. So, boy, I wonder what the other questions were. So, the first one, Visa Chase, no, Nothing new. There's actually the same series of conversations that are going on. A number of the other banks are obviously concerned about what this means longer term, but everybody's Waiting and watching to see how this gets implemented. And within those dialogues, a number of them, it does help To help open doors for us without a doubt. But beyond that, I've got no new perspective for you there. Will Chase move volume over to Visa? I mean, we've Forgot volume coming to us from Chase, the InterContinental Hotel Group co brand is a Chase co brand, which we just won. So will they move volume? I'm assuming they would move some, but I'm not sort of inside of Chase discussing this. But as being a banker in my previous slide, I would still like to keep those open with more than one network because it suits me when I'm a banker. Does that mean that The shares will not change and the proportions will not change. I would assume that the proportions will move towards the one you've chosen to put more investment with. And so I actually believe that to be the case. I just don't know actually what they'll do. Okay. Helpful. Thanks Thank you so much. Our next question comes from Julio Quinteros from Goldman Sachs. You may go ahead. Great. Hey, Ajay, when we were in at the last Investor Day together, you had mentioned that once you show us a margin above 55%, it was it's going to be hard to go backwards. We're running 2 quarters into the year at north of 58%. The full year guidance is just something around I mean, what's the delta there for the rest of the year as you guys think about the margin profile? And why should your margin step back here from the sort of 58% level or so? Yes. Good question. It does I don't think it's going to go back to $50,000,000 We never said $50,000,000 is the guidance. We just said A minimum of 50. I kind of as I told you, I did that when I came in because I found that at that time we were out there saying we're going to continuously increase our by a few hundred basis points every year. And I didn't feel that was a strategic goal for the company compared to growing our franchise, growing our revenue And converting cash, I just thought that's a much better way of thinking about what the company is trying to do than Trying to put a margin growth target, but you already have a relatively attractive margin in the company. Having said that, our margins tend To be a little variable by quarter. So the fact that we've got 58 right now from what I recollect normally the 4th quarter has a relatively low margin. And I think that's Been the case for the 3 or 4 I've been here 4 years now. It's been the case for these 3 or 4 years that I've seen it. So I think the annual margin tends to settle at a different number, Predictedly since the Q4 also is a relatively large quarter in many other ways. So I don't know that you would assume that 58 is there with 6. I just I would tell you this. We're very focused on not putting away money just because the margin is higher. We're also focused, as I said, on taking away pricing as the only way to grow, although as I've said many times, We work on many lines of pricing every quarter and the results show up. This quarter, there is a certain amount of pricing. This pricing will give us some benefit for a couple of more quarters to We tinker around with pricing every quarter. There are thousands of lines in 200 countries and that's a fair Opportunity. So will it be a high increase in pricing, low increase in pricing? Remember this, I'm not into pricing As a way to grow revenue. I mean, we're trying to fight that 85%. But we will do what we can at the right time With pricing and margin. So I still stick around to that 50% minimum. That's to reassure investors that we're not going to throw the money away. But I'm not going to give you an estimate that it will go down or up just because we have quarterly variances. All we have to do is put some more money into a series of investments and we'll take a couple of quarters where the margin will be lower than it is today. It will still be for the year above 50. That, I promise. Got it. Great. Thank you. Our next question comes from Rod Bourgeois from Steen, you may go ahead. Yes. And so I guess on a related note on the margin front, I mean it's encouraging to hear that macro is starting to Prove some in certain parts of your business, particularly in the U. S. And maybe even some early signs in Europe. Does that at all change your view on margins going Forward. In other words, in years where the revenue growth is weak, you seem to give some margin expansion to help with the earnings growth. But if the macro continues to get better, how does that affect the outlook on the margin front? Hey, Rod, let me just jump in here. First of all, we are not running the business based on a particular margin. As Ajay just said, we put a margin minimum in place to make absolutely ensure that our investors understand That we look at every investment that we do in the company critically and that we do it in such a way that we get returns from it. That's how we look at investments. And really how we run the company is looking at these investments, Making these investments every year, every quarter as we see fit and we think that based on our current business trajectory, 3, the way it's the business that we have today that we will be at a minimum 50% margin. We do not run the mix business for margin An expansion per se. That cuts across whether the economy is doing better or worse and that's not what we're doing. And So I wouldn't assume any change based on the U. S. Economy looking better or not better. Nothing changed in And just to clarify on that, does that mean as we move into 2014, your view on margins is still Sort of keeping margins in the around 50% range? Absolutely, Rod. Our annual operating margin minimum That we put out for 3 years is 50% and it's the minimum. That doesn't mean that it couldn't go higher because and then mostly because of revenue growth, But it's a combination of where the revenue growth comes in and the investments we decide to make in the company. Understood. And then on the pricing front, I mean, you mentioned that pricing was somewhat of a benefit. Can you quantify, was it sort of 1% benefit? No, no, Raj. It was 4% in total on the revenue line. 4% in total. And then that benefit, Does it taper off in the next couple of quarters? So there are a couple of pricing in there. 1 I already mentioned, which was the U. S. Acquiring Support TV just started this quarter. That's going to be with us for the next three quarters and that was probably about half Of the price changes. And then we had a couple of other small ones. 1 anniversaried this quarter, which is the acquirer license fee, which we have talked And then there's a very small one which you know that we've been starting to put through which is pricing related to the digital wallet operators. But we're talking about small numbers going forward. Operator, next question please. Our next question comes from Bill Karkash from Nomura Securities. You may go ahead. Thanks. Good morning. Ajay, I was hoping you could give us a sense of whether in your conversations you see any indication of Certain groups in the industry moving closer to thinking of debit as just being debit with the distinction between pin and signature just not being as important, for example, like in your discussions with issuers Given that their economics are identical for both now or do you see the distinction continuing to be drawn? And then I guess for the industry as a whole, I guess Ex market share shifts, do you have a sense for whether there has been any kind of a notable shift in the mix of signature versus pin transactions post all of the Durbin regulation? Both great questions, Doug. So the second one, so what about industry as a whole? Has there been a move from signature to PIN? Actually not identifiably so. Has there been a move from debit to credit? Not identifiably Do people talk about in the banking industry and in the merchants business, do they talk about expecting changes? Yes. But it's been about a year now and it hasn't really delivered great change. And I think finally, it's not about the bank and the merchant. It's about the consumer and what they want I think the consumer is unimpacted by this dialogue in most ways other than seeing indirect impact caused by an increase in checking fees or a drop in free checking accounts and so on. They don't in their minds necessarily connect one to the other. And I think they're still behaving the way they choose to behave, which is to use their debit when they want and their credit when they want. They have impacted more My overall trends in the economy. So I think as the U. S. Economy continues to recover, generate jobs and the like, You would probably see an increase in credit spending that may be faster than debit. But That still is out there to be seen. That's the fast cycles I'm talking about. So I'd say nothing much right now. Okay. That's really helpful, Ajay. If I may one last follow-up here. Can you comment on the ISIS announcement of its national rollout? And we've seen a number of reports suggesting that the rollout of NFC is just pretty unexciting, but can you share your thoughts on the growth outlook for NFC as you see it over the course of the next say 12 to 18 months. Thanks. NSP to me has opportunities because it is a technology that is applicable not just to payments, but also delivering Things around security and things around loyalty and so on and so forth. I think anything that goes beyond just payment to the whole shopping experience, So the whole consumer experience, so the merchants experience is an important aspect in the upcoming transition That's going on between physical and digital, right? That's how I think about it. I don't think these are 12 18 month things Bill because Just think of the ecosystem and the infrastructure that needs to be built for any of these to happen. And so I tend to look at it as a longer So, Matt, what and I think that most people would say if you look at contactless payments in Australia as an example, I was looking at data the other day that something like 25% or 30% of all transactions in Australia under AUST one hundred dollars Comes out of contact. That's a big number compared to where they used to be 2 years ago. Now will it go even higher? Probably. Will it take years to happen? Probably. So some countries like Australia, Canada and Turkey are further ahead in NFT than others. So it's kind of a you run a business with so many Countries, it's a mixed bag and it's tough to generalize across all of them. But in general, I think NSP has got opportunity. I'm not sure that I can tell it to you in February 18. Thank you very much. Appreciate it. Our next question comes from David Hodgson from Buckingham Research. You may go ahead. Yes, thanks. I wonder could you give us an update on your joint venture with Telefonica in Latin America and sort of what's And what you've learned so far? Sure. So we've got remember we've got 2 different JVs JVs with them, right? We've got the one that's in 12 countries excluding Brazil, what we call Wanda. And then we've got Zoom, which is in Brazil. That's because of the way Telefonica was constructed When these JVs were signed. So in the first one, Argentina was the first one to go out and they actually used the mobile wallet that exists In the joint venture, we have the Smart Telecom in the Philippines called MPS. So that's the first one out there. The second one Zoom and just launched in April actually, I think just Around the time of our Q1 earnings call or just after or just before I'm kind of forgetting that's the 1st mobile program in the region That is a Mastercard prepaid companion card in addition to the mobile wallet. So 2 different kinds of flavors. My sense is The concept of having a prepaid card as a companion card attached to the mobile payment would probably drive this faster than just the mobile payment by itself Only because of to my answer to Bill's question, building ecosystems around new things takes time. The card acceptance system, Even if it's not completely built out in Brazil, it's way more built out than a mobile only payment system. So that's the first learning we've got. And I think we've got a lot of learnings about working with Telefonica. We've now actually in the I don't know last 3, 4 months, I forget when, we've launched 2 more initiatives with them, Both in Europe, I think there's something in the Czech Republic and there's something with them in Germany that we are doing. So the relationship has expanded a little But beyond the original construct in Latin America. Okay. Thanks. Operator, next question please. Our next question comes from Tom McRahon from Janney. You may go ahead. Hi, Ajay. Most of the questions in the quarter are answered. I'll ask a bigger picture Question. When you joined Mastercard 3 years ago, you talked a lot about innovation and the importance of that. And I was wondering if there's any way you can kind of speak to kind of how you're tracking to creating that culture in terms of Financials like how much of your revenue for example, revenue growth the last few years was a function of new product introductions or new innovations? And as you look forward into your kind of 3 year financial outlook, how much of that is going to be how much of the growth is going to be attributable to some sort of innovations that Mastercard is developing today? So we haven't put out a measure of an innovation index, which is kind of what you're referring And but as Martina just explained in an answer to Rob a little while ago, if you think about our 3 year projection on revenue growth, Those 2, 3, 4 percentage points at the end that she was talking about are from innovation in new products, from things like data analytics, which to me is a relatively new product all the way to changes in market share and growth, whether it be U. S. Credit or frankly U. S. Debit or all the Things we're doing overseas as well. So you can see it in that ballpark in that block of 2%, 3%, 4%. My whole attempt around innovation was to change the way we went to market, so that we didn't just sell Credit, debit, prepaid and commercial, what we look at diversifying that growth from the core products both in terms The geography and in terms of the kind of clients we worked with. So there you can see 30 odd deals with mobile telecom operators In the last few years, we had none 3 or 4 years ago. In fact, the dialogue used to be how they wouldn't need the banks and the networks To be able to grow, I think that demonstrates clearly that we have been able to show that our product set and technology adapted to mobile payments can work with them. I just I was talking about Telefonica. So there are examples like that in a number of others. I talked about Singtel and the other telcos in my call as well. So that's the first part. The second part around innovation has to do with mobile payments, e commerce and the whole Of Information Services, we're making a lot of progress in all three. Mobile, I just talked about. We've done a lot of work in Information Services and Data analytics. So that's where we are. I don't have the innovation index that I'm going to give you publicly because the issue is what's a new product? In a consumer product company, you can evaluate it in different ways. What's a new product for us? Is a credit card with a new set of features a new product? For a new product only that which comes in a new delivery channel. And then we'll get into endless discussions about that. I'm much more focused on measuring our ability to generate new ideas in the company through solution based selling to our clients and see the impact on our brand. And our brand has gone from being number 87 in the brand index evaluated by clients We're number 20 in 4 years and we spent about the same or a little less money than we used to. That's all part. If you look at that brand index, It talks about innovation as being a big driver of the change. So that's kind of how I measure it right now. Maybe a few years down the road, Martina will actually allow me to talk about an innovation index and I'll let you deal with her on that one. Thank you. Okay. Operator, I think we have time for one last question. Our final question comes from Tien Tsin Huang from JPMorgan. You may go ahead. Hi, thanks. Good morning. Just good quarter. Just want to ask a couple of follow ups. Just I guess on product innovation In the Visa's Investor Day, they talked about, I was trying to look up the number, something like $300,000,000 in the last 2 years in product innovation. I'm curious, how does that compare roughly to what Mastercard Spend and Product Innovation. And then my follow-up was just I just wanted to clarify for Martina. The other line was a little bit better than we had modeled. Does that Capture the pricing you referred to beyond the cross border change? So, Tien Tsin, let me just take other revenues first. So in other revenues, actually what you're seeing showing up is some really nice growth in our Access prepaid business as well as in our Advisors business. And Ajay already talked about some of the proof points such as in Australia, etcetera that we're doing with both of those businesses. In addition to a couple of the price increases that I talked about which are reflected in other revenues. The first part Tien Tsin, I don't know How Charlie measured the numbers. I haven't had a chance to understand what's inside that number. I kind Investor Day is not that far away. So we'll chat with you then on that topic. But the issue is what's inside of it as answering to the earlier Question makes all the difference. So for example, all the work we're doing on fraud tools is that innovation in a sense It probably is because it's developing entire new forms of technology. All the work we're doing on tokenization Is that innovation? Probably is if it delivers a new way of dealing with safety. All the work we're doing with True Access To drive merchant funded loyalty programs around the world is that innovation and R and D probably. We've got Mastercard Labs. So we've got different portions Delivering this answer, I actually don't look at it that way. I look at it as I said in the earlier question of funding this in many different ways, But most importantly, in changing the way we talk to merchants and banks and governments about relating with them in a more solution based selling way. So the example with Nigeria where they were trying to do an ID scheme, which ended up being not just that, but also a payment scheme with a card that's two sided with a We spent money on that. It's that innovation. We spent money on biometric identification for the UID in India. So I don't want to get into I've Counted this and not counted that and create some new metrics that everybody will try and track. But you should know that there are a ton of people in this company Whose only job is if they want to come to work on January 1, 2014, they better have new Yes. Or there won't be enough. That I can promise. Okay. Ajay, you have some closing comments? I do. Okay. After all that, okay. So how do I think about this? We delivered pretty solid results for the first half of this year, Driven off as we've talked about a little bit volume and transaction growth around the world. And worldwide GDP crossed the 1 $1,000,000,000,000 level for the first time in the second quarter. And when Martina was reading that out, I was looking at that as a milestone in some ways, but on to the next $1,000,000,000,000 already. And our first half net revenue growth was a bit better than we forecasted for all the reasons we talked about. We remain confident about this 3 year objective that we've got out there. And we're working hard to deliver on another good year in spite of what I consider to be somewhat unpredictable economic conditions. And my view is that the secular trends in our industry are just of great interest to me. They are strong drivers for top line growth even in slower economic environments. So I'm looking forward to seeing many of you at Investor Day in September. I think you'll get a chance You'll experience what you've done for the last couple of years, some of our innovative products and services. We've got some really cool ones lined up for you this year. So hopefully that will be fun. In the meantime, thank you for your support and thank you for being on the call with us today. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. 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