Earnings Call: Q4 2010

Feb 3, 2011

Ladies and gentlemen, welcome to the Mastercard's 4th Quarter and Full Year 20 10 Earnings Conference Call. My name is Eric. I'll be your audio As a reminder, the is being recorded for replay purposes. I would now like to turn your presentation over to Barbara Gasper, Head of Investor Relations. Please proceed. Thank you, Eric. Good morning and thank you all for joining us today either by phone or webcast for a discussion about our Q4 and full year results. With me on the call today are Ajay Banga, our President and Chief Executive Officer and Martino our Chief Financial Officer. Following comments from Ajay and Martina, highlighting some key points about the business and our financial results, we will open up the call for 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 and slide deck have also been attached to an 8 ks that we filed with the SEC earlier today. A dial in replay of this call will be available for 1 week through February 10, as well posted on our website for 30 days. Finally, as set forth in more detail in today's earnings release, I need to remind everyone that by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release well as contained in our recent SEC filings. With that, I'd now like to turn the call over to our President and CEO, Ajay Banga. Ajay? Thank you, Barbara. Good morning, everybody. Before Martina gets into the details of the results, I thought I'd comment on some operational drivers for the quarter. A little bit on our thoughts on the U. S. Regulatory front as well as our recent business highlights. So the 4th quarter, We saw net revenue growth of 10.7 percent as reported or 13% in a constant currency basis. We healthy growth in gross dollar volume of 11%, cross border volume grew 18.7%. All that put together helped to fuel 4th quarter operating income growth of nearly 22% and operating margin of 39.6% and EPS growth of 41%. For the full year 2010, we delivered 8.6% revenue growth or 9 0.5% on a constant currency basis, operating income growth of almost 22% and EPS growth of 26%. This is driven by strong operational performance, including 9.1% gross volume growth and 15.2 percent cross border volume growth. Now volume growth for the quarter remained strong side of the U. S. And we began to see an uptick in the U. S. As well, where 4th quarter volume turned positive. And this is supported by commercial credit volume growth, which was positive for the 3rd consecutive quarter and consumer credit volume growth in the United States, which turned positive for the first time in 11 quarters. Additionally, excluding the deconversions, by our spending pulse data as well, spending on necessities such as groceries was actually above free recessionary levels. And Restoring spending, apparel, restaurants showed an improvement, although spending in these categories still is below pre recessionary levels. Based on the spending trends we've seen and the improving consumer confidence, I think I'm cautiously that we will see continued improvements in 2011. It's just that it's hard to see sustained growth until the housing market unemployment improved. So let me now go on to the U. S. Regulatory update and touch briefly on that for the legal and regulatory developments here in the U. S. As you probably just seen, we just filed an 8 ks to announce that we have executed a judgment and settlement arrangement in connection with our merchant interchange litigation. While this is not a settlement, it does address the allocation of financial responsibilities among all the defendants. And the 8 ks sets forth in some detail, the various permutations in settlement and judgment scenarios and in a situation where all parties agree to Mastercard's portion of the total settlement would be 12%. So now Turning to the financial reform bill, suffice it to say that we were disappointed with the draft rule proposal released by the Fed on December 16th. Mastercard is seeking changes to the Fed's proposal. We will continue to advocate to the Fed and lobby in Congress, both independently and through participation in and through participation in wider industry efforts. And of course, we will obviously be submitting written comments said as part of the official comment process. But I've had the opportunity personally to talk with legislators and regulators in several DC visits over the last few weeks. One of the points I've been attempting to clarify is the role Mastercard plays and why this whole interchange issue is so important. We sit in the middle of the payment chain, linking consumers, merchants and banks, all types and all sizes of banks. And we provide and solutions that are all aimed at allowing this convenient and secure electronic payments that we all love so dearly to occur. Interchange change revenue goes to the issuer, not to us. So why is it our issue? And the answer is very simple. What we about is the health and the vibrancy of the payment system. I care about the continuation of innovation and benefits for all the participants in the system. At the end of the day, Interchange provides the balance between the cost consumers pay and the cost merchants pay. When that balance or tinkered with, the unanticipated consequences become very, very concerning. The balance tilting towards the other end. So you can ask some interesting questions saying, why do the Fed, what do they take into account, do they take into account the right cost, was this to consumers and others. And those are all the right questions for legislators and the Fed. Some see this as a battle between banks and merchants, and yes, to a large extent, it is. But the consequences of the balance I mentioned earlier are serious. Consumers stand to these additional costs and in some cases face a loss of access to banking services. It seems to that the implications are about far more than addressing a battle between large banks and retailers. This is about understanding the consequences to consumers and the payment system and this debate has been relatively forgotten up until now. That said, as investors, it's important for you to keep in perspective the implications of these regulations to our company, to our business, even if the rules are implemented as currently proposed by the Fed. So let me emphasize a few points. 1st, we continue to believe that impacts on our business will be manageable. The rules regulate debit interchange in the United States, not our network fees. Mastercard does not earn revenue from the interchange excluding prepaid U. S. Debit, remember, represents approximately 14, 14% of total Mastercard net revenues in 2010. 2nd, while our network fees being regulated. For sure, we anticipate some discussions with issuers regarding our fees. By the way, that's new thing. We routinely have discussion with issuers on the cost of our network services when contracts come up for renewal. You would expect that. We have a proven track record of navigating these negotiations in a way that achieves an appropriate value for the services we provide, while making the issuers get the appropriate incentive for them for the work they do. 3rd, we continue to anticipate some potential upside to our volumes as a result of the routing non exclusivity regardless of how it finally gets From a pure share perspective, as I've said in the past, we have more to gain than to lose. We Beyond this, Mastercard offers a wide range of product constructs to help consumers who may be looking for alternatives to debit. Unless you believe that consumers in the United States will revert to cash and check and I think that's a real stretch. I do not believe that. Mastercard as alternatives for those who may no longer be able to afford debit cards and while it could take a little time for these consumers to adapt, the alternatives I'm talking about would allow them to continue to benefit from the convenience and safety of electronic payments. But it goes without saying this is a challenging environment for U. S. Debit. The Fed's proposal as currently written, I firmly believe will harm consumers. We strongly believe in the value prop of debit products, we will work hard to defend the category. That said, the impacts to our business are limited in many respects and the legislation to provide opportunities that balance the risks. Whatever happens, by the time these regulations get implemented in the latter part of this year, it would we only begin to have any impact on Mastercard in 2012 and I remain optimistic that we can navigate through these regulatory challenges in the U. S. Just we've done successfully in other markets in the past. Meanwhile, we remain focused on our growth strategy. In fact, we signed a significant number of new and renewed deals around the globe in the Q4. So let me take a moment to a few of them. Let's start with prepaid. In December, we announced an agreement to acquire the card program management operations of Travelex, and an important driver for our future global prepaid growth. We continue to expect that transaction to be completed in the first half of the current 2011. In addition, we have launched multiple prepaid programs during the quarter. I'll give you a few examples. Corporate and consumer reloadable prepaid products in the United States, Mexico, Germany, Italy, Switzerland and with Carrefour, for example, in Romania. And sector programs in the UK and the United States with the State of Illinois Department of Labor delivering unemployment, other benefits and so on Mastercard. In credit, we continued our momentum on the airline co brand space, targeting the affluent segment and beyond. For example, we signed deals to flip the Swiss Air Miles and More affluent portfolio and the Austrian Air Miles and More commercial portfolio from another network. We launched programs at Czech Air and Wizz Airline, one of the largest discount airlines in Eastern Europe. And the good news, and I'm pleased to announce this, we have just signed an agreement to launch a program with and launched over 20 airline co brand programs around the globe. So in addition to these airline programs, we launched a co brand credit card with Tesco and the Bank of Communications in China. And Canada, after decades of a non dual environment, we are really excited that the change to permit duality is finally beginning to pay off for us. In fact, just this We've launched 3 new affluent credit programs with CIBC, which as you know is Canada's largest card issuer until recently was an exclusive partner of a competing network. So we to make great progress in the strategic mobile space coming at this in a few different ways. Just last week, we announced a joint venture with Telefonica to provide mobile financial solutions in 12 Latin American markets. This should bring together Mastercard's payments assets and our expertise with mobile expertise as well as its 87,000,000 customers, many of whom do not have access to financial services. So the JV will basically provide them with mobile payment services to transfer money, reload mobile airtime, pay bills, make retail purchases. I think this JV has great potential to increase financial inclusion and expand acceptance and usage payments in markets where the war on cash is in a relatively nascent stage. Recently announced an agreement with Airtel Africa and Standard Chartered Bank to link subscribers' mobile accounts Mastercard account number. To start, all the subscribers will do is to use this number to complete mobile e commerce transactions. But On that, we're actually exploring future capabilities to allow this account number to be able to transact anywhere a Mastercard is The program starts with Airtel consumers in Kenya, again many of whom are unbanked with to expand the functionality to key markets within Airtel's footprint across sub Saharan Africa. And finally, last week in the United Kingdom, Barclaycard and Orange announced that they will be launching contactless payments via NFC enabled phones to their customers this summer as the first commercial launch of this kind in Europe. And I'm pleased to say Mastercard is the payment network to support the launch of this service. So we're sort of carrying on pushing hard in mobile around the world. And I think we've gained actually have more significant outcomes than the others. The point is, I'm confident that we are continuously improving our position towards long term success this area as the ecosystems get defined. So with that, let me turn the call over to Martina for a detailed update on our financial results and operational metrics. Martina? Thanks, RJ, and good morning, everyone. Let me begin on Page 3 of the which shows our reported results. Net revenue grew 10.7 percent over last year's 4th quarter to €1,400,000,000 or 6.3% in process transactions. Approximately 5 percentage points of net revenue growth came from pricing. These drivers were partially offset by an increase in rebates and incentives. The 4.6% increase in total operating expenses versus last year's 4th quarter was primarily due due to higher marketing spending as well as higher general and administrative expenses as a result of the DataCash and strategic investments somewhat offset by lower severance charges. Operating income was CAD 569 1,000,000 for the quarter, up 21.6 versus last year. This resulted in an operating margin for the quarter of 39 0.6%. The effective tax rate declined to 28.7% primarily due to benefit recorded in connection with the repatriation of foreign earnings. We delivered net income of €415,000,000 up 41.2 percent over the Q4 of 2019 or a 46.2% increase on a constant currency basis. Earnings per share were $3.16 on a diluted basis. As expected, the DataCash acquisition had a $0.03 dilutive impact in the 4th quarter and an dollars 0.08 dilutive impact for the full year. On the next couple of slides, we have metrics. So on Page 4, you see that worldwide gross dollar volume or GDV was up 11 on a local currency basis in the 4th quarter and grew 10.9% on a U. S. Dollar converted basis to By the way, this is the highest quarterly GDV ever. U. Of 2,008. Across the rest of the world, GDV continued to grow a healthy 16.1% on a local currency basis. Worldwide credit percent on a local currency basis and U. S. Credit GDV growth was positive for the first time since the Q2 of 2008. Credit GDV for the rest of the world grew 11.6% on a local currency basis. Now worldwide debit GDV grew 15.2 percent on a local currency basis. And in the U. S, Underlying U. S. Debit growth was healthy and in the double digits. Debit growth for the rest of the world was about 29 percent driven by basis was up 18.7 percent and this was the strongest cross border growth in 10 quarters. This was supported by double digit growth in APMEA, Latin America and Europe as well as mid single digit growth in the U. S, which was a sequential Now turning to slide 5, process transactions were up 6.3% compared with a year ago quarter at slightly over RMB6.2 billion. Process transactions continue to grow at double digit in Latin America and APMEA. Process transaction growth has been impacted by a number of factors. And so 1st, the conversions in the U. S. And in the U. K. Were essentially completed in the 4th quarter. Nearly all of these cards have now rolled off. And second, we have been benefiting from the roll on of new deals such as the switching deal Itau in Brazil and the SunTrust debit deal in the United States. If we exclude the last quarter. And global card growth was 2.5 percent to over 1,600,000,000 Mastercard and Maestro cards. Now let's turn to Page 6 to discuss the components in revenue and their performance relative to last year's Q4. Domestic assessments increased 14.5% due to increased volumes and impact of 20 10 pricing changes. Cross border volume fees increased by 3.9 percent. And excluding the impact of the cross border pricing structure change, these volume fees actually increased by about 19%. I would like to remind you that the impact of 2,009 cross border pricing is included in the gross revenue and in the rebates and incentives for the Q4 of 2019, but it is netted in these line items for the Q4 of 2010. And in Appendix A in this Transaction processing fees grew 9% and other revenues were essentially flat compared to the Q4 of 2009. So in total, gross revenue increased by €159,000,000 or 8.5 percent. Rebates and incentives for the quarter were 5 the RMB94 1,000,000 up RMB20 1,000,000 from the year ago quarter. However, the increase was RMB77 1,000,000 or roughly 15% when adjusted for the cross border pricing structure change. As Ajay stated earlier, we had a great quarter from a deal signing perspective and we saw healthy volume growth, both of which contributed to this increase. And for your reference, for the full year 2010, rebates and incentives were 26.7% of gross revenue versus For some detail on expenses, during the 4th quarter total operating expenses increased 4 point percent or 6.1% on a constant currency basis. And within total operating expenses, the general and administrative increased 2.3%. This growth was primarily due to increased investment in support of strategic growth initiatives such as prepaid, e commerce and mobile as well as the inclusion of CAD9 1,000,000 of DataCash's operating expenses following the close of the acquisition at the end of October. This was partially offset by a decrease in severance charges on a year over year basis. Advertising and marketing expense was up 6.8% versus the Q4 of 2,009 or 8.2% on a constant currency basis, Merely driven by customer specific initiatives and support of sports sponsorships outside of the U. S. As well as by increased support of strategic due to the DataCash acquisition. So turning to Page 8, let's just take a quick look at our strong which we are particularly proud of given the headwinds that we faced throughout 2010. We achieved full year net revenue of €5,500,000,000 up 8.6 percent and nearly 10% on a constant currency basis. And as a result of the net revenue growth and slightly lower operating expenses, full year operating income increased nearly 22% versus 2,009 and resulted in an operating margin of 49.7 percent. Net income for the full year was €1,800,000,000 which includes benefit of the slightly lower tax rate. This net income represents a 26.2% increase over 2,009 or 27.9% on a constant currency basis. And EPS was 14.05 up 25.9 percent versus 2,009. So moving to the cash flow statement and balance sheet highlights on Page 9. We generated EUR670,000,000 in cash from operations in the 4th quarter, driven net income adjusted for non cash items and partially offset by litigation settlement payments. And we ended the quarter with cash, cash equivalent and other liquid investments of €4,200,000,000 even after closing on the acquisition of DataCash. So the combination of M and A activities from the latter part of 20 and sharing agreement that Ajay just referenced that we just have announced has prevented us from being in the market for our 1 1,000,000,000 share repurchase program. So let's turn to Slide 10 and first discuss, 2011, starting with an update of what we have seen for Master processed volumes for the Q1 through January of 2018. Our cross border volume grew roughly 18% globally, in line with what we saw in the 4th quarter. This was due to continued strength Asia Pacific, Latin America and Europe, as well as an improving trend in the United States. Although not a perfect proxy for GDV, total U. S. Process volume grew 1% about the same level that we saw in the Q4. As a reminder, the Q1 of A comparative point of view, we're still facing a headwind, which will be partially offset by our new business in the first two quarters of 2011. In January, total process volume growth for the rest of the world was about 22%, ahead the 19% pace that we saw in the 4th quarter due to continued strength across APMEA, Aetna America Europe. And globally, Process Transaction growth was about 9%, but if you exclude the effects of the net headwind process transactions actually grew 12%, signaling a healthy underlying usage trend, which is in line with what we have seen over the past 2 quarters. So now let me spend a little time to outline a few preliminary thoughts on our view of from a continued economic improvement in the U. S. As well as by the momentum of new business wins. Our growth rate the first half of twenty eleven will be lower than the growth rate in the second half of the year. This is primarily due to last year's first half including more volume related to the debit deconversion. We remain committed to our target of a minimum 50% annual operating margin. As we have discussed at our Investor Day last September, there are a number of strategic areas in which we are making significant investments and you have some of that investment spending already occur in the latter part of 20 only a small operating margin expansion in 2011. This includes the impact of the DataCash acquisition and our investments in areas such as e commerce, mobile, prepaid, commercial and information services. We expect this will impact all expense line items. In addition, our pending acquisition of the program management business from Travelex could have a $0.04 dilutive We have also hedged the purchase price of this acquisition and the final impact will depend on movements in the currency markets. We continue to this acquisition to close in the first half of the year. For modeling purposes, you should assume a full year tax rate of 30 percent similar to the rate we saw in 20 10. Before we move into the Q Let me briefly touch on our 2011 to 2013 performance objectives, which continue to be a net revenue of 12% to 14%, a minimum operating margin of 50% on an annual basis and an earnings per share CAGR of at least 20%. Recall that we have set that these objectives all on a constant currency basis and exclude acquisitions except for LATACash and Travelex. Obviously, we'll have to look at these objectives when there is more clarity around the longer term impact of the final U. S. Regulations on our business, but they currently remain unchanged. Let me now turn the call back to Barbara to begin the Q and A Barbara? Thanks, Martina. We're now ready to begin the question and answer period. And in order to get to as many people in our 30 minutes, we ask that you limit yourself to a single one part question and then queue back in for additional questions. Eric, would you like to kick off the Q and A please? Thank you. Your first question comes from the line of Sanjay Sakhrani with KBW. Please proceed. Thank you for your color on your visit to D. C. I guess just from your conversations, how sincere do you believe are the efforts by some of those legislators to scale back the Fed's proposal. Do you think it's a high probability event? Thanks. Hi, Sanjay. It's tough to predict what when you put sincerity and politics in the same space. So I don't know how to say that correctly. I can't I don't know how to do it. But I would say this to you, they certainly, the ones I met, even the ones who are not completely come out and said that the unintended consequences of this could be more than they had anticipated. You've heard Bonnie Frank, you've heard retired Senator Chris Dodd, you've heard others, you know there's going to be a hearing in the house in a few days' time. So my sense is that if you'd asked me the same question 3 weeks I would have been much more despondent about where this is going. I feel a little better now that at least going to try my best to help make a change happen. Next question please. Your next question comes from the line of Adam Firsch with Morgan Stanley. Please proceed. Thanks. Good morning. Ajay, hearing the same thing out of DC. And I'll refrain from congratulating you on the 12% until we know that it's 12% of what, But at least we're making some progress there. In the my question is, in the past, the feeling I got was that Mastercard was not as willing to use its A and M line to help fund customer specific initiatives. Does the color around this line item in 4Q indicate a change of thinking? In other words, that you're more open to using this big source of operating leverage here to offset pressures in other areas and preserve the margin trajectory? Thank you. So actually, Adam, that's a deep question. What it really refers to is how we're going to use our P and L and our business model leverage to drive for growth in our company. And one of the ways is through A and M, but a deeper way is all the strategic initiatives in mobile, e commerce, prepaid, that kind of stuff. In fact, in the Q4, we've had a tax benefit and we Martin and I took the opportunistic call to use some of that space to actually put some effort and energy back into a couple of the things we were investing in. And I'm going to keep trying to do that. I'm committed to maintaining that 50% operating margin, but I'm also committed to using the dollars above that margin to try and keep building the company for the next 10 years. And I think that this decade in payments is going to be a remarkably different decade. There's going to be change in form factors, there's going to be changes in competition, technology is changing everything and I want to be a part of that change and a part defining the ecosystem. As I've told you personally and I've told others in the Investor Day and through meetings, that's we can really come out this next few years ahead of the curve and that's what I'm trying to do. If you talk to me a year, year and a half About mobile, you would have heard we were doing some pilots. Then a lot of momentum has come about in the last 1 year and mobile network and us are engaged in really sensible practical conversations. I don't know which one of these investments in prepaid, in e commerce, in mobile, in advertising will hit the ball out of the park. But I think Maybe none of them will individually, but put together, they will really position Mastercard the right way for the coming decade. That's what I'm trying to do. Great. Thank you. Your next question comes from the line of Jason Kupferberg with UBS. Thanks. Good morning, guys. I wanted to just drill in on the Telefonica JV a little bit more. It seems particularly interesting down there in LatAm. You give us any general sense of the size of the investment you're making, perhaps how long it might take for this JV to start generating a meaningful amount of revenue because it seems like there's a ton of opportunity there as you outlined just tapping into that consumer base? Yes. Look, this thing is we'll be owned fifty-fifty by us and Telefonica. And it's at least 12 markets. My whole logic with We'll make money 2 ways in this JV. 1 is the single line item that will come through that will the net share of profits that or losses that that JV will make that will come through as a plus or a minus on our revenue line. But the Other side is when people use existing Mastercard form factors to spend and they happen to be a part of this of the consumers of this JV, that gives me another stream of revenue, which won't show up in this line, it will show up in my regular business To me, both those are going to be really interesting because with the partnership with Telefonica, I get a way to reach both types of revenue streams. I'm hopeful that we will get some initial benefit from existing Mastercard kind of consumers. I think reaching out to the unbanked and to provide for financial inclusion does have a longer term angle to But I think both are very interesting aspects for our future. They are investments. This is not the kind of stuff that pays back in 1 or month 1 or quarter 1 or maybe even in some cases, year 1, it depends from one investment to the other. And so I'm not going to make any specific comments on any one investment, but I've got the ability and the thinking within our leverage as a company. As I said to Adam's question a little while ago, to put some money on the line to help drive and drive the ecosystem that will come about in mobile. And actually, the bigger question to me is, I don't know which way mobile payments will develop, I know they'll develop. I just don't know which way develop. I don't know whether the developing world will end up being somewhat different from the developed world in terms The nature of how mobile ecosystems get taken up. In the developed world, it may be that contactless becomes interesting, it may be, I don't know. On the other hand, in the developing world, it may be that SMS based mobile system each way to help drive it and to help drive the value generation from that. I don't want to stand on the sideline and watch. And that's kind Your next question comes from the line of Craig Maher with CLSA. Please proceed. Yes, good morning. I had a question about prepaid. Western Union reported the other day. I would imagine they're one of your most important global partners in prepaid, they actually called out prepaid for the first time as a material contributor to revenue. So I wanted to ask How globally you're seeing your prepaid cards being used or high proportion being reloaded or are these being general or are they generally being used as one use throwaway cards? So I wanted to hear your thoughts on how that market is evolving as it's becoming material to some other companies' revenue? Thanks. First of all, Western Union is a good partner. And they've got some Cool distribution and they have their own challenges, but at the end of the day, they're a good partner and we're regular contact and dialogue with them for business growth in different aspects, not just prepaid with them. Having said Your question was more about prepaid than Western Union. So the first part is, I have a very low interest in single use prepaid cards because The P and L impact of those is less than attractive. You just don't get to amortize the acquisition costs over multiple users of that card. So you take a gift card and it's the way the prepaid market developed, but the average gift card load in the U. S. Used to be, I'm a few month old numbers, dollars 75, dollars 80 and whereas the average multiple reuse reloadable social credit card goes all the way to $800,000 $900,000 $1,000 So the economics are obvious and I'm much more interested in the reloadable both for corporate reloadable purposes, payrolls and the like, but also for individual general purpose reloadables. And that's where we're putting our in energy. Having said that, the biggest market right now is the United States and the others are beginning to grow, but right now it's still the U. S. And in the us, the lion's share of the market is reloadable cards and that's kind of where we are focused in the U. S. Outside of the U. S, the market is still developing. In some countries, gift cards are again the front end of the wedge, in some countries, gift cards are again the front end of the wedge just as they were in the U. S. In others, it's more the reloadable side. And frankly, if I had my way, I would always be promoting the reloadable ones as you can sense from where I'm going. But in general, the TravelX than the one time load, just as one example. Next question please. Next question comes from the line of Julio Quinteros with Morgan Stanley. Please proceed. Great. Thanks. Hey, A. J, can you maybe walk us through a little bit on some of the discussions you might be having with the banks about Their attitude or options for offsetting some of this potential loss interchange revenue on the debit side, is there any sort of preference that thinking about in terms of how they would potentially offset some of this stuff? Hi, will you have you changed companies or there Just a mistake. Oh, I didn't hear, where am I supposed to be now? Whichever one you'd like to, but it's that Morgan Stanley. I'm better Maybe we should know something. Adam and Julio need to have a conversation. But anyway, all the joy, I'll drop aside. The question is a very serious question. So Let me put it for you this way, you've probably been hearing a number of the bank CEOs on their earnings calls over last few weeks. And that gives you a pretty good sense of the similar form of discussions that we are having with a number of them. Branch banking services with ATMs and customer service and phone calls and all that kind of stuff, they view the debit card as helping to provide for good profit margins there. Of course, they also earn profit margins from the spread on the deposits they're versus the lending they do. Now in a low interest environment, that's currently a challenge, but that's not an always perpetual case. But they basically make money from these two paces. And they've got to make it back if it's going to go away in such a large way away from their P and L. And so the different things they're looking at are the ones they've described. They're looking at fees, a number of them have already put in fees for accounts for ordering checkbooks for statements, they're looking at fees on different aspects of transactions that impact their earnings in their retail banking business, they're looking at reducing the reward on their debit card activity, they're looking at fees on debit cards, they're looking at restricting the manner in which debit cards get used either for large ticket items because of concerns around fraud losses or a debridement for small ticket items. And so there's a series of things going on. My concern, which I tried to explain a little earlier, is that This could actually lead to one completely unintended consequence, which is a number of people dropping out from the bottom of getting access to regular banking. And I think that's going to be a circumstance that the United States does not to confront. We already have 40,000,000 to 45,000,000 people who have people are those estimates vary, but those are old estimates that don't have the right access to banking, that go to check cashers, that go to payday lenders or unofficial borrowing methodologies for getting their access to money. I just worry about where all this is going. And I think that in an effort to reallocate profits between big banks and big retailers, the dialogue has got to take into account these kinds of consequences. So I think that's what the bank CEOs are trying to say, although at the end of the day, given who they are, the dialogue very quickly turns to how will you make back your money as against what's the unintended consequence. I happen to be in the position where I can focus on the unintended consequence and a little less on how I make back the money, but that's just my luck of where I am today. Thanks. Next question please. Your next question comes from the line of Scott Valentin with FBR Capital Markets. Please proceed. Just along the A and M line, I think it came up earlier, maybe using A and M to maybe engage issuers. But just On the merchant side, given the potential for exclusivity to go away, have you kind of focused on merchants and trying to engage Merchants and become more of a partner rather than just providing transaction services? Yes, absolutely. All over the world, I think this company is making enormous effort at merchants. I actually view my role as being the player between the banks, the merchants consumer. And so to me, all three are interesting and you'll see us focusing on all three categories. I'm driving a lot of thinking not just on banks of all shapes and sizes and not just on merchants of all shapes and sizes and I'll give you a few specific examples, but even on focusing to them that satisfy their needs. So let me give you an example of merchants in specific. Look at Carrefour. Carrefour in France is now one of our most interesting and one of our most interesting partners. And sometime back, they had already crossed about 2,500,000 to 3,000,000 cards issued with us, not just in France, but as I was mentioning a little earlier in the call, now even in Romania, and I missed out a bunch of countries where they're already doing business with us. They're the ones who launched contactless Mastercard only cards and helped us in fact to take advantage of the changes caused by the sort of rules in Europe. Just one example, Walmart in the United States issues payroll card to their employees. 600,000 of them or so have signed up to get the payroll card with us and not have to get paid by a check. Just way of doing business with them. We do through advisors, we do business with them on figuring out how to make more money or better targeted marketing to individual customers. We do business with airlines and Internet merchants across the world in different with Amazon, we had an Amazon gift finder towards the end of last year. We are their chosen partner of choice in many countries around the world. I just keep going with this list here. So is there more to be done? 100%. Am I satisfied with where we are on building Merchant relationships? No. But do I feel better about it today than 2 years ago? Absolutely. Next question please. Your next question comes from the line of Andrew Jeffrey with SunTrust. Please Hi, good morning. Thanks for taking my question. Ajay, could I ask you to opine on the future of PIN debit? I know there's A lot of discussion about how the Durbin rules are ultimately going to be implemented, interpreted, etcetera. But it strikes me that One of the unintended consequences is that with the convergence of PIN and Signature debit interchange, one of the 2 payment forms may ultimately fall out of favor. It seems any significant thought to how you see that evolving assuming that the Durbin rules are implemented around interchange at least as currently contemplated? Yes, Andrew, if it all goes through the way it is right now and the convergence does happen, clearly there's going to be over a period of time some change in the way this thing is looked at because the merchants will have a different view, the banks will have a different view and consumers will want to choose based on what card They have, but it's kind of interesting, if you think about Mastercard, we were the guys who focused on pin debit in the United States for years to our eventual cost in some ways on our market share with inadequate focus on Signature debit. You know that Maestro is the leader in pin debit around the world and is the only actual if you think about CITIS and Maestro, those are the only global interoperable And so to me, PIN debit is in many ways an interesting aspect of providing consumers access to their own money in that sense. India, the State Bank of India issues, they are single largest issuer of debit cards, Maestro cards, and in the world today has one issue, again, PIN debit base. So yes, I think PIN debit is going to be an interesting evolution. The way we're looking at it, I'm prepared to go both ways because I'm very confused about which way this exclusivity rule will go. And I clearly hope it doesn't go the way of 2 signature and 2 PIN because that will just be confusion unfounded, right? But who knows? But if it doesn't go that way and it goes one signature and one unaffiliated pin or one pin and one unaffiliated signature, Then I believe that as the interchanges converge that there is an increasing role for PIN. I don't use our global schemes to play in that space. Next question please. Your next question comes from the line of Shintan Wang with JPMorgan. Please proceed. Hi, thanks, Larry. Good morning. Glad to see the volume strength. I actually wanted to ask about The update you gave, you mentioned, Ajay, I think the 12%. I was just looking at the 8 ks, it also discusses your reads your portion under a global settlement at at 33%, which is I guess similar to the Walmart case. So can you help reconcile those two numbers? And I'm not a lawyer, but also does this effectively mean that the defendants are now waiting for the merchants to do the same thing in order for the to be certified so we can set a trial date and move forward, etcetera? Okay. So fortunately, I'm not a lawyer either. That's the good But let me tell a little bit more about this, Tien Tsin, just for a second, right? And I do have Noah sitting here, who's my General Counsel, who Look, we're a little disturbed by saying fortunately, neither you nor I are lawyers, but hey, that's what makes us decent guys. So here's the deal, all the jokes aside. By entering into this judgment and settlement sharing agreement, what we're doing is we've percentage that we've agreed to in the sharing agreements is what that will come out at rather than potentially 100%. So in the event of a global which involves Visa, involves the bank defendants and involves Mastercard, Mastercard would pay 12% of the monetary portion of the settlement. However, in the event of a settlement, which involves only Mastercard and the defendant banks with respect to their Mastercard issuance, which could happen, then Mastercard pay 36% of the monetary portion of that settlement. So that's the difference between those two numbers. These same percentages, just to clarify, apply in the event that any of the cases go to trial and an adverse monetary judgment is rendered on any of those cases. The way this came about was based on lots of negotiation. What we are pleased about is at least our share is now Also importantly for us, Tien Tsin, the covered cases in these agreements kind of parallel the that are covered as a part of Visa's retrospective liability plan, meaning in English. The covered cases include the existing proposed class action and the individual merchant actions as well as any future opt out merchant actions. So it's a whole lot. I don't know if the merchant cases will settle or not, which is to the latter part of your question. This is engaged in confidential mediation efforts. All the defendants are still awaiting decisions on their motions to dismiss. The court has not yet ruled on the merchant's motion for class certification. So everybody is kind of working on an additional round of briefings. No trial date has been set. This stuff is still very much up The 12,000,000 if it's a global settlement, the 36,000,000 if it's Mastercard and the defendant banks for their share of the Mastercard Issuance. I'm almost a lawyer. Welcome. Your next question comes from the line of Chris Bendler. Please proceed. Good morning. I just wanted to Hadi, if you could please provide Any color or update on what you're hearing or any sort of discussions that you've had regarding signature Exclusivity on the debit side, I mean, it seems like for you, it's a little bit of a potential benefit or a significant benefit. So are you supportive of Signature debit exclusivity going away and opening up that market, it seems like the unintended consequences there be pretty significant as well. If you could give a little color on that would be great. Thank you. Well, look, my first perspective is that the signature exclusivity is actually only a subset of a much bigger issue, which is the issue around why a government is involved in setting prices between 2 economic These banks and retailers, I'm struggling with that and I'm struggling with how they would be better able to market value than the negotiations that happen on a daily basis between banks and retailers. So that's my bigger issue. I Exclusivity, whether it's signature only, whether it's one signature, one unaffiliated PIN, whether it's, God forbid, 2 signatures and 2 unaffiliated PINs, I don't know. I don't know which one of those will come out. And frankly, my perspective on that is, if that's the only option I have, at least I will find a way to make an opportunity out of that just because of my starting position on market share in the United States. So suffice to say you're not pushing forward at all? No, no, no, no. I'm Actually pushing to say that let market forces do their work. That's where I'm coming from. Any Ability to offer any sort of opinion on probability, hopeful it's low, does it seem low to you? No, I'm planning on the basis that what's been proposed right now goes right through. That's the way I'm working inside the company. And there are few of us who are dealing with this situation on the outside are the are working the hardest to try and make whatever effort we can to make our point of view heard. But the company, 99.9% of is focused on this is going through the way it is right now. That's to me the only responsible way to work this. Does that mean Signature debit 2 center networks or No, that one I'm confused about. I'm talking about the absolute level of compensation that the Fed seems to have decided is appropriate for system. I got you. Thank you. Your next question comes from the line of Bob Napoli Piper Jaffray. Please proceed. Thank you and good morning. I hear Ajay that you feel like You have benefits possibly and but the market has it would hit your stock price and Visa stock price for the moment is disagreeing. And I guess trying to Maybe if you could quantify a little bit more, 14% of your revenue is U. S. Debit. I was hoping you could break that out between As Visa has what percentage comes from merchant acquirer and from issuer? And your thoughts on Potential price compression or risk to more or less risk to each of those revenue streams to each of those parties? Look, I think Firstly, I think the stock price in the market is reflective of many things. And I think the uncertainty around this regulation, just like the uncertainty around The merchant case does weigh on stock prices. That's what people do, right? That's what investors and analysts and individual buyers also think about. My perspective is and the reason I gave you the 14% is to kind of tell you that this is not a dead stock for this company. And that within that, Certainly, some revenue could be at risk depending on where this goes. But the reason I keep talking about the other opportunity is just the fact that my market happens to be much lower than anybody else's in this case and therefore the opportunity for me to benefit from a destabilized or a changed marketplace in terms of volume and and transactions exist. Whether those transactions will be as rich in their revenue as they were today, I don't think they will be. So I don't have any way to quantify today's date as to how much of the 14% would be at risk or not. But suffice it to tell you that I believe that the majority of it is going to walk out the door. Some of it absolutely, it will come up for renewals, it will come up for The truth is whether this act happened or not, some of my revenue is at risk every time I go back for a renegotiation. That's how I'm And that's where my personal perspective is coming from. But Martina, you've got something to add to that? No, I think you said it perfectly. Okay. Is there What have you heard out of credit? And I'm sorry, but have you in your recent discussions in D. C, have you heard anything with regards to Interest in credit or not interest in credit regulations? No, I think I'm quite certain that the merchants would want to raise that whenever they And they have for many years, but I don't believe that in this currently changed political circumstances that feature, you got to look at the losses on the credit book that banks take versus the benefits that the merchants get in that kind of circumstances. There's a whole different set of But having said that, that's logic and logic is only so good up to a point. So I'm alert to it. We are actively discussing it. But at the end of the day, I don't see any movement on it. Thank you. Operator, I think we have time for just one more question. Your last question comes from the line of James Friedman with Susquehanna. Please proceed. Hi. Thanks Barbara for sneaking me in with Last one. Ajay, I just wanted to ask or know if this is more appropriate with regard to the merchant class action in the 8 ks this morning. There were a number of quests in that original complaint, as I recall, monetary damages among them. Should this 8 ks be interpreted to suggest that the resolution is going to be purely monetary in damages and that the other Claims in the complaint have been resolved? No, I'm going to let you handle that. Thanks. The answer is to The agreement only addresses the monetary component of any resolution or judgment. So it only addresses the cash component to the To the extent that there is or isn't any other part of the case, this agreement doesn't speak to that. Ladies and gentlemen, this concludes our Q and A session. I would like to turn the call over for closing remarks. Thanks. So let me leave you few closing thoughts and thank you for being here today through our conversation. 2010 was just not without its challenges, right? The impacting our performance were kind of primarily the result of economic softness, primarily in the United States as well as as you well know the roll off of a few debit portfolios, some of which we still have this lapping issue that Martina talked about for the early part of 2011. But those challenges, we did grow net revenue almost 9% and EPS over 25%. This was fueled By kind of the war on cash, as I call it, around the world, we saw double digit volume growth in Latin America, in Europe, but also in Asia Pacific, the Middle East and Africa. And we left 2010 in a much different place from where we started. Continues to show some improvement. We have not only worked through the roll off of the debit portfolios, but we actually won significant new business across the globe that is contributing to our results and will contribute to our results in the next couple of years. Additionally, you've already begun to see us execute our growth that we believe will position us for strong long term growth. And I'm sort of looking at capturing more than our current or share of the 85% of transactions around the globe that today are conducted with cash and checks. Those are expensive ways of transacting and the cost of those methods of transacting are borne by society and not clear to everybody, but they're expensive. So the war on cash makes eminent sense for governments, for consumers, for banks and for merchants. So these efforts we're making recent moves such as the acquisition of DataCash, the pending acquisition of TravelX's card management business and of course things like the Telefonica joint venture, all of which include an increased focus on consumers and you will see more. Of course, 2011 is not going to be without its challenges. The U. S. Economy still has it's housing and unemployment issues to work through and there's the U. S. Debit regulation that we just talked about that we will have to navigate as well. And pretty sure other challenges will come up around the world in different ways. But as we enter 2011, I enter with some optimism. And as I time today and thank you for your commitment to our company. Ladies and gentlemen, thank you for your participation in today's conference. This concludes our