Earnings Call: Q2 2010

Aug 3, 2010

And welcome to Mastercard's Second Quarter Earnings Conference Call. My name is Jeremy, and I will be your coordinator for today. At At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the presentation over to your host for today's call, Ms. Barbara Gasper, Head of Investor Relations. Ma'am, you may Thank you, Jeremy. Good morning and thank you all for joining us today either by phone or webcast for a discussion about our Q2 2010 Financial Results. With me on the call today are Ajay Banga, our President and Chief Executive Officer as well Welcome to Martina Hundmejian, our Chief Financial Officer. Following comments from Ajay and Martina, highlighting some key points about the business environment and our 2nd quarter results, we will open up the call for your questions. This morning's earnings release and the slide deck that will be referenced 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 this morning. A replay of this call will be posted on our website for 1 week through August 10. 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 Matt, I will now turn the call over to our CEO, Ajay Banga. Ajay? Thank you, Baba. Good morning, everybody. I'm pleased that we've got yet Another good quarter to report this morning that highlights the solid fundamentals of our business. Before Martina gets into the details of the I thought I'd comment on some of the contributing drivers of the quarter as well as some recent business highlights. So the The second quarter, we saw net revenue growth of 6.7% as reported and 7 point 9% on a constant currency basis. Gross dollar volume grew 8.5% on a local currency basis and I've spoken off on past earnings calls with you. But if you exclude those deconversions, underlying transaction growth was around 10%. Our expense control efforts over the past year have allowed us to deliver an operating margin of 52.6 percent this quarter, a 9 percentage point expansion over last year's Q2. We put all this together and it helped fuel Our net income growth of roughly 31% or 34% on a constant currency basis. Some of the progress We saw in the quarter can obviously be attributed to global macroeconomic improvements. And as a global company, we continue to see the non U. S. Markets becoming a bigger contributor to our businesses. Today, in fact, the international markets, the markets outside of the United States account for 55% of our total revenue, up So about 50% just 2 or 3 years ago. As in the recent quarters, our volume growth outside the United States outpaced growth in the United States. The The Asia Pacific and Latin America regions delivered another quarter of strong double digit growth spurred Our volume growth in Europe continues to remain healthy. Both domestic and cross border volumes are driving the growth in these regions. In the U. S, however, conflicting signals make it difficult to determine if we have moved into a period of real economic recovery. You've all seen the recent economic data around unemployment, retail sales, consumer confidence and The consensus seems to be that perhaps there will be some ups and downs with respect to economic recovery. This is reflected in our own consumer research and our spending And airline spend is up. So there are mixed signals here and consumers are likely to remain cautious until employment and housing in the U. S. Show signs Sustainable improvement. And I guess they will just continue to look for ways to spend and budget smarter. You can see evidence of this in our own U. S. Data. Mastercard's process Credit volume growth was up slightly in the 2nd quarter, an improvement over the 1st quarter, but the pace of growth declined Constant at about 20% over the 1st 2 quarters of the year, excluding those portfolio deconversions we've While on the subject of the U. S. Market, let me just briefly touch on a piece of We recently signed Financial Reform Act, specifically the Durbin Amendment Act. I know that everybody to develop the regulations and for our customers to react before we will know the full implications both for the industry and for our company Mastercard. We have spoken to the Fed. We will be working constructively with them as they move into We still believe the secular shift to electronic forms of payments will continue and that fundamentally U. S. Consumers are not going to go How to meet their customers, their consumers needs for payment products and we will be there to support that effort whether challenges, but I also believe it will present opportunities. And in the past, we as a company has certainly proven our ability to work through them with flexibility and with innovation. And as such, even now, we We are exploring various strategies to address the different scenarios that could come about with as the Fed goes through In the meanwhile, we are focused on executing our strategies around the globe. As I said And earlier, the markets outside of the U. S, the global markets outside of the U. S. Account for more than half of our net revenue and that We have more convenience, more security for our customers and value for all the other stakeholders. I thought I'd take a few moments to highlight a few recent news items. Just Today, we announced an expansion of our existing relationship with Telefonica, a leading telecom company in Latin America to include of these issuing markets. We've also recently announced a joint venture with Smart Communications to build a Mobile payments infrastructure, kind of like a mobile gateway starting in Brazil for our customers that will give consumers access to mobile payments. In China, we launched MoneySend to the Bank of China. So now consumers in China can receive money transfers from friends and family outside of the country. China, by the way, marks the 19th market where Mastercard MoneySend is now enabled. Sberbank, the largest Retail Bank in Russia is actually upgrading its passbook savings accounts to include a Maestro debit card, which will act is the primary tool for consumers to access online and mobile banking. Since this program was started in mid-two 1000 and It's yielded 1,300,000 upgrades last year and continues to generate similar results this year. They've also just Launched a Mastercard branded credit card, co branded with MTS, a leading Russian telco on the Mastercard platform and of course, carrying on the rollout of the Maestro Momentum Cards. Here in the U. S, I'm pleased that We'll be leveraging our inControl platform to bring Citi's consumer cardholders, increased control security and budgeting capabilities. And in This is the first consumer application of InControl in the U. S. Market. We also expanded our PayPass transit New York City beyond the original Lexington Avenue sub alliance in collaboration with the MTA, the Port Authority and the New Jersey Transit to basically make Commuting faster and easier. This expanded 6 month pilot now includes parts trains as well as some New York City and NJ Transit bus routes. It's the 1st payment system to link all three transit agencies, replacing the need for riders to carry Specific fare cars for each transit system and of course also enables the rider to transfer between systems. Our development of a differentiated solution that allows authorization of the turnstile to take place faster was a critical factor in winning this trial. So with that, I'm going to turn the 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 the deck, which shows our reported results. As Ajay said, we are very pleased to deliver another good quarter of solid Financials. Net revenue grew 6.7 percent over last year's Q2 to 1,400,000,000. On a constant currency basis, net revenue grew 7.9%. This revenue growth was primarily driven by a 15 basis. Additionally, pricing contributed approximately 4 percentage points to net revenue growth, including the effect Of cross border rebates, all of these positive factors on net revenue was somewhat offset by additional rebates Incentives primarily due to new and renewed customer agreements as well as rebates related to higher volumes. Operating Sensus declined 10.4% versus last year's Q2, primarily as a result of lower severance as well as savings due to reduced headcount. Our operating income was 717 for the quarter and resulted in an operating margin of 52.6 percent, a 9 point 1 percentage point improvement over the year ago quarter. We delivered net income of 4.58 $3.49 per diluted share, up roughly 31% over the Q2 of and 34% on an FX adjusted basis. Turning to Page 4, we are seeing stronger performance across a number of Cross border volume growth year over year was the strongest it had been since the Q3 of Worldwide gross dollar volume or GDV was up 8.5% on a local currency basis In the 2nd quarter and grew 9.8 percent on a U. S. Dollar converted basis to RMB656 1,000,000,000. U. S. GDV was down 0.5%. While not yet a return to positive growth, this is another quarter of sequential improvement compared to a decline of 1.1% in the Q1 of this year. Across the rest of the world, GDV continued to grow Credit GDV grew 6.1% on a local currency basis. This was also the strongest growth rate 0.2% on a local currency basis. This was against the strong comparison of 13.1% growth in the Q2 of last year. In the U. S, debit GBV volume grew 0.8% and debit growth for The rest of the world was 29%, primarily driven once again by growth in our Asia Pacific, Middle East Africa region. On a local currency basis, worldwide purchase volume grew 7.9%. Cross border volume growth on a local currency basis was up 15.2%. We saw double digit growth in Asia Pacific, Middle East, Africa, primarily driven by activity in Australia, China Africa for the World Cup and volumes were up 79% in June year year on a local currency basis. We also saw double digit 0.1% compared to the year ago quarter to €5,600,000,000 In Asia Pacific, Middle East, Africa and Latin America, process These transactions continue to grow at double digit rates offset by deconversions of portfolios On a year over year basis at 944,000,000 cards at the end of the quarter. Excluding The U. S. Card issuance grew 7% versus the Q2 of 2019, demonstrating the continued growth opportunities for Mastercard from the secular shift from cash to electronic payment forms. As of June 30, 20 Domestic assessments increased 11% due to increased volumes and the impact of 2,009 and 2010 price increases, partially 4.5%. More than half of the $120,000,000 increase was due to our October 2009 pricing adjustment. The remainder was primarily due to cross Quarter volume growth, which was up 15.2% on a local currency basis. Production processing fees increased 6%. Pricing contributed approximately 2 percentage a one time benefit from the implementation of new authorization parameters. As I said before, process transactions were Essentially flat in the quarter and continue to be affected by the loss of certain debit portfolios. Excluding the loss Plus of these portfolios, process transactions grew approximately 10%. However, revenue growth for This line item was impacted less due to the pricing of the portfolios that are rolling off. Other revenues decreased 5.2%, primarily driven by lower compliance and research fees. All of this resulted in an increase of $204,000,000 or 12.6 percent in gross revenue. For the quarter, rebates States and incentives grew €119,000,000 Approximately €55,000,000 of this increase was due to rebates associated with last October's revised cross border pricing structure. The remainder was attributed to new and renewed customer agreements as well The next question comes from the line of John. Good day, ladies and gentlemen. This is the rebates related to higher volume. Overall, rebates and incentives represent 25.3 percent of gross revenue versus 21 2% in last year's Q2. Now let's turn to Page 6 for some detail on expenses. During the 2nd quarter total operating expenses decreased 10.4 percent and within total operating expenses, general and Administrative expenses decreased 14.5%. The decrease was primarily due to a lower personnel expense, which was down 83,000,000 And lower severance drove roughly half of this decrease. The remainder was primarily due to reduced Headcount, following personnel actions taken in 2,009, although we are adding talent in growth We're roughly flat for the quarter. Moving to the cash flow statement and balance sheet highlights on Page 7. Income partially offset by litigation settlement payments. And we ended the quarter with cash, cash And other liquid investments of $3,500,000,000 Now let's turn to our thoughts for But before I get into that, let me just give you an update of what we have seen for Mastercard processed volumes for the Q3 through July Our cross border volumes grew approximately 15% globally, which is Pretty much the same as the growth rate in the Q2. The Asia Pacific region continues to demonstrate the strongest growth, while the The U. S. Saw a little bit of softening, although it still remains positive. Although not a perfect proxy for GDV, total The U. S. Processed volume growth, which was about 1% positive in the second quarter was down about 2% In July, slightly lower than the month of June due to the continued roll off of the 2 debit portfolios. If you If you were to exclude the impact of those debit portfolios, total U. S. Process volume growth was almost 7% in 1% in the second quarter. And U. S. Debit process volume growth, which was about flat for the second quarter is now trending down 5% in July, but was up 21% when you exclude the tempering effect of the And in July, total processed volume growth for the rest of the world continued at a similar pace to what we saw in the 1st and second quarters or about 13%. Globally, process transaction growth was just slightly negative, including the impact of the 4 debit portfolio rollouts and almost 12 1% growth excluding that impact. Now let's get into the thoughts for 2,000 and For 20 10, and the following represents our current view obviously on a constant And half of twenty ten relative to the 9.7% growth we've seen in the first half due to the following factors. The first, we begin to experience tougher comps. Given that signs of the economic recovery The in the U. S. Remains uncertain. 2nd, the roll off of a few debit portfolios will continue to We'll roll off faster than originally anticipated and our as reported process transaction growth will bottom out in the Q3, not in the Q4. And we continue to expect contra as a percentage of gross revenue to average 26% to 27% for the full year, likely at the high end of the range given the deal volume we have seen and our current of our new SunTrust deal in the Contour line in Q3. However, Contour as a percentage Our gross revenue will still be highest in Q4 due to the normal seasonality of rebates and Overall, we continue to anticipate our total operating expenses for 20.10 will be flat to Savings obtained from our 2,009 severance actions are being reinvested back into the business areas such as e commerce, mobile and prepaid, Continue to expect G and A to be down from 2,009 levels including severance. And while we are currently forecasting advertising and marketing to be up Before we continue to assume an effective tax rate of 34.5 percent for 20 10. Now finally, we remain committed to our objectives For the 2,009 to 2011 period of annual margin expansion of 3 to 5 percentage points and average Annual net income growth of 20% to 30%. Remember, while all of our objectives are on a constant We had a 1% headwind to net revenue in the 2nd quarter and we expect that headwind to increase to 3 to 4 percentage If current exchange rates, particularly euro hold for the balance of the year. Recall that the euro averaged about 1.4 Around the U. S. Economic recovery, economic growth for the rest of the world is improving. Additionally, the underlying fundamentals of our business remains strong. This enables us to deliver a good quarter. And as we work through the challenges of some debit roll offs, we also We have new business wins such as SunTrust and others that we have yet to announce that will begin to contribute later this year. Remember that some contracts and centers for new business are recognized early on and only over time you will see the full Full contribution to net revenue. In total, we believe we can deliver a solid year for 20.10 in line with our overall longer And the question and answer period. In order to get to more people in our allotted time frame, we are asking that this morning you limit yourself to Single question and then queue back in for additional questions. Operator? Thank you very much, ma'am. And ladies and gentlemen, your first question comes from the line of Adam Friesch with Morgan Stanley. You may proceed. Thanks Barbara. This one question is going to be tough for me. But a lot of ways we can go here. I guess, the one Place I'd like to go just given it's the most topical is the mobile opportunity. Yesterday's reaction in the stocks from the Bloomberg article Suggested a pretty negative outcome for you and your largest competitor. So it's hard not to imagine you working with the largest wireless networks at some point. But can you talk about maybe, Ajay, what you're doing here? Why maybe we should feel a little less concerned that you're Not going to be successful in the mobile opportunity. And then maybe expand on a couple of other growth opportunities that you're excited about that we might see impacting the P and L in the next Hi, Adam. Well, the first part, the mobile part, I'm not going to comment on whether that That pilot is actually happening or not because none of the actual players in the pilot are confirming what they're doing. So that's not what I want to go down the path off, but I would tell you this, Mastercard has been partnering with mobile carriers, with handset manufacturers And with banks, for many years now globally to launch a bunch of NFC, these contactless payment trials with to get this mobile commerce opportunity to come through. In fact, I kind of counted up, we've got close to 20 pilot and commercial roll around the globe as we speak and I'll give you a few examples for you to understand where I'm coming from. In the UK, Barclays goods and services at retailers, there is the PayPass terminal that's been used. In Turkey, on the other hand, we partnered with Guaranty Bank and with Avia, which is a leading local mobile operator to pioneer these mobile NFC payments and there in that case, it was using an antenna attached to the In June, in the U. S, Citi has announced the launch of Mastercard PayPal's tags available for the majority of their credit cards. You can stick that Let's stick at the back of your mobile device and use it at any of the PayPass enabled merchants that exist. We've also announced a partnership with Bank of Montreal and RIM Research and Motion to bring mobile payments to BlackBerry smartphones through a similar Mastercard We've got programs in Brazil, we've got programs in India, we've got programs in Korea, we've got programs in Singapore, we've got mobile Mastercard Money Sense service, which is an easy way to transfer money from person to person using the mobile phone or an Internet browser. We can also use this to pay for purchases, it also allows small non traditional merchants to accept electronic payments. They've got MoneySend app for the iPhone and the BlackBerry. We've even So I have a degree of confidence that these companies are playing, we and others are playing actively in The mobile payment space, I have no doubt that while the business model for mobile payments is have to be proven in a tangible way across the world. I have no doubt that it will get proven in some form through these various experiments and trials. That I have no doubt on. You will find us putting a lot of energy and effort, including these ones I just gave you an example of, including what we just did As simply as a co brand card with Telefonica, which could open up all kinds of opportunities for prepaid cards and other Nothing we could do with similar phone companies around the world. I just think that one announcement Different companies will play in the space. I also believe that finally the phone partners, the mobile carriers, the handset manufacturers, banks, People like us, what we need is an open payment system. What you do not need is a payment system that is built off one brand. Even our MTA trial As I spoke about in New York, well, right now it's a trial using us. Eventually, we actually expect in a short period of time for If it works out to become a brand agnostic trial, where we may have the advantage of processing more of the transactions because our technology approves those transactions at It turns out faster, but it will be brand agnostic. And so to me, I think the real development of growth in mobile commerce requires that kind Center of that developing those new generation of mobile phone payments. So that's where I am with it. Okay, great. Thanks, Ajay. Appreciate it. And your next question will be from the line of Bryan Keane with Credit Suisse. You may proceed. Hi, good afternoon or good morning. I just Would be interested in getting a little color on some of your conversations with the Fed. We've heard BofA come out with some thoughts. There were some pretty Significant cuts and interchange. So we'll be interested in just kind of what you've been hearing from the Fed? And then secondly, on timing, When do you think we'll get some idea on what the Fed is thinking for sure? Well, look, we've been talking to the Fed as I said, so have the others. And Our talks with them, our meetings with them are very constructive. We are trying to make sure that they get all the information they need, all the facts they need to be able to actually assess what they've been asked to do 9 months from the date of the signing of the bill, which is the actual setting of what should be these new debit interchange levels and they have 12 months to actually come out with clarity around the exclusivity angle Of the debit card branding. I have every expectation they're going to meet their dates. And Actually, what we're discussing with them is not something I'm going to discuss openly on a conference call because that will be an inappropriate thing to do. But it's A very practical open conversation with full data and full information that we plan to give them. Okay. Thanks a lot. And your next question will be from the line of Sanjay Sakhrani with KBW. Go ahead. Thank you. Good morning. I was just wondering if you could give us a sense of where we are in the process The roll off of account losses for each of the customers and just looking ahead for the next few years, do you guys have any major contract renewals? Sanjay, in terms of the roll offs, we are fairly far through a number of the roll offs, in Particularly of the U. K. Portfolios and as we just said on the earnings call, we are also relatively far through the VAMO roll off. We We have some more cards left to roll off in the Q3 and that's why we're saying that we're actually going to bottom out from a transaction point of view. And from a transaction growth point of view, a degradation point of view in the Q3 and then we're going to go into a bit more of fashion into the Q4. So by the end of the year, we will be pretty much done. We don't expect that our results will We impacted in 2011. And in terms of major contracts that are coming on Really the one that we've been talking about now for a while is the SunTrust contract. And there, we said earlier early in the year that we would think that we have in 4th quarter the roll on, we are Accelerating that, the roll on will be coming on in the Q3 now. And so hopefully, we'll be up and running in the latter part of the Q4 with Some contribution to our net revenues. In terms of major renewals for the near future, We don't really have any major renewals for the next couple of years. We do know that there is an opportunity in 2011 Very comfortable on where we are. Okay, great. Thank you. Question, please. Your next question is from the line of Andrew Jeffrey with SunTrust. Hi, good morning. Could you talk a little bit about Cross border contra revenue, the rebates and incentives, Martina, are we going to effectively Lap those pricing adjustments at the end of 'ten and then normalize in 'eleven? Yes. I mean, as you know, we have the The cross border pricing showing up in our gross revenues as well as in our Contour revenues and we did implement, Andrew, as you know, October 1 of last year, those kind of changes. So in the Q4, we will be lapping those price Good day, ladies and gentlemen. Albeit, what I just would like to make sure that you understand in 2011 and going forward, it really depends on how cross border volume growth is going to behave. So you might depending on On how much it will grow, you might see some impact still year over year on the growth line as well as on the contrast And net net, as we said before, we expect that there will be only a slight contribution to overall net revenue, positive Your next question will be from the line of Craig Maurer with CLSA. Go ahead. Yes, good morning. I just wanted to ask for a bit off topic, an update on CEPO With all the turmoil in Europe, if there's been any movement on that or if that's been pushed to the back burner for now? Thanks. No, actually, SEPA is exactly where it was and it's still online and they're making steady progress. In fact, in a number of countries, in In Germany, we've now got the 4th bank to become a Maestro exclusive issuer, which is Dresner settlement. They're actually migrating close to 3 quarters of 1,000,000 cards from their local debit card human processor. We've got in France, we've begun processing domestic Take Mastercard transactions for the first time with the launch of what I talked about in the last call, the Carrefour retailer card as well So there's a bunch of these happening. We've got debit Mastercards now in all 4 Nordic countries. We're launching the product in Ireland, Turkey, Greece, UK, Poland, and in April, we actually have mandated e commerce support for all 300 1,000,000 Maestro cards in Europe, which I think will enormously help with the utilization of these cards for e commerce. And on the competitive acquiring front, domestic transactions on these cards issued with the Maestro logo are actually starting to be routed through our network. If an acquirer or a merchant chooses to do so, so we're Seeing an incremental volume from that, it's still small numbers, but it's early days in the game. But on hole in hole, I don't think The so called macroeconomic scenario in Europe has changed any of the on the ground desire and reality to go forward with the Thinking behind several. Thank you. And your next question will be from the line of James Friedman with Susquehanna. Martin, I appreciated the more detailed color about the impact of foreign exchange. If you could revisit what you said again and also the ban And that you had described for the €1.30 to €1.45 I think. If you could repeat that again, I'd appreciate it. Certainly. So basically what we In the Q2, we had about a 1% headwind on foreign exchange. So this is really isolating the euro and the real and the movement of that. And If we were to stay at the euro at around 1.30 and you compare that to the year ago second half euro For rate, which was around 145, we do believe that we are going to have a bit of an increased headwind of about 3 to 4 percentage points. It depends on which quarter you're going to be, but for the second half in total is about 3 to 4 percentage points. I just also would like to reiterate The rule of thumb that we really give to everybody in terms of looking at our euro exposure, we really say for every EUR 0.01 move that The euro moves versus the dollar, that net revenues is impacted by $9,000,000 to $11,000,000 And then On the operating expense line, the move impacts about $4,000,000 to $5,000,000 So you're on the operating income line, you have About a move of $5,000,000 to $6,000,000 and that should allow you to extrapolate depending on what kind of exchange rates you assume for the rest of the year where our Results could be coming in from an as reported basis. That's really helpful. And then if I could just follow-up with a related international question. 1 1 of your competitors on their conference call had referenced long term targets of generating 50% of their revenue internationally. Since you are already disproportionately international, could you describe your long term objectives? What percentage and acceleration So first of all, I'm not sure the right word would be disproportionately exposed because I think that's just I'm extremely exposed because I think that's just the reality of the world and what's going on with economic growth around the world. We have 55% of our revenue comes from markets outside of the United States and I'm not sure that's a unfortunate or disproportionate part of it. I think the second part, the I think part of the question where we're going, we've got Investor Day coming up in September, why don't we wait to have a conversation that day. I'm not sure yet whether I I want to necessarily set up a target to go there. I'd much rather go where markets are growing. And if markets happen to grow faster for the next 5 years overseas, I would love to see faster growth there. If the U. S. On the other hand comes out of its current cycle into a good economic Savi, I'll celebrate that as well. So I'm not sure that setting up a target for where I want to get my business from is as useful as setting up a target Question, please. And your next question will come from the line of Bob Napoli with Piper Jaffray. Thank you. Good morning. And I understand that It's going to take some time to get a handle on any effect from the Durbin Amendment. But it might be helpful to provide us with a A little bit of color of kind of the revenue, the revenue yield of the U. S. Debit business, so we can get a feel For the economics, a little better feel for the economics. I don't want to expect something exact, but maybe some kind of a ballpark feel Bob, it's Martina. First of all, as we all know No, it's far too early to be really drawing any type of conclusions in terms of what the Durbin Amendment does given all the interpretation that the Fed has to do. But in a very predominant way, what was featured in the Durbin Amendment was really related to interchange fees. And as you know, while we interchange the transaction, that is not our revenues. So we are basically handling the interchange fee from the acquirer to the issuing community. And again, I can only tell you it's very, very Very difficult for us without the interpretations to understand how the environment, the payments environment in total We'll really be impacted. How the banks will specifically be impacted? Of course, we are all seeing the announcements and Expecting that there will be some decrease to their interchange revenues, but then to extrapolate to What that means for the individual payment network would be too premature to do at this point. But you could give a feel for like what your net revenue yield is off of your debit volume? No, Bob, we are not giving that. We don't have those kind of detailed numbers out there in the market. Your next question will be from the line of Julio Quinteros with Goldman Sachs. Great. Good morning. Real quickly, we talk a lot about the numbers that could be at risk related to Durbin and whatnot. But Can you just maybe frame, Ajay, for us the mitigation efforts and some of the strategy that you guys are going through right now? As As you think about what the Fed could do, what are the levers to potentially offset any moves by the Fed that could impact volumes or your overall business. And I guess just relatedly to that as well, as we look at the credit card accounts on file declining still, How are you guys thinking about that in terms of also mitigating the sort of future lack of growth on the credit card side? Well, I'm not sure you can conclude that there'll be a future lack of growth on the credit card side, first of all, given all the change that will happen. One of the things that could well happen is that the pattern of spend changes from one kind of card used to another kind depending on what kind of Consumer incentives get developed over time by issuers or by merchants as they respond to where the Fed comes out on its thinking So I'm not sure I could conclude that credit card spend will necessarily decline over time. I'm not even sure that I could conclude that debit card spend would decline because it will Debit card spend would decline because it will depend on where the interchange number settles down, how the debit card plays a critical or non role in the strategy of retail banks to get DDAs through the door, which they need for relatively low cost funding. So this is you're asking me to conjecture on 100 different permutations and combinations and we're working our way through those. I'm not Do that conjecture. But I would tell you this, if you go by what happened in Australia, then you know that what will happen here is that banks We'll relook at their economic model. They will look at pricing. We're already seeing motion on the so called, let's say, The soon to happen demise of free checking is how people are speculating. I don't know that's true, but I can see some movement on that. You're going to see efforts by the issuers to drop off costs, they'll go for electronic servicing, they'll probably look at their rewards programs, they're going to see efforts to cross sell to the DDA even stronger, more enhanced because that's the only way you can afford that DDA account. You're going to find every It includes the fair compensation for technology, for fraud, for security, for privacy, plus The margin for the capital invested, I think those are the kind of conversations you're going to see. Beyond that, conjecturing how the market will shake out and how we'll respond, We just have to be sensible over the next few months. I firmly believe what I said earlier. There will be challenges, but there will be But there will be opportunities. And I've said this in a less than in a somewhat more joking way. This is one time when I am probably grateful For not having had the highest market share endeavor in the United States. Great. Thank you. And your next question will be from the line of It's Khasain with Bank of America Merrill Lynch. You may proceed. Thanks. Ajay, just following up on your last comment there, what is Mastercard's view on non exclusivity? Thanks. I don't have a view yet because I'm going to see watch what the Fed does. As you know that that's one of the topics that's the 1 year away decision that they have to explain. So I don't have a clear view yet. I am developing different scenarios for different ways in which they may respond, but that's kind of where I am. I mean, just given your market It seems like it presents opportunity to the extent that it relates to offline, not just PIN. Is that right? That's really your conclusion, buddy, to draw. I am still waiting to see how the Fed comes to a understanding of what constitutes the amendment they'd like to put in. If you kind of looked at the language In the Durban Amendment, the plain language requires that an issuer's debit card must access at least 2 unaffiliated debit networks. The Fed's got to interpret whether one of those is signature, So we're going to see how that goes and then I'll have a more considered view for you. Thanks, Ajay. And your next question will be from the line of Jason Kupferberg with UBS. So Ajay, you've inherited a great balance sheet And your stock is down along with some others obviously because of all the regulatory uncertainty that's popped up here over the last few months. I mean, how How do you think about balance sheet deployment options? Do you think more seriously about possibly doing a new share buyback program? Or are we going to have to wait Will the September analyst meeting to perhaps get some more from you on that? Yes. I answered my own question? Let me ask you another quick one then on prepaid. If you can give us sense. I don't know if it can be quantitative at this point, but what kind of growth are you seeing in prepaid, maybe parse out U. S. And non U. S. At least qualitatively, can you give investors a sense? Great question. I think PayPay is a huge opportunity. And the market size is the largest today In the United States, largest by far, not just by a small amount. The fact is it has many things built into it, Everything from what the Social Security Administration is planning to do, Ayesha, I think we talked about this last earnings call, but what they're planning to do By 2013, every single payment from the Social Security Administration will either go by direct deposit to bank account that the receiver has or by a direct load onto a prepaid card that the receiver must then It so happens that we've got a great program in place to be the supplier of those prepaid cards through Direct Express and America. And so that's kind of driving one of the things that's driving prepaid as a space. The prepaid card space has got a large component of Consumer reloadable, general purpose cards, a large component of what the government will provide, which is kind of the example I just gave you, a fairly Very large component dedicated to payroll and corporate payroll and the like, and then a much smaller component dedicated to gift cards. And In fact, gift cards are what everybody talks about, but in fact, the economics of a gift card are very different from the other three Because a gift card is a one time load of an average of $70 to $80 each time in the U. S, whereas a social Security card, a 1000000 of which are already in circulation by the way, have a load of somewhere between $700 to $800 a month. And if a person stays on that payment for a year, you're talking about $9,600 of load compared to $70 to $80 of load on a gift card. So the economics are very different and we We're very focused on the government payroll and consumer general purpose reloadable. There's obviously a lot of growth to happen I think the Telefonica deal as an example is a great way to think about consumers who may possess phones, but may not possess formalized bank accounts and formalized credit cards as a way of entering into a whole new space. There are similar opportunities with the Accord JV that we signed In Europe, where we look at meal vouchers and company benefit payments that come on to prepaid cards, there's opportunities There's no more payments in Latin America that we're exploring and doing a lot of work with. There's similar things in Asia from India to other locations. So I'm very interested and intrigued by what prepaid could do and how it could be a way of getting so many underbanked, not just unbanked, people to participate in the payment system. And that's kind of where our effort and energy is going, Juss. All right. Well, good luck with that. We'll see you at the Analyst Meeting. Thank you. And next you have from the line of Don Fendetti with Citigroup. Hi, good morning. Ajay, these have mentioned that they have had some recent Discussions with the DOJ, but we're pretty comfortable with where they were going. I was curious if you had any comments? And does that Tie into anything on the merchant litigation, if you could just sort of frame that issue from Mastercard's perspective? Sure. Doug, the DOJ has been in contact with us for quite a while on this CID goes back to October 2008. In If you go back to our Qs from that time onwards, you'll find us talking about it consistently, including in the latest Q. The The fact is that we're working with them and cooperating with them for all the information they're looking for. As you heard in a different call, this is not directed We have one payments network. It's part of an overall investigation of the merchant rules, not the interchange, the merchant rules, the POS rules Several U. S. Payment card network players. It's got to do with all the POS acceptance rules. So I'm not going to comment on communications with the Government regulators, I said that for the Fed, that's kind of not what I do. What I can comment on is in my public filings. All I can tell you is we're actually A very constructive dialogue with them and that's where we are today. So is there, I guess, as an investor, is there any risk around So business practices or would it be the type of thing where it's pretty marginal no matter what comes out? Tough for me to conclude until I know what the DOJ is thinking, but I have no reason to believe that the DOJ investigation has anything Any magnitude that I would be so seriously concerned about today, that's today, it's got rules, it's got POS acceptance rules. Tomorrow, if they change the POS acceptance In a way that makes it a different business model, yes, then over a period of time, it will have an impact. But I don't know any way to add any more information to you than where that It is today. Okay. Thanks for the clarity. And your next question will be from the line of Rod Bourgeois Don't take it seriously, man. It's the only one. On that note, do you view the Durbin Amendment as opening certain doors The share gain opportunities in the U. S. Debit business and I guess more specifically on that, could you give us any examples of new strategies that you're entertaining in order To respond to whatever your expected case scenario is related to the Durbin Amendment. So, as I said, there's One expected case scenario for the Durban amendment, there's actually a series of multiple options that could settle down depending on how the Fed, which has been tasked with studying this, she comes to conclusions over the next 9 months in the case of the interchange numbers and 12 months in the case of the other provisions So there's no way for me to give you one versus the other. And I doubt that even on Investor Day in September, we You're going to know much more by then about which way the Fed is leaning or thinking. But I would suggest to you, does it open up I think it opens up both opportunities and challenges depending on which side of the table the Fed comes out on. And my perspective is that when you've got a lower market share, us as well as other players, whatever changes in the Kim will give us an opportunity to be nimble and respond to it. Having said that, the larger market share players will fight as hard as they But I'm very confident that I will find opportunities through this for us to keep doing well. Well, So one scenario is that you have an opportunity to get your brand on Visa branded exclusive cards. And I guess my Question is why would that not be a big opportunity from a share gain perspective, an opportunity that you've not seen in a long time? Sure. If that Nice to attract merchant routing decisions your way in order to gain that share. Hypothetical question, Chief. I don't answer hypothetical questions. All right. We'll talk at Analyst Day. Thanks. You got it. And your next question will be from the line of Tom McGrawan. You may proceed. Ajay, Do you have any thoughts about chip and TIN technology coming to United States? And any thoughts about what you view to be the total fraud cost in the system, including That's a great question. I'm not sure that That chip and pin technology in the United States is a definite in the next foreseeable period of time, Unless it gets legislative, that's a different thing. But where it is today, the cost of actually rolling out the acceptance network as As well as reissuing all those cards, is so many multiples of any fraud cost benefit that I think the economic rationale for doing that will become very challenging. And in this current environment, where so many other revenue lines for The Bank are under pressure given the moving target of the financial reform bill from what's going on with capital So what's going on with the revenue streams in their trading book, in their investment banking book, in their consumer banking book, I don't know that A lot of our clients would consider that to be priority number 1 today. That's just the reality of where it is. So that's kind of where it is today. I'm not sure if you'll see a great deal of movement on that in the foreseeable future in the U. S. Jeremy, I think we have time for one Next question? Absolutely. Your final question will be from the line of Chen Xinyuan with JPMorgan. Go ahead. Good morning. Thanks. Sorry if I missed this, but did you give an update on the merchant litigation case? And Ajay, I heard you mentioned Charge cards in your prepared remarks on Durbin as an option for issuers. And I'm curious if you see a revival in growth for charge cards in the U. S? Sure. Hi, Tien Tsin. I'm not sure yet that I can comment definitely about ChargeCards revival. That's just one of the options that I think that if I will be thinking very carefully through different ways of finding relatively low risk methodologies of making sure that I can The low risk methodologies of making sure that I can help give my consumers the right kind of tool and yet protect my revenue stream. So that's That's one of the ways that people would look at it. But I don't know for sure that I can tell you that a lot of people are going to come and jump at it tomorrow. As far as the merchant interchange The change litigation is concerned, what's nothing new. The court heard oral arguments on the plaintiff's motions for The clarification and the defendant's motions to dismiss in November or not, that decision is still awaited. The parties are participating in a confidential mediation, I have I have no idea if it will be successful or not and no trial date has been set up. So there's nothing new on that merchant litigation from what we discussed That's the last time we spoke. Okay, great. Thanks for the update. And at this time, I would like to hand the call back to Ajay for his closing comments. So thank you for all the questions. And let me leave you with just a few closing thoughts. Over the shorter Both the economy as we discussed in the U. S. In particular and the regulatory front represent some challenges. However, Mastercard Instacart, I think, has demonstrated over the years that it can find its way through these challenges. And on the business front, Martina and I both Talked about the fact that we have lost a few debit contracts over the last couple of years that are only now beginning to work their way through our financials. We've also won a few great Deals and debit and the emerging payments space that I think will begin to contribute later this year, but will contribute much more over the next We also worked very hard to control expenses to manage through the impact of the recent global economic slowdown. And I'm still Trying to put money into investing in future growth, again, as Margina mentioned, we're putting some of the savings into e commerce, mobile, prepaid, that kind of I'm kind of still very optimistic about our future growth prospects. We do business in 2 10 countries today and the majority of our Revenues come from outside of the United States, which as of now are showing faster growth. At any given time, I'm going We have challenges in some markets and opportunities in many more. Our global structure, our global construct, I think contributes to our resilience through And frankly, to my expectation for long term growth of our business. I just firmly believe that payments is and will remain a growth industry due to the continued secular trend to electronic payments. The underlying fundamentals of our business remain intact and we are also innovating in order to be best positioned take advantage of these growth opportunities. That's why I'm very excited to be here. I'm very excited to be leading this company and this team. And once again, thank you for your I look forward to seeing many of you at our Investor Day on September 15, and we'll continue the discussion about our business and the strategy Thank you for our future. Thanks again. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have yourselves Wonderful day.