Mastercard Incorporated (MA) Q1 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to MasterCard's First Quarter 2010 Earnings Conference Call. My name is Jeremy, and I will be your coordinator for today. [Operator Instructions] At this time, I'd like to turn the presentation over to your host for today's call, Ms. Barbara Gasper, Head of Investor Relations. Ma'am, you may proceed.

Thank you, Jeremy. Good morning, and thank you all for joining us today either by phone or webcast for a discussion about our first quarter 2010 financial results. With me on the call this morning are Bob Selander, our Chief Executive Officer; Ajay Banga, President and Chief Operating Officer, who, as you know, will succeed Bob as MasterCard's CEO on July 1; as well as Martina Hund-Mejean, our Chief Financial Officer. Following some comments by Bob, Ajay and Martina, highlighting some key points about the business environment and our first quarter results, we will open up the call for your questions. This morning’s earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website, mastercard.com. The earnings release and the slide deck have also been attached to an 8-K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for one week through May 11. Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today’s call may include some forward-looking statements about MasterCard’s future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings. With that, I will now turn the call over to Bob Selander. Bob?

Thanks, Barbara, and good morning, everyone. I'd like to start out by saying how pleased I am that we've been able to deliver another strong quarter of earnings results. This is indicative of both the underlying momentum of our business, as well as some encouraging signs of economic recovery in pockets around the world. In the first quarter, we saw net revenue growth of 13.1% on an as-reported basis, and 10.2% on a constant-currency basis. Gross dollar volume, or GDV, grew 8.3% on a local-currency basis. We continue to see growth in processed transactions, and cross-border volumes have returned to double-digit growth. We maintained solid expense control, which allowed us to expand our operating margin nearly five percentage points from last year's first quarter. All of this helped fuel net income growth of almost 24% for the quarter, or approximately 19% on a constant-currency basis. We believe that some of the improvements we saw in the quarter can be attributed to recent positive macroeconomic data points. For example, the stabilization of unemployment rates in United States as well as increased consumer confidence, although still at low levels, were likely contributors to increased spending in discretionary categories and to the improvement we saw in U.S. credit volume. While credit growth in the U.S. was still negative for the quarter, we've moved beyond the double-digit declines of 2009. During the month of March, we saw positive growth in processed U.S. credit volume for the first time in approximately 18 months. This trend continue through the first four weeks of April. Given the challenges we've all faced over the last 18 months or so, it is encouraging to see signs that the global recovery is continuing across a number of countries, specifically in Russia, India, China and Brazil. As many of you are aware, many economists now observe that the global economy has reached a self-sustaining momentum. This is particularly evident across emerging market environments. I recently returned from a series of business meetings across Asia, and I was struck by the overwhelming sentiment of optimism that many of our customers have about their future business opportunities. This is in contrast to some of my recent interaction with bankers in the U.S. and Western Europe, who have been more cautious. Nonetheless, we continue to see improvements across a number of economic indicators, which bode well for our business. Excluding the U.S. region, we saw strong GDV growth of approximately 15% on a local-currency basis for the quarter. I'd now like to introduce Ajay Banga, MasterCard's next Chief Executive Officer and the newest member of the company's Board of Directors. Over the course of the succession planning process, our Board focused on identifying someone who possesses both leadership skills and proven results. Ajay has a career that is rich and bold. His industry knowledge, his deep background in financial services, his experience working in numerous geographies have all prepared him well for this role and make him the perfect CEO to lead MasterCard into the future. As we work together over the past eight months, I have been very impressed by his thoughtful and energetic approach to business. For me, it has been challenging and exciting to have led the company for the past 13 years. I'm proud of how our company has demonstrated strong, consistent performance. Importantly, we built an incredible set of assets that offer a true competitive advantage, including: a world-renowned brand and our iconic Priceless advertising platform; a global technology network that is second to none, offering incredible flexibility and customization opportunities for customers; and employees who are deeply experienced, knowledgeable and passionate about the payments business. I look forward to continuing my current role, and then transitioning to the Executive Vice Chairman role in July. And now, I'd like to turn it over to Ajay to provide some comments on our business.

Thank you, Bob. Let me start off by saying that Bob has just done a tremendous job of positioning MasterCard for continued success. The strong first quarter results that we announced this morning is just one more indication of that positioning. Martina is going to get into the details of the results shortly, so I thought I'd spend a few minutes sharing some of our thoughts and business highlights with you. The payments industry is still very much a growth industry, not just in the emerging markets where there is an obvious potential for growth all around. But also in the developed world, where there is continued opportunity for growth by market segment, and in new and alternative payment platforms like contactless, mobile, e-commerce and remittances. We're just very fortunate to be part of an industry where the secular shift from paper to electronic forms of payments will drive growth through different economic cycles. Our industry and our business have been built on the widespread adoption of credit and debit products globally, and we remain very optimistic about the growth potential of these businesses. We're going to invest our resources in initiatives designed to accelerate our business in key markets around the world and to drive growth beyond that secular momentum. To do this, you will find us sharpening our focus on supporting the needs of constituents across the payments industry and diversifying our revenue streams by geography, by customer and by product, including capturing the large opportunity we believe prepaid products represent. Innovation will be key to our future success, so you should expect to see us putting an even higher level of effort in these areas while we continue to innovate in more of the traditional spaces of debit, credit and prepaid. I'm sure you will hear a lot more from us about this when we host our annual investment community meeting in September. So let's do a quick review of some of our recent announcements in this area, and let me give you a sense of where we are focusing our efforts. Last month, we launched MasterCard Labs, our new global Research and Development organization, focused on payment innovation, aimed at differentiating MasterCard among customers and consumers. MasterCard has contributed significant innovations in the past as well, including PayPass, MoneySend and inControl. The creation of this organization, along with some other recent announcements, underscores our commitment to build solutions with our own, but also with partners to most efficiently and effectively meet the emerging needs of the payment space. Another example is our launched of MasterCard MarketPlace in the United States, powered by a new alliance with Next Jump [Next Jump Nation]. MasterCard MarketPlace allows cardholders access to merchant-funded offers from thousands of merchants. What's new and different about it is that shoppers can set what types of offers they want to see, and the MarketPlace then tailor the discounts to shoppers' stated preferences, as well as their interactions and the behavior of shoppers just like them. Importantly, merchants are then able to customize offers to groups of people and monitor the results realtime, which in the past have proven to produce industry-leading conversion rates. So it's not just an enhanced check out experience, but an enhanced shopping experience for consumers and a targeted promotions engine for merchants. Think of it more as a Match.com for shopping and with some of the largest online retailer among the over 28,000 participating merchants. They're very excited about what this platform can do for us and our customers. I hope you had the chance to sign up and check out the daily overwhelming offers and VIP invitations to exclusive shopping events. Our inControl solution continues to gain momentum with recent U.S. commercial wins including JPMorgan, Fifth Third and the First National Bank of Omaha. We're very optimistic we will be able to bring you further daily news in this in the near future. We're also making progress in the U.S. debit front, but not as you've heard from some cynics, with deals at any price just to gain market share. In addition to the fund trust deal, which we announced back in January, we have signed debit deals with a number of other banks in this past quarter, including Ohio-based FirstMerit Bank, who will be converting their debit and credit portfolios to MasterCard. Additionally, Ally Bank, the online banking unit of GMAC Financial Services, will begin issuing Platinum debit MasterCard cards later this year through their U.S. online, checking and money market account holders. On the credit front, HSBC renewed their global mass affluent Premier credit relationship with MasterCard. And as part of a long-term contract renewal, MasterCard is now the exclusive brand of choice for HSBC's Premier card program, which is aimed and targeted at affluent customers around the world. Prepaid continues to be a high-growth area as we further build our market leadership. On Earth Day recently, the U.S. Treasury announced a green initiative to reduce paper checks. Treasury will leverage the existing Direct Express program with Comerica Bank that already has more than 1 million MasterCard-branded prepaid cards. Direct Express will be expanded beyond Social Security benefits to now include all Veterans Affairs, Railroad Retirement and Office of Personnel Management benefit recipients that currently receive paper checks. This conversion process will begin this year with requirements that all new recipients receive payments electronically starting in March 2011, and all existing recipients receive payments electronically starting in March 2013. Being part of this tremendous growth opportunity just validate the efficiency that payment cards deliver over the traditional forms of payment. These are just some of our efforts that have made it to the point of public announcement. Stay tuned. We expect to have more to say on a number of fronts as we move through the year and continue to build and bring even more new products and services to the market. I'll now turn it over to Martina to discuss the first quarter financial results in detail. Martina?

Thanks, Ajay, and good morning, everyone. Let me begin on Page 2 of the deck, which shows our reported results. As Bob said, we are very pleased to start off 2010 with strong first quarter financial results. Revenue grew 13.1% to $1.3 billion over the comparable period last year. On a constant-currency basis, net revenue grew 10.2%. This revenue increase was primarily driven by a 10.9% increase in cross-border volume, and 8.3% increase in gross dollar volume on a local currency basis and a 4.6% increase in a number of process transactions. Pricing contributed approximately five percentage points to net revenue growth. This growth was somewhat tempered by an increase in rebates and incentives due to the impact of our cross-border pricing structure, customer agreement activity and volume increases. Operating expenses increased 2.2%, primarily due to foreign exchange fluctuations. Excluding the impact of foreign exchange, operating expenses were up slightly as we continue to manage our expenses prudently. Our operating income was $700 million for the quarter and resulted in a quarterly operating margin of 53.5%, a 4.9 percentage point improvement over the year ago quarter. We delivered net income of $455 million, or $3.46 per diluted share, up roughly 24% over the first quarter of 2009. Turning to Page 3, we are seeing a stronger performance across a number of business drivers, including the strongest volume growth since the third quarter of 2008. And cross-border volumes were back to pretty healthy double-digit growth levels as well. Worldwide gross dollar volume, or GDV, was up 8.3% on a local-currency basis in the first quarter, and grew 14.8% on a U.S. dollar-converted basis to $631 billion. We've continued to see stabilizing trends in U.S. GDV with good sequential improvement in the first quarter, which was down 1.1% as compared to a decline of 3.4% in the fourth quarter last year. Across the rest of the world, GDV continue to grow a healthy 14.7% on a local-currency basis. Worldwide credit GDV grew 3.5% on a local-currency basis versus the slight decline in the fourth quarter. This is the first quarter since the fourth quarter of 2008 were worldwide credit GDV was positive. U.S. credit GDV growth continues to improve on a sequential basis, but was still down in the high single-digit range. Credit GDV for the rest of the world grew 9.1% on a local-currency basis. Let's turn to debit. Worldwide debit GDV grew 18.1% on a local-currency basis. This compares to about 12% growth in the first quarter of last year. In the U.S., debit GDV volume grew 7%. Debit growth for the rest of the world was approximately 33%, primarily driven once again by growth in our Asia Pacific, Middle East Africa region. On a local-currency basis, worldwide purchase volume grew 8.7%. U.S. purchase volume was also slightly positive for the quarter. Cross-border volume growth on a local-currency basis was up 10.9%. We saw a double-digit growth in our Asia Pacific, Middle East, Africa and European region, while our cross-border business in Latin America was good, largely due to the strength of our Brazilian cross-border volume. We continue to see good growth in our U.S. cross-border volumes with strong cross-border acquiring from travels into the United States. When we look at processed transactions, they increased 4.6%, compared with the year-ago quarter to a $5.4 billion. In Asia Pacific, Middle East, Africa and the Latin American regions, processed transactions continue to grow at double-digit rates. With the exception of Europe, all other regions grew at mid to high single-digit rates. The number of MasterCard branded cards worldwide was essentially flat on a year-over-year basis at 957 million cards for the quarter. Excluding the U.S., the rest of the world card issuance grew approximately 7%, demonstrating the continuing growth opportunities for MasterCard from the secular shift from cash to electronic payment forms. As of March 31, 2010, there were approximately 1.6 billion MasterCard and Maestro-branded cards issued globally. Now let's turn to Page 4 to discuss the components of revenue. Domestic assessment increased 6.1% from the first quarter of 2010 due to increased volumes and the impact of the April 2009 pricing change, partially offset by the repeal of some European pricing beginning in July 2009. Foreign exchange contributed roughly three percentage points of growth. Cross-border volume fees increased 39% versus Q1 '09. A little more than half of this $125 million increase was due to pricing actions during 2009. The remainder was primarily due to cross-border volume growth, which was up 10.9% on a local-currency basis. Foreign exchange contributed approximately three percentage points of growth. Transaction processing fees increased 16.7% compared to the year-ago period. We continue to benefit from April 2009 U.S. pricing changes, which accounted for approximately 11 percentage points of the increase. The impact of foreign exchange contributed roughly three percentage points of growth. Processed transactions grew 4.6% in the quarter and continued to be affected by the loss of certain debit portfolios in the U.K. and the U.S. Excluding the loss of these portfolios, processed transactions grew approximately 10%. Other revenues increased 12.6% versus the first quarter of 2009, primarily driven by compliance and penalty fees. All of these resulted in an increase of $255 million, or 17.1% in gross revenue. For the quarter, rebates and incentives grew $103 million. Approximately $55 million of this increase was due to rebates associated with our new cross-border pricing structure. The remainder was attributed to new and renewed agreement and volume growth. Overall, rebates and incentives represented 25.2% of gross revenue, versus the 22.6% in the first quarter a year ago. Now let's turn to Page 5 for some detail on expenses. During the first quarter, total operating expenses increased 2.2% and were up only 0.5% excluding the impact of currency fluctuations. Within total operating expenses, general and administrative expenses increased 2.1%, with currency fluctuations accounting for 1.4 percentage points of the increase. The remaining change in G&A was primarily driven by a 2.9% increase in personnel cost, mainly due to increased payroll taxes related to divesting of equity compensation awards. Travel and entertainment cost was also up somewhat versus extremely low levels in last year's first quarter. These increases were partially offset by lower severance cost and reduced payroll. Advertising and marketing spend was down 0.7% versus the year-ago period. Excluding the impact of foreign exchange, A&M declined about 4% versus the first quarter of 2009 primarily due to lower spend in the U.S. Depreciation, amortization was up as a result of continued investment in data center equipment and capitalized software. Moving to the cash flow statement and balance sheet highlights on Page 6. We generated $95 million in cash from operations in the first quarter primarily driven by operating income, partially offset by payments of year end payable litigation settlement payments and the payroll tax liability associated with divesting of equity compensation awards. We ended the quarter with cash, cash equivalents and other liquid investments of $3.3 billion. Before getting into some thoughts for full year 2010, let me give you an update of what we've seen recently. While looking at our MasterCard processed volumes through April 28, we see the following. Our cross-border volumes continue to improve across all regions, with a rate of growth a bit higher than the first quarter. We see continued strong growth in our Asia Pacific, Middle East, Africa region and Europe region, and some good increases in the U.S. and acquire cross-border volume as more consumers and business people travel to the U.S. As Bob said earlier, growth in U.S. credit processed volumes was more positive in April than it was in March. However, when we look at total U.S. processed volume growth in April, it is very similar to the first quarter growth rate due to the tempering effect of the two U.S. debit portfolio losses. Total processed volume growth for the rest of the world in April was also similar to what we saw in the first quarter. Now let's turn to our thoughts for 2010, please look to Slide 7. In order for our full year 2010 net revenue growth to be as strong as the double-digit growth we saw in the first quarter, we would have to see further improvements in some of the macroeconomic indicators, stronger volume growth and cross-border activity beyond what we are currently forecasting. Remember, as the year progresses, we will see some tempering in top line growth due to the following factors. First, we begin to experience tougher comps, given that signs of economic recovery began to show in the second half of 2009. Second, the rollover of a few portfolios will continue to dampen our processed transaction growth. Right now, we expect this to bottom out in the fourth quarter of the year, but we expect processed transaction growth to remain in the single-digit range. We will continue to give you an indication of the adjusted transaction growth rate each quarter in order to demonstrate how the underlying business is performing. And we continue to expect contra as a percentage of gross revenue to average 26% to 27% for the full year, given our current expectations of volume growth and cross-border volume growth in particular. Therefore, as a percentage of growth order revenue, contra will be a bit higher in the remaining quarters for the year than the 25% level we saw in Q1. Let me remind you, that we always look at rebates and incentives in the context of longer-term net revenue growth. Overall, we continue to anticipate our total operating expenses to 2010 will be flat to slightly down over 2009 levels including severance charges. Some of the savings obtained from our 2009 severance actions will be reinvested back into the business areas, such as e-commerce and prepaid, as well as some additional marketing efforts. Turning to the components of operating expense. General and administrative expense is expected to be down from 2009 levels, including severance. We still expect advertising and marketing to be up, mid-single digits from our full year 2009 spend. While our current full year view for advertising and marketing expense has not changed, our expectations for the quarterly cadence of spend has changed from our initial thoughts. Rather than the absolute level of spend being relatively equal in the remaining three quarters, we now expect the quarterly spend to increase sequentially as we move through the year, and depreciation, amortization will trend upward over the balance of the year due to the impact of increased investments in our business. We continue to assume an effective tax rate of 34.5% for 2010. And finally, we remain focused on our objective for the 2009 to 2011 period of annual margin expansion of three to five percentage points and average annual net income growth of 20% to 30%. Remember, while all of our objectives are on a constant-currency basis, our as-reported numbers will include any impact of foreign exchange. Assuming yesterday's exchange rates hold for the balance of the year, we would expect the current tailwind to revenue we saw in this quarter to be a roughly neutral in the second quarter turning into headwind for the back half of the year. As we look at underlying economic indicators, customer relationships and business momentum, we believe we will be able to deliver another solid year. Let me now turn the call to back to Barbara to begin the Q&A session. Barbara?

Thank you, Martina. We're now ready to begin the question-and-answer period. And in order to get to as many people as possible in our allotted timeframe, we ask that you limit yourself to a single question with one very brief follow-up, and then queue back in for additional questions. Operator?

[Operator Instructions] And ladies and gentlemen, your first question comes from the line of Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang - JP Morgan Chase & Co: I wanted to ask about Europe. The purchase volume there, I guess, was a little bit better than what we expected. Can you comment on recent trends in Europe both in cross-border and also in the purchased GDV side? Anything we should consider as we look through the next few quarters?

Tien-Tsin, it's Martina. There is nothing specific really to call out. We are seeing some better momentum in Europe, but we can't really point to any specific factors at this point. Tien-Tsin Huang - JP Morgan Chase & Co: So in terms of recent trends there, just to clarify, anything that's worth noting from a macro perspective?

If you are just talking about over the recent issues that Europe has regarding Greece and some of the other countries, we really have not seen any impact on our numbers related to those kind of issues. Tien-Tsin Huang - JP Morgan Chase & Co: And my follow-up is probably another brief one, but just thoughts on Visa's acquisition of CyberSource, and does this increase your desire at all to do a deal in e-commerce?

Tien-Tsin, it's Ajay. We're already present in the gateway business for quite some time. We've had the MiGS, as you know, MasterCard Internet Gateway System [MasterCard Gateway Service] in Asia for quite a while. And that's a relatively large gateway of system. It's the biggest actually, one of the biggest in the Asia Pacific. We've got plans to expand our gateway footprint with gateways that are part of our mobile strategy, as well as part of our launching in tandem with Itaú [Itaú Unibanco] in Brazil. So gateways as such are interesting, but I think all e-commerce strategy goes past the gateways to looking at how you offer cardholders a more rewarding and more finely tuned, unique and personalized offers of online shopping, which is what the MasterCard MarketPlace is about. It also is about giving merchants access to new customers and getting incremental sales from existing customers and reducing the amount of abandoned shopping carts, which is again what the better conversion ratio of things like the MarketPlace is about. And of course, it's about enabling issuers to have a much stronger link with their cardholders. So within MarketPlace, gateways, R&D and our E-commerce business, MasterCard Labs, the mobile strategy, you'll find us focusing on this space in many different ways over the next couple of years.

And your next question will be from the line of Julio Quinteros with Goldman Sachs.

On the puts and takes in the rebate, can you just make sure that there's something -- there's two parts here. I just want to make sure we have this straight. One is the cross-border component and the other one is a component for some of the new contracts plus volumes. The way that they ramp as we go forward, can you just kind of walk us through how to think about this on a quarterly basis? Obviously, it's going to be higher for the rest of the year. I want to wake sure we understand, when you think about the changes especially on the contract, when to expect to see those things ramp up.

Julio, as in now, it's always very difficult to predict what happens on a quarter-by-quarter basis, because it depends on when we really sign a contract. And at that point in time, you have to consider what the accounting implications are. But for the whole year, we said that contra at this point in time is forecasted to be at the percent between 26% and 27%. And that is really based on the kind of volumes that we are forecasting, as well in particular cross-border volumes. Because obviously, as you know, it's part of the rebates and incentives. We have really, we have the cross-border pricing structure in there. For this particular quarter, rebates and incentives grew by $103 million, roughly half of that or $55 million was related to the cross-border pricing structure. In the other half, you can pretty much divvy up between new and renewed agreements, as well as volume growth. And we would expect that for the next few quarters, we are seeing something very similar. The one thing that I just want to highlight a little bit, we do expect SunTrust starting to convert in the fourth quarter. And that would be an impact on our financials right then and there, because we have a conversion going on. And as you know, as part of the conversion, you typically have to take some of the costs of that into your P&L in period.

And then just the revenue growth expectation as you go forward, have to think about the portfolio losses as an offset. But it looks like you're coming in much stronger on the cross-border and U.S. credit volumes also appears to be a little bit better. Is that the kind of a good way of kind of characterizing the puts and takes here?

Yes, I mean, puts and takes is obviously both on the overall volume, as well as in transaction growth. We do have some headwinds, so we'd like you to take those into account, because we're really not being finished -- we are not going to be finished with the headwinds until the fourth quarter has rolled around, and including the fourth quarter. And then we are seeing some better numbers in cross-border volume than we otherwise saw before, but we'll have to see how that's going to go forward.

And next, you have a question from the line of Adam Frisch with Morgan Stanley.

I wanted to get color from you on three fronts. One, what will be the most noticeable difference in MasterCard in 12 to 24 months from now? Two, some additional thoughts and innovation, it's great to hear that's a big focus of yours. Your thoughts on building versus buying, and whether MasterCard will get more active in the M&A space. And then finally, your split in resource allocation between the U.S. and non-U.S. regions.

What difference will you see? Look, I believe that this company has just built off an outstanding foundation. I have said this publicly. I have said it in employee meetings. You're not first one to ask me this question, as you can imagine. I don't have any plans to dramatically change things than the company's working the right way. People change things when you feel that things are broken. This is not in that kind of form. It's a company with an outstanding track record of revenue growth and profit growth. There are things to do which we are working on, which we have been working on not just since I joined but from earlier. And one of those is to focus on innovation as a way of differentiating our company and our products, both for our clients but also for their customers, the ultimate cardholders and the ultimate payment originators and receivers. So that's kind of how you'll find us very focused. We've got a series of thoughts around innovation. You're going to hear more when we meet in September. But a little bit about can be talked about to date, be it the launch of MasterCard Labs, which is really an attempt to focus on innovation effort by bringing technology and business people together in one organization, with an effort to fast-track ideas and bring them out the door. The second part has to do with ideas in e-commerce and mobile banking and mobile e-commerce. I think it's not, as I said, not just gateways. Gateways are oriented more towards how a merchant experiences the event. There's wallets that are oriented more to our customer experience in the event. But then there's all these other things you can do with things like the MasterCard MarketPlace to make that customer have a more enriching experience and the merchant have a more successful outcome. So you'll see us focusing on e-commerce. You'll see us focusing on prepaid. You'll see us focusing on reward schemes. There's some articles that have come out recently about things they're trying to do with reward schemes. This is all WIP, work in our process. I think on the build versus buy, in all honesty, there's no straight answer to these things. It depends a little bit on what you see in the marketplace, when it fits to just strategic priority. First, it must bring something to you, you do not possess, either in the form of distribution or products or people. Secondly, it must fit with your hurdles in terms of what you expect to make back from the money we invest on behalf of our shareholders. And if it doesn't fit those two primary criteria, we'll build it. And I don't have a real answer. It depends on issue by issue, item by item, circumstance by circumstance. This company invested money a little a while ago in buying Orbiscom to get hold of inControl, which was IP-protected. And I would tell you that we are beginning to see a lot of interest in all my travels in the last -- just three months, I have been to different markets. I've been to Russia, Turkey, Poland, India, the U.K., Brazil, Colombia, Mexico and Canada, in addition to the U.S. And I'm telling you that clients everywhere, senior managers and those clients, really understand what inControl is about. Bob has been all over Asia in the last month. He's been to Australia, to Hong Kong, to Singapore, to China and back. And he has the same experience that they've been having on this topic. So, yes -- would that have been a good buy? Yes, because we couldn't have built that ourselves compared to having an intellectually-property-protected item we could have picked up when we bought Orbiscom. So there's no real answer. It's an answer on what's right for that strategic priority. Resources between U.S. and international, I don't know that yet. I don't know the answer to that. I think you will find that the way I look at this business and the way Bob has been looking at it, is that while we believe that the international markets, not just the developing markets by the way, we believe even developed Europe has opportunities that is relatively well positioned in that marketplace. And with some more opportunities coming through it, I believe that the world outside of the United States is an attractive place for our growth. We already get 55% of our revenue from outside of the United States roughly, and that's already higher than a number of other companies in our space. That doesn't mean that we would believe we should invest less in the United States. I think the United States is still the bedrock of our business, and we need to grow there and demonstrate revenue growth in that marketplace. But I think you'll find us thoughtfully investing in both spaces as the opportunities come along.

And sir, your next question comes from the line of Andrew Jeffrey with SunTrust.

Good to hear that U.S. credit trends are headed in the right direction. Can you drill down in that a little bit? Maybe Martina to talk about categories of U.S. credit spending. I think Visa said a couple of weeks ago or last week that it saw still greater strength in sort of nondiscretionary items within their credit book of business. Can you comment on that a little bit, and just maybe give us a little bit color on what we're seeing in the United States?

We are seeing some trends that people are willing to do a bit more discretionary purchases versus the nondiscretionary purchases. As you know, most of our cards are really everyday cards, so you're using them every day. So we definitely see the nondiscretionary purchases continuing and toping up a little bit with the discretionary side. The only real data that we have published in the past is really from the MasterCard SpendingPulse. And when you look at some of that data that is out there, you can see that some of the discretionary items, such as what's happening from a furniture industry point of view, what's happening from an electronic industry point of view, when you look at the jewelry kind of area, the things are picking up; albeit they're still back to fairly low levels compared to like 2006 and 2007, so hopefully we'll see a lot more to come. But we are starting to see the consumers coming back into the market.

Prepaid is an area that's gaining a lot of attention these days. Is there anything specific you can talk about in prepaid that you think starts to move the needle from MasterCard over the next several quarters?

I can start, then maybe Ajay may want to jump in here. But obviously, one of our flagship programs really is the Comerica program. And as you know, we had won some months ago, 18 months or 20 months ago, we had won the Social Security issuance all on MasterCard. And the announcement was made very recently that we are actually winning more of the government programs. Those are significant programs. Given that the U.S. Treasury really wants to move off the paper checks into the electronic payment form, this will be a good significant amount of momentum that we will eventually see. And by the way, we are not only seeing that in the United States. We are seeing that also in other countries. And we have features with you [ph] (00:57:58) at some point in time, for instance Italy. And so that's in the public sector arena. Is there something you want to add?

Yes, a couple of things that might be of interest to you, is our H&R Block prepaid card, which we've got going with us. We've also got the Wal-Mart payroll card recently, which allows us to issue payroll cards to Wal-Mart employees, who otherwise would have taken a check and have to go to a check-casher to get out their cash. So there's a series of these events, the U.S. government Visa -- Martina just talked, she mentioned Italy and the Italian post office. We've also had a deal with Univision for a prepaid card and that appeals directly, as you can imagine, to the kind of community that looks at Univision as a source of news and entertainment vault. And so we're trying to focus our prepaid efforts you will find in many different direction: one, being the government space; two, being the consumer general focus, reloadable space. Those two are very interesting because of the of the profitability and reuse dynamics of those. If you think about a gift card, a gift card is a onetime acquisition with an average of $70 or $80 loaded on it. Whereas a general focus, reloadable or a Social Security card tends to create $800 a month on the average, and people last there for a year or two years. You can imagine the profitability, dynamics of that are more interesting than that of a gift card. It doesn't mean gift cards are not interesting, just means the others are somewhat more attractive. The whole prepaid space, be it corporate payroll and benefits of the medical reimbursement cards, there's just a series of phases with Accor Services, our JV in Europe, that we are working on. So I don't know how to exactly tell you that there'll be something specific that will come in next 18 months. You'll just see us working very hard at each and every one of these opportunities to get into the opportunity as it grows. but also to tap into more pieces of the value chain as we go along.

And your next question will be from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.: I was wondering if you could elaborate on the timing of the customer losses this year and their impact on process volumes. I was just [indiscernible] (01:00:15) And then just as a follow-up, I wanted a clarification on the rebates and incentives line. If SunTrust -- the conversion happens in the fourth quarter as planned, does that take up that run rate of rebates and incentives that you addressed, Martina?

First of all, on the timing of the customer losses, we are pretty much I think done in terms of having seen the impact in our first quarter completed on one significant customer in the U.S. And we still have one other customer standing out there, which is the WaMu for the rest of the year. And that's going to come off and fit some screws over the rest of the year. In the U.K., we are through one of the portfolios probably like 50%, 60% and maybe the other portfolio also would still run through to the rest of the year. So Sanjay, you're really going to see for the rest of the year still some headwinds, both -- some are volume as well as some transaction point of view. On the rebates and incentive line, I think I really can't add anything more than what I already said, which means in Q4, we are probably going to see the impact from SunTrust. But we are not ready to establish any new baseline going forward.

And your next question will be from the line of Jason Kupferberg with UBS.

I think in the past, you've indicated that your next sizeable contract renewals are scheduled for 2011. Can you assess the probability of those becoming early renewal situations that could positively get renegotiated before the end of this year? And in situations where the customer does ask for the early renewal, what types of concessions can you as the network typically secure in return?

Jason, when we look at 2011, there is no really sizable renewal of a MasterCard portfolio.There is another sizable renewal of a competitor portfolio in 2011. What we have is one sizable renewable in 2012, one in 2013 and one in 2014. So that's still way out. But obviously, what we will be doing is we will be, from a competitive point of view, trying to make sure that we expand where MasterCards are being issued. So that will be our approach in 2011.

And then just to switch gears, with United and Continental, looking like they're going to merge here. Any thoughts on the opportunities or risks that could be associated with United Visa portfolio being combined with Continental's MasterCard portfolio? Maybe you can frame a best or worst case scenarios for MasterCard. I think you did recently renew the Continental portfolio, but any thoughts there?

Let me take that for a second. During the process of evaluating all those terms, it's my understanding and our understanding that the existing MasterCard-branded Continental cards will remain MasterCard-branded for the life of the account. So I don't know what else opportunities or issues may come along as this merger goes through. It's very early days, and so that's kind of the way they are right now.

And your next question will be from the line of Rod Bourgeois with Bernstein. Rod Bourgeois - Sanford C. Bernstein & Co., Inc.: Ajay, it seems MasterCard needs a bigger U.S. debit market share, and I'm wondering if this would be a key goal of MasterCard under your new leadership?

Look, I think being Present in the debit market in the United States, which is certainly a growth category is without doubt, something we have want to play in. We are already a reasonable player. Some of the transactions that have happened in the last few years have not worked in the favor of this company, in terms of being able to hold on to some of that business. But we're making progress. We have made progress with SunTrust. We've made progress with a number of different-sized banks as well. Yes, you will find us focused on growing our debit book, but focused on growing it with transactions that make sense for our company. And there are many other opportunities as well. I believe prepaid is another opportunity at getting at a similar pay now, in fact, pre-funded card. And so there's many ways to grow our presence in the non-credit space, and you'll find us making efforts on all those fronts. Rod Bourgeois - Sanford C. Bernstein & Co., Inc.: And then the follow-up, kind of in a similar vein of asking about kind of key strategic initiatives, do you have any plans to move more into acquire a processing activity? We see some of that going around the in space, and I'm wondering if that scenario where MasterCard will increasingly focus?

Look, I think we've -- the concept of being in processing both in some ways issuer processing and acquirer processing, is not a bad thing for a company in our space. And some of our competition talks about it as well. We've got a -- let's say a process, a technology called IPS, Integrated Processing Solutions, that we have got signed up with a few customers and we are very focused on rolling that out for the issuer processing side. I think there's a series of things that we've been doing on the acquirer processing site in a number countries. In some countries, they may actually have to do that underground to establish certain presence on the ground as part of the terms of doing business in those countries. So you will find us thoughtfully looking at all these opportunities to grow our presence. And hopefully, you've heard a little bit more about this when we meet in September. Rod Bourgeois - Sanford C. Bernstein & Co., Inc.: Is that an area where you would be aggressive or just incremental with your strategy on the acquirer processing side?

September is not that far away.

And your next question from the line of Chris Mammone with Deutsche Bank.

Could you maybe just go into some of the recent pricing changes that you made with the Cirrus ATM network? I guess we always thought of the ATM business as being less lucrative certainly than the POS side. So is a takeaway there that perhaps you're running out of areas in the POS side to exact pricing and now, I mean, ATMs?

Chris, I have to draw you back on in terms of what we are talking about pricing initiatives, is one, we've got -- we obviously looking at what kind of value we provide to the customer and what kind of pricing these changes we might have to do in order to be competitive. And that's really in the main how we're looking at it. And in the past, we've been saying that on a -- for the 2009, 2011 period, our run rate for pricing was kind of in the 200 basis points as though. So we're not looking at this any different. Obviously, we'll be reassessing as we are coming closer to September and our investor community day in terms of where we're going to go from here. But at this point in time, this is a pretty good viewpoint, and it's fairly consistent what we said in the past.

Could you just give us the underlying sort of same-store transaction growth rates, excluding the acquirer [ph] (01:07:54) portfolios on a monthly basis through the first quarter and into April?

For the first quarter?

Yes, if you could just give us sort of what January to Feb to March that you've pulled the plug?

No. I mean, what I can tell you only is really from a volume point of view, because transactions are clearly difficult, I mean, in terms of drawing any conclusions because of the loss of the portfolios. But from a volume point of view, what we have seen is that January was an okay month. It was a little bit later in February, and then March should really kind of snap back. And when we look at the average of the quarter that we just said both for the U.S. and for the rest of the world, we're seeing in April exactly the same average at this point in time. That's for domestic volumes. And then for the cross-border side, our 10.9% that we set for the first quarter on average, that's a little bit higher when we look at the April numbers.

And your next question is from the line of Bob Napoli with Piper Jaffray.

I was hoping you might be able to give some update on your thoughts around regulation and interchange, I guess the Conyers Bill kind of popped up a little bit again last week. And I was just wondering if you can give some color around your thoughts about what could happen when in the yard?

As you probably know, Conyers and Durban have been making various proposals in the U.S. Congress, and there are some amendments that have been put forward in terms of the financial regulatory reform bills that are currently being looked at and debated in the Senate. From our perspective, we believe that these continue to be pushed by the Merchants Payments Coalition. And the motivation behind these is really to put merchants in the position where they don't pay their fair share. At the end of the day, someone's going to have to pay this. And to the degree these amendments as some of them seem to be getting structured or to move through, then consumers would wind up being penalized. So we're paying attention to these things. We think that Congress understands that you can't give anybody a free lunch. And so we hope that that's the way they think about it as they work through financial regulatory reform.

You really didn't mention anything on the call yet about you have your focus on the Money Transfer (sic) [MoneySend] segment or remittance or the card. And I just don't know if that's kind of moved down the scale somewhat, given the other opportunities you have down the list of material opportunities over the next few years. But I was hoping you might give some updated thoughts on your activities there as well.

Well, actually, I thought I did talk about remittances, it's in passing, that it's true. But that's not because of the fact that it's not playing a role. We've got a series of pilots around the world in different corridors of money transfer remittances, between the UAE and certain countries. We're in the process of looking at a pilot between the United States and Mexico. So we've got a series of pilots around the world, and that is actually part of the whole space, mostly in mobile banking and mobile commerce that we're looking at as a process. It's also possible to look at remittances cross-border in the prepaid space, particularly with U.S. payroll on the one side and recipients on the other. And there's some word going on in that space as well.

And your next question will be from the line of David Parker. [Lazard Capital Markets]

Visa Europe recently changed some of their interchanged fees. Has this changed the competitive landscape over in Europe? And can you just give us an update on the SEPA [Single Euro Payments Area] initiatives?

David, I think you're referring to the press coverage over an agreement reached by Visa with the European Commission. And I think it was limited to debit, cross-border within Europe and potentially in a couple of individual markets in terms of the debit interchange fees. As you probably recall, it was over a year ago that we reached an agreement with the European Commission on both debit, as well as consumer credit cross-border interchange fees within Europe. The way that I think I've described this in the past is, is it gave some stability in terms of our issuers and acquirers understanding the nature of what was happening with regard to interchange fees. It's supported the principle of interchange fees that we thought was very important. But it was also done at levels that were lower than what we think is appropriate and necessary to support continued investment in the business by issuers in Europe. And that's why we also indicated that we're continuing our appeal to European Commission decision in the Court of First Instance. And we expect that will probably make its way through the court system later this year or early next year.

You recently talked about upgrading your processing network. Can you provide some of the highlights that you implemented or changed? And are there any more changes going forward that could tick up some capital expenditures?

We make upgrades to our processing network on a fairly frequent basis. In fact, twice a year is what we are doing right now. It's a structured process. Our issuers and acquirers are very much a part of this whole process, because they have to do work at their end depending on which elements of this upgrade they wish to take into their systems. It just so happens the ones we've done in the recent past had a couple of interesting features; and there one being the remote point redemption methodology, which is yet to be rolled out commercially, and so it's a little premature to talk about it. And another one being the whole fraud detection methodology. There's some built-in capabilities in Asia Pacific and in Latin America. There's a series of these. And so each of our upgrades have this been built into our system with a few new features in each. So I don't know that you should read more into it in terms of kind of any incremental investment cost because of that. This is something we've been doing for years. It doesn't mean there won't be incremental investments and strategic business ideas. I just wouldn't to read too much into it based on the fact that there is an upgrade.

Yes. And just to add to this, as you know, I mean, we have pretty steady-state capital expenditures. We don't expect anything different for the rest of this year from a capital expenditure point of view. But what you're also seeing is, as we are adding to our capital, our depreciation and amortization expense does go up and it will go up again this year.

Your next and last question will come from the line of Craig Maurer with SLSA (sic) [CLSA].

I wanted to get your opinion on the launch of Elo down in Brazil, the competing network that was launched in the JV that will focus on the low-income households. And it will be a direct competitor to Visa and MasterCard. So I wanted to get your opinion on why you think they felt the need to launch that, whether it was just a land grab on fees. Or was there something that the existing card business wasn't bringing to that subsegment?

Well, I was in Brazil just last week actually, when this announcement was happening. And I have the opportunity to meet both Bradesco and Banco do Brasil; which by the way, are actually very more aligned with our competitors and with us. So this question's probably better answered by them in some way. My general sense of where they're trying to go on that, the government of Brazil is trying to go, is to help find a way to increase the level of bankerization. It a bad word, but it's what it means. It's the bankerization, the extent of banking that is provided to individuals in their country. They have made a series of attempts over the last the last seven, eight years, including the expansion of the ability of merchants, drug stores and convenience stores, to even do basic cash availability and transactions of that size on behalf of banks. It's trying to provide access to people to come into the banking system. And I think what they are trying to do with Banco do Brasil and Bradesco, which are very large banks, in addition to Banco Itaú, which is also a very bank -- but these two have attempted to go out and create this new bank in which they are looking for a local debit scheme but also for local use, that's also attached some processing assets into it. In all honestly, I don't expect major changes over the short and medium term. As both these clients -- they were very clear that they intend to the keep issuing other brands. In fact, I specifically understood from them that their commitment and intentions with MasterCard remain exactly the same. So having said that, when somebody launches a local debit scheme in a marketplace, it doesn't back the market. It'll take some business, their percentage away from the global payment schemes. But the global payment schemes bring different things to the table, and the total market should grow as a result of this effort. So I think the opportunity in Brazil is much bigger than this issue share, would either pull down or up. So I think there's so many other opportunities in Brazil to grow the business for us and our competitors. And I think there's a much better position there that we all need to occupy and invest in.

And with no further questions, I'd like to turn the call back to Mr. Bob Selander for any closing comments.

Thanks. As evidenced through our great performance and the accomplishments in the first quarter, we are committed to leveraging the strength of our global network, processing capabilities, our strong relationships with customers and our product development platform to drive payments innovation and business results for our issuers, acquirers and our other partners around the world. We remain very optimistic about our future growth prospects. MasterCard is well positioned to take advantage of the recovery. We are fortunate to be part of an industry that offers tremendous opportunity for growth, and the payment trends are working in our favor. Consumers, merchants, businesses and governments all over the world continue to migrate towards electronic payments. Thanks for joining us, and have a great day, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a wonderful day, evening, night or morning.