Mastercard Incorporated (MA) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 MasterCard Earnings Conference Call. My name is Chantalay, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Barbara Gasper, Head of Investor Relations. Please proceed.

Thank you, Chantalay. Good morning, everyone, and thank you for joining us today, either by phone or webcast, for a discussion about our third quarter 2011 financial results. With me on the call today are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer. Following comments from Ajay and Martina, 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 slide deck have also been attached to an 8-K that we filed with the SEC earlier this morning. A dial-in replay of this call will be available for one week, through November 9. 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 most recent SEC filings. With that, I will now turn the call over to our CEO, Ajay Banga. Ajay?

Thank you, Barbara. Good morning, everybody. As usual, before Martina gets into the details of our results, let me start with some comments. In the third quarter, we saw net revenue growth of 27% or 24% on a constant currency basis. This helped fuel operating income growth of 31% and EPS growth of 43%. We're obviously pleased with our results this quarter, including our fourth consecutive quarter of double-digit volume growth, as well as the highest growth rate in process transactions since the IPO in 2006. Each region posted healthy volume growth with the strongest growth in Latin America and Asia-Pacific, Middle East, Africa. Volume growth in the U.S. of almost 14% was led by strong debit results aided by the roll on of business wins and double-digit increases in our commercial credit business. Despite persistently high unemployment rates and a weak housing market that has resulted in the low levels of consumer sentiment that we all read about, we are still seeing the consumer spend. Our U.S. consumer credit volume grew 4%, and debit volume grew about 22%. This is consistent, by the way, with our SpendingPulse data that shows retail sales growth x auto has remained for the most part between 8% to 9% year-over-year in the recent months. Certainly, some of this increase is due to inflationary pressures such as higher gas prices and food inflation, but it's still money that consumers are spending. However, the comparison will become more difficult starting in November as U.S. retail sales x auto were up by over 5% in November and December of 2010 versus last year's spring-summer period when the comparable number was only about 1%. Moving on to Europe. Our performance there is driven by healthy cross-border volume growth and new domestic processing businesses in the Netherlands. Given the sovereign and banking debt concerns in Europe, we are surprised that consumer sentiment is low, and we will continue to watch it as Europe tries to get closer to a plan that should go some way towards alleviating these issues. But in spite of the economic headlines, we are still seeing a significant opportunity from the secular shift to electronic payments in Europe. In Latin America and APMEA, we continue to benefit from strong cross-border volume growth, which is above 20% in each of these regions. Additionally, new business of Itaú is driving growth in Brazil. While both regions are still performing strongly, the issues faced by some of the world's largest economies could begin to impact sentiment and confidence in these emerging markets. Given our growth this quarter, it is clear that this economic uncertainty is not yet showing up in our business results. However, we will continue to keep a watchful eye, given that the signals remain mixed. At the same time, we are very much focused on what we can influence and control, and that is winning deals and market share. We also continue to see growth opportunity in the ongoing migration of cash to electronic commerce and this is what we are dedicating our resources to. Before I get to our business highlights, I'd like to give you a brief update on the regulatory and litigation fronts. So first of all, although changes to debit interchange became effective on October 1, there are still a lot of moving pieces in the U.S. debit landscape. All issuers continue to work through their internal decisions as to how to make their debit cards compliant from a PIN mark perspective. Merchants, issuers and acquirers continue to seek incentives for routing preferences. Our perspective remains unchanged from what you heard Chris McWilton and me said on last quarter's earnings call and at our September investor meeting. We are in a completely different competitive situation from others in the debit space and do not have the need to defend a large incumbent position. We are focused on 4 objectives within our U.S. debit business: first, to retain our existing placement on the minority of our debit portfolios that are exclusive MasterCard debit portfolios. It's important to remember most MasterCard debit portfolios are already Durbin rule compliant. Second, to get Maestro as the PIN debit brand on the back of competitive debit cards; third, to continue to convert competitive portfolios to MasterCard as we have done with SunTrust, Sovereign and the recently announced Huntington Bank; fourth, to win routing preference with selected merchants and acquirers. Now with this in mind, we remain focused on strategic and surgical opportunities that make sense for us. A deal-specific approach is what we believe is needed to give us the flexibility to navigate the complexities around PIN enablement and routing that exist in the market right now. Remember that revenue yield on PIN volume was thin even before Durbin and will become even thinner after paying routing incentives. As a result, debit volume growth rates will exceed revenue growth rates as this space unfolds. Recall also that lower revenue yield does not necessarily equate to lower operating margin. Given the scalability of our network, we are able to process these additional transactions at a very low incremental cost, and therefore, we will be strategic and selective when considering situations where we are willing to pay enhanced economics for routing. So now let me take a few moments to provide you an update on litigation. You will recall that last February, they announced a judgment and settlement sharing agreement in the MDL case, which capped our percentage of financial exposure at 12% of the monetary portion of a judgment of settlement that will involve Visa, MasterCard and the bank defendants. We've also been involved in court recommended mediations, and while we have made substantial progress with the individual merchant plaintiffs, there has not been similar progress with the class plaintiffs. And based on developments in the mediation process, MasterCard has extrapolated an estimate of a reasonably possible loss of at least $500 million if there is a negotiated settlement with all plaintiffs. At this time, it is not possible to put an upper limit on this loss due to the significantly higher demand by the class plaintiffs, which are unacceptable to MasterCard. You will see our updated disclosure on this matter in the 10-Q, which we shall file later today. In the meantime, we continue to execute our strategy and I have several business highlights to share with you. First in prepaid. In the U.S., MasterCard has been awarded 60% of all competitive public sector programs measured by volume during the last 18 months. These represent $16 billion in GDV, one of the most recent of these which has been launched under the state of South Carolina Department of Social Services for child support benefits, and this is addition to the state of Illinois unemployment benefits program that we previously announced that is now launched and others that are coming in this area. But prepaid is not only a tool for financial inclusion and benefits distribution. There is a value proposition here for various segments of bank customers as well. So I'll give you an example in Italy where we have 2 prepaid programs recently introduced to talk about. The first is a youth-focused product that is designed in partnership with Intesa Sanpaolo and is based on opening branches called Superflash, which by the way is also the name of a popular credit card they launched. Three branches are already open. The focus is on simplicity and convenience, young staff, by the way, noncash handling branches, although they do have some ATMs, and several more branches are being opened in 8 cities in Italy. And the product involves other young or appeal brands for youth such as Nike, Sony and Vespa 500,000 cards have already been issued. The second is a PayPass-enabled prepaid card co-branded with Vodafone as an extension of its loyalty program and actually the introduction of NFC technology to their customers. And we continue to have success with IPS, our processing platform and Access Prepaid, the program management business of Travelex that we bought, 2 extensions of our prepaid capabilities. We have launched in Australia and issued multicurrency prepaid MasterCard running on the IPS and Access Prepaid platforms. This card is capable of holding up to 7 currencies at the same time. It's distributed through Flight Centre, a major travel agent chain in Australia. Thomas Cook, the largest travel-related financial services company in India will be issuing MasterCard prepaid cards. This is actually the first time that the Reserve Bank of India has allowed a nonbank institution to issue foreign exchange prepaid cards. So now let's turn to debit. Just a few moments ago, I mentioned about Huntington converting its debit portfolio to MasterCard. That started in early October. Old cards will be deactivated no later than the end of November. In Italy, on the domestic processing front, this is actually interesting. We have signed a multi-year agreement with the first major Italian bank to migrate cards that are currently co-branded with the domestic scheme to Maestro only. The conversion is expected to ramp up in the first quarter of 2012. And in India, we are collaborating with the Ministry of Food and Civil Supplies for the Government of Punjab to establish an electronic procurement and payment system, which will improve the efficiency and actually help to decrease the cost of their current manual system, which involves an annual outlay of $6.5 billion. Also on the government front, we have launched 2 commercial credit programs in partnership with the Mexican government and Banamex, Citigroup's bank in Mexico to migrate that DND expenditure to MasterCard from nonelectronic forms of payment. And while on credit, let me mention during the quarter, we renewed our consumer and commercial credit agreement with EnterCard, a leading credit card player in the Nordics. It's built on our recent success in debit with Swedbank that we all talked about last quarter. In Latin America, we are making really good progress with Banco Bilbao Vizcaya Argentaria known as BBVA with whom we previously signed a multi-year relationship covering 9 markets. BBVA is issuing MasterCard black cards in each of its 9 South American markets. This product will displace a competitive product over time. And in Argentina, just last month, MasterCard has begun to switch all of BBVA's credit transactions, the first bank actually among the leading international banks in the country to shift its domestic switching to our network. In the U.S., we signed a multi-year renewal of our consumer credit business with RBS Citizens, continuing an already strong relationship. Working in partnership with Citizens, we've actually delivered a lot of innovation to their consumers, including a recent launch of inControl functionality for small business clients in their commercial portfolio and the use of MasterCard Advisors to improve the performance of other card product portfolios, and while in the U.S., Citi, American Airlines and MasterCard have launched a Citi Executive AAdvantage World Elite MasterCard, its highest level offering in this co-brand relationship. This is actually a chip-enabled card with benefits such as Admirals Club membership, priority check-in, waived baggage charges. So now let's get to mobile. We continue to build our partnership in Telefónica, including a strategic alliance launch co-brand credit products in 11 countries around Latin America and the Carribean. And in fact, we've just launched a Mobistar co-brand card in Mexico, the first in this market to target mobile phone users with enhanced mobile benefits. We are working with Etisalat, the leading telecommunication provider in the United Arab Emirates on a contactless mobile payment solution that will launch in the first quarter of 2012, and while on the topic of contactless payments, let me take a minute and discuss some PayPass highlights from around the world. PayPass has been implemented in over 37 countries and now is accepted at over 341,000 merchant locations and growing. This is a product that started out in the card form factor. It's increasingly being deployed as part of mobile handset, and at our recent Investor Day, those of you who were there saw it as part of a mobile solution and experienced the benefits it can deliver to consumers. For merchants, it speeds checkout. For issuers, it adds functionality to help drive top of wallet behavior and retention. In Canada, virtually all created 90% of MasterCard cards are PayPass enabled, and roughly 10% of total MasterCard transactions are contactless. In July, we added acceptance of McDonald's adding another 1,400 locations in Canada. In Australia, the majority of banks that issue MasterCard are also issuing PayPass-enabled MasterCards. There is acceptance in major retailers including JB Hi-Fi, Bunnings, 7-Eleven, Caltex, Dimex and McDonald's. Acceptance continues to grow in transit categories, in cinemas, in stadiums, and there are additional large chains that will add terminals. We just can't announce their names yet, but watch this space. There's more to come. And our largest issuer in Australia, Commonwealth Bank has just launched an iPhone app called Kaching that works in conjunction with the special iPhone case to enable PayPass transactions. In the U.K., not only is the transport for London implementing open payments, but the nation's largest bus and rail operator, FirstGroup, has also announced nationwide rollout of contactless acceptance in buses. These are cash-heavy channels that will be replaced with electronic payments. In Poland, we just reached 1 million PayPass transactions per month. The PayPass acceptance locations in Poland are counted in the tens of thousands and include IKEA as an example who is also a partner in a PayPass-enabled co-brand credit card. And in the U.S., we continue to see merchant interest in contactless as a result of the next wave of innovation that's happening with contactless mobile devices. Just recently, several merchants have signed on to add PayPass acceptance, including Walgreens, Macy's, Subway, OfficeMax, The Container Store, Toys"R"Us, Jamba Juice, Peet's Coffee, American Eagle, Foot Locker, Guess, and there's more to come. Now let me 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 versus last year's third quarter. As you just heard, we had a terrific quarter. Net revenue grew over 27% driven by very strong volume and transaction growth across our base business, as well as the addition of new deals. Acquisitions contributed about 4 percentage points to this growth, resulting in a very robust top line growth rate of almost 24%, excluding acquisitions. Total operating expenses were up 23.1%, which included about 9 percentage points of expenses related to acquisitions. Therefore, expense growth, excluding acquisitions, was just under 15%. Foreign exchange contributed less than 4 percentage points to net revenue growth and just over 2 percentage points to operating expense growth. The FX impact is the same for growth rates with and without acquisitions. Operating income was up 30.9%. This resulted in an operating margin for the quarter of 55.1%, up from 53.6% in last year's third quarter. Bottom line, we delivered net income of $717 million, up over 38% and diluted earnings per share of $5.63, up almost 43%. Now on the next couple of slides, representing the operational metrics for the third quarter of 2011 compared to the same quarter a year ago. So if you go to Page 4, you can see that worldwide gross dollar volume or GDV was up 18.1% on a local currency basis or 23.4% on a U.S. dollar converted basis. This is the highest quarterly growth rate we have seen in more than 4 years. U.S. volume growth was 13.6%, and outside of the U.S., volume growth was 20.4% on a local currency basis, including about 25% growth in Latin America and Asia-Pacific, Middle East, Africa. Worldwide credit volume grew 14.9% on a local currency basis, which breaks into 7.1% growth for the United States and 18% for the rest of the world. Worldwide debit volume grew 24.2% on a local currency basis. In the U.S., debit growth was 21.6%, and outside of the U.S., debit growth was 26.3%. Cross-border volume growth on a local currency basis was up 19.3%. That's actually the seventh consecutive quarter of double-digit growth, and in fact, we had double-digit growth in every region. Turning now to Slide 5. Processed transactions were up 20.5% compared with the year-ago quarter to $7 billion. This was the fourth consecutive quarter of double-digit growth and the highest quarterly growth rate for processed transactions since we went public in 2006. All regions contributed to this growth, but let me point out some specific examples that are related to new deals that have now started to lap. In the U.S., we continue to benefit from the new debit business such as SunTrust, which converted to MasterCard starting in the fourth quarter of 2010. In Europe, processed transactions are still increasing as a result of new business in the Netherlands that we began to see earlier this year. And in Latin America, we are seeing more transactions from our expanded processing relationship with Itaú in Brazil, which began to lap in September. Now global card growth was 7.8% to $1.7 billion MasterCard and Maestro cards. So now let's turn to Page 6 to discuss revenue growth versus last year's third quarter in a bit more detail. The net revenue generated outside of the United States represents about 62% of total revenue compared with 59% last year. This shift was driven by revenues growing at a higher rate outside of the United States, about 33% compared with 19% growth for U.S. revenue. Let me turn to the components of net revenue. Domestic assessments increased 25.5%, primarily due to strong volume growth. Cross-border volume fees increased 7.4%, but if you exclude the impact of the October 2010 cross-border pricing structure change, these fees actually increased about 23%, driven by double-digit cross-border volume growth in all regions. Transaction processing fees grew 26.1%, driven largely by growth in processed transactions due to new business in Latin America, Europe and in the U.S. Other revenues grew 41.3%, driven mainly by the inclusion of revenues from the acquisition of Access Prepaid Worldwide. In total, gross revenue increased by $432 million or 22.2%. Now rebates and incentives were $564 million, up $42 million or 8.1%. However, the increase was about $110 million or roughly 25% when adjusted for the cross-border pricing change that I've referenced just earlier. This increase was due to stronger volume performance and the impact of new and renewed deals. Remember that going forward, this pricing structure will largely be in the base as we made the change in October of last year. Overall, third quarter revenue came in higher than we expected, primarily due to stronger Brazilian processing and cross-border inbound travel to the U.S. However, please note that at this point, we do not expect these 2 factors to contribute at this level to fourth quarter revenue growth, and I will speak more about this in my thoughts for 2011, which comes a bit later. Now moving to Page 7. Let's go through some detail on expenses. So within total operating expenses, general and administrative expenses increased 27.3% or 25.2% on a constant currency basis. Now this growth was primarily due to higher personnel and other expenses related to strategic growth initiatives such as mobile, e-commerce and information services and the inclusion of acquisitions. In total, acquisitions contributed about 10 percentage points to G&A growth. Advertising and marketing expense was up 9.8% or 6.8% on an FX adjusted basis. Sponsorships such as the Rugby World Cup held a couple of weeks ago in New Zealand, as well as promotional activity in support of strategic initiatives accounted for most of the increase. Depreciation and amortization increased 38.9%, primarily due to the amortization of intangible assets from our recent acquisitions. As a result, we posted operating income growth of 30.9% or 26.3% on a constant currency basis. Below the line, there are a couple of items to highlight. We recorded other income of $28 million, primarily due to the realized gains on the sale of investment and an adjustment to the earn-out related to the Access Prepaid acquisition. We consider most of these items to be more of on a onetime nature. We saw additional benefit from a decrease in interest accretion now that we made the last AmEx litigation payment in the second quarter of 2011. Also, our tax rate declined to 30.5% in the third quarter from 32.3% in the year-ago period. While there were some puts and takes in terms of discrete tax items, the year-over-year decline was primarily due to a more favorable geographic mix of earnings, which resulted from the expansion of our operation in APMEA. The cash flow statement and balance sheet highlights are summarized on Page 8. We generated $1 billion in cash from operations in the third quarter and ended the quarter with cash, cash equivalent and other liquid investments of $4.4 billion. We repurchased about 250,000 shares of Class A stock during the third quarter at a cost of approximately $77 million. Year-to-date through October 27, we have repurchased approximately 4.4 million shares of Class A common stock at a cost of approximately $257 per share. This leaves $879 million remaining of the $2 billion in total share repurchase authorization. We will continue to look to repurchase shares on an opportunistic basis. So with that, let me turn to Slide 9, and let's discuss 2011, starting with an update of what we have seen from MasterCard processed volume for the fourth quarter through October 28. Our cross-border volumes grew 17% globally, and that's slightly below the 18%, 19% growth we have seen over the last four quarters. This is driven by somewhat tougher comparisons, particular in the U.S. as well as in Latin America. Although not a perfect proxy for GDV, total U.S. processed volume grew 13%, similar to the level that we saw in the third quarter. Recall that U.S. processed volume was flat in October of 2010 as a result of the conversion. Total processed volume growth outside of the United States was 18% versus the 22% pace we have seen in the recent quarters, due in part to the Itaú volume beginning to lap in September. And globally, processed transaction growth of about 20% is in line with what we have seen in the third quarter, and this was driven by slightly higher growth in Europe, slightly lower growth in Latin America and continued and double-digit growth in the United States and APMEA. So let me outline our current view for 2011, which remains fairly consistent with what we talked about on September 15 at our Investor Day. While we expect revenue growth in the second half to be higher than the first half of the year on a constant currency basis, we believe the majority of that impact came in the third quarter. This is because a number of deals are coming to their one-year anniversary such as SunTrust, which began to convert in the fourth quarter of last year; Itaú processing, which began late in the third quarter of 2010; as well as the lapping of the DataCash acquisition, which you might recall closed at the end of October last year. Additionally, the year-over-year growth rate for cross-border travel into the United States could be slightly lower in the fourth quarter and the level we saw in the third quarter because of tougher comps in the fourth quarter this year. As a result of all of these factors, revenue growth comparisons become a bit tougher in the fourth quarter. Regarding foreign exchange rates, if you assume the euro trades at an average of $1.36 per euro, we should see minimal FX impact to fourth quarter revenue growth, though we continue to expect a full year tailwind of roughly 2 percentage points to net revenue growth. We remain committed to our target of a minimum 50% annual operating margin and continue to expect only a small operating margin expansion in 2011 relative to 2010. Operating expenses continue to include strategic investments, as well as the expenses of both DataCash and Access Prepaid Worldwide, which mostly impact G&A. As a result, G&A will be up significantly for the full year, though not as much as we saw in the third quarter since the DataCash acquisition will lap in late October. Turning to depreciation and amortization. That will be about approximately $200 million for the full year. We continue to expect the proportion of annual A&M spend by quarter to be very similar to the patterns we saw in both 2009 as well as in 2010, and when thinking about other income for the full year, remember that a number of the items that we saw in the third quarter were onetime in nature and do not reflect the normal run rate of this line item. For modeling purposes, we now expect the 2011 full year tax rate will be just about 32% due to the earlier than anticipated impact of some of our tax planning initiatives. Now let's quickly review our long-term financial objectives, which remain unchanged from what we said at our Investor Day back in September. For the 2011 to 2013 period, these objectives are a net revenue compounded annual growth rate of 12% to 14%, a minimum annual operating margin of 50% and an earnings per share compounded annual growth rate of at least 20%. As a reminder, these objectives are all on a constant currency basis and exclude acquisitions except for DataCash and Access Prepaid Worldwide. Now let me turn the call back to Barbara to begin the Q&A session. Barbara?

Thank you, Martina. We're now ready to begin the question-and-answer period. [Operator Instructions] Operator?

[Operator Instructions] Your first question comes from the line of Bob Napoli of William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: I'd like a little update on Europe if I could. I mean, it's 1/3 of your spending and your slowdown -- your performance there in light of the circumstances is pretty impressive, and I'd like a little more color on what you're seeing there on a real time basis and imagine that some of these processing deals that you've won that's made the numbers look better than the market itself.

Bob, let me take this first. First of all, yes, we are seeing actually extremely good performance in Europe. When you look at our total GDV numbers and GDV growth numbers in Europe, it's over 17%. You see both from a credit as well as from a debit perspective, a double-digit growth there. You see double-digit growth almost 18% from a cross-border point of view, and then we're benefited in particular in the Netherlands by the deals that we did there on the transaction processing, which is 30% growth. So we have really not seen any significant impact in Europe given what's going on there from an economic point of view. In part, it is because all of the good work that our people are doing on the local ground in terms of winning agreements and implementing things, it's in part the secular trend going from cash and check to electronic forms of payments. And we'll be watching this situation very carefully going forward, but despite the turmoil, our business is performing well.

Your next question comes from the line of Chris Brendler of Stifel, Nicolaus. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Martina, the domestic assessments strength you pointed to obviously -- I was trying not -- as has been summed. Processing revenues were up I think 26% and transactions were up 20%. Is there any -- was there any pricing in there that drove the outperformance or is that currency?

Okay, can you repeat that question, please, because I didn't get everything? Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: The domestic processing increased this quarter. Revenues I think were up 26%, but processed transactions were up 20%. Was there any pricing in there? Or is it just currency that drove the outperformance?

What you have to look -- yes, domestic processing had a little pricing in there for sure, just a tiny little bit. It was about 2 to 3 percentage points, but what you have to compare is you have to compare the 25% increase on revenues to what we did from a U.S. dollar converted GDV number. And when you look at this, the numbers, except for that small price change, actually line up perfectly. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Okay, and just secondly on PIN debit in the U.S., do you have any plans to try to use your signature rails to process PIN debit transactions?

This is Ajay. And I'm not going to tell you what plans we have, but I'll tell you this. We can obviously do that. In fact, microprocessing in Europe right now is done off those rails, and so we actually have rail experience on that. But I'm not going to talk any more about our PIN debit plans other than what I talked about in my opening comments for what we're trying to do.

Your next question comes from the line of Julio Quinteros of Goldman Sachs.

Great. Ajay, can you just go back and rehash the strategy here on PIN debit? I mean, you outlined the 4 things that I think make a ton of sense in terms of how you're going about this. Maybe as opposed to rehashing all 4 of them. Just focus specifically if you can on the routing opportunity with both merchants and the merchant acquirers if you will.

Julio, I'm not going to add much more. We are working through the routing opportunities with selected merchants and acquirers. We've actually been signing a few deals with them. I'm just doing all this in a surgical, strategic way for those opportunities that make sense to us. I don't feel it's in my competitive interest to be publicly talking about which ones are signed and what my plans for the next quarter are. So I just don't want to go any further down that path, but you should just know all 4 of those things I talked about. That is retain our existing placement on the minority of our debit portfolios that are exclusive to us; second, get Maestro as the PIN debit brand on the back of competitor cards; third, keep converting competitive sick portfolios to MasterCard like we've been doing; and finally, work on resulting preference. We're working on all those 4 ideas with strategic, surgical opportunities, because the state is still complex and there's many moving parts. And there's still a lot of negotiations going on, and the issuers are looking for incentives. The merchants are looking for incentives. The acquirers are looking for incentives in a business that has trimmed revenue yields to start with, and so we want to make sure we do it well and smartly.

Your next question comes from the line of David Togut of Evercore Partners.

I apologize if you already addressed this and so was cutting over from another earnings call, but did you quantify any changes in U.S. debit volume growth since the new interchange regulations when it went in effect on October 1? At least, can you quantify any that might be specifically tied to that?

David, it's really far too early to be looking at any different change in trends. In fact, when I was talking earlier in my script, in my prepared remarks about processed volume, we really have not seen much of a change whatsoever in the United States, not on the debit volume, as well not on the credit volume but very similar to the third quarter. So I just suggest to you that it's far too early to be figuring out where that might go.

Your next question comes from the line of Glenn Fodor of Morgan Stanley.

Martina, you had your goal out there for operating margin of at least 50%, but I just want to get a sense of your appetite to flex around that target level over the near term. And secondly, looking out over the next 12 months or so, I mean how would you characterize it from an internal investment standpoint? Are we looking at heavier than normal amount of investments on the docket, about average, less than average?

Yes, Glenn, I'd be happy to talk about this. First of all, we put out the 50%-plus operating margin out there for a reason, and we put it out there because we are doing fairly significant investments in our strategic priorities, which we quote, e-commerce, mobile information services, what we do in the debit space and what we do in the prepaid space as well as in the commercial credit space. In addition to that, the numbers that you are seeing here, we have the acquisition expenses included, which will anniversary at one point in time, latest in the first -- at the end of the first quarter, I'd say, at the beginning of the second quarter of 2012. So you will see a couple of more quarters of this coming through. We are keeping flexibility from an operating margin point of view, primarily because we're looking into the future and what the economies, the growth economies might bring in the future. So of course, when we put our plans together -- and this is by the way no different for 2012 than what we would have done for 2011 as well as 2010. We are putting certain plans together to make sure that we can flexibly react. If we were to see some changes in the economic environment, it doesn't matter in which part of the region of the world. So you should expect us to have that kind of flexibility built in to future plans, too, as we do -- as we did this year and last year.

Glenn, the only thing I'd add is that as you heard Martina in her prepared comments, the fact that we are sticking to the concept of a minimum 50% even for 2011 when clearly for the first three quarters, we have done somewhat beyond that is because she has indicated that there are still expenses to come in the fourth quarter, maybe at a lower rate than what we saw in the third quarter but probably at a higher rate than would otherwise have been thought about. And I think those are the kind of indications we're trying to put our money back into our strategic initiatives. We've actually, from little, little things that we have hired this year close to 700 people into our company, and that's in addition to those we got through the acquisitions of Access Prepaid and DataCash. And by the way, of those 700, close to 350 are in the United States where people think that hiring is not going on, and so we're actually adding. And I think that's part of what we're trying to do with our business is to invest sensibly, but like Martina just said, they're very cognizant of the mixed signals that we are getting in the world economic system. Whether the signals are coming from confusion between macroeconomics and microeconomics, I don't know. But I just know that I'm getting these. It's not showing up in the business yet, and so every month, she and I are very conscious we need to keep some flexibility in the way we are constructing our expenses so we can react if we begin to see an impact on our top line. And remember that even for our top line, we are trying to indicate that the third quarter did have certain aspects to it that may not get repeated in the fourth quarter, but we remain in the perspective that says the second half is going to be higher than the first half. That part has not changed.

Your next question comes from the line of Jason Kupferberg of Jefferies. Jason Kupferberg - Jefferies & Company, Inc., Research Division: On the rebates for Q4, I guess historically Q4 is the highest quarter for that line. Do you expect that, that will be the case again this year and any quantification you could provide around that? And would just love any thoughts from you guys on do you think we'll see any new issuers join the Google Wallet initiative in addition to Citi at any point soon.

Jason, I really don't expect much change in the fourth quarter from what you see typically in our fourth quarter. You'll see a very normal fourth quarter from a trajectory, from a contra revenue trajectory point of view, so there's really nothing to call out in specific.

As far as Google is concerned, Jason, I would say that 2 things are happening: one, of course, the bunch of new merchants that we talked about in my remarks. But within the next few months, I think Google Wallet will open up to the other networks, which I believe is the right thing. I believe that open systems is the only way. I've been saying this for a while, that mobile payments will begin to acquire traction. I think that'll be networks as well over a period of time. I'm sure they'll open up to other banks as well. I just don't know what the timing of these specific things is.

Your next question comes from the line of Bryan Keane of Deutsche.

Super results, but I did want to dig down on the 0.4, which I think was on the debit strategy of winning routing preference for merchant and acquirers. I think that's the first time I've heard you talk about that, Ajay, and we obviously know Visa has kind of planned to incentivize merchants and acquirers. So I guess my question is won't that pressure some of your rebates and incentives going forward and how do we think about that? And then secondly, are you worried a little bit that you could lose some PIN share if you don't incentivize some of these merchant and acquirers now that Visa's put out this strategy?

Actually, it's not the first time I've talked about the routing preference and incentive. It's just that I'm sticking to my way of thinking about it, which is I don't plan to go out with a broad-based approach. I don't need to. I will do this selectively with certain merchants where I believe it makes a difference to the kind of volume that we get on our debit business. We are already been doing some of those even prior to the changes in the rule because we've been having relationships with selected merchants where we feel that they will either make a difference to reducing the use of cash or they will make a difference to the perception of how debit can be used. And that's sort of a new thing. And the difference only is you aren't seeing as big an impact on our rebates and incentive line as you may have seen with other competitors, but honestly, you got to ask them that question. I don't know why that is the case. Mine is what it is.

Yes, in fact, let me just add to it. Of our $110 million of increase in incentives in the third quarter, the vast majority is really related to volume performance, okay? It's only a small portion related to signing new agreements or renewing agreements.

Okay, so no additional expense to think about as we head into 2012 with the result of this?

Look. As Ajay said before, things are changing everyday. The market has to work through a dislocation that happened from the legislation, and we are going to have to work through that. So I'm -- we're not going to talk about 2012 at this point in time. This is only our third quarter results. Typically, we give you on the February call with our full year disclosure. We give you a typically a few words about the next year, but the situation is fluid, Bryan.

Bryan, think about what I said earlier. We're going to keep our flexibility going. I think among other things like the economic environment, I think similar to that, this whole debit environment is still moving around. And I don't want to give you thoughts about something I don't have fixed right now directly for next year. It would be a mistake in guidance to give you. I don't want to do that.

Your next question comes from the line of Craig Maurer of CLSA. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: Just a quick question on Brazil. I was curious if the end of exclusivity and the opening up of those systems down there added any to -- anything to your growth rate and if we should think about any type of grow over effect from that.

Craig, that's a great question. Actually, when Redecard existed earlier in its original form and the predecessor was yellow, which was the Visa-based acquiring scheme existed in its earlier form, actually, the distribution for this yellow predecessor was wider than the distribution for Redecard in its predecessor form. And so in fact, the opening up of that market effectively expanded the distribution for MasterCard to the same level as that of all the other competitors. Now it did that for others too, but it actually helped us in that sense. Mind you, I'm not talking about a 50% extension. I'm talking about way south of that number, but it did help. Should you be thinking about that in a lapping sense? It start as a significant amount. I think the bigger issue in Brazil in a lapping sense is the Itaú processing, which lapped in September, and the second issue of course out there is Brazil's economy and how well it holds up, and I mean that constant guidance that comes around Brazil saying doing well on commodities, struggling on industrial production, so we keep an eye on that as well. But I would say I wouldn't factor a great deal in my mind at least of the lapping caused by the removal of exclusivity.

Your next question comes from the line of Darrin Peller of Barclays Capital.

You process and actually handle the authorization and settlement in about 5 or 6 countries, and I think you highlighted today new processing in Brazil and Netherlands, which I think you may have discussed before. But that's obviously continued to contribute to growth, and I think these types of transactions really boost your revenue yield per transaction longer term. So can you just comment on that for a minute? I mean have there been any further changes in the landscape, maybe SEPA or others that really might incrementally continue to open up the opportunity to process more transactions around the world versus just the brand transactions?

Seeing your transactions and processing them is always useful for a company like ours not just for what we get as a revenue directly from it. For what it gives us is the ability to sell other value-added products based on what we see in those transactions. And so all of the effort we do with them inControl or a fraud management capability or behavioral scoring through Advisors, all that does get enhanced when we see transactions. So I believe that's what we'd like to do. Now we're trying our best to improve our position in that space across the world. I think SEPA, clearly, as we've talked about does provide a degree of opportunity there, and in fact, our progress in SEPA over the last, I'd say, few months and few quarters has actually shown some of that. Transactions in SEPA up and beyond are the ones that we have seen and up beyond 100%. In fact, our processing of domestic transactions grew 180% in the third quarter of 2011 and have grown 113% year-to-date. Now it's on a small base, and Europe takes -- it's an evolution. As you can see in the newspaper right now, Europe's not a revolution although it feels like that on the roads of Greece. But I'd say to you that's what we are trying to do. Yes, SEPA and the payment systems directive does provide opportunities in Europe. Yes, there are opportunities like that in other countries around the world, as domestic schemes that were created over time begin to find that the economics of staying up to date with the technology investments required to be that way no longer make sense, and they start coming to players of scale to say, while you've got the scale across 200 countries, why am I redoing it in every country? That's the principal way in which we get into these processing transactions. It's very important to us. It's a constant effort. It's a slow effort.

Okay, that's helpful. Just one quick follow-up. Conversations progressing with banks regarding debit pricing, especially given now with the U.S. banks. Primarily, you're tracking their debit usage fees that many had planned to instate. Can you comment on the course of action you think these banks might take to take advantage of -- or really just try to replace the debit interchange revenue now?

They've been -- I would tell you that the amount of noise made on the media of about one particular aspect of what they're trying to do is what the media chooses to do, but they've been doing things with the taking away of free checking accounts for a while. They have done things with different fees. They have looked at their rewards on debit cards. They're looking at every line of cost in their system. If you think about it, it's a fair amount of revenue that is moving from them to some of the retailers over this period of time, and they're going to try to find ways to make sense. I don't know what they're going to do. I don't know yet, but I know what they're trying to do is to look at every single line item from the cost of running a branch to the cost of rewards to checking accounts and also they had looked to recently at debit card fees and looks like that one got away for the time being.

Your next question comes from the line of David Hochstim of Buckingham Research.

I wonder -- could you give us an update on what's happening with China and with your relationship with China UnionPay and how much cross-border volume in China is affecting the APMEA numbers?

No, I'm not going to give you specifics on China's cross-border volume, but it's healthy and growing. I would say on China UnionPay, our relationship carries on from where it was for the last few quarters. We are now at the mobile payments gateway trial. We have done that. It's complete. They're actually moving towards commercial production off that. Eventually, the plan is for us to help them increase their acceptance overseas while CUP will help us increase acceptance for our brand in China. But it's not just about increasing acceptance. It's based on getting revenue from their acceptance for them and for us, so those are the kind of things we are looking through with them. We continue to work with them on this cross-border outside of China relationship. As you know, domestically, the market is still a controlled market with China UnionPay being in a monopoly position and with us and competitors, all of us not being allowed to play there, and that's an unfortunate situation.

Okay, and again, I guess, asked earlier, but in Europe, just to be clear, have you looked at the sort of same customers over time? There's no change in spending behavior?

At this point in time, we are really not seeing any significant changes, David.

Your final question comes from the line of Sanjay Sakhrani of GIC (sic) [KBW]. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: So Martina, just a quick clarification on Europe. What is the growth rate x that add in Netherlands? And kind of when does it lap into next year? And then just separately, I was just wondering if you guys had any thoughts on Durbin's request for an FTC study on the small bank debit interchange exemption.

Okay, let me take the first one. Ajay will take the second one. But really where you see the Netherlands showing up in a big way is in the transaction processing numbers, which are very, very healthy in Europe. I think I said, 30% plus at this point in time. It's in the volume numbers as well as in the cross-border numbers that I was quoting for Europe. You are not really seeing a significant impact from the Netherlands, so this is very good across all of the countries. And remember this is not just Western Europe. There's a healthy portion of Eastern Europe in there.

And Sanjay as far as the second part of it is concerned, I continue to believe that once the law is the law, we will ensure that we implement it to the best of our capability. And in that law, the banks below $10 billion are entitled to a differential interchange from those above, and I'm determined to implement that with the full force of what I can do. So whether Senator Durbin wants to investigate it one way or the other, it's his call and I think it’s his prerogative. But I'm just determined as a company to do what's right. And now the law is the law and that's what we're going to do.

At this time, I would like to turn the call back over to Ajay Banga for closing remarks. Please proceed.

So let me leave you with just a few closing thoughts. We've delivered really good results year-to-date due not only to strengthen our base business across all 5 of our regions but also driven by volume and transactions from new deals. We remain watchful of macroeconomic trends around the world. We are always ready to react as Martina was saying in response to a question. If you see those trends going in a direction that begins to impact our business, as we discussed in our investor meeting, we believe that global PCE will continue to grow over time. There will be ups and downs by country, ups and downs by year, but in the meantime, we continue to invest and execute at a very local level to drive acceptance in new categories, displace cash and bring the benefits of electronic payments to more people and more institutions. Cash is not free. It costs up to 1.5% of GDP for a Central Bank to print it, secure it and distribute it, and it comes at a cost to banks. It comes at a cost to merchants. It comes at a cost to consumers. We will continue to push innovative products into the market that drive efficiencies and growth for all the stakeholders, and in turn, I believe, this will drive MasterCard share and long-term revenue growth. So once again, thank you for your support for our company. Thank you for your time today, and I look forward to seeing some of you again over the next few months.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.