Highlights From MA's Q3 Conference Call: Net Sales Grew, But Branded Cards Remained Flat at 964 Million

November 3, 2009 1:38 PM EST

MasterCard Incorporated (NYSE: MA) reports Q3 EPS of $3.48, ex-items, versus the analyst estimate of $2.94. Revenue for the quarter was $1.4 billion, which compares to the estimate of $1.35 billion. Shares are down 3% in afternoon trading

Highlights From MA's Q3 Conference Call:

• (CEO) We saw net revenue growth of 2% on an as-reported basis and on a constant currency basis, net revenue growth was 3.9%.
  
• Total operating expenses declining approximately 13% this quarter, excluding the impact of litigation settlements.
  
• This has allowed us to deliver an 8.8 percentage point operating margin improvement over the same quarter last year, despite slower top-line growth. I am pleased that net income grew 41.6% on the same adjusted basis.
  
• The economic downturn has continued to affect consumer and business spending during the quarter.
  
• Turning now to our thoughts on the economy and the state of business around the world, our assumptions remain unchanged. And we don't expect any global economic improvements until sometime in 2010.
  
• However, in a report published in October, the international monetary fund believes there are some early positive signs.
  
• Advanced economies like the U.S., U.K. and western Europe are projected to expand sluggishly throughout much of 2010 with unemployment continuing to rise until later in the year. The IMF projects that advanced economies will grow 1.3% in 2010, better than the decline of 3.4% they are forecasting for this year.
  
• Emerging and developing economies are generally further ahead on the road to recovery, led by a resurgence in Asia, primarily in China and India. Overall, economies in this category are projected to grow from a rate of 1.7% in 2009 to 5.1% in 2010.
  
• Turning to the latest MasterCard spending polls data for the U.S. retail sector for the month of September, the results indicate an improvement over August, signaling the potential for a stabilizing environment for the remainder of the year.
  
• Retail sales excluding autos declined 2.1% versus September last year. When excluding both autos and gas, retail sales actually rebounded growing 2.1%. This is a positive sign considering the average of the prior three months June through August declined 2.4% on a year-over-year basis.
  
• Sales in luxury goods showed signs of improvement this September as the sector comparables begin to reflect the spending freeze that began in the last two weeks of September of 2008.
  
• The rate of growth on a worldwide basis turned positive in low single digits which was better than the decline of .3% we saw for Q3.
  
• (CFO) Q3 net revenue grew 2%, to 1.4 billion over the comparable period last year. Net revenue grew 3.9% for the quarter on a constant currency basis.
  
• This revenue increase was primarily driven by pricing changes of approximately 6 percentage points and is 7.6% increase in the number of processed transactions. These factors were partially offset by the impact of slightly lower cross-border volumes in local currency terms which translated to a 6.4% decline on a U.S. dollar basis.
  
• We have continued to effectively manage our total operating expenses which decreased 13.3% for the quarter. Foreign exchange contributed 1.3 percentage points to the decline.
  
• As a result, our operating income was 680 million for the quarter and we delivered a quarterly operating margin of 49.8%.
  
• MasterCard's effective tax rate was 32.9% in Q3 of 2009, both excluding and including special items. Primarily, reflecting adjustments to our effective tax rate as a result of a settlement with the I.R.S. over prior tax years.
  
• Worldwide growth dollar volume or GDV was relatively flat at .3% on a local currency basis in Q3. And declined 4.7% on a U.S. dollar converted basis to $633 billion.
  
• Across the rest of the world, GDV continued to grow by 6.3% on a local currency basis or for a decline of 2.4% on a U.S. dollar basis.
  
• Worldwide debit GDV grew 15.2% for the quarter on a local currency basis. This compares to about
  19.2% growth in the third quarter of last year. And it is the highest quarterly growth rate this year. In the U.S., debit GDV volume grew 7.2%.
  
• Debit growth for the rest of the world was almost 26.5% primarily driven once again by several countries in our Asia Pacific Middle East Africa region due to market growth and customer rents.
  
• For the quarter, cross-border volume growth on a local currency basis was about flat, down .3% and declined 6.4% on a U.S. dollar converted basis.
  
• When we look at process transactions in Q3, this increased 7.6% compared with a year ago quarter to 5.8 billion.
  
• The number of MasterCard branded cards worldwide remained flat at 964 million in the quarter and excluding the U.S., the rest of the world card issuance grew 8.5%.
  
• Other revenues decreased 1% on an as-reported basis, but grew .4% on a constant currency basis. Rebates and incentives were largely flat versus the same period last year.
  
• Excluding special items, total operating expenses decreased 13.3% during Q3.
  
• Without the impact of severance in both this quarter and the year-ago quarter, total operating expenses declined 17.1%. The decrease was mainly driven by the following. General and administrative expenses decreased 7.9% with currency fluctuations essentially accounting for 1.1 percentage points of the decline.
  
• Travel expenses decreased approximately 50% or 10 million on a year-over-year basis as a result of continuum cost reduction initiatives. The decrease in G&A was partially offset by personnel costs for the quarter which increased 4.9%, due to the $31 million severance charge.
  
• As we have mentioned before, we expect to fall below our long-term minimum average net revenue growth objective of 12% on a constant currency basis for 2009.
  
• For advertising and marketing spending, our thoughts remain unchanged that fiscal year 2009 will be lower than fiscal year 2008 on both an as-reported and constant currency basis and that spending in the second half of 2009 will be significantly higher than the first half of the year.
  
• We now expect Q4 advertising and marketing spend to be about 20% higher than our Q4 spend last
  year. We now expect our full year 2009 tax rate to be approximately 34%.
  
• Since our year-to-date tax rate at 33.6% is lower than this, keep in mind that our Q4 rate would have to be higher than the previous quarters. Based on these assumptions, we anticipate that we would be able to achieve at least 20% net income growth for 2009 excluding any impact of severance charges.
  
• (CEO) In the U.S., we signed a long-term extension of our agreement with Continental Airlines related to the U.S. issuance of both credit and debit co-brand cards offered primarily by Chase.
  
• Fifth Third Bank is now issuing World Debit MasterCard cards which is the only premium debit product in the United States that gives mass affluent consumers access to enhanced rewards, unique offers and savings opportunities.
  
• I am pleased to announce an agreement with Univision Communications, the nation's largest Spanish language media company to introduce prepaid programs that are being developed to provide U.S. Hispanic consumers with access to valuable financial tools.
  
• In India, we launched one of the world's largest near-field communications pilots with Mastercard Pay Pass embedded in the mobile handsets.
  
• (Q&A) I guess let me start off quickly with the severance charges and new severance charges into the fourth quarter charges. Any thoughts, Martina, into severance around 2010? (A)Julio, as you know, we've been taking severance charges every quarter. And we are really trying to make sure that we get all of the actions that we need to take into this year. And that's why we are finishing off in the fourth quarter. You know, with this kind of environment, you never know what could happen in the future. But we are really trying to take the opportunity at this point in time to do the right decisions from an efficiency point of view as well as reallocation of investments point of view. It should be substantially done.
  
• I was hoping you could provide some commentary or what you see in the advertising environment as the spend was quite a bit lower than what I was looking for in the quarter. (A)Well, I don't think there's any startling thing here. We had indicated that we would be spending a lot more in the second half of the year during our second quarter conference call. From the standpoint of the allocation and timing of the spending, what caught us a little bit by surprise was the rate in the third quarter. And we fully expect to spend what we had anticipated would happen in the third and fourth in combination, of course, across the two quarters, which is why Martina, in order to help provide you with a little more specificity indicated that we're anticipating the fourth quarter will be approximately 20% above what we saw last year. As economies around the world are beginning to show some positive signs, we are trying to step in and take advantage of some of those opportunities. And it clearly varies from one part of the world to another, but as we move into what is a larger seasonally spending season, we are trying to make sure we are well-positioned in working with our customers and in supporting our brand and at variation promotions built around sponsorship and other activities to lever what we see is a global economy.
  
• How should we talk about top-line growth for 2010 and factoring the recent trends with credit and debit and assuming we have a gradual recovery in consumer spending in 2010, will MasterCard have to increase sales and marketing expenses? And in this context, maybe you can comment on your priorities in sales and marketing. And will these priorities actually have to get modified next year? (A)Moshi, we are in the midst of working our way through the budget process at this point in time. I guess from a good news perspective, when we are working our way through this last year, every week we were realigning our assumptions to the down side as we saw the fourth quarter deteriorate quite rapidly. In fact, late third quarter of last year. So it's a little bit premature to begin to comment. Clearly, we feel better about the environment now. We're beginning to see some of those positive trends that we already mentioned to you. To the extent that we are underestimating the rate of economic recovery, I would view that as wonderful news. But as I indicated in my earlier comments, we're still expecting it to be a less robust recovery than we might like and we are managing our business that way.
  
• How should we think about top-line growth? That's my first question, about top-line growth for 2010 kind of factoring the recent trends we have seen in credit and debit. (A)Yeah, at this point in time, the best we can say to you over the three-year period we have already indicated that there's not an ability to deliver that 12% in 2009. And we don't believe we'll be able to get to an average of 12% over the three-year period of 9, 10 and 11. You can do the math as well as I can. Getting to that level would require quite significant growth rates in 2010 and 2011 which we don't envision at this point in time.

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