Highlights From MA's Q1 Conference Call: Net Revenue Growth Was 14.8%; Intl Volumes Continue to Grow Double Digit

Mastercard Incorporated (NYSE: MA) reported Q1 EPS of $4.29, $0.19 better than the analyst estimate of $4.10. Revenue for the quarter came in at $1.5 billion versus the consensus estimate of $1.46 billion. Shares look to close up 2.5% today.

Highlights From MA's Q1 Conference Call:

• (Ajaypal Banga) In the first quarter, we saw net revenue growth of 14.8%, with essentially no real impact from foreign currency exchange rates.
  
  
• We saw healthy GDP growth of 12.8% and an 18.5% increase in cross-border volume. And all this put together helped fuel first quarter operating income growth of nearly 20% and EPS growth of 24%.
  
  
• I'm actually quite pleased with the solid start to 2011, delivering our second consecutive quarter of double-digit volume growth, including improvement in the United States.
  
  
• Outside of the United States, volumes continue to grow double digit, with solid increases in Europe, Latin America, and the Asia/Middle East/Africa region, which is up about 20% this last on Asia/Middle East/Africa, despite the natural disasters and political upheaval that have occurred there recently.
  
  
• So far, what we have seen is that some of the affected markets have experienced double-digit declines in inbound volumes, but outbound volumes have actually jumped. Other markets have seen related increases in inbound travel volumes, markets such as the United Arab Emirates and Turkey.
  
  
• Moving briefly to U.S. debit regulation, I know this is of great interest to many of you, but I have very little new information to report. We as a company continue our advocacy efforts in Washington to delay or to change the Fed's proposal. And we fully endorse all efforts to ensure that lawmakers have a better comprehension of the unintended consequences of the law that was passed around this time last year. The fact is that interfering with the balance of costs paid by consumers and merchants will most likely tilt that burden towards consumers. It will also stifle innovation as participants have less incentive to invest. I believe this was not completely understood prior to the legislation being passed.
  
  
• Also, given the complexity of the issue, while we were not surprised to hear Chairman Bernanke announce that the Fed would not meet the April 21st deadline, we actually don't have any further insight as to when the Fed will actually release its final regulations. In some cases, this uncertainty has had very little impact on issuer decisions related to their debit portfolios; while in other cases, issuers are taking a wait-and-see attitude before making any changes. Ultimately, we will need to wait and see the reactions of all stakeholders including issuers, acquirers, merchants, and consumers before the full impact to our industry can be measured. Whatever happens, the earliest this regulation will likely begin to impact MasterCard would be in 2012.
  
  
• I think it's worth mentioning that we also have done a couple other things. The Arab Bank Group, one of the oldest banks in the Middle East, has launched a MasterCard World card to its top customers in Jordan, the UAE, Qatar, and Bahrain. In Abu Dhabi, we signed an exclusive debit deal with Abu Dhabi Commercial Bank, one of the top five banks in the UAE. And in Egypt, we reached an agreement with EgyptAir to develop a debit co-brand card. So you can see that despite the turmoil in that region, we've continued to get credit, debit, and prepaid deals done across several markets, including Egypt.
  
  
• We're also making progress in enabling Maestro card for e-commerce use. Over 80 million of the 300-plus million Maestro cards in Europe are now enabled.
  
  
• In fact, in only four months, Groupon has become the largest volume e-tailer for Belgium Maestro cards and one of the top merchants for Maestro in Spain. And we expect other e-commerce merchants to follow later this year.
  
  
• (Martina Hund-Mejean) Net revenue grew 14.8% to $1.5 billion. Foreign exchange rate fluctuations had essentially no impact. Net revenue growth was driven by increases of 12.8% in gross dollar volume on a local currency basis, 18.5% in cross-border volume, and 11.1% in processed transactions.
  
  
• This quarter, a full 60% of net revenue was generated outside the U.S. as non-U.S. revenue growth continues to outpace growth in the United States. Total operating expenses were up 9.4%.
  
  
• Operating income was $836 million, up 19.4%. This resulted in an operating margin for the quarter of 55.7%, 2.2 percentage points higher than last year's first quarter.
  
  
• The effective tax rate declined to 32.8%, primarily due to the geographic mix of earnings and tax planning initiatives.
  
  
• We delivered net income of $562 million, up 23.6%. Earnings per share were $4.29 on a diluted basis, up 4%.
  
  
• And here you see that worldwide gross dollar volume, or GDV, was up 12.8% on a local currency basis, and grew 15.2% on a U.S. dollar converted basis to $728 billion. This is the highest quarterly growth rate we have seen since the third quarter of 2008.
  
  
• U.S. volume growth was 5.8%. And across the rest of the world, volume growth was 16.8% on a local currency basis.
  
  
• Worldwide credit volume grew 10.3% on a local currency basis, which breaks down into 4.8% growth for the United States and 12.5% for the rest of the world, including double-digit gains in Latin America and APMEA [Asia-Pacific, Middle East, Africa].
  
  
• Worldwide debit volume grew 17.4% on a local currency basis. In the U.S., debit growth was 6.9%. And it was about 28.4% for the rest of the world, driven by APMEA and Europe.
  
  
• Cross-border volume growth on a local currency basis was up 18.5%. This is actually the fifth consecutive quarter of double-digit growth.
  
  
• Processed transactions were up 11.1% compared to the year-ago quarter at about 6 billion. Processed transactions continued to grow at double-digit rates in Latin America and APMEA, and have turned positive in Europe for the first time in several quarters as we continue to lap the UK deconversion.
  
  
• Global card growth was 4.7% to about 1.7 billion MasterCard and Maestro cards.
  
  
• In total, gross revenue increased by $230 million or 13.1%. Rebates and incentives for the first quarter were $477 million, up $37 million from the year-ago quarter. However, the increase was about $100 million, or roughly 27%, when adjusted for the cross-border pricing structure change.
  
  
• Advertising and marketing expense was up 12.1%, mainly driven by customer specific initiatives and support of sponsorships outside of the United States, as well as by increased support of strategic priorities such as Affluent.
  
  
• Depreciation/amortization increased 19.3%, primarily due to the acquisition of DataCash and investment in technology improvements.
  
  
• So we generated $355 million in cash from operations in the first quarter. And we ended the quarter with cash, equivalents, and other liquid assets - other liquid investments of $3.9 billion.
  
  
• We purchased about 2.6 million shares of Class A stocks during the quarter at a cost of approximately $654 million.
  
  
• In April, total processed volume growth for the rest of the world was about 22%, slightly ahead of the 20% pace that we saw in the first quarter due to continued strength across the regions. Globally, processed transaction growth was about 16%, ahead of the 11% growth we saw in the first quarter.
  
  
• We remain committed to our target of a minimum 50% annual operating margin and continue to target only a small operating margin expansion in 2011.
  
  
• In total, we expect DataCash to be neutral to 2011 earnings, and the Travelex program management business to be $0.04 to $0.06 cents dilutive, including integration expenses. As a result, the acquisitions will contribute more to operating expense growth for the full year than they will to net revenue growth.
  
  
• For modeling purposes, you should continue to assume a full-year tax rate of 33%.
  
  
• Finally, we remain focused on our objectives for the 2011 to 2013 period of a net revenue compounded annual growth rate of 12% to 14% and minimum annual operating margin of 50% and an earnings per share compounded annual growth rate of at least 20%.
  
  
• (Q&A) Ajay, you commented a little bit about impacts or potential impacts due to Durbin. And one of the things you said is that there could be a potential benefit from routing of non-exclusivity. So I just wanted to dig down on that a little bit because I remember on the last call, I thought you guys made a point that multiple routing options on signature could be a negative for the industry and maybe MasterCard. So were you specifically talking about both multiple routing options on both signature and PIN, or are you trying to make a distinction there? (A) Thanks. It is actually that if there were multiple routing options on signature and PIN, I remember saying that would not be a good outcome for the industry. It would be very confusing. That still remains the case. It's only if the routing options that come out are somewhat simpler than that and are limited to having a non-connected PIN brand along with a signature brand, one at the back, one in the front on a card. I think that is the opportunity when, given our lower share of volume today, that we would have a volume opportunity. It's not clear to me how this will work out. It's not clear to me what will eventually come out in the rules. It's not yet clear to me what the shorter term impact will be versus the medium term. But I can, looking out and saying just given the reality of my lower share, that should give me some volume benefit over a period of time.
  
  
• Okay, just a quick follow-up. July 21, do you expect the Fed to have a decision or at least some kind of decision on Durbin by then, or do you think that could be postponed as well? (A) No, that's what the Fed Chairman has said repeatedly; that he and his team will be ready by that date, and I expect him to be absolutely on schedule for that one. I just don't know any more than you do.

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