This summary is based on the second quarter fiscal 2008 earnings call conducted by MasterCard Inc. (MA) on July 31, 2008.
Management:
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Chief Financial Officer: Martina Hund-Mejean
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Investor Relations: Barbara Gasper
Key Investors Issues
- The firm realized a net loss of $747 million, or $5.74 per diluted share, including a special item.
- Net revenue growth was 25.0%, to $1.2 billion
- Gross dollar volume up 12.8% and purchase volume was up 14%.
Half Year Highlights:
- MasterCard reported net income of $674 million, or $5.13 per diluted share, excluding the impact of special items, and a net loss of $300 million, or $2.29 per diluted share, including special items.
- Net revenue was $2.4 billion, a 27.0% increase versus the same period in 2007.
Second Quarter Highlights
The firm delivered net income of $276.0 million, or $2.11 per diluted share excluding a special item related to the settlement of the anti-trust litigation with American Express.
- Under the terms of the settlement, it will pay American Express up to a total of $1.8 billion.
- Including the special item, the firm recorded at net loss of $(747.0) million, or a loss of $(5.74) per diluted share.
- Net revenue totaled $1.2 billion, up 25% over the comparable period last year driven primarily by strong growth and worldwide GDV and processed transactions, as well as cross-border volumes, which grew 18.9%.
Additionally, pricing changes contributed approximately 5% of the revenue growth in the quarter.
- Current fluctuations of the Euro and the Brazilian real relative to the U.S. dollar constituted 5.4% of the net revenue increase resulting in underlying business growth of 19.6%.
- Excluding the several items related to the litigation settlement, operating income of $416.0 million resulted in an operating margin of 33.4%, a 6.1% improvement over the prior year.
- Gross dollar volume grew 12.8% on a local-currency basis, and 18.2% on a U.S. dollar-converted basis, to $655.0 billion.
Additionally, cross-border volume, or the volume that is generated from cardholders who travel outside of the country where their card is issued, was up 18.9% over the comparable quarter last year.
- Processed transactions, or transactions processed across MasterCard’s network, increased 13.6%, or $5.2 billion as the company continues to benefit from the global diversification of the business with its ability to generate significant volumes, transactions, and revenues from economies outside of the U.S.
- Net revenue yield was 19 basis points in the quarter, versus 18 basis points in 2007 with pricing changes the primary driver of this improvement.
- Net operations fee increased 28.7%, or $209.0 million, to $938.0 million driven by growth in processed transactions, cross-border volumes.
Operation fees were also impacted by new pricing changes implemented in January of this year on cross-border acquiring volumes and on retail purchases in the U.S. by non-U.S. cardholders.
- Further, fees were also driven by revenue for other payment-related services such as new accounts enhancement program launched late in the second quarter of 2007 in global cardholder services.
- Net operation fees, as a percentage of gross operation fees, improved slightly due to a continuation of lower rebates to customers who did not achieve contractual performance criteria.
Net assessments increased 14.9%, or $40.0 million, versus the prior year.
- Operating expenses increased 14.6%, of which 4.5% were related to currency fluctuations due to a 15.7% increase in general administration expenses, of which 3.3% were related to currency fluctuation.
- The growth in G&A was driven by higher personnel costs, excluding the impact of FX, personnel costs increased 18.1%, primarily driven by the hiring of new personnel as well as higher severance costs.
- The firm recorded a 13% increase in advertising and marketing expense due to the timing of expenses, mostly for sponsorship activities related to the UEFA and European Championship soccer events, as well as ongoing investments in high-growth markets.
MasterCard generated $319.0 million in cash flow from operations and ended the period with $2.7 billion in cash, cash equivalents, and available-for-sale securities.
- This includes the repayment of $80.0 million of subordinated debt.
- Available-for-sale securities decreased $84.0 million in the quarter, mostly due to the sale of short-term bond funds.
- Due to the American Express litigation, litigation liability increased by $1.65 billion and deferred income tax assets increased by $530.0 million.
The firm repurchased approximately 1.3 million shares of Class A common stock for a total of $355.0 million and has now completed the approved $1.25 billion repurchase program.
- This past February, the Board authorized the conversion of up to 13.1 million shares of Class B stock into Class A stock during 2008.
- In the second quarter the firm implemented and completed the conversion program with all of the 2008 authorized shares of Class B common stock converted into an equal number of Class A common stock, which was then subsequently sold for transfer to public investors.
Economic Pespectives:
- The slow down in the U.S. economy has had an effect on growth in the United States as evidenced by a steady decrease in U.S. GDV growth from 10.6% in 2007 to 6.2%.
- Credit volume growth was only 0.7% but debit grew at 15.8% and U.S. purchase volume was slightly higher than GDV growth, while cash volume growth was down.
- Processed transaction growth is still ahead of volume growth at 7.8%.
