Operator:
Good morning. My name is Laurie and I will be your conference operator today. At this time I would like to welcome everyone to the MasterCard First Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, we will have a question-and-answer session. At that time instructions will be given on how to queue up for a question. I would now like to turn the call over to Barbara Gasper, Head of Investor Relations. You may begin.
Barbara Gasper:Head, Investor Relations:
Thank you, Laurie. Good morning everyone and thank you for joining us for a discussion about our first quarter 2016 financial results. With me on the call this morning are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer. Following comments from Ajay and Martina, the operator will announce a opportunity to get into queue for the question and answer session.
Up until then no one is actually registered to ask a question. Even if you think you have already dialed into the queue, you need to register again following our prepared comments.
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 at mastercard.com. The documents have also been attached to an 8-K that we filed with SEC earlier this morning. A replay of this call will be posted on our website for one month.
Before we get started, I would like to point out a change we have made around reporting the impact of currency on our business. As Martina mentioned on our last earnings call, we realize it has become more difficult for many of you to model our business as FX rates continue to move around. Therefore beginning this quarter, instead of reporting FX adjusted growth rates which only reflected the translational impact of two functional currencies, the Euro and the Brazilian real, we are now reporting currency neutral growth rates which include both the impact from translating functional currencies into US dollars for reporting purposes as well as the underlying impact of local currencies being converted into their functional currency.
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. And now with that, I would like turn the call over to Ajay.
Ajay Banga:President and Chief Executive Officer:
Thank you, Barbara. Good morning everybody. We are very pleased to deliver solid results this quarter and despite I think everybody would agree is an ongoing mixed global economic environment. On a currency neutral basis, we reported net revenue growth of 14% and an EPS growth of 1%.
So when you remove the impact of the non-recurring discreet tax credit and the balance sheet remeasurement related to Venezuela in last year’s first quarter, our EPS growth is 12%.
So now let’s take a look at the global economy and it’s largely unchanged from what we discussed last year quarter with the US economy remaining solid with inflation and wages growing at a similar pace and the unemployment rate kind of holding steady at 5%. We just saw the unemployment rate numbers coming out this morning as well. However as we know from the Fed comments yesterday, uncertainty remains among on they might take action as well as the potential impact from the global economy.
So looking at the rest of the world, the economic outlook continues to be mixed. In Europe both consumer confidence and economic sentiment declined slightly this quarter. However recent stimulus measures by the European central bank and steady improvement in the unemployment rate I think should continue to drive growth across the region particularly in the UK and Germany.
Asia is still challenged by the continuous turmoil in China. Consumer confidence remains cloudy with the exception being India where both consumer and business sentiment remain high. In Latin America, Brazil is still in the worst recession in the country’s history and of course economic conditions in Venezuela are deteriorating further but Mexico is stable and it seem to driven by solid consumer spending and declining inflation.
So none of this surprises us. But it is does seem that we are likely to remain in the period of economic uncertainty. And so that said, we have continued to work hard to ensure that our business maintains its strong growth trajectory. And we are seeing double-digit volume and transaction growth across most of our markets.
In addition, we are benefiting from the successful integration of our recent acquisitions and continuing to grow our services business. As I told Barbara yesterday, at this time, steady as she goes is what our focus is.
So now let’s move on to some of our recent business activity. During the quarter, we signed a number of new deals and renewals supporting the expansion of our business around the world. I am going to give you a few examples. In Europe, we extended our contract in Nordea which is the largest bank in the Nordics for their consumer credit and their commercial card portfolios and we added the rollout of MasterPass and In Control with them.
Staying in Europe, we also renewed and extended our contract with DSGV, the largest banking group in Martina’s home country of Germany for their credit business. We have also -- the rollout of MasterPass. Further we added a new debit portfolio with Unicredit, a leading European financial group based in Italy.
In Asia, we just reached recently renewed and expanded our contract with both Mitsubishi US which is one of the largest issuers in the region for their consumer and their commercial credit business and with Maybank the largest bank in Malaysia for their credit and debit business.
And finally I am going to talk a little bit upon of example of working with a number of our merchant partners and I am going to give you a specific example. This one is of McDonalds. We have talked in previous calls of a partnership with them in the Middle East. Now in South Africa as well where McDonalds is leveraging MasterPass to simplify the ordering process as well as well as utilizing contact less functionality at their restaurants of course the idea is to improve the drive through and the dining experience.
But on the down spot actually has not gone beyond the core business. There also a customer applied productive technology is our APT the cloud based data and analytics company that we acquired last May. MacDonald’s use APT software to analyze a variety of strategic initiatives including new food and menu items, determining which item should be on the menu and other business priorities. That’s just one of the many examples of the value we can provide through our merchant partners when you combined products we have with the data and analytics that we are capable of analyzing with them.
So, next I’d like to give an update now we’re advancing our strategy in the digital payments space and I am going to start with MasterPass. So, remember we’re on the marathon here and we’re making great progress, with our digital by default strategy. That’s about enabling issuers to auto enroll cardholders on to the MasterPass platform without any additional effort having to be made by the consumer. We’re looking forward to announcing some bank partners who would be leveraging this ability in the near future and as we continue to drive new acceptance from MasterPass as well, we’re closing in and signing up about 270,000 merchants representing more than $160 billion in addressable volume.
Earlier this month, Vodafone Egypt migrated nearly 2 million Vodafone cash wallets from their close loop system to our mobile payment gateway platform that enables us to process all of their transactions. This migration builds an our goal of creating an inter-operable network across the Egyptian mobile payment ecosystem that I have spoken to an earlier call and helps to drive our strategy of financial inclusion and of course accelerate the conversion of cash.
And then moving on to MasterCard Digital Enablement Service or MDES, we continue to make significant progress around making digital transactions more secure via encryption and tokenization. In Asia we have pleased to now have more than 30 issuers signed up for the MDES service.
We have also launched the first NFC based wallet in Latin America with Citi Dynamics in Mexico utilizing our cloud based payments technology. And by the way this wallet, the Citi Dynamics one, was created by developers from our C-SAM acquisition which actually gave us access to a very talented pool of engineers for enabling us to build our capabilities for issuers and merchants exactly like the example of Citi Dynamics.
The finally we continue to support our digital partners by helping Android Pay launched in the UK and both Samsung Pay and Apple Pay are expanding to Singapore. We are also pleased to be partnering with Facebook as they leverage MDES to test tokenization by enabling pilot participants to interact with sellers and advertisers directly on the platform to complete their purchases all without ever having to leave the Facebook App.
To moving on to safety and security. You know there are a lot of efforts from us and others going into the space and as a result of successful biometric trials in the Netherlands and the US that we announced last August, we are actually launching MasterCard identity check fondly referred to as Selfie Pay in the US, Canada, and parts of Europe this summer with more countries to be announced soon. Much of the initial interest in identity check has come and been attached to the consumer side of these business but interestingly we would actually currently working with BMO Financial, Bank of Montreal in Canada to rollout the first corporate credit card program using selfi pay in both the US and Canada.
In addition we recently launched IQ series. That’s a suite of products that uses real time intelligence to empower issuers to make more informed fraud management decisions as well as most importantly, potentially decrease the growing problem of false declines.
Industry studies are showing that one out of every six card holders have experienced at least one decline because of suspected fraud in the past year. That by the way adds up to false declines of $118 billion a year or several times the actual amount of true card fraud.
Next we worked with our issuers to deliver additional benefits to our cardholders and kind of protect them even more from fraud. As of two weeks ago, all MasterCard consumer and small business cardholders are now covered by the industry’s first global around the world zero liability promise ensuring they are not responsible for any unauthorized charges.
While on the topic of safety and security, let’s spend a minute on the status of EMV in the US. We now have about 67% of our consumer credit cards and 24% of our consumer debit cards with chips on them. Roughly 1.2 million US merchant locations are now accepting these cards and while that’s good progress we are seeing a across the industry and also in our own number, I think everybody recognizes that checkout times at the terminal may appear longer when using a chip card and to help address that concern, we announced M/Chip Fast which is to help speed EMV transactions. You leverage the capabilities who are existing contact list technology which as you know has been deployed in various transit and other applications around the world.
Using that cardholders will experience max stripe transaction speed. But with the added security of EMV M/Chip. At the same time, we are going to make this happen in collaboration with the industry including other networks to look at how to bring a consistent approach to the market and best support the EMV checkout experience. And the point of all these examples is that people shop on all sorts of devices and through multiple channels and they expect technology to simplify that process while keeping the transactions safe and secure.
And I gave you all these examples to demonstrate and reinforce our commitment to predicting every transaction, doesn’t matter whether it took place in the physical world or the digital world, we are committed to doing this.
So I spent the last several minutes talking to you about how we have grown our business through a series of organic investments and it’s important to recognize we have also been growing our business by integrating the various acquisitions we made over the past few years that expand our presence across the payment value chain. So let me give you a couple of examples across information services and processing. So let’s start by information services that business within advisors. I mentioned APT earlier when I talked about McDonalds.
One of the great things about that subscription based business model is that it generates a recurring revenue stream with an average contract length of about three years and since the acquisition, we have integrated the sales and product organizations of APT with advisors to drive some pretty good benefits.
Let me give you an example. Since their acquisition, thirty organization have subscribed to the APT platform in long term contracts and in additional to McDonalds that I talked about, I will give you a few more, Asahi Breweries in Japan, Sunoco in the US, and in the UK, KFC. We have also signed more than 15 new deals incremental to APT’s earlier business as usual effort, in other words, using MasterCard’s client relationships and coverage including by the way one of the largest airlines in Europe, one of the largest retailers in brazil, two of the largest financial institutions in Asia and several in the US.
What’s exciting about all this deals is that they include expanding relationship with long time APT clients who now also license newly creative product modules leveraging insights derived from MasterCard data.
Finally we launched APT Engage which is a suite of products which leverages aggregative and anonymized MasterCard payment transaction data combined with APT’s proprietary analytics to help issuers and merchants better understand customer standing behavior, so which products are high loyalty as well as planning for new retail locations.
That’s about information services. On to processing, the idea there being to extend our capabilities beyond switching, getting beyond authorizing, trailing and settlement. Payment transaction services business we’ve signed a deal with BNP Paribas in Poland to provide issuer processing services which by the way has also enabled us to become one of the major third party processors in the country.
In the US our year-old partnership with Green Dot to process all their debit and prepaid cards, as resulted in the successful migration of now approximately 50 million account files with another 50 million to occur over the balance of 2016. And lastly in the same business, we enabled several transit operators in Turkey, to begin using NFC capabilities by processing contact class cards thereby allowing us to increase our share of domestic process transactions.
Staying with processing on the prepaid management services side, we’ve just implemented a card program with British Airways to facilitate compensation payments to BA passengers for delayed or canceled flights or lost luggage. We’ve also launched the first dual purpose travel insurance and multi-currency prepaid travel product with Slide Center which is one of the world’s largest travel agency. And lastly as a result of integrating our acquired assets into our payment gateway services business, we are now able to offer products globally which include integrated fraud and risk management solutions to both merchants and to acquirers. We are already seeing several new wins including four new deals with key acquirers and resellers in Australia, India, Saudi Arabia, Singapore, who can now offer these capabilities to their merchant base and in turn that kind of helps us expand our footprint in these markets.
We have also worked to ensure that our payment gateway provides acceptance for the latest digital payment methods. We now support both Apple Pay and Android Pay in addition to MasterPass.
We all recognize these acquisitions require a certain amount of time investment and resources to integrate. We work very hard to ensure this happens seamless and efficiently. We are now clearly seeing the benefits that’s come from them both in our dialog and in our engagement with our customers.
So with that, I am going the call over to Martina for an update on our financial results and operational metrics. Martina?
Martina Hund-Mejean:Chief Financial Officer:
Thank Ajay and good morning everyone. Let me begin by giving you some highlights on the first quarter as starting with page three where you see the difference between as reported and currency neutral growth rates for this quarter.
As Barbara explained at the start of this call, we have now changed how we report the impact of currency. So instead of reporting FX adjusted growth rates which only reflected the translational impact of the Euro and the Brazilian real functional currencies, we are now reporting currency neutral growth rates which exclude all impacts of foreign exchange rates. This is so the impact from translating functional currencies into US dollar for reporting purposes as we as the underlying impact of local currencies being converted into their functional currency. We hope that this change will make it easier for you to understand the underlying performance of our business.
And all of my comments going forward will pertain to our new currency neutral growth rates.
Net revenue growth was 14%. While operating expenses grew significantly, this was mostly due to the difference between FX hedging and balance sheet remeasurement gains that we had in the year-ago quarter versus foreign exchange losses on our hedging contracts in this quarter. I will talk more about this when we get into the detail of operating expenses.
As expected, net income was also impacted by a higher tax rate than in the year-ago quarter due to the non recurrence of a discreet US foreign tax credit from which we benefited in the first quarter of 2015.
EPS was $0.86, up 1% year-over-year but as Ajay said, it was impacted by $0.08 due to the discreet tax item that I just mentioned and the Venezuela balance sheet remeasurement gain in the year-ago quarter. When you exclude these two items, EPS grew 12%.
Share repurchases contributed $0.03 per share and as of April 21, we have $2.9 billion remaining under our current authorization. And lastly, cash flow from operation was $1 billion and we ended the quarter with cash, cash equivalent and other liquid investments of about $6.2 billion.
So, let me turn to page four and here you can see the operational metrics for the first quarter. Included in these numbers is a positive lift of about 1% due to leap day on all of our metrics. Our worldwide gross dollar volume or GDV growth was 13% on a local currency basis. It’s about up one PPT from last quarter.
Overall, our US GDV grew 10%, made up of credit and debit growth of 11% and 8% respectively. Total US GDV has continued one PPT headwind from lower gas prices.
Outside of the US, volume growth was 15% on a local currency basis, also up about 1 PPT versus last quarter with mid to high teen’s growth in each region except Canada which was impacted by the lapping of our wins. Cross border volume grew 12% on a local currency basis and that’s similar to what we saw in the fourth quarter.
Turning to page 5, process transactions grew 14% globally to $12.6 billion, a 2 PPT increase from what we saw in the fourth quarter with higher growth in all regions except Canada again due to the lapping of our wins. Globally the number of cards grew 7% with 2.3 billion MasterCard and Maestro branded cards issued.
Let me turn to page 6 for highlights on a few of the revenue line items. Net revenue growth was 10% as reported or 14% on a currency neutral basis given currency headwinds. We saw strong volumes in transaction growth particularly in the US and Europe and some of which was due to the impact of leap year. Rebates and incentives were slightly higher than what we expected due to deal renewals.
Looking swiftly at the individual revenue line items on a currency neutral basis. Domestic assessments grew 13%, in line with worldwide GDV growth. Cross border volume fees grew 14% or cross border volume grew 12%. The 2 PPT gap is due to a number of pricing actions partially offset by a higher mix of interim Europe activity.
Transaction processing fees grew 18% primarily driven by the 14% growth in processed transactions as well as some pricing.
And finally, other revenues grew 22% driven primarily by our APT acquisition and our safety and security product offerings.
Moving on to page seven, here you can see that total operating expenses increased 25% in the quarter, or 29% on a currency neutral basis. Most of this increase is due to FX movements recorded in our G&A line. I mentioned on our last earnings call that we recorded a large amount of FX gains in the year ago quarter mostly due to onetime gains related to Venezuela. The absence of those gains plus the unrealized losses we recorded this quarter on our FX hedging activity due to the weakening of the US dollar relative to year end 2015, resulted in an almost $130 million increase to expenses.
Excluding this, and a 4 PPT impact from acquisitions, we did not have in the year ago quarter, G&A grew 11% as a result of our continuing investment in areas such as digital, data analytics, and safety and security.
The increase in depreciation and amortization expense is primarily due to amortization of intangibles related to our acquisitions.
So now I am going to turn slide 8, let’s discuss what we have seen in April through the 21st. Well many of our business drivers are similar to the first quarter, direct comparisons to the first quarter are a bit difficult since it had the benefit of both leap day and Easter.
The numbers through April 21 are as follows. Starting with processed volume with saw global growth of 13% the same as in the first quarter. In the US, our processed volume would 10% down roughly 1 PPT from the first quarter with slower growth in both credit and debit. Gas had less than 1 PPT negative impact on our April growth down slightly from the first quarter impact.
Process volume outside the US grew 16%, up 1 PPT from the last quarter with higher growth in most regions and primarily driven by Europe and APMEA. Global process transaction growth was 14% the same as we saw in the first quarter. Process transaction growth outside the US was up a bit with increases in APMEA in -- while the US growth was down almost 2 PPT due to slower growth in both credit and debit.
With respect to cross border, our volumes grew at 11% globally, down 1 PPT from last quarter with lower growth in Europe primarily due to the timing of Easter.
Let me start out with a quick comment about our long-term performance objectives for 2016 to ‘18 which excluded the impact from our two major functional currencies, the Euro and the Brazilian real, as well as excluded any new M&A activities.
Since we are now making the change to recognize the impact of all foreign exchange on our business, we reviewed these objectives and determined that no change is required from what we issued previously because we have baked in very little local FX impacts over the three-year period. Therefore our 2016 to ‘18 objectives remain as follows but are now on a currency neutral basis.
Net revenue CAGR of low double-digits, operating margin of at least 50%, and in EPS CAGR in the mid teens and measured off a 2015 pro forma EPS figure of $3.12.
Now moving specifically to this year, there is really no change in our outlook for the business from what we discussed with you on our earnings call back in January. The US and European economies are showing some sign of improvement but the rest of the word remains challenged. In addition, FX headwinds will continue to be with us into 2016 although likely not as significant as 2015 given current FX rates.
And our underlying business fundamentals remain strong. We will continue to run the company for growth both on the top and on the bottom-line as well as balancing our investment with astute expense management.
As we look at full year 2016 and after factoring in our new currency neutral methodology, we continue to expect to be at the low end of our three-year revenue growth range. When you model on an as reported basis you will need to adjust for the impact of all currencies and at the current rates, we estimate that it would mean about a 3 PPT headwind on net revenue growth and about a 4 PPT headwind to the bottom-line.
And let me call out a few other items that you should consider when modeling 2016.
The how we baked in incentive, we continue to expect to see growth in the high teens slightly lower than the 20% as reported growth rate we saw in 2015. On expenses, we still expect total operating expense grows in the high single digit range on an as reported basis. And finally, you should assume a tax rate of slightly less than 30% for 2016.
Now, let me turn the call back to Barbara to begin the Q&A session. Barbara?
Question & Answer
Barbara Gasper:
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, we ask that you limit yourself to a single question and then queue back in for additional questions.
Operator:
Your first question is from Glenn Greene of Oppenheimer. Your line is open.
Glenn Greene:Oppenheimer & Co.:
Thanks. Good morning. Nice results. I guess, I just wanted to ask the first question on somewhat of a slowdown in US volume growth, obviously still strong but the January update you had given was 12% instead of having the leap year benefit, the timing of Easter, anything to sort of call out in terms of the gradual slowdown in the US?
Martina Hund-Mejean:
Well, look first of all I think what you saw in the first quarter was very similar to what we saw in the fourth quarter. So, there was really a continuation in terms of how the US consumers feel. The first three weeks of the second quarter. So, that’s it’s April, first of all, as I tell always it doesn’t really make a quarter but you have the affect of Easter in there, right because Easter was in March not in April and that typically happens to be a bigger effect in the United States.
Ajay Banga:
And in Europe probably. Those are the two places where Easter has some impact. You’ll see less impact from Easter in the other regions of the world. So right now we got no further conclusion for you Glenn.
Glenn Greene:
And any impact at this point from USA rolling of or is there sort of the timing of that sort of..
Ajay Banga:
Very early days, small impact right now. But I am sure that’ll build as we told you over the course of the year and into next year.
Glenn Greene:
Okay, great. Thank you. Your next question comes from the line of Bill Carcache of Nomura. Your line is open.
Bill Carcache:Nomura:
Thank you. Can you give some color around the trajectory of your investment spending as we progress through the year and maybe any thoughts on when we can expect positive operating leverage to return. Thank you.
Martina Hund-Mejean:
Bill look first of all a couple of thoughts. Our investment does bounce around by quarter-over-quarter but we don’t get really a quarterly outlook for you. So you are really going to have to think about the high single-digit as reported numbers for OpEx and total that I was just telling you about and that does include all of our operating expenses including the foreign exchange losses that we booked in the first quarter. So hopefully by knowing the first quarter, you are able to chart out the next three quarters for the year given that we’re giving guidance for the high single-digit number.
In terms of operating leverage what we have said when we looked at our business and we do that actually every year that we feel very comfortable with an operating margin in excess of 50%. Remember we’re really running the business for our revenue growth so for top-line growth which means that we are having to make a number of investments on the OpEx side in order to generate the bottom-line growth. So we’re holding that as a metric and at this point in time the heavy duty investments that are happening is in the digital, is in the data analytics arena as well as in the safety and security arena.
Bill Carcache
Thank you.
Ajay Banga:
At the end of the if you take out the currencies, our revenue was 14% and our G&A growth if you take out these one-timers it was 11. That’s kind of how we are running the company on a daily basis. We may have quarters when the gap between the two will be wider, we may have quarters when it’s a little narrower because that’s the point that was Martina was making. We don’t really manage that on a quarterly basis.
We try and to do for the year as a whole is to make sure that we have good revenue growth and put money back into the priority areas. That’s kind of what you are seeing in our underlying business. FX and balance sheet remeasurement and type is important, it matters to our shareholder but if I left into say with we are investing in digital and data and safety and security, I don’t think that would be the right thing to do. So that’s how we are trying to run the place.
Martina Hund-Mejean:
And in fact the underlying G&A growth of 11% when you actually extrapolate that to operating expense growth so at same basis taking out the acquisitions as well as the foreign exchange losses, it was 8%. So you look at the operating expense growth of 8% versus the revenue growth of 14%. So you can actually see that there is positive leverage.
Bill Carcache:
Understood. Thank you.
Operator:
Your next question comes from the line of Sanjay Sakhrani of KBW. Your line is open.
Sanjay Sakhrani:Keefe Bruyette & Woods:
Thank you. Good morning. I guess I had a question just on Europe, how things are progressing there as Visa’s getting closer still Visa Europe and then maybe just little bit about the M&A opportunities out there. Thanks.
Ajay Banga:
Thanks Sanjay. You know got to wait for Visa to get through with acquisition processes. You heard on their call they’ve got some timing change and some construct changes in that. I think the construct changes actually make it simpler for the banks to evaluate what they’re getting and what they’re not and so that’s actually a good thing for everybody and the timing change will just have an impact on how these deals progress overtime.
So they are working a way through it and we are working hard in Europe. And M&A broad ideas on M&A. Broad ideas on M&A aren’t any different from what I’ve told you in the past which is kind of you know some deals that come across we see deals every quarter. We end up probably seeing sometimes as much as 15 to 20 deals.
We end up doing one or two if we are lucky in the course of, of a period of time. Couple of years ago we did more than that. So it depends, it depends on what we need for product or geography or expansion of capabilities but we’ve actively looking all the time.
Martina Hund-Mejean:
Yes so the areas really haven’t changed in terms of what we have told you before which is in the processing arena and the information services arena and the loyalty arena, technology is really important for us but those areas really have not changed.
Sanjay Sakhrani:
Okay. Thank you.
Operator:
Your next question comes from the line of Moshe Orenbuch of Credit Suisse. Your line is open.
Moshe Orenbuch: Credit Suisse:
Great, I guess there have been some press reports about the potential for an acquisition. Can you just talk generally about what types of assets would be kind of interesting at this point and how you’re thinking about the acquisition front?
Ajay Banga:
Actually a little bit of that was Martina was just referring. We’re trying to build out capabilities in the areas we’ve identified in the last three years in our strategic plans on our Investor Days. Basically that’s in processing so we get to see more transactions and we get beyond the clearing, authorizing, and settlement space of the existing card kind of business. So that’s why you saw us doing and you saw in my opening remarks the commentary on the different processing entities and how to what we are doing.
It could be the data cache kind of this which the payments gateway area. It could be with things like and those are all in the regular transaction processing spaces but it could be in any space that allows us to get to see more transactions and six seven years ago we used to see under 40% of our transactions we now see close to 50%. That enables us to do a better job with our co-products but even more importantly with our information services and advisers and safety and security products which is where we’re putting some emphasis. So that’s the second area beyond processing.
Anything that gives us capabilities, strength, geography, product knowledge, or skill sets in data analytics, in safety and security, in information services, in loyalty and rewards and the acquisitions in Australia that we have done. That’s all about those spaces. And we haven’t wavered off that. You’ll read speculation every once in a while speculation is speculation till we can announce anything to you..
Moshe Orenbuch:
Thanks very much.
Operator:
Your next question comes from the line of Tien-Tsin Huang of JP Morgan. Your line is open.
Tien-tsin Huang:J.P. Morgan:
Great. Thank you and thanks for moving to the FX neutral...
Ajay Banga:
I had told Martina you would be the most happy boy there.
Tien-tsin Huang:J.P. Morgan:
Oh yes. My head is already spinning so a little less spinning is good. I wanted to I guess ask on the US I guess credit overall actually just credit purchased volume I saw the US credit volume accelerate a little bit from the metrics sheet have grew international credit I think for the first time as I can remember.
So in international credit looks like you’re slowing a little bit. How much of this is cyclical or are there some other things to consider or some win loss dynamics may that we should be aware of?
Ajay Banga:
Some of it is just that remember for a while our issue of mix was underperforming soon after and for many years after the crisis if we look at the reports you will find it so happens that our issuer mixes back into growing its volumes and its businesses and so that’s kind of riding that tail wind in our sales. In -- to all the other stuff that’s going in and out but the wins and losses you’re well aware of. There’s almost nothing that you don’t know other than smaller institutions which won’t move the numbers the way you think about them.
They could easy but they are unlikely to move transaction numbers and so you’ll find our consumer credit and our commercial credit in this first quarter actually both are up over the fourth quarter and both are also kind of doing okay over the course of the year.
It’s ins and outs all of that but most of it would have to do just exact number for this quarter would have to do with issuer mix rather than anything dramatic in terms of wins or losses.
Tien-tsin Huang:
So nothing to call out with Europe volumes I guess you could give it in general but just from what you can tell with new regulations in places has there been any impact on volume?
Ajay Banga:
Not yet Tien-tsin. As I said that’s why I used that comment to Barbara about steady as she goes. I am really keen to make this speed run through in that for almost steady focus.
Tien-tsin Huang:
That’s great. Thank you.
Operator:
Your next question comes from the line of Darrin Peller of Barclays. Your line is open.
Darrin Peller: Barclays:
Thanks guys. I just want to follow up a bit on the spread between the revenue growth and transaction process and the volume or the and sort of the growth rate as well as the cross border side of volume there I know you mentioned pricing. Typically we’ve seen the interim Europe volume obviously have a big impact on revenue growth versus volume but it seems like pricing is may be offsetting that. I guess from understanding going -- some short of a shift that’s occurring have a little volume into Europe versus other areas and is pricing big enough and sustainable that we should really forecast the revenue growth rate build to outperform the volume growth cross border going forward just given that that’s a pretty good going...?
Martina Hund-Mejean:
So Darrin first of all these we’re pricing into actions that were introduced last April, April 2015. So that means to have anniversaried now with the first quarter so you’re not going to see that in any significant way in Q2. And secondly from an intra-inter European mix that means the relative growth rates of those cross border volumes, we really haven’t seen much of a difference there. It was a little bit less of a drag than we have in the prior quarters but is still a drag.
Ajay Banga:
And by the way in cross border business in fact think anything you would like to get a little insight into, the markets that are suffering in terms of our recognizing cross-border business from them, I know different from what you would think. Brazil is slower, Nigeria is slower, Canada is a little slower that’s kind of what you would have expected and China for example actually is slower into the US but not into other markets. So Chinese cross-border travel seems to be up in Japan and in Australia, little slower into the United States. So all that is inside the numbers that you see and that’s kind of how you should think about cross-border.
We work very hard on cross-border because it’s an important part of our business and it’s the result of our cross-border effort is literally a result of 35,000 different initiatives happening all over the world in different countries on helping to make to cross-border be a predictable and good part of our business.
Darrin Peller:
okay thanks modeling cross-border revenue to outperform volume in the next few quarters?
Martina Hund-Mejean:
no I think you should be going back to what we have before.
Darrin Peller:
okay alright thanks guys.
Operator:
Your next question comes from the line of Moshe Katri of Sterne Agee. Your line is open.
Martina Hund-Mejean:
Moshe are you there?
Moshe Katri: Sterne Agee:
Yes can you hear me now?
Ajay Banga:
yes.
Moshe Katri:
So repay level remains pretty elevated in terms of growth rate. How should we think about in general the competitive environment and then on top of that, so we have any large renewals coming up? Thank you.
Martina Hund-Mejean:
Look Moshe first of all the competitors environment has not changed. We have really said that that it’s always competitive in terms of winning a business. Price is always one factor but what really plays is what kind of product suite you can offer and we sell into a customer but the price inclusion has not changed and you can actually see that from our rebates level in terms of what we are saying for the whole year. We have not changed our view whatsoever but you do know that we can never perfectly forecast when we sign a particular for renewal so that it happens to be here in the first quarter we have a few more renewals that we saw into we have charted out for the rest of the year.
Moshe Katri:
So we don’t have anything significant in terms of larger renewals this year?
Martina Hund-Mejean:
So I think we got pretty much -- I mean every year we have one or two significant renewals but at this point I think we pretty much have got now hands around this. Remember when renewals happen, it typically work at least twelve to eighteen months ahead of the renewals at particular customer so we got our hands around that pretty well for this year.
Ajay Banga:
So once guidance she gave you that during the conversation that she was speaking about the fact that our rebates and incentives as a whole which also include by the way the impact of better volumes. Remember that it’s also paying for volume so there is just not deals although that’s what you’re asking about, it is also volume and volumes that just reply to even Tien-tsin’s question. Some of sure makes it doing better than they used to so that’s always size that and she’s factored all that in when said that you should expect rebates and incentives for the year as a whole to be a little lower than what you saw last year which was around 20% in the high teens I think are the words that Martina has been using.
Moshe Katri:
Great thanks.
Operator:
your next question comes from the line of Jason Kupferberg of Jefferies. your line is open.
Jason Kupferberg: Jefferies:
Thanks guys. Ajay I wanted to get your reaction to Wal-Mart Pay and the potential for other similar mobile wallet solutions target pay or what have you. In the surface this does seem like a different approach from the merchants as opposed to be MCX approach because it will offer the consumers opportunity to use all tender types including the traditional networks rather than being hyper focused on reducing acceptance cost and trying to force to use the private label and couple of debit payment types. What’s your perspective did you see an actual change in how the merchants are thinking about mobile wallets?
Ajay Banga:
You know, I think this whole mobile space Jason is such a fluent and moving space that everybody is trying to figure out what will be the next holy grail. And in truth I think nobody actually knows and I think that as I have said many time, it’s going to take a few years for this to settle. That’s why even companies like ours in mobile you have seen us place efforts, energy, money bets, in everything from you know whether the transaction data is on the handset or its in the cloud whether we are working with mobile network operators or hardware manufacturers or distributors of that stuff, its whole mobile space whether, is such an evolving space that I don’t think anybody knows the answers. And I think that was going on even with the retailers.
I think they are trying to find a way to offer a product on a wallet that their consumer can be connected to for loyalty and not just let a digital player own that space also not just let the banks own that space. The banks by the way are doing the same thing. They are trying to make sure they offer products, that get the consumer loyal to them and not just let the digital player own that space or the merchant own that space and of course the digital player is doing the same thing. So they are all doing the dance right now and I don’t think anybody knows the real answer.
But I do believe in two or three underlying factors. The first one is we as a network we believe that a focus on the person who owns the consumer relationship in this case the bank or the merchant does it may be that they are the ones who should be developing the loyalty with that consumer. People like us we are B2B2C company, we operate through them and therefore our role is to facilitate that and do it in a way that drives our business with them and enables our value added services to be used so a very focus on going through them whether it be through a Wal-Mart or through a Citibank or through different bank.
The second rule that I think applies universally is that more consumer choice in tender and payment is better than less. And I think that just a reduce to friction and I there is one large merchant in the United States who doesn’t think that way but otherwise every other merchant around the world in keen to basically of a more tender choice to that consumer rather than less and I think that’s going to be even more important in the mobile world to reduce friction. I think those trends of rules apply and so my view of the suggestion don’t conclude too much yet but be prepared to see many of -- research going on in different places I think the days of one model only one big mobile network or one sorry one big mobile wallet or one big e-commerce wallet existence those days are going away. There is going to be a lot of competition in that space with multiple tenders with choice for consumers and it’s going to be interesting to watch where this settles .
Jason Kupferberg:
alright it sounds like there won’t be just one winner. Thanks.
Ajay Banga:
yes I don’t think it is good I don’t think there’s one winner in this game and don’t think we will ever know who the winners are for a few years to come. I mean a mobile phone is such small surface area, if it everybody has launched all their wallets you will have no place to sell a product you will only places to make payments with which probably is not where the mobile guys are going.
Operator:
Your next question comes from the line of Brian Keane of Deutsche Bank. Your line is open.
Brian Keane: Deutsche Bank:
hi guys just wanted to follow up on cross-border. Martina I think you mentioned that it’s slowed a little bit on the update due to Europe so just a bit color on that and then obviously when you compare your cross-border growth rate for its peers they seems to be quite bit higher just trying to again reconcile some of the differences there. Thanks
Martina Hund-Mejean:
Yes Brian look in terms of the slowing on the cross-border we obviously see a number of factors. One certain countries have certain economic issues. So you can put for Brazil Venezuela Russia Nigeria so there is lot of country so just economically having a rough time and you don’t all of our driver on the secondly there are number of other countries that just impacted by the stronger dollar right so you can see Australia Canadian dollar so the number of those economies actually doing okay but they’re not traveling in dollar in that’s countries as much as because dollar is so strong and even though we saw little bit weakening of the dollar for the first quarter. It’s still at a very high level.
So I think you’ll see all of that coming through this year albeit as a t a lower level of impact than what we saw in 2015. In terms of reconciling it to competitors, you’re going to have to ask them how they do the methodology but I would presume that outside of Europe, we are seeing relatively similar trends. Other than that, I hope that we have a little bit of a better growth rate given all of the activities that Ajay has mentioning we are undertaking with various portfolios.
Ajay Banga:
We also decided that weakening currency is there than we have seen overtime some increased US travel into some of the European countries. We know all this kind of washed in and out of the numbers you are seeing. And you do see an impact caused by destabilizing world events. So it so happens with Europe has back to your European question, Belgium and Turkey are both in our European numbers and both Belgium and Turkey have had a somewhat difficult time with their security situation over the last few months.
Paris which got impacted so unfortunately in November last year has still not recovered to what it used to be prior to November. And so there is a little bit of that inside Europe as well but remember at the end of the day, it’s a little slower than it was in the first quarter and then of course there’s Easter. So it’s really hard to give you a broken pattern of all those, all that’s washing through the numbers that we are talking about.
Brian Keane:
Okay thanks for the color.
Operator:
Your next question comes from a line of Chris Brendler of Stifel. You line is open.
Chris Brendler: Stifel Nicolaus:
Hi thanks good morning. Question on Europe real quick I know mentioned that you haven’t see any real impact from the EU regulations but any shift of the margin from credit cards to debit cards as rewards products leave the system and then analytic question quickly your major competitor in Europe changed the terms of their acquisition on the earn-out, does that have any impact competitively? Thanks.
Ajay Banga:
I don’t think. It’s too early big impact of those EU regulations yet in the kind of numbers that you would want to look at. I think the doubt you will impact over a period of time. I have every expectation that acceptance will expand because of lower merchant cost.
We seen some of it already, but the results of that acceptance expanding in terms of impacting our volume in a way that I can you give you tangible numbers, you guys give it a few more months. I have every expectation that the separation scheme and processing is going to require some work we are doing that work. It may not impact us enormously in terms of expense in the first quarter second quarter but you know what these are things that all add to work and I would be low to tell you that the EU regulations are going to no impact. I think it’s a pretty serious industry move and it will have impact or time range that consumer behaves, the merchant behaves, and the way we construct our business plan.
The second part of our Visa and its Visa Europe, to the first question that I would in the beginning. it’s still early it just announce by them that they have changing the term of the manner in which the exact deals price as well as the timing I think the next two or three months we will see what that does in terms of how issuers are thinking my general sense is it will make easier for this sure to know exactly what they going to get space from the excise of support and that will make it little easier for them comprehend what they getting what they leaving behind if they make decision. A reach sense is good thing that’s transparency and the second part of it is going to be same so later so it’s just going to make it a little longer out on gestation periods meanwhile we are all working the way like busy beavers.
Chris Brendler:
Great. Thanks --
Operator:
Your next question comes from the line of Dan Perlin of RBC Capital Markets. Your line is open.
Daniel Perlin: RBC Capital:
Thanks. So a lot of discussion around kind of gaining local market processing I think globally in particular in Europe. I am wondering just as a broad rule of thumb can you give us some sense about implications as you capture more of that or revenue yields?
Martina Hund-Mejean:
Well when you talk about local processing I presume you are talking about issuer processing and acquiring processing, the assets that Ajay was talking about in his script and we have told you before that typically those kind of assets produce a lower yielding transaction than what we see in our switch transaction. So in clear and settlement but the purpose for is not just to be making money on that processing fees, the primary purpose is that we are doing this in countries that we typically down switch the transactions so that means it’s a different mean for us to be actually seeing the transaction and then what we do with the transaction is utilizing it for additional services. So as soon as you see a transaction, we can for instance put our safety and security products in it. We can do data analytics in it.
So you cannot have to look at this whole picture holistically not just at the yield that that process transaction actually produces.
Ajay Banga:
One thing you know for sure is that as that said in previous Investor Day as well as overtime, we are clearly investing in building out our capabilities in this value added services. We believe those are important for the next decade and two in the business. There is a lot of runway in seeing transactions and processing because 85% of the world’s retail transactions are still cash. So yes, there’s a lot of runway but the there is also a lot of runaway in building ancillary services that are connected to that transaction.
I am not interested in building services that are not connected to our core business neither am I interested in building services that have a very high proportion of annual renewal in them. We turned rebuild is the right way, so that how 10 years and 15 years it would be an outstanding assets for our company. We told you in I think the last Investor Day Martina was in September. I think we told you that close to a quarter a little less than a quarter of our revenue is now coming from all these services and we are continuing to focus in grow those.
Martina Hund-Mejean:
now in -- you have specific question on revenue yield. Remember how do we do revenue yield. Right. We are actually looking at switched transactions when you look at transactions processing fee that’s switched transaction does not have included the process transaction that coming out of our -- issue -- and acquiring processing.
So, when you just calculate no more yield, -- we be at on the domestic assessments side be it on the cross-border side, be it on the transaction processing side. You are not going to see that impact.
Daniel Perlin:
Got it, and then if I get follow up on -- that your point on making on information services, I think analyst -- is around 20%. You asset mention the margin on that business for around 40. And I am just wondering, if we think about the update is there structure -- can I got those to be -- typical dramatically margin, or is that the structure going to be lower to longer term. Thanks,
Martina Hund-Mejean:
yes, so let me just take this for the moment. First of all what we said, that our services business around about approaching about 25% of our total revenues. And yet we did say that the margin is around 40% at this point in time, there is whole mix of different businesses in there, so what I just said about the processing business typically that is a much lower margin type of business when you look at some of the information services businesses it’s a higher margin and when you look at to safety and security business as an even higher margin so then I can just mix some all together because just number of factors but what we are doing and this is what we’ve said given that we have done a number of acquisitions holding them together with our assets we have made and member maybe the restructuring charges we took 15 months ago or so we have actually made some really good progress to the increasing new margin of these businesses overtime.
Ajay Banga:
What the point in the September time or sometime in the quarter I made the point as just the margin is down 40 but scale does bring a higher margin just by the way scale in our core business has been improving our margin overtime so I don’t consider this to be inherently lower margin businesses is that what you’re trying to get certainty that in the mix that some that will be inherently low that some that will be inherently higher just like in our current core business there are different yield and different margins even in our current core business between the different kinds of payments involve and the different kinds that we do in so it’s all about our mix
Operator:
Your next question comes from the line James Friedman of Susquehanna. Your line is open.
James Friedman:Susquehanna Financial Group:
hi thanks I was wondering if you give us a perspective on corporate commercial and accelerating de accelerating and opportunity internationally for those. Thank you
Ajay Banga:
yes so we talked about commercial little bit I honestly I consider this whole commercial business to be a continuing area of growth and I’m sure so do my peers because it’s not just about us or our peers, it’s the market place . This commercial business has a nice opportunity for all of us. We are signed deal with Barclays in the UK recently we expanded our global agreement of Citibank to include that commercial transport in Asia in Europe but also in the Unites States we kind of seeing continuing strong redemption of smart -- which are reporting and reconciliations we are seeing continue adoption in control for commercial payment that virtual cards and we most starting to see increase beyond the typical bank card issuers they are looking technology provider in best that commercial payment solution into that platform where working with payment aggregators in short and HealthCare kind of its an interesting space we are in the early stages of long run in commercial but we have seen -- where they going and that continue good growth in there and not just in the U.S. this is commentary as you talk about has number of oversees geographies that are picking up business volume and effort as well.
Martina Hund-Mejean:
Operator I think we have time one last question.
Operator:
Your last question today comes from the line of James Faucette of Morgan Stanley. Your line is open.
James Faucette: Morgan Stanley:
Thanks very much I just wanted to follow up on the question around expenses and particularly changes in Europe I am just wondering how much and we should expect and when we should expect expenses that start to incurred around operational decline EU regulation our potential impact on our separation of brands etcetera and I guess just get edge from viewers how much of impact this that to have on your PL.
Martina Hund-Mejean:
James first of all any impact that we except to from the separation of game and processing in Europe was already told end to our performance objectives as well as any comment we have that I made about 2016 in terms of operating expenses. So it is all folded in. What we really have to do is we have to separate the switching business into an isolated unit.
It’s not a legal separation, it’s a functional separation. It reports separately from our European President Javier Perez. It has to have obviously enough of a substance in it that the unit can go to market as well as it can do its middle office and back office functions. And so you should expect that while it is a smaller unit that it will be very well seeded with the right kind of people and it will have some impact on our operating expenses but as I said this is already all factored into our commentary.
Ajay Banga:
That’s part of what I said in the earlier call, the way Martina manages our expenses is that we got to do what we got to do. We got to do what we do strategically as well as what we are required to do by law. But then like for example Russia in our G&A line of 11% includes the impact of the Russian processing which is not coming through our expense line which by the way is just what it is. We got to manage it and it’s part of what we are going with.
There is point my putting that out separately for you and saying -- I wouldn’t be even better but the way we manage this -- acquisitions once in -- results. We got a find a way to cut expenses elsewhere while investing in the right things and you will see at to that on Europe you have seen us through that on Russia you will see at do at all this acquisitions and with the strategic investments set kind of what we are trying to do. Manage our expenses in all aspects of our lines.
James Faucette:
Thank you very much that’s great.
Ajay Banga:
Okay. So thank you all for your question and will going leave now leave you with a couple of closing thoughts. The first part is I think our business is performing well. You see that reflected in our strong volume and transaction growth and that’s despite the somewhat uneven global economy.
We are growing revenues from our core businesses but also from our services as we just had a discussion of both organically and through the ongoing successful integration of our acquisitions over the last few years. We’re pleased with that progress across MasterPass, across the MasterCard digital enablement system and our partnerships with many of the digital players but as I said in the answer to Jason, that’s there is a lot of things that will evolve there and this is a marathon not a sprint. We continue to build on our momentum in safety and security. We are committed to making sure that is what consumers get no matter which channel or which instrument or device they choose to use to shop on and we remain very focus on creating a better experience to both card holders and merchants across all these channels.
So thank you for your continuing support of the company and thank you for joining us today.
Operator:
This conclude today’s conference call. You may now disconnect.
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