Mastercard Incorporated (MA) Q3 2008 Earnings Report, Transcript and Summary

Welcome to the third quarter 2008 MasterCard earnings conference call. At this time all participants are in a listen only mode. We will be facilitating a question-and-answer session towards the end of this conference. (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, Miss Barbara Gasper, head of Investor Relations.

Thank you for joining us today either by phone or webcast for a discussion about our third quarter 2008 financial results. With me on the call today are Bob Selander, our Chief Executive Officer; Martina Hund-Mejean, our Chief Financial Officer; and Tara Maguire, our Corporate Controller. Following comments by Bob and Martina highlighting some key points about the business environment and our third quarter results we will open up the call for your questions. Today’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 www.MasterCard.com. These materials have also been attached to an 8-K that we filed with the SEC earlier today. A replay of this call will be posted on our website for one week until November the 10th. 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. With that I will now to turn the call over to Bo Selander.

I’d like to start out by saying how proud we are that in the current economic situation we have been able to deliver another strong quarter of earnings results. We saw net revenue growth of over 23% and I’m particularly pleased that we were able to post a 41% operating margin for the quarter an 8.4 percentage point increase over last year excluding our litigation settlement. However it is the economic situation that everyone is interested in. I’m going to leave the discussion of our third quarter results to Martina and begin by focusing on what we’re seeing in our business. The current economic crisis is like no other that we’ve seen. When we faced the last economic downturn in the United States we saw employment begin to rise, housing was driving the recovery, the financial institutions were in good shape, the financial markets were functioning and there was very limited commodity inflation. In some ways this time around there are fewer economic and financial levers to be pulled and over the last month we have seen unprecedented coordinated and structured responses from governments and central banks around the world resulting in a large scale intervention into the financial markets and institutions. As credit markets have tightened and fears of recession spread the last several weeks have been challenging for everyone, our customers, you as investors and for us. The concerns about a global economic slow down have had an impact on spending around the world primarily by the consumer. We recently saw that US Conference Boards Index of Consumer Confidence fell to an all time low since the measurement began 40 years ago. US GDV fell by .3% in the third quarter and consumer spending fell by the same .3% in the month of September. Housing prices continue to fall in the US, UK and Spain and all of this has led to sharply declining equity markets. We’ve also seen unbelievable banking industry consolidation and the nationalization of others and we’re seeing trends in our US business that until now we have not seen. You have heard us say in previous public forums that our business was holding at levels roughly equal to our second quarter gross volume dollar growth through July and August. This continued through early September but turned downward in mid-September following announcements such as Lehman’s bankruptcy, Merrill Lynch’s buyout and several bank mergers or bailouts both here in the United States and abroad. For the third quarter our total global gross dollar volume grew 12.3%. During the month of September worldwide processed volume growth our intra-quarter proxy for gross dollar volume was high single digits on a local currency basis. US growth was in the low single digit range. In the month of October we have seen a pronounced weakness in the US where are our process volumes were slightly negative versus last year. On a global basis our processed volume growth was in the mid single digits on a local currency basis. Cross border volume growth has also been slowing globally. For the third quarter we saw growth of 18%. Through the first four weeks of October cross border growth was in the high single digits. The decline has been primarily driven by a marked slow down in cross border volumes from US cardholders as Americans are cutting back on travel and cautiously spending if they do travel. From our perspective we’re seeing thoughtful and significantly reduced spending among our financial institution customers. They’re shifting their focus away from marketing, account acquisition and system enhancements towards retention and credit loss management activities. We’re supporting their efficiency and optimization efforts. We’re leveraging the strengths of our brands, technology, product innovations, people while emphasizing the balance of intelligence and insights, risk management and cost management best practices. For example customers are particularly interested in our data analytics and benchmarking capabilities. We anticipate these challenges continuing for the remainder of 2008 and into 2009. While we are fortunate to be part of an industry that offers tremendous opportunities for growth with the secular trends away from cash and checks we are not immune from the world’s economic problems, our customers’ challenges and the increased competition we face. As are most companies we continue looking for ways to control expenses as we navigate through these difficult economic times. We are using resources in a more thoughtful and efficient manner while trying to ensure that we remain well positioned for future growth. We have significantly ratcheted up our focus on our cost structure while making the investments necessary for future growth. For instance we have established a hiring cap essentially eliminating all open positions. We are also tightening up on contractor expenses, reducing travel expenses and spending with suppliers and consultants. I’d like to stress that our global structure, the diversification of our business and our solid business model are resilient. We are not directly exposed to consumer debt so we don’t have the risk of consumer credit write offs. Also it’s important to consider that we do business in 210 countries and territories and over 50% of our revenue is generated outside of the United States. As we move forward we continue to focus on supporting our customers as they address the needs of their businesses while we develop our pipeline of new business opportunities. We were already on the ground in emerging markets with the local capabilities to deliver our global product and service propositions. Payment trends are working in our favor, people all over the world continue to migrate toward electronic payments. The biggest opportunity still lies in cash and checks. On the legal front we recently reported that we reached a settlement in the Discover litigation. I’m pleased that this settlement has closed another chapter with respect to our legacy litigation cases. Under the terms of the settlement we will pay Discover a total of $862.5 million later this month. In the third quarter we recorded a pre-tax charge of $827.5 million. This includes receiving a payment of $35 million from Morgan Stanley and the total after-tax charge was $515.5 million. Before turning the call over to Martina I’d like to provide you with some initial thoughts about our outlook for 2009 which are summarized on Slide 3. We are still completing the work on our 2009 budget. However, when thinking about next year there are two items I’d like to highlight for you now. First, we expect that our net revenue growth will fall below the average annual range of 12% to 15% that is in our longer term objectives. Second, we are planning to hold operating expenses essentially flat over 2008 levels. We still need to invest wisely for long term growth while managing our expenses aggressively. I already mentioned some of the cost containment and reduction initiatives. In summary for 2009 we would expect that high single digit growth would be necessary in order to meet our margin expansion objective of three to five percentage points per year and average annual net income growth of 20% to 30%. Based on the recent strengthening of the US dollar we expect that foreign exchange will be a headwind for us on the revenue and net income lines keeping in mind that the same phenomenon results in a tailwind for us on the expense line. This is the reverse of what we’ve seen over the past several years. We are holding to our longer term performance objectives. Currently visibility beyond 2009 is difficult but we will continue to work towards those objectives over the longer term and we are pulling all the levers we can as we drive the organization to achieve them. Remember that our longer term objectives are based on constant foreign exchange rates. Also while we feel very fortunate and comfortable with the growth prospects of our business model the changes that are taking place in the financial markets globally are unprecedented and have certainly not been expected by anyone. As we gain more clarity about these forces we will continue to evaluate our objectives and adjust them if appropriate. With that I’ll now turn the call over to Martina for a detailed update on our third quarter financial results.

As Bob mentioned we are pleased with our overall third quarter results. Turing to Page 4 of the slide deck in the third quarter we delivered net revenue of $1.3 billion up 23.6% over the comparable period last year. This was driven primarily by strong growth in worldwide gross dollar volume and processed transactions as well as cross border volume, currency fluctuations of the Euro and the Brazilian Reais relative to the US dollar contributed 3.5 percentage points of the net revenue increase resulting in underlying business growth of 20.1%. Pricing changes contributed approximately five percentage points of the revenue growth in the quarter. As Bob discussed we have taken a one time tax effective charge of $515.5 million for the Discover litigation settlement in the third quarter which we are treating as a special item. Because the settlement will be paid as a lump sum later this month there is no interest accretion that needs to be considered for modeling purposes. With respect to the American Express settlement that was reached in the prior quarter we have already told you about the $23 million in interest accretions which is not considered a special item. This represents about $0.11 per diluted share in the third quarter. Excluding the Discover settlement total operating expenses grew at 8.3% or $60 million to $790 million. We continue to demonstrate the leveragability of our business model by delivering operating income of $548 million excluding the litigation settlements. In 2008 we have consistently and significantly our operating margin delivering 41% in the third quarter an 8.4 percentage point improvement on a year-over-year basis. While strong revenue growth has enabled us to leverage our operating margin combined with some efficiencies related to an accelerated company wide cost containment and reduction program. We delivered net income of $322 million or $2.47 per diluted share excluding the special item in the third quarter. Including the litigation settlement we recorded a net loss of $194 million or a loss of $1.49 per diluted share. Turning to Page 5 we continue to benefit from the global diversification of our business with our ability to generate significant volume transactions and revenue from economies outside of the US. Worldwide gross dollar volumes grew 12.3% on a local currency basis in the third quarter and 14.8% on a US dollar converted basis to $662 billion. While the local currency growth rate is very similar to the GDV growth rate in the same quarter a year ago the US experienced slower growth offset in Asia-Pacific, Canada and Europe. Although not shown on Page 4 on a local currency basis worldwide purchase volume was up 13.3%, also slightly lower than the growth rate in the comparative quarter last year. Cash volume growth was 9.5%. Total US gross dollar volume growth was 4.7% and US purchase volume was higher at 6.6%. US debit for GDV continues to grow at a healthy 15.3% versus third quarter growth last year of 12.1%. Total US credit GDV growth declined by 1.3% but credit purchase volume grew at 1.5% for the quarter. Therefore the decline in overall US credit GDV was driven by negative cash volume growth as US issuers significantly reduced balance transfer acquisition campaigns. This is the second consecutive quarter of negative cash volume growth due to reduced convenience check usage and balance transfer activities which do not generate significant revenue for us. Cross border volume which is generated from cardholders who travel outside of the country where their card was issued was up 18% over the comparable quarter last year. This rate of growth was slightly lower than the growth rate of 19.2% for the third quarter last year. On the whole travel patterns remained fairly consistent on a year-over-year basis and we saw no significant change with the exception that there was less US travel to Europe but US cardholders increased their travel to other markets. Overall strong European cross border volume growth did offset lower growth in the US and a majority of the Europe cross border volume was generated on an intra-Europe basis. This pattern is consistent with the same quarter last year as Europeans traveled closer to home during the summer. While we’re still seeing healthy double digit growth rates for both consumer cross border volume grew at a somewhat slower pace than a year ago and commercial cross border growth accelerated. Processed transactions or the transactions processed across MasterCard’s network increased 13% to $5.4 billion in the third quarter compared with the year ago quarter. Net revenue yield which was 20.2 basis points in the quarter versus 18.8 basis points in the third quarter of 2007 was driven primarily by pricing. On a sequential basis the increase was primarily due to higher revenue for authorization settlement and switch revenue and cross border revenue. Let’s turn to Page 6, here you can see that net operation fees increased 25.8% or $204 million to $996 million in the third quarter. Gross operations fees increased 24.8% to about $1.1 billion. This growth was driven by two factors, first the growth in processed transactions, gross dollar volume and cross border volumes that I’ve previously described on Page 4. Second, new pricing changes implemented in January of this year on cross border acquiring volumes and on retail purchases in the US by non-US cardholders. In the third quarter net operation fees were 90.8% of gross operation fees slightly higher than the same quarter in 2007 due to the slower growth in rebates than gross revenue growth as a result of customer performance. On Page 7 we show that net assessments increased 17.5% to $342 million versus the third quarter of 2007. Gross assessment increased 15% to $604 million due to strong GDV growth of 14.8% on a US dollar basis. Net assessments as a percentage of gross assessments improved slightly to 56.6% due to timing and terms of non-gross dollar volume based incentives. Finally when looking at full year 2008 total net revenue growth we expect to exceed the 15% upper limit of our longer term revenue growth target assuming minimal changes in current exchange rates. Please turn to Page 8 for some detail on expenses. During the third quarter excluding the special item total operating expenses increased 8.3% of which 2.4 percentage points were related to currency fluctuations. This increase was mainly driven by the following, general and administrative expenses increased 14.1% of which two percentage points were related to currency fluctuations. The increase was the following, higher personnel costs accounted for eight percentage points of the G&A growth and was primarily driven the hiring of new personnel over the last 12 months and increased contractor costs. Three percentage points of the G&A increase was due to foreign currency transaction losses mostly due to the strengthening of the US dollar and higher professional fees primarily consisted of legal costs to defend outstanding litigations accounted for a further percentage point of the G&A increase. For the full year 2008 we expect G&A growth to approximate the third quarter year-to-date growth rate of 13.6%. As Bob mentioned earlier we are making significant changes in order to maintain an essentially flat expense structure going forward. In response to the current economic climate we have continued implementing a number of expense management measures such as eliminating open job reqs, reducing contractor spend and reducing travel and consulting expenses. In fact we saw a 20% saving in T&E expenses over the third quarter last year. While we had a slight increase in advertising and marketing expenses of 1.1% approximately three percentage points of this increase was due to foreign exchange. So excluding the impact of foreign exchange advertising and marketing expenses declined on a year-over-year basis. For the full year of 2008 we expect that our total advertising and marketing spend will be down versus what we spent in 2007. Previously we said that we expected 2008 spend to be flat relative to last year. Moving to the cash flow statement and balance sheet highlights on Page 9 we generated $388 million in cash flow from operations during the quarter and $931 million during the nine months through September 30, 2008. Even after our first payment of $150 million to American Express in the third quarter we ended the quarter with $2.8 billion in cash, cash equivalents and current available for sale securities. We have a number of balance sheet accounts that are impacted by the settlement with Discover such as our accounts receivable for the $35 million payment from Morgan Stanley and an increase in tax receivables and prepaid expenses. The lease on our St. Louis facility and related off balance sheet arrangements will change in 2009 by MasterCard repaying $149 million in debt. This item has been re-classed from long term to short term in the quarter. In conjunction with this payment during the first quarter of 2009 we will record the building as an asset on our books. I will now hand back to Bob to discuss some recent business highlights.

Before moving to the Q&A session I would like to share with you some of our recent business successes from around the world. In addition to our strong top line performance we remain focused on delivering best in class products and services to our customers. We continue global expansion of our credit and debit products and our acceptance channels including mobile phones and public transportation systems. We are happy to announce a new partnership with Barclaycard launching the first Barclaycard MasterCard commercial proposition targeted at UK small businesses. We are very pleased to continue building our relationship with Barclaycard. Likewise we continue to expand our relationship with Chase in the United States with the recent launch of the Chicago Bears Debit MasterCard. All new and existing Chase personal checking customers in Illinois are now eligible for this program. We continue our tradition of innovation with mobile payments which goes back five years when we first piloted the use of contactless payments on mobile phones. Earlier this year we announced our Mobile Money Send capability delivering person-to-person mobile payment service to MasterCard cardholders. Just last week we announced another competitive first, our over-the-air provisioning service. This service allows over-the-air personalization of cardholders’ mobile devices in an easy, one step process. This will enable mobile devices to perform payment transactions at merchant location with PayPass enabled terminals. In Italy we announced a strategic partnership with Telecom Italia to develop PayPass enabled mobile phones. We signed a deal with HSBC for a co-branding partnership with Woolworth’s Australia’s leading supermarket retailer to provide PayPass enabled cards to the retailer’s customers. In Europe we continue to see slow but steady progress on the SEPA front. Over the past two years we have concluded business agreement with approximately 30 banks across the Sapa area for their debit card business adding to our already strong European debit position. As a result the majority of European debit cards are now branded with either Maestro or MasterCard. With banks taking a more gradual approach towards Sapa by maintaining local schemes longer than the end of 2010 co-branded cards will be in the market longer than originally foreseen. We are making progress in unlocking the domestic debit business with acquirers and merchants now able to route domestic transactions across our network. We continue to see an increase in domestic processing of Maestro transactions. For example earlier this year I told you that we were processing roughly 14% of all domestic transactions in Italy. That figure is now approaching 17%. While other countries are less mature in processing domestic transactions we are beginning to see domestic Maestro volumes over our network in Belgium, The Netherlands, Luxembourg, France, Portugal, Germany and Ireland where before we only saw cross border transactions. In summary I’d just like to reiterate how pleased we are with being able to deliver a great third quarter with over 23% revenue growth and a 41% operating margin. We are seeing slow downs that are affecting our customers and we expect some challenges over the next few quarters as we work through this unprecedented economic environment. However we are still confident in our business model and will continue to make the necessary investments to fund future initiatives while being mindful of making our cost structure even more efficient. It is this combination that will position the company to continue to deliver growth over the longer term. I’ll now turn the call back over to Barbara so we can begin taking your questions.

We’re now ready to begin the question-and-answer period and in order to get to as many people as possible in our allotted timeframe we ask that you limit yourself to a single question with one follow up and then queue back in for additional questions.

(Operator Instructions) Our first question comes from Julio C. Quinteros – Gold Sachs & Co. Julio C. Quinteros – Gold Sachs & Co.: Real quickly two things, both on pricing opportunities and headwinds as you guys think about the longer term trajectory. Can you just sort of spell those out in terms of what you are expecting on both fronts, pricing on the one side and then fx on the other?

Let me take that, in terms of the pricing opportunities, as you know this year we were fortunate enough to have about 5 percentage points impact on our top line from additional pricing that we were able to take in the market due to the kind of value propositions that we are actually delivering to customers. We did say in the past that we believe that pricing opportunities exist in the future albeit it is completely connected to what kind of value we are delivering to customers and as you can appreciate in this kind of economic environment we’re certainly going to be very carefully evaluating what kind of pricing actions we will take. However, from what we said in the past, our view on pricing remains to be the same. So, at this point in time we are really not having a change in thought on that. From a foreign exchange point of view, foreign exchange is obviously a moving parameter. You can see that in terms of our top line growth we are always calling out what kind of foreign exchange impact we had. For this quarter it was 3.5%. Maybe it’s helpful if I can give everybody a guideline in terms of how to look at our foreign exchange impact. Maybe what I do is I really hinge it towards the Euro dollar relationship. So, let me lay this out for you, for every $0.01 of move in the US dollar to Euro relationship so for instance if, and these are always number but for instance the US dollar instead of taking $1.50 to purchase a Euro, it’s only $1.49 to purchase a Euro so every $0.01 the impact on our top line for the whole year would roughly be $8 million to $9 million. With that you have about 80% of our foreign exchange exposure captured. We are also exposed to the Brazilian Real and a number of other currency but we pretty much have 80%. Now, in addition to that I would like to add to the guideline that obviously we also have an impact on our operating expenses and that would be an offsetting impact. So, with the appreciating dollar you have headwinds on the revenue line but you would have tailwinds on the operating expenses and for that the guideline I would say is about $4 million to $5 million so in operating income you roughly can see for that $0.01 change for the whole year would be able $3 million to $4 million. With that hopefully you can make your assumptions where you think foreign exchange rates will go. Julio C. Quinteros – Gold Sachs & Co.: Just to clarify, the mid single digit growth for 2009 to get to the 20%, that is just what it would require to get to that 20%, that wasn’t the actual number that you guys were targeting to for 2009, is that correct?

In fact, what we said is that we needed high single digit growth for 2009 in order to continue to have our operating margin performance objective of 3 to 5 percentage points as well as producing net income growth of 20% to 30%.

Our next question comes from Charles Murphy – Morgan Stanley. Charles Murphy – Morgan Stanley: I wanted to return to pricing, for ’09 do you consider the amount of revenue growth you’ve gotten from pricing this year to be an anomaly? Do you expect to get a similar type of revenue growth from pricing or how should we think about that over the next year?

Charlie, the comments that we are going to make are going to be very consistent with what we had said before. We actually did say, I think, on every earnings call we had this year that the 500 basis points that you’re seeing in every one of the quarters is actually quite extraordinary. It’s predominately fueled by what we’re seeing on cross boarder volume. I think what we laid out is that at any point in time we feel comfortable that we might be able to do pricing according to the kind of value proposition that we delivered to our customers of a minimum of 200 basis points per year and we are not stepping back from that kind of view. Charles Murphy – Morgan Stanley: As a quick follow up, can you help us understand what a legitimate downside case is for local currency cross boarder GDV growth?

Charlie, I don’t know that there is anyone who could possibly give you a downside on that. If you go back and explore some of the things that happened in Asia Pacific during the SARS crisis in 2003, as I recall they closed the Hong Kong airport for about six weeks so cross boarder completely went away for all intense and purposes in that part of the world. If you can give me the exact amount of plane embarkation and some of the other things, I’ll give you a shot at what the impact will be in cross border. Now, what I did share with you was some of the things we track other than the gross dollar volume which we report out to you quarterly and I did mention that we’ve seen cross border transactions during the month of October fall relative to the 18% growth that we had in the third quarter. We had continued growth but it was high single digit growth rates during the month of October so we’re already seeing a slowdown in that growth rate, I just can’t tell you how low it may go or how long it might last.

Our next question comes from the line of Adam Frisch – UBS. Adam Frisch – UBS: Just a quick point of clarification before my question, are you saying that you think ’09 revs will be in the high single digits and you are therefore not changing your margin or EPS growth objectives for ’09?

What we’ve said is we don’t think we’re going to be able to reach the 12% to 15% longer term performance objectives we’ve established and that at this point in time we’re looking at needing high single digits in terms of top line growth in order to make the 3% to 5% on our operating margin and the 20% to 30% on net income growth. Again, excluding the adverse or positive impacts that foreign exchange might have in comparing it with prior years. Adam Frisch – UBS: It’s a point of technicality but I know I’m going to get asked about it and I think it is the key item here for ’09. Does that mean you do think you will be able to hit your margin and EPS growth targets in ’09?

Well, we’re still working our way through the budget process and at this point in time I believe we can still achieve those objectives. I do not know where we are going to come out and I certainly can’t tell you how the global economy is going to fair, I can only give you a set of assumptions that are the ranges we’re dealing with. Adam Frisch – UBS: My question is, is the quality of your credit card user base, can you quantify for us just in terms of accessing their quality, what percentage would qualify as challenged from a credit perspective and I don’t know if you want to use metrics like FICO scores or percentages of revolvers or percentages of credit lines being used or anything like that but is there anything you can help us kind of qualify what your credit card user base is like?

Let me try and help you with that. First of all given that we are not an issuer of cards, as you know we would not be seeing individual card holders FICO scores. However, what we do from time-to-time is we actually do an independent third party survey of MasterCard and its major competitors, major payment card competitors and from this data we can absolutely not see any appreciable difference in the terms of percentages of card holders in each category and the categories are obviously subprime, prime and super prime with the exception of one company and that would be American Express which certainly has a lower percentage in the subprime category which is understandable given their business model. Adam Frisch – UBS: If I could just ask one follow up, if revenue growth is lower than the high single digits is there more room to cut costs? Could we actually see operating costs go negative if you need to in order to preserve the margins or some sort of margins and EPS growth?

Adam there’s a point in time where you decide you’re not going to chase something which will short change our investments in the future. So, we’re trying to position ourselves with as much flexibility as possible as we did last year, as we complete our budget with a set of sort of fixed assumptions, we’ll go back and build contingency plans in the event we’re wrong. I’d like to be able to assure you that regardless of circumstances we can do something but I can’t assure you of that. I can only say that we’re quite focused on flexibility and to the degree revenues come along less rapidly we’ll be doing things in terms of working those expenses levers to try and ensure we produce better results than might have otherwise been anticipated.

Our next question comes from Gregory Smith – Merrill Lynch. Gregory Smith – Merrill Lynch: I just wanted to go back to the 20% to 30% sort of net income guidance. I think that is at constant currency so if we do think currency is going to be a headwind which looks pretty obvious at this point could you then fall below that on a reported basis which obviously what the numbers in first call reflect? I just want to be sure I understand that?

Absolutely. If we are going to get these kinds of currency headwinds and I gave you a little bit of a guideline in terms of where we would be coming in from an operating income for how foreign exchange would impacting operating income than you have to take the tax effect but on a reported basis it could fall below that 20% to 30%. That is why we made it so absolutely sure that everybody heard when we put out the long term objectives back in May, at the end of May that is on a constant fx basis because we cannot call foreign exchange.

We’ve had a lot of questions about what constant fx means and one of the things we did is we put together a illustrative example which we’re going to be posting on our website under where you go to get the third quarter call information with the press release and the slide deck and the supplemental operations table. There will be an additional table there that we’ve worked through with an example. So, if people pull that off and you need help walking through that, Jason [Lane] and I would be happy to spend time with anybody who wants to talk about this further. Gregory Smith – Merrill Lynch: Then just one last question, you’ve obviously gotten a couple big lawsuits behind you which is great but we still have this merchant interchange lawsuit lingering out there. Any update on timing of that lawsuit at this point?

I’m trying to reflect on the timing of that one, to your point we had three sets of legacy litigation, the foreign exchange cases which are substantially behind us, the competitor cases, AMEX and Discover which we’ve obviously taken settlement on and also the merchant case. At this point in time that merchant case is going to play out over the next couple of years. We’re in the midst of completing the discovery process as we speak and there are some dates I think are relevant. Let me see if I can pull those up for you, I mentioned discovery should be completed in November, in the next few weeks. The class certification is currently scheduled for January of next year, expert reports are midyear next year, the June timeframe, there will be further briefing and other motions that we expect would only be filed sometime very late in the year, assume December of 2009. So there is no formal date set for trial yet but I think we’re imaging this thing is going to take a couple of more years to play out.

Our next question comes from Moshe Katri – Cowen & Co. Moshe Katri – Cowen & Co.: Going back to cross border transactions, is there a way to break down the mix here by maybe US to non-US destinations, destinations within Europe and then anything that has to do with Latin America travel? Then, can you help us understand the relations between cross border transactions and revenue growth?

We have shared with you that we have seen 18% growth in the third quarter and that it slowed in October to high single digits. I can’t give you more texture than that in terms of the geography. We did mention that US travelers in the third quarter were less active than European travelers and the European travelers tended to be traveling with Europe. I really can’t get any more granular than that.

In terms of cross border volume growth and the impact on net revenues Moshe, first of all when you look at our net revenue growth of 23.6% how I look at it is take out the 3.5 percentage points of foreign exchange here to business growth down to 20% and then you take the 5% pricing out so you’re down to 15%. Well, you look at our GDV growth of 12.3%, our purchase volume growth of 13.3%, transaction growth of 13% and that doesn’t get you quite there to the 15% so it’s really the 18% in terms of cross border volume growth that bridges the gap.

Our next question comes from Anurag Rana – Keybanc Capital Markets. Anurag Rana – Keybanc Capital Markets: It’s nice that you guys gave some guidance about operating expenses growth in ’09, I think that was in our view one of the most important features of today’s results but could you also give us a little more color about volume growth in Europe especially given that seems Europe lagging US in terms of just the general economy?

If you take a look at the detailed attachments to the earnings press release you’ll see some breakdowns in terms of third quarter growth rates within the various regions of the world. We continued to have strong gross dollar volume, in this case I guess it would be gross Euro and Sterling volume growth in Europe. For the quarter on a local currency basis we grew 16.8% in Europe and purchase volume grew 17.1%. So, it was quite strong growth in the third quarter. Given the amount of processed transactions we have in Europe, interim reporting in terms of our own monthly data is a little less meaningful in Europe than it is when we look at it on a global basis but I can just say that we’re seeing generally a slowdown versus what we’ve seen in the third quarter around the world and that was the basis on which I shared that data point that suggested in the total GDV on a local currency basis we’re seeing in the month of October mid single digit growth globally.

Our next question comes from Craig Maurer – Calyon Securities. Craig Maurer – Calyon Securities: I was hoping to get some clarification on your comments with SEPA and in terms of local banks holding on to their networks a bit longer. One, I was wondering is that being driven by the current economic situation and two, in our discussions with local banks it seems the point of consternation with those large banks that haven’t moved over is the franchise fees currently being paid to MasterCard for local debit transactions to carry the bug that MasterCard isn’t processing and that’s a big point of contention. I was wondering if you could comment if there’s any give and take in that subject that might accelerate conversion to local processing?

From my perspective what we have going on in the single European payments area are a couple of things. First of all, the reality of the economic environment that we’re in, most of our financial institution customers in Europe, in western Europe have gotten their faire share or more of the issues that we’ve seen working their way through US financial institutions. Just take a look at the landscape in terms of what’s going on with the partial nationalization of several banks with the mergers of several banks in the UK, with the [Fordyce] situation. So, the economic impact there is very real, very serious. Consumer was already in recession, I’m sorry there was already negative growth in GDP in the second quarter in Europe. So, Europe is a very trying environment for our customers and the investments that they’re willing to make in order to get things done on multiyear periods not surprisingly are being cut back in favor of restoring their balance sheets, their capital counts and other shorter term priorities that they may have that they think will give them more immediate impacts. So, I think that’s the first thing that is going on, just the reality of the economic environment. The second thing has to do with the business pace and what I will call some regulatory uncertainty and as you know we had a decision from the European Commission a year ago December which resulted in our suspension of our intra European cross border interchange fee. As banks are looking at the business case for various things related to a single European payments area clearly their models are in state of flux as they look at the realities of what that might imply if that decision stands despite our having appealed it and taking it to the Court of First Instance or to the degree it might domino in to the domestic market places. I think all those variables are at work here.

Our next question comes from Tien-Tsin Huang – JP Morgan. Tien-Tsin Huang – JP Morgan: I jumped on a little bit late, I just want to confirm with Bob the process volume growth information that you gave for October. Is that inclusive of cash transactions?

Yes, it will be anything we process so if we happen to process a cash transaction we would. Those tend to be more cross border as you would imagine because there are some domestic cash transactions, in fact the vast majority are done on us ATMs so we would not necessarily see those or process those. Tien-Tsin Huang – JP Morgan: I was just curious if there was a way to get a better sense of what the purchased volume growth looked like?

I think you should just take them at face value which is the best we can share with you at this point in time and that’s where we had a third quarter total gross volume dollar growth of 12.3% globally and local currency. We’re looking at mid single digits in the month of October and cross border which was 18%, we’re looking at high single digits during the month of October. So, quite dramatic reductions relative to what we were seeing for the average of the third quarter. Tien-Tsin Huang – JP Morgan: So I guess my question is this, what are you seeing in terms of process transaction growth ignoring volume here? I’m just trying to get better sense of how much of the slowdown is really weaker average tickets versus fewer swipes? Do you have a view on that?

We’re going to be releasing spend polls data in the next few days and one of the few things that we’ve seen over the last several months has been a reduction in ticket size, i.e. dollar volume is growing less than the transactions. If you think about it, if you filled your car with gas in the last few weeks, gas prices have fallen about 33% over the last several week but you still wind up going in and buying just about as much gas assuming your driving is the same. So, you keep the transactions but you lose the dollar volume in that environment. We’ve seen that across several categories in prior months. We’ve seen that in airlines and hotels where we’ve seen if you will inflation driven related price increases but slowing transactions. Tien-Tsin Huang – JP Morgan: Then this is the last follow up, can you remind us how much of your total revenue is really based on a per swipe or just the transaction or click fee versus spread based or average ticket based?

We don’t really give any percentages out but in terms of how we charge a lot of our revenue is volume based and a smaller part is transaction based.

Our next question comes from Christopher Brendler – Stifel Nicolaus & Company, Inc. Christopher Brendler – Stifel Nicolaus & Company, Inc.: On the litigation settlements with AMEX and Discover now behind you and the merchant case a couple of years away, any updated thoughts on uses of excess capital? A buyback or anything else?

Just a couple of observations, obviously we will be reviewing our capital position regularly with our board as we’ve indicated in the past and I think it’s even more true today than perhaps it was over the past several quarters, we want to maintain flexibility and at this point in time we believe there’s an extra premium to be placed on the flexibility and having a strong balance sheet given the nature of the credit markets and the environments we’re in. Having said that, assuming we feel comfortable that we have more than enough flexibility than we would look at buy backs if we don’t have other opportunities or deals that would require us to use that capital. Christopher Brendler – Stifel Nicolaus & Company, Inc.: Then in Europe you reported that you loss a couple of major [inaudible] in UK. Is that impacting your guidance at all? Is it material change to lose HBC and RBS and what are you planning on doing about your [Maestro] strategy?

Those transactions or those deals were already reflected upon when we came out and gave you our longer term performance objectives back in May. So, from that perspective they’ve been built in to our thinking. Christopher Brendler – Stifel Nicolaus & Company, Inc.: One quick follow up, I think you said on the last quarter’s call that you’d expect process transactions to outpace GDV as average ticket goes down. Are you seeing that in October?

Chris we don’t have the data for transactions for October, we really only have process volume.

Our next question comes from Sanjay Sakhrani – Keefe, Bruyette & Woods. Sanjay Sakhrani – Keefe, Bruyette & Woods: Most of my questions have been asked but I was just wondering if I could just drill down on cross border a little bit more and I’ve asked this question before, and I appreciate the commentary on kind of the consumerist line and the commercial kind of accelerating a bit but, have you guys ever drove down on what kind of cross border volume growth has come from kind of cyclical impacts versus secular impacts? My assumption is that both are kind of slowing but cyclical more so but your analysis would seem to indicate the opposite?

I don’t have any real insights to share with you. I don’t know if Martina if you have anything?

That is a very hard thing to divvy apart. Sanjay Sakhrani – Keefe, Bruyette & Woods: Then maybe one follow up, obviously we saw a lot of consolidation occur across the financial space, have you guys had any discussions with some of the consolidatees or consolidators in your customer base to discuss the opportunity or their appetites for dual issuance on debit?

Well obviously we’re talking with our customers, whichever side of the table they may be sitting on as consolidators or consolidatees, generally it’s at the end of the day consolidators who are making the decisions so that is where our focus is. With regard to debt, in the United States we’ve already seen banks sign up for debt duality and I gave you the example today of Chase’s, and they were already dual and debit but Chase’s Chicago Bears card that they’ve launched. Obviously we have also previously referred to the various NFL and I guess major league baseball debit programs that the Bank of America is involved with. So, we continue to work with our customers to try and find ways to give them obviously more attractive products for their card holders and merchants alike.

Our last question comes from Patrick M. Burton – Citigroup. Patrick M. Burton – Citigroup: I’d like to follow up Bob on your earlier comments on how far is too far to potentially cut back. On the advertising side how far could you trim that back without getting let’s say significant push back from clients?

I don’t know if we can give you a definitive point on that. I think the process is one where we pay attention to several variables, first of all our customers and the degree to which they count on our brand and the related marketing support, that’s a result of our budgeting process where we sit with customers and we’re obviously in the midst of that right now and look at what they want to get done and that will vary from one customer and one market to another. Secondly, we believe that we should be investing in our brand and that helps us drive utilization of our products so that’s a second dimension. Obviously, the health of the domestic economy and what’s going on with consumers it has impacted our customers’ plans will then work its way in to our thinking with regard to our marketing activities to drive the usage. I think probably the third dimension on that is what are competitors doing? Do we keep ourselves at a level of awareness, of advertising recognition and likability and some of those other measures that we use in other parts of the world to ensure a vibrant, vital healthy brand? So, all of those things would go in. If everybody in the world stops advertising and marketing and all of our customers say, “We don’t need any.” Then the combination of the competitors and customers telling us that, if we haven’t already gotten the message with what’s going on with the consumer in the marketplace than that would clearly cause us to pull that lever and ratchet back further than we would have otherwise done.

Bob, I think you have a few closing comments you’d like to make before we say goodnight?

I want to thank you all for joining us today. These are clearly challenging times and despite the economic environment, we are very excited with our results in the third quarter. We believe our business fundamentals continue to provide a solid foundation and we remain committed to growing our business while we aggressively manage costs in order to drive shareholder value. Once again, thanks for joining us today.

Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.