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MasterCard posts Q3 loss on settlement charge; shares up on guidance

04 November 2008  |  1527 views  |  0 Source: MasterCard

MasterCard Incorporated (NYSE:MA) today announced financial results for the third quarter of 2008.

The company reported net income of $322 million, or $2.47 per diluted share, excluding a special item, and a net loss of $194 million, or $1.49 per diluted share, including the special item -- a $515.5 million net after-tax charge related to an antitrust litigation settlement. The company's total operating expenses, operating margin, other income, effective tax rate, net income and earnings per share, excluding the special item, are non-GAAP financial measures that are reconciled to their most directly comparable GAAP measures in the accompanying financial tables.

Net revenue for the third quarter of 2008 was $1.3 billion, a 23.6% increase versus the same period in 2007. Currency fluctuations (driven by movement of the euro and the Brazilian real relative to the U.S. dollar) contributed 3.5 percentage points of the increase in net revenue for the quarter. The higher net revenue in the third quarter versus the same period in 2007 was fueled by:

  • Growth in MasterCard's gross dollar volume, which increased 12.3%, on a local currency basis, to $662 billion;
  • A 13.0% increase in the number of transactions processed, to 5.4 billion;
  • An increase in cross-border volumes of 18.0%; and
  • Pricing changes, which contributed approximately 5 percentage points of the net revenue growth.

Worldwide purchase volume during the quarter rose 13.3% on a local currency basis, versus the third quarter of 2007, to $497 billion, driven by increased cardholder spending on a growing number of MasterCard cards. As of September 30, 2008, the company's financial-institution customers had issued 970 million MasterCard cards, an increase of 10.3% over the cards issued at September 30, 2007.

"We are very pleased with our third-quarter performance and our ability to deliver strong financial results given the declining global economy," said Robert W. Selander, MasterCard president and chief executive officer. "At a time of unprecedented economic challenges, consumers, businesses, and governments around the world have continued to migrate toward various forms of electronic payments."

Selander also noted: "As we are not immune from the long-term effects of the current economic environment, we have significantly accelerated the focus on our cost structure, while making sure we remain prudent in allocating resources to those investments that will enable us to drive growth worldwide, today and in the future. Our focus on our customers has never been more important as we work side by side with financial institutions to help them continue to develop the value of their payments businesses. Our account teams and MasterCard Advisors are helping our customers address risk management, reduce write-offs, improve segmentation efforts, and deliver more relevant messages to cardholders.

"Looking ahead, the long-term opportunity for MasterCard remains unchanged -- to displace cash and checks, and continue to advance commerce globally, creating long-term value for our customers, merchants and shareholders alike," said Selander.

The special item for the third quarter of 2008 represented:

  • An $827.5 million net pre-tax charge related to the antitrust litigation settlement between MasterCard and Discover Financial Services, which was announced on October 27, 2008. On an after-tax basis, this equates to approximately $515.5 million.

Excluding the special item, total operating expenses increased 8.3%, to $790 million, during the third quarter of 2008 compared to the same period in 2007. Currency fluctuations contributed 2.4 percentage points of this increase. Growth in total operating expenses was driven by:

  • A 14.1% increase in general and administrative expenses, primarily resulting from higher personnel expenses due to new personnel and higher contractor costs, foreign currency transaction losses and increased litigation expenses. Currency fluctuations represented approximately 2.0 percentage points of the increase; and
  • A 1.1% increase in advertising and marketing expenses versus the year-ago period, with approximately 3.0 percentage points of the increase primarily related to the impact of foreign currency fluctuations.

Including the special item, total operating expenses for the third quarter of 2008 increased 121.7% versus the year-ago period, to $1.6 billion.

Excluding the special item, the operating margin was 41.0% for the third quarter of 2008, up 8.4 percentage points over the year-ago period. Including the special item, the operating margin was a negative 20.9% for the third quarter of 2008.

Total other expense was $14 million in the third quarter of 2008 versus other income of $129 million in the third quarter of 2007. The decrease was primarily due to gains realized in the third quarter of 2007 from the sale of a portion of the company's investment in Redecard S.A. in Brazil. Interest expense versus the year-ago period increased $23 million primarily due to the interest accretion associated with the American Express settlement that occurred in the second quarter of 2008.

Excluding the special item, MasterCard's effective tax rate was 39.7% in the third quarter of 2008, versus 34.8% in the comparable period in 2007. The increase was primarily due to a tax charge for the remeasurement of deferred tax assets as a result of a change in the company's estimated effective state tax rate. Including the special item, the effective tax rate was 34.1% benefit and 34.8% expense for the third quarters of 2008 and 2007, respectively. The decrease in the effective tax rate was primarily due to the tax benefit related to the charge for the Discover settlement, partially offset by the tax charge for the remeasurement of deferred tax assets.

Year-to-Date 2008 Results

For the nine months ended September 30, 2008, MasterCard reported net income of $1.0 billion, or $7.59 per diluted share, excluding the impact of special items, and a net loss of $493 million, or $3.79 per diluted share, including special items.

Special items for the nine months ended September 30, 2008, included:

  • $75 million pre-tax gain from the termination of a customer business agreement;
  • A $1.65 billion pre-tax charge related to the antitrust litigation settlement between MasterCard and American Express; and
  • An $827.5 million net pre-tax charge related to the Discover litigation settlement.

Special items for the nine months ended September 30, 2007 included:

  • A $3.4 million reserve recorded for a litigation settlement; and
  • $90 million in other income related to a settlement received under an agreement to discontinue the company's sponsorship of the 2010 and 2014 World Cup soccer events.

Net revenue for the nine months ended September 30, 2008, was $3.8 billion, a 25.8% increase versus the same period in 2007. In addition to growth in GDV, processed transactions and cross-border transaction volumes, this increase was driven by pricing changes, primarily cross-border transaction pricing implemented in January 2008, which contributed approximately 5 percentage points of the revenue growth in the year-to-date period. Currency fluctuation contributed approximately 4.6 percentage points of the increase in revenue in the year-to-date period.

Excluding special items for both periods, total operating expenses increased 11.3%, to $2.3 billion, for the nine-month period compared to the same period in 2007, primarily due to higher personnel expenses. Currency fluctuations contributed 3.3 percentage points of this increase. Including special items, operating expenses increased 131.4%, to $4.8 billion.

Excluding special items, the operating margin was 39.3% for the nine months ended September 30, 2008, up 7.9 percentage points over the year-ago period. Including special items, the operating margin was a negative 26.5% for the nine months ended September 30, 2008.

Total other income was $169 million for the nine-month period versus $268 million for the same period in 2007, including special items in both periods. The decrease was primarily driven by lower gains and dividends from the sale of Redecard securities and the settlement received in 2007 related to discontinuing the company's sponsorship of World Cup soccer events, partially offset by the termination of a customer business agreement in the first quarter of 2008. Additionally, interest expense versus the year-ago period increased $25 million primarily due to the interest accretion associated with the American Express settlement.

MasterCard's effective tax rate, excluding special items, was 36.6% in the nine months ended September 30, 2008, versus a rate of 35.1% in the comparable period in 2007. The increase was primarily driven by a tax charge for the remeasurement of deferred tax assets, as a result of a change in the company's estimated effective state tax rate. Including the special items, the effective tax rate was 40.4% for the 2008 period, and 35.1% for the 2007 period. The increase in the effective tax rate was primarily due to the tax benefits related to the charges for the American Express and Discover settlements. This was partially offset by the tax charge for the remeasurement of deferred tax assets.

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