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The credit card industry is inching closer to settling yet another challenge to its controversial interchange system, as MasterCard Inc. on Thursday reported setting aside $495 million tied to pending litigation.
February 2
MasterCard's adjusted earnings rose 17% in the second quarter on increased volume, but several factors, including a shakier economy and increased rebate and incentive payments, are raising concerns about its growth prospects for the remainder of the year.
But despite those gains, MasterCard (MA) executives are projecting slower revenue growth in the second half of the year in part because continued weakness in the global economy is likely to temper consumer and business spending. Activity in Europe accounted for 30% of MasterCard's transaction volume in the second quarter and it remains to be seen if that is sustainable given that region's economic woes.
"Overall, we maintain our cautious outlook for the rest of 2012," Chief Executive Ajay Banga said on a conference call with analysts. "We will continue to watch global macroeconomic indicators, particularly as they pertain to Europe. We would need to see improvement in these before we can expect sustained positive growth in spending trends."
In all, profits rose to $713 million excluding a $13 million after-tax litigation charge in a
MasterCard's earnings per share rose 19% year over year, to $5.65, which beat analysts' estimates by 7 cents, according to Bloomberg. However, analysts had projected more robust revenue growth, which could explain why MasterCard's shares were down nearly 2% in midday trading Wednesday.
Revenue was up 9% year over year, to $1.8 billion, but came in roughly 4% lower than analysts had expected.
The card network also reported a 24% increase in rebates and incentive payments, which could have both positive and negative implications, says Greg Smith, an analyst at Sterne Agee.
"Heavier rebates tend to imply good things about the future," if they are spurred by signing new or renewed deals or heavier volumes, he says.
But the uptick could indicate lower transaction yields, particularly if the company needs to incentivize merchants more due to stronger competition and other factors including new rules around debit routing and recent interchange litigation that could require the networks to "treat merchants more like a customer," Smith adds.
Still, analysts said that the card network remains relatively well positioned even in the wake of a widespread economic downturn.
"Amid this macroeconomic environment, it's not that surprising to have a cautious tone, especially given the degree of exposure MasterCard has in Europe," says Jason Kupferberg, an analyst at Jefferies.
"The way I view it is you still have the underlying secular growth in cards," adds Sterne Agee's Smith. "If economic growth is flat or even negative, there's still going to be growth in card transactions."
That could be particularly true outside of the U.S. Roughly two-thirds of MasterCard's transaction volume comes from outside of the U.S. and like rival Visa (NYSE: V),
On a local currency basis, the gross dollar volume grew 19% outside of the U.S., to $599 billion from a year earlier.
"If you look over the last couple of quarters, it's hanging in there at pretty robust rate," says Kupferberg.
In addition, analysts say that the company has some wiggle room on the expense side that could help offset any future declines in revenue.
"Advertising and marketing is, I think, the most prominent item they have some flexibility on," Kupferberg says.
He points to the dramatically more severe and sudden downturn in 2009, noting that while revenue grew just 2% over the year, adjusted earnings per share rose 19%. "They cut advertising and marketing expenses by 19%, so that was pretty significant."
"If they have to, not that they're planning to do this, but if there's a real urgency, they have some flexibility," Kupferberg says, adding that the company has built some of that spending back up in the past couple of years.
