Lower costs, higher volume drive MasterCard profit

MasterCard Inc. said Tuesday its third-quarter profit was bolstered by continued cost-cutting measures and an increase in the number of transactions it processed.

However, worldwide purchase volume grew only 0.4 percent on a local currency basis during the quarter, providing further evidence that a global economic recovery is likely to be slow. Volume fell in the U.S.

"The economic downturn has continued to affect consumer and business spending during the quarter," Robert Selander, MasterCard's CEO, said during a conference call with investors. "We don't expect any global economic improvement until sometime in 2010."

But, Selander did note that there have been some signs of stabilization in recent months and the worst of the downturn is likely over.

Shares of MasterCard fell $6.79, or 3.1 percent, to $215.85 in afternoon trading as the broader market declined.

The credit card and global payments processor earned $452.2 million, or $3.45 per share, during the quarter ended Sept. 30. It lost $193.6 million, or $1.48 per share, during the same quarter last year.

Last year's results reflected an $827.5 million pretax charge related to an antitrust litigation settlement.

Adjusting for special items like litigation costs, MasterCard earned $456 million, or $3.48 per share, during the most recent quarter.

Analysts polled by Thomson Reuters, on average, forecast earnings of $2.94 per share on revenue of $1.35 billion. Analysts do not always include special charges in their estimates.

MasterCard's revenue edged up to $1.36 billion from $1.34 billion a year ago.

Lazard Capital Markes analyst David Parker said in a research note that revenue should return to "double-digit growth in the next few quarters," as economic concerns ease. Parker maintained a "Buy" rating and $250 price target on the stock after the earnings report.

While purchase volume remained relatively unchanged, the number of transactions MasterCard processed during the quarter jumped 8 percent to 5.8 billion.

The bigger jump in processed transactions than purchase volume indicates customers are spending less on each purchase as concerns about an economic recovery keep spending in check.

Martina Hund-Mejean, MasterCard's chief financial officer, said in an interview with The Associated Press that customers are increasingly switching from using cash and checks to debit cards, fueling growth in that area of payments.

Use of credit cards is growing more slowly than debit cards because of the overall effect of the weak economy, and not necessarily because customers are switching from credit to debit cards, she said.

Particularly in the U.S., Hund-Mejean said customers are using payment cards more for nondiscretionary spending right now as the economy remains weak.

Spending fell the most in the U.S., where purchase volume declined 7 percent to $204 billion. Canada was the only other region MasterCard reported a decline in purchase volume.

MasterCard's Asia, Europe and Latin America all reported increases in volume, led by a 16 percent jump on a local currency basis in MasterCard's Asia Pacific, Middle East and Africa region. That region accounted for about 18 percent of total purchase volume on MasterCard branded cards during the quarter.

U.S. purchase volume accounted for about 43 percent of total worldwide volume.

Hund-Mejean said overseas economies, particularly emerging markets, are clearly starting to rebound faster than the U.S.'s economy.

MasterCard again used cost-cutting measures to help boost its profitability. Excluding last year's special legal costs, operating expenses fell 13 percent during the quarter to $685 million. The company, based in Purchase, N.Y., cut costs through a reduction in professional fees and travel expenses.

It also slashed its advertising and marketing expenses by 29 percent to $173.8 million.

Stifel Nicolaus & Co. analyst Chris Brendler wrote in a research note that expenses are likely to increase again in the coming quarters but still remain below peak levels seen in 2007.

Brendler said expenses will eventually likely range between $800 million and $850 million per year, above the $700 million annual pace seen during the third quarter and below the roughly $1 billion in 2007.