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3rd UPDATE: MasterCard 2nd-Quarter Profit Rises 15.1%; Revenue Misses

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--Core earnings of $5.65 a share beat analysts' estimate

--Revenue rose less than expected due to an increase in rebate and incentive payments

--Company is confident merchant settlement will receive court approval

(Updates with details on trade-group opposition in penultimate paragraph.)

By Andrew R. Johnson

MasterCard Inc.'s (MA) second-quarter profit increased 15.1% as cardholder transactions and payments volume continued to climb, though revenue missed expectations on higher rebate payments to clients and currency fluctuations.

Dour economic data in the U.S. and abroad have heightened worries consumers will face financial strain in the months ahead. MasterCard continued to post solid growth in spending trends in the quarter, but executives said they expect growth to wane in the rest of this year.

"We need to see more stable growth signals before expecting U.S. confidence levels to show a sustained increase," Ajay Banga, chief executive of MasterCard, said during an earnings conference call Wednesday, adding conditions in various foreign markets remain choppy.

The Purchase, N.Y., company said it earned $700 million, or $5.55 a share, up from $608 million, or $4.76 a share, a year earlier. The results included a previously disclosed $20 million pretax charge for a pending multibillion-dollar settlement of merchant lawsuits MasterCard, Visa Inc. (V) and numerous banks entered into last month, potentially eliminating an overhang for the companies.

Excluding the charge, MasterCard posted a profit of $713 million, or $5.65 per share, beating analysts' estimate.

While transaction and payments volume continued to increase in the quarter, net revenue increased 9.2%, or 13% on a local-currency basis, to $1.82 billion. Analysts on average were expecting the company to earn $5.58 a share on revenue of $1.88 billion, according to Thomson Reuters.

The weaker-than-expected revenue was driven by an increase in rebate and incentive payments, which are paid to banks and merchants, and foreign-currency fluctuations. The rebates climbed 24% to $661 million. MasterCard attributed the increase to new and renewed agreements and larger payments volume.

MasterCard's shares were down 2.5% at $425.56 in recent trading.

Weak U.S. employment figures, declining consumer confidence and economic challenges in Europe have cast a pall over payments processors, which depend on transaction volume for revenue. Tuesday, the U.S. Commerce Department said consumer spending slipped slightly in June, the second-straight month of decline.

"The reality is you're going to see probably a bit of deceleration of spending-volume growth, but I still think you're going to see both debit volume and credit volume largely grow for the industry," said Darrin Peller, an analyst with Barclays.

The continued shift to electronic payments from cash and checks will help promote growth despite tough economic conditions, Mr. Peller said.

Martina Hund-Mejean, chief financial officer of MasterCard, said during the call the company expects net-revenue growth in the second half of the year to be lower than the 13% increase in local currency it posted in the second quarter. She cited tougher comparisons to previous periods and "global economic uncertainty."

MasterCard, which generates more than half of its revenue in foreign countries, has managed to shake off some of those concerns by gaining share in the debit-card market thanks to new rules. The Durbin amendment, a provision of 2010's Dodd-Frank financial overhaul legislation, requires banks that issue debit cards to include multiple, unaffiliated processing networks on their cards, which has led to more business for MasterCard.

Overall purchase volume on MasterCard cards increased 13% on a local-currency basis to $661 billion, a slower growth rate than in the previous quarter. Processed transactions, though, surged 29% to 8.5 billion, on par with the first quarter.

Cross-border volume, or payments made in one country with a card issued in another country, increased 17%. Such transactions are more lucrative for the payments networks because they typically carry higher fees.

Growth has slowed slightly in the third quarter as of July 28, Ms. Hund-Mejean said.

Cross-border volume was up about 14% in July, which was driven partly by the impact of the strengthening U.S. dollar. Overall processed transactions increased about 25%.

While the U.S. housing market has seen some improvement, sustained progress needs to be made on the unemployment front "in order for the consumer to be willing to spend more," Ms. Hund-Mejean said in an interview.

In Europe, processed-volume growth in July was in the "low teens" on a percentage basis, down from the "mid teens" in the second quarter, Ms. Hund-Mejean said.

Consumer confidence in Europe has "come back from the really lows at the end of 2011," but business sentiment has declined, Ms. Hund-Mejean said.

Visa and MasterCard don't lend money or issue cards to consumers; rather, they help process transactions for banks that issue cards and those that work with merchants.

Visa and MasterCard executives have said they don't expect the pending merchant settlement to have a lasting effect on card use, despite a provision that would allow merchants to charge customers an extra fee for paying with a credit card. Under the deal, the payments networks and card-issuing banks agreed to pay retailers $6.6 billion to settle lawsuits dating back to 2005.

MasterCard's $20 million charge adds to a $770 million charge it took in the fourth quarter to pay for a potential settlement. Its share of the settlement is $790 million, while Visa is on the hook for $4.4 billion.

Merchants alleged Visa, MasterCard and the banks conspired to set fees retailers pay each time a consumer swipes a credit card at arbitrarily high levels. The fees, known as interchange or swipe fees, are set by Visa and MasterCard but collected by card-issuing banks like Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) as revenue.

As part of the settlement, Visa and MasterCard agreed to temporarily reduce credit-card interchange fees by an amount equal to $1.2 billion. The deal requires court approval and has sparked opposition from Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), as well as several trade groups that are plaintiffs in the suits.

Wednesday, the National Community Pharmacists Association, a plaintiff in the suits, said it rejected the settlement because it "does little to reform a badly broken system."

MasterCard General Counsel Noah Hanft said during the conference call the company is confident the settlement will receive court approval, allowing it to "turn the corner on the years of litigation and allow us to get back to doing business with the important merchant community."

Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

August 01, 2012 14:51 ET (18:51 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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