MasterCard Reports 2005 Earnings with a Loss in Q4

MasterCard Incorporated today reported that 2005 was a record year as a result of outstanding performance achieved with the support of its member financial institutions globally. In 2005, net revenue was $2.9 billion, a 13.3% increase versus 2004. This growth was not significantly impacted by currency fluctuations. Net income for the year was a record $267 million, or $2.67 per share on a diluted basis, compared to $238 million, or $2.38 per share on a diluted basis in 2004.

The increase in revenue was due primarily to higher gross dollar volume (GDV) on MasterCard branded cards, up 11.9% to $1.7 trillion, and growth in the number of transactions processed by MasterCard in 2005. GDV growth was fueled by cardholders using the 749.3 million MasterCard cards issued by the company’s global customer base at more than 24 million acceptance locations around the world. MasterCard achieved strong international growth, driven primarily by an increase in cross-border travel. Certain pricing changes that went into effect on April 1, 2005 also fueled the increase in revenue.

“MasterCard is delivering results that reflect our customer-focused strategy and the value of our key strategic assets — our brand, our global network and our payments expertise,” said Robert W. Selander, president and chief executive officer. “Over the past year, MasterCard’s ability to effectively deliver against the needs of our key customers, establish tangible relationships with the merchant community and make inroads in processing demonstrates the strength of our global business model.”

Total operating expenses increased 13.3% in 2005, primarily driven by additional advertising and market development and personnel costs, including additional severance costs, an adjustment related to the accounting for the company’s performance award programs, and the hiring of additional staff to support the company’s strategic initiatives.

Advertising and market development expenses to promote the company’s brands and assist its customers in raising consumer awareness and card usage grew to $1.0 billion, a 10% increase versus 2004.

Based on progress in ongoing settlement discussions related to the company’s currency conversion litigation, certain of which were favorable to MasterCard, the company increased its reserve related to this litigation to $89 million, $75 million of which was recorded in 2005.

Other income and expense increased $37 million to $14 million in 2005. Contributing to this improvement was a $12 million increase in interest income from higher cash and investment balances and interest rates earned on those balances. Additionally, the company recognized a $17 million gain related to the settlement of a customer business agreement dispute, and $9 million in gains related to the sale of two investments.

The effective tax rate in 2005 was 34.5% versus 26.5% in 2004, due principally to the favorable settlement and reassessment, during 2004, of various tax and audit issues.

Commenting on the company’s financial performance, Chris A. McWilton, chief financial officer, said, “Our financial performance in 2005 demonstrates MasterCard’s strength and positioning at the center of a rapidly growing global payments industry.”

Fourth Quarter 2005
The net loss in the fourth quarter of 2005 was $53 million or $.53 per share on a diluted basis, versus net income of $1.3 million or $.01 per share on a diluted basis in 2004. The fourth quarter is typically a period of low profitability due to heavy advertising, promotions and incentives. Net revenue in the fourth quarter grew 4.7% from $684 million in 2004 to $716 million in 2005. Currency fluctuations negatively impacted revenue growth in the fourth quarter by 1%.

Although GDV in the fourth quarter grew 11.9% to $445.8 billion, significant promotional expenditures with customers and merchants which are recorded as offsets to revenue, and tiered pricing arrangements which provide higher discounts for greater volume, limited revenue growth.

Operating expenses increased 15.8% from $704 million in 2004 to $815 million in 2005. Contributing to this increase was a $27 million increase to the company’s currency conversion litigation reserve and a $20 million increase in the company’s actuarially determined severance reserves.

Other income and expense increased by $12 million to $11 million in the fourth quarter primarily due to gains on the sale of two investments previously discussed.