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MasterCard Q2 Earnings Top on Higher Revs, Margins Dip

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MasterCard Inc. (MA - Free Report) reported second-quarter 2014 operating earnings per share (EPS) of 80 cents. The results comfortably exceeded both the Zacks Consensus Estimate of 77 cents and the year-ago quarter figure of 70 cents. With this result, the company’s average four-quarter beat stands at 5.3%.

Operating net income rose 9.8% year over year to $931 million. No special items were recorded during the comparable periods.

Results reflected increased number of processed transactions and strong gross dollar value (GDV) growth, partially offset by higher operating and tax expenses. Notably, the negative factors also led to deterioration in operating margin and cash flow.


Quarterly Details

Net revenue jumped 13.4% year over year and 13% on constant currency basis to $2.38 billion, and breezed past the Zacks Consensus Estimate of $2.3 billion. The upside was primarily due to a 12% rise in the number of processed transactions to 10.6 billion along with 16% increase in cross-border volumes. These were partially offset by higher rebates and incentives, primarily attributable to new and renewed business alliances.

During the reported quarter, GDV increased 13% to $1.1 trillion, while worldwide purchase volume rose 13% year over year, on a constant currency basis, to $821 billion. As of Jun 30, 2014, MasterCard had issued over 2.0 billion MasterCard and Maestro cards.

Total operating expenses rose 14.5% year over year to $994 million. The overall increase primarily resulted from a surge of 32.8% in depreciation and amortization expenses and 19.2% uptick in general and administrative expenses. These were partially offset by 7% decline in advertising and marketing expenses.

Subsequently, operating income increased 12.6% year over year to $1.38 billion in the reported quarter. However, operating margin dipped to 58.2% from 58.6% in the year-ago quarter.  Additionally, interest expense rose 200% year over year to $15 million. MasterCard's effective tax rate was 32.2%, higher than 31.2% in the year-ago period.

Financial Update

As of Jun 30, 2014, MasterCard’s net operating cash flow plunged 19.6% year over year to $1.3 billion, primarily owing to higher investments in acquisitions and strategic initiatives.

At the end of Jun 2014, cash and cash equivalents decreased to $2.88 billion from $3.6 billion at 2013-end, while long-term debt stood at $1.49 billion against nil debt at 2013-end. In Mar 2014, MasterCard raised about $1.49 billion from its bond sale – the first ever executed by the company.

Meanwhile, retained earnings increased to $11.67 billion at the end of Jun 2014 from $10.12 billion at 2013-end. Moreover, total equity declined to $6.3 billion from $7.5 billion at Dec 2013.

Share Repurchase Update

During the reported quarter, MasterCard repurchased about 15.7 million shares for $1.2 billion. Until Jul 24, 2014, the company bought back another 1.4 million shares for $106 million.

On Dec 10, 2013, the board of MasterCard sanctioned a new share repurchase program worth $3.5 billion. The company has about $728 million worth of stock available under this latest share repurchase program.

Dividend Update

On May 9, 2014, MasterCard paid its quarterly dividend of 11 cents per share to shareholders of record as on Apr 9. This was hiked by 83% in Dec 2013, marking the second hike in 2013. Previously, MasterCard had increased its dividend annually by 100% each in the February of 2013 and 2012.

Zacks Rank

MasterCard currently carries a Zacks Rank #3 (Hold).

Peer Take

Last week, MasterCard rival Visa Inc. (V - Free Report) beat on its fiscal third-quarter earnings, thanks to lower expenses. The company reported operating earnings of $2.17 per share, outpacing the Zacks Consensus Estimate of $2.09 and the prior-year quarter figure of $1.88 per share.

Another peer, Discover Financial Services (DFS - Free Report) reported second-quarter 2014 operating earnings of $1.35 per share last week. The figure exceeded the Zacks Consensus Estimate by a nickel and rose 13% from the year-ago quarter. The stellar results were primarily driven by loan growth and share repurchases.

Earlier this week, American Express Co. (AXP - Free Report) posted second-quarter 2014 operating earnings per share of $1.43, which outpaced both the Zacks Consensus Estimate of $1.38 by 3.6% and the year-ago quarter figure of $1.27 by 12.6%. The upside was primarily driven by a surge in consumer spending from AmEx cards and a lower share count.

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