"These strong results underscore our success in displacing paper-based forms of payment in all corners of the globe in the face of a highly competitive payments market," said Robert W.Selander, MasterCard president and chief executive officer. "This marks the twelfth consecutive quarter of double-digit purchase volume growth and the tenth consecutive quarter of double-digit GDV growth. Over our forty year history, we have invested heavily in our global brand and payments network. We believe that merchants, consumers, corporations and governments have recognized the convenient and secure electronic payment solutions which this investment has enabled.
"With our unified global organization and our unique structure as a franchisor, processor and advisor, we are focusing our efforts full time on delivering value-added products and services that enhance the profitability of our customers'businesses, and provide innovative programs that meet and exceed their cardholders' and merchants' needs," Selander said. "At the same time, we recognize that results are best delivered locally, and our structure allows us to develop solutions that work for our customers wherever, and however, they do business."
Total operating expenses decreased 2.6% to $627 million during the quarter compared to the same period in 2005. Excluding the year-ago impact of litigation settlements and an adjustment to reflect an accounting methodology change for cash-based executive incentive plans, operating expenses increased 8.8%. This was primarily driven by an increase in personnel costs related to the hiring of additional staff to support the company's customer-focused strategy; a severance expense resulting from an update in plan estimates; and higher professional fees related to legal costs to defend outstanding litigation. As expected, advertising and market development expenses decreased 4.6% to $209 million versus the year-ago period due to higher spending for the 2006 FIFA World Cup earlier in the year. Currency fluctuations contributed approximately 1% of the increase in expenses for the quarter. Total operating expenses, excluding special items, is a non-U.S. GAAP financial measure that is reconciled to the most directly comparable U.S. GAAP measure in the accompanying financial tables.
Total other income was $17 million in the third quarter 2006 versus $16 million in the third quarter of 2005. The increase was driven primarily by interest income from higher cash balances related to proceeds received from the company's May 2006 initial public offering. This increase was offset by a gain the company recorded in 2005 from the settlement of a contractual dispute.
Chris A. McWilton, MasterCard's chief financial officer, noted that "In our first full quarter as a publicly listed company, MasterCard delivered strong revenue and earnings growth while further improving operating margins. The third-quarter results continue to demonstrate the strength of our business model and the momentum within the overall payments industry. These results are particularly notable when measured against last year's strong third- quarter performance."
Year-to-Date 2006 Results
For the nine months ended September 30, 2006, MasterCard reported net income of $9 million or $0.07 per share. Excluding the impact of special items, the company reported net income of $420 million, or $3.11 per share.
Special items, each of which occurred in the second quarter of 2006, included:
* A $395 million non-cash expense resulting from the donation of approximately 13.5 million shares of Class A common stock to the MasterCard Foundation that occurred simultaneously with the company's IPO, which was not deductible for tax purposes;
* A $23 million reserve recorded for litigation settlements; and
* $7 million in interest income earned on the IPO proceeds ultimately used for redemption of shares of Class B common stock.
The company's net income and earnings per share, as well as total operating expenses discussed below, each of which exclude special items, are non-U.S. GAAP financial measures that are reconciled to their most directly comparable U.S. GAAP measures in the accompanying financial tables.
Net revenues for the nine months ended September 30, 2006 were $2.5 billion, an 11.9% increase versus the same period in 2005. Currency fluctuations had a negligible impact on revenues during this period.
Total operating expenses increased 33.2% to $2.3 billion for the nine-month period compared to the same period in 2005. Excluding the impact of the charitable contribution to the MasterCard Foundation, litigation settlements, and the incentive plan accounting methodology change mentioned above, total operating expenses increased 13.4% due to increased personnel costs, professional fees and sponsorship costs related to the 2006 FIFA World Cup. Currency fluctuations had a negligible impact on operating expenses during this period.
Total other income was $41 million for the nine-month period versus $4 million for the same period in 2005. This change was driven by a $45 million increase in investment income, including the $7 million special item earned on IPO proceeds. Interest expense also decreased by $8 million due to a refund of interest assessed in connection with an audit of the company's federal income tax return and a reduction of interest reserve requirements related to the company's tax reserves. In addition, $3 million was due to lower interest accretion relating to the U.S. merchant lawsuit settlement.
MasterCard's effective tax rate of 95.9% for the nine months ended September 30, 2006 includes the impact of a non-deductible, charitable stock contribution to the MasterCard Foundation. Excluding this impact, the company's tax rate would have been 34.6% vs. 35.5% for the same period in 2005. The company's effective tax rate, excluding the impact of the share donation, is a non-U.S. GAAP financial measure that is reconciled to the most directly comparable U.S. GAAP measure in the accompanying financial tables.
