MasterCard Inc. said Thursday it posted a second-quarter loss because of a charge related to a settlement with rival American Express Co.
Excluding the charge, the payment processor's profit rose 9 percent, while sales jumped 25 percent on increased spending by cardholders, especially with debit cards.
Purchase, New York-based MasterCard said it lost $747 million, or $5.74 per share, from April to June, after the effect of a $1 billion after-tax charge related to antitrust litigation. Excluding that charge, it earned $276 million, or $2.11 a share _ better than analysts' forecast of a profit of $2.02 a share, according to Thomson Financial.
In the same period last year, MasterCard earned $252.3 million, or $1.85 a share, including the effects of $3.4 million set aside for litigation settlement and $90 million in income from an agreement to discontinue its sponsorship of the World Cup.
Were it not for MasterCard's legal costs, the second quarter would have been a strong one for the company. MasterCard's stock pullback belied largely upbeat assessments by card industry analysts. Anurag Rana of KeyBanc Capital Markets called MasterCard's results "impressive," while Moshe Katri of Cowen & Co. wrote that while the short-term outlook is a bit uncertain, in the long-term the company "will continue to benefit from secular growth trends in the electronic payments arena."
MasterCard and its competitor Visa Inc., unlike most card companies, are not exposed to deteriorating trends in consumer credit because they do not lend. Rather, they process the transactions made on their branded cards, and the credit is issued by member banks such as Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc.
MasterCard's revenue surged to $1.2 billion in the second quarter from $997 million a year earlier. More than 5 percentage points of that increase was due to the dollar's weakening against currencies including the euro and the Brazilian real. When payments are made overseas, the revenues that MasterCard pulls in from them are converted into dollars.
A sharp rise in gross dollar volume, even after the effect of currency fluctuations, also contributed to the jump, as did an increase in the total number of transactions processed and in cross-border transactions. Payments made by travelers abroad bring in bigger fees for MasterCard.
Pricing changes also helped revenue growth by about 5 percentage points.
MasterCard's results, like Visa's results did late Wednesday, indicated that the average U.S. cardholder is turning to debit more than credit as the economy weakens. Within the United States, gross dollar volume on MasterCard credit and charge cards rose 0.7 percent during the second quarter, but gross dollar volume on MasterCard debit cards shot up 15.8 percent.
Some of the disparity is because people are switching from cash and checks to debit, but some of it also reflects a shift away from credit.
"The economic environment is pretty tough," said Chief Financial Officer Martina Hund-Mejean, adding that consumers are continuing to shift their spending away from discretionary items and more toward non-discretionary items like gasoline, food and health care.
"We also do believe that the housing prices and the restrictions in credit for consumers have an impact on consumers utilizing their cards," Hund-Mejean said. Banks, facing still-tumbling home prices and rising consumer defaults in a broad array of debt products, have been lowering credit lines for many cardholders.
MasterCard's stock fell $21.77, or more than 8 percent, to $248.96 in late morning trading. During the second quarter, shares rose about 19 percent.
Shares of competitor Visa, which posted a 41 percent increase in quarterly profit late Wednesday, also slipped Thursday by $1.42 to $77.03.
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