MasterCard Inc , the world's second-largest credit card network, forecast marketing expenses will increase 20 percent, and rebates and incentives will go up in the fourth quarter, sending shares down up to 6 percent.

MasterCard's outlook overshadowed better-than-expected quarterly earnings boosted an aggressive 29 percent cut in marketing expenses, higher fees to banks, and a more intense use of debit cards.

The quarter was a blowout, but then they did caution that marketing expenses are going to be up significantly in the fourth quarter and the rebates and incentives are also going to be up significantly in the fourth quarter, said Greg Smith, an analyst at investment bank Duncan Williams.

The quarter wasn't quite as good as it looked when taking into the context much higher marketing expenses and rebates and incentives in the fourth quarter, Smith said. While they dramatically beat third quarter expectations, you will probably see analysts lowering estimates for the fourth quarter.

MasterCard's third-quarter net income was $452 million, or $3.45 per share, compared with a loss of $194 million, or $1.48 per share, a year earlier.

Excluding special items, the credit card network posted earnings per share of $3.48, beating analysts' forecast of $2.94, according to Thomson Reuters I/B/E/S.

The company said special items for the third quarter of 2009 represented $6.2 million of litigation settlement charges. The special item for the third quarter of 2008 represented an $827.5 million net pre-tax charge related to an antitrust litigation settlement.

Revenue rose 2 percent to $1.4 billion, and also beat analysts' forecast, boosted by higher fees charged to banks and increased consumer use of credit and debit cards. These factors were partially offset by the impact of slightly lower cross border volumes.

But operating expenses declined 13 percent to $685 million, driven by higher-than-expected cuts in expenses and a reduction of 7.9 percent of personnel and administrative costs.

Processed transactions grew 7.6 percent in the quarter to 5.8 billion boosted by a more intense use of credit and debit cards in Asia Pacific, Middle East, Africa and Latin America.

MasterCard's gross dollar volume was up 0.3 percent on a local currency basis to $633 billion.

The company also benefited from a lower tax rate. MasterCard's effective tax rate was 32.9 percent in the third quarter, down from 39.7 percent a year ago.

MasterCard is partly insulated from the credit crisis because it processes transactions rather than lends funds. But the company has seen a slowdown in the growth of revenue and transaction volumes in recent quarters as consumers used their credit cards less.

POSITIVE SIGNS, BUT NO BUOYANT HOLIDAY SEASON

There are some positive signs emerging, Chief Executive Robert Selander told Reuters in an interview.

Selander said worldwide cross-border volumes showed low single digits growth in October, compared with a 3 percent decline in the third quarter, and U.S. processed volumes grew slightly compared to low single-digit declines.

He also said an improvement in retail sales in September and in credit and debit card spending in October was encouraging, but warned that more job losses and a historically low consumer confidence would slow any recovery.

It's not going to be an overly buoyant season, Selander said. We are seeing improvements relative to prior months, and given that it was a weak fourth quarter last year, we think it will be viewed as good as or better than last year by the time the season is done.

The company reiterated it would not meet its average revenue growth target of 12 percent to 15 percent in 2009-2011, but affirmed its forecast of more than 20 percent net income growth.

Investors expectations were high about MasterCard's profits, after the company's larger rival, Visa Inc , reported better-than-expected quarterly earnings last week.

We would classify the quarter as well managed on the expense side, with signs of stabilization, RBC Capital Markets analyst Daniel Perlin said in a research note. We would take advantage of stock price weakness.

MasterCard shares ended down 1.55 percent at $219.20 on the New York Stock Exchange, after falling as much as 5.8 percent during the session. The stock is up 53 percent in 2009.

(Reporting by Juan Lagorio, editing by Gerald E. McCormick, Dave Zimmerman, Gunna Dickson)

Marketing Down