First Data post Q4 loss on merger costs

Source: First Data Corp

First Data Corp. today reported its financial results for the fourth quarter and full year ended December 31, 2007.

Consolidated revenues for the quarter were up 11% to $2.1 billion. Adjusted EBITDA excluding projected near-term cost savings for the quarter was up 5% to $662 million.

For the quarter, the loss from continuing operations was $273 million but included $499 million of merger related costs and other costs directly attributable to the transaction with affiliates of Kohlberg Kravis Roberts & Co. (the "Transaction"). These costs are referred to collectively as "Merger Impacts." (1) A table describing adjusted EBITDA and reconciling income (loss) from continuing operations to adjusted EBITDA is included in the accompanying schedules.

For the full year, consolidated revenues were up 14% to $8.1 billion. Adjusted EBITDA excluding projected near-term cost savings was up 6% to $2.5 billion. Income from continuing operations was $163 million, but included Merger Impacts of $720 million. Excluding Merger Impacts, full-year 2007 income from continuing operations grew 4%.

"Our performance reflects continued execution in a challenging economic environment," said Michael Capellas, Chairman and Chief Executive Officer. "In the fourth quarter, First Data saw accelerated momentum in the areas of new product innovation, sales execution and operational efficiency."

Segment Results

Commercial Services

For the quarter, Commercial Services reported revenue of $1.2 billion, up 7% or 10% excluding purchase accounting adjustments. Excluding reimbursable debit network fees and purchase accounting adjustments, revenue growth was 5%. Lower revenue growth, compared to the fourth quarter of 2006, was primarily the result of a large merchant rolling out First Data's Electronic Check Acceptance product in the comparable prior year period. In addition, a bank deconversion from the STAR Network in the fourth quarter and lower consumer transaction volumes in December 2007 resulted in lower transaction and processing revenue. Operating profit was $112 million, down 63% or up 3% excluding purchase accounting adjustments. Operating profit margin, excluding reimbursable debit network fees and purchase accounting adjustments, was 33.8%. Reported operating profit margin for the quarter was 9.4%.

Full-year Commercial Services revenue was $4.5 billion, up 9% or 10% excluding purchase accounting adjustments. Excluding reimbursable debit network fees and purchase accounting adjustments, revenue growth was 6%. Operating profit was $939 million, down 14% or up 6% excluding purchase accounting adjustments and accelerated stock based compensation expense related to the Transaction.

Full-year operating profit margin, excluding reimbursable debit network fees, purchase accounting adjustments and accelerated stock based compensation expense related to the Transaction, was relatively flat at 32.7% compared to 32.9% last year. Reported operating profit margin was 20.8%.

Financial Institution Services

For the quarter, Financial Institution Services revenue was $504 million, up 4% or flat excluding reimbursables and purchase accounting adjustments. Operating profit was $62 million, down 36% or down 2% excluding purchase accounting adjustments. Revenue and operating profit in the quarter were impacted by previously anticipated price compression from contract renewals and by lost business in the STAR Network. Operating profit margin for the quarter was 29.1% excluding reimbursables and purchase accounting adjustments. Reported operating profit margin was 12.2% for the quarter.

Full-year Financial Institution Services revenue was $2.0 billion, up 8% or up 5% excluding reimbursables and purchase accounting adjustments. Operating profit was $345 million, down 7% or up 3% excluding reimbursables, purchase accounting adjustments and accelerated stock based compensation expense related to the Transaction. Full-year operating margin was 29.8% excluding reimbursables, purchase accounting adjustments and accelerated stock based compensation expense related to the Transaction. Reported operating profit margin was 17.4%.

First Data International

For the quarter, First Data International generated revenue of $479 million, up 27%. Revenue growth on a constant currency basis, excluding acquisitions and divestitures, was 8%. This 8% growth was lower compared to the fourth quarter of 2006 primarily due to a card portfolio sale and a significant contract renewal in the comparable prior year period. Operating profit was $55 million, down 6% or up 5% excluding purchase accounting adjustments. Operating profit margin was 12.9% excluding purchase accounting adjustments. Operating profit included approximately $10 million of incremental investments in data center consolidation, platform initiatives and strategic business development, which negatively impacted the 12.9% operating profit margin by two percentage points during the quarter. Reported operating profit margin was 11.5%.

Full-year First Data International revenue was $1.7 billion, up 32%. Revenue growth on a constant currency basis, excluding acquisitions and divestitures, was 8%. Operating profit was $169 million, up 10% or up 16% excluding purchase accounting adjustments and accelerated stock based compensation expense related to the Transaction. Full-year operating profit margin was 10.6% excluding purchase accounting adjustments and accelerated stock based compensation expense related to the Transaction. Full-year operating profit included approximately $33 million of incremental investments in data center consolidation, platform initiatives and strategic business development which negatively impacted the 10.6% operating profit margin by two percentage points. Reported operating profit margin was 10.1%.

Other Matters

Effective January 1, 2008, First Data adopted a revised segment reporting structure. The company's segments will include Merchant Services, Financial Services, International, Prepaid Services and Integrated Payment Systems. For applicable prior year and quarterly periods, the company will provide financials realigned to these segments.

In January of 2008, the company's Official Check and Money Order business (the "Official Check Business") repositioned its investment portfolio to mostly short-term taxable securities. This repositioning did not result in material gains or losses to the company. The Official Check Business comprises most of First Data's Integrated Payment Systems segment which the company is winding down. The Official Check Business processes official checks and money orders and the revenue is primarily driven from its investment portfolio. First Data's TeleCheck business is not related to the Official Check Business and is not impacted by the portfolio repositioning.

First Data's largest merchant alliance, Chase Paymentech Solutions, LLC ("Chase Paymentech"), is 51% owned by J.P. Morgan Chase Bank, N.A. ("JPMorgan") and 49% owned by First Data. The current term of the existing alliance agreement expires in 2010; however, JPMorgan had the right to terminate the alliance due to the change of control upon the closing of the Transaction. First Data has extended the time period to exercise this right to allow for further discussions regarding the alliance. If JPMorgan exercises its termination right, First Data has the right to receive 49% of the alliance's merchant contracts by value and be allocated 49% of the alliance's sales force. A termination is not expected to have a material impact to income from continuing operations or adjusted EBITDA and First Data's reported revenues would increase. Potential risks if the alliance is terminated include the potential loss of certain processing volume over time, the loss of JPMorgan branch referrals, the loss of access to the JPMorgan brand, and post-termination competition by JPMorgan.

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