First Data 2007 Annual Report Download - page 51

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Pro Forma Historical
Successor Predecessor
Percent
Change
Historical
Percent Change
Year ended
December 31,
2007
Period from
September 25
through
December 31,
2007
Period from
January 1
through
September 24,
2007
Year ended December 31,
(in millions) 2006 2005
Pro Forma
2007
vs. Historical
2006
2006 vs.
2005
Acquiring revenue $ 1,990.4 $ 540.3 $ 1,450.1 $ 1,915.4 $ 1,795.3 4% 7%
Prepaid revenue 140.6 57.3 83.3 125.8 115.0 12% 9%
Processing revenue charged to unconsolidated
merchant alliances 201.6 54.0 147.6 202.4 224.7 0% (10)%
Total transaction and processing service fees 2,332.6 651.6 1,681.0 2,243.6 2,135.0 4% 5%
Equity earnings in affiliates 316.4 95.6 220.8 283.3 237.0 12% 20%
Total transaction and processing service fees
and equity earnings in affiliates $ 2,649.0 $ 747.2 $ 1,901.8 $ 2,526.9 $ 2,372.0 5% 7%
Acquiring revenue in the 2007 predecessor and successor periods was favorably impacted by increases in transaction volume due to consumer spending
at the point of sale, improved merchant retention, activation improvements, the growth of new alliances and 2006 pricing changes. In 2006, the Company
began classifying commission payments to certain ISO's as expense rather than netting them against revenue consistent with the Company's accounting for
other similar arrangements. This had a favorable impact in the 2007 predecessor period. The 2007 successor period was favorably impacted by the year end
holiday season although less than in prior years. Negatively impacting revenue in the 2007 successor period was the impact of purchase accounting resulting
in not recognizing annual fees of approximately $23 million pertaining to the predecessor period that would otherwise have been recognized in the fourth
quarter. Most of these annual fees were accrued as part of purchase accounting.
On a 2007 pro forma basis compared to historical 2006 the increase in acquiring revenue was driven by increases in transaction volume due to
consumer spending at the point of sale, improved merchant retention, activation improvements, the growth of new alliances and 2006 pricing changes. On a
2007 pro forma basis in comparison to the historical 2006 results the reclassification of certain ISO commission payments positively impacted the acquiring
revenue growth rate by approximately 1 percentage point with such increase being offset by the above noted purchase accounting which negatively impacted
the acquiring revenue growth rate by 1 percentage point. The 2007 pro forma revenue growth and transaction growth rates were negatively impacted
compared to 2006 due to the year end holiday season, as the growth rates, although positive, were lower than in 2006.
The increase in acquiring revenue in 2006 compared to 2005 was driven by increases in transaction volume due to consumer spending at the point of
sale, sales productivity, the alliance formed with Citibank in 2005, as well as the above noted reclassification of certain commission payments out of revenue
and into expense. Also contributing to growth were improved merchant retention, activation improvements, the growth of new alliances and 2006 pricing
changes. The reclassification of certain ISO commission payments positively impacted the acquiring revenue growth rate by approximately 1 percentage
point.
The Company's transaction growth rate for PIN-debit increased for 2007 on a pro forma basis compared to historical 2006 and for 2006 compared to
2005. One of the items driving growth in PIN-debit transactions is increased penetration in the grocery, petroleum and quick service restaurant markets.
Merchant PIN-debit transactions, including acquired and STAR network transactions, accounted for approximately 27%, 25% and 25% of total
domestic merchant transactions for the pro forma 2007 results and the historical 2006 and 2005 periods, respectively. The Company continues to see a shift in
consumer behavior toward the use of PIN-debit cards from other forms of payment, particularly checks and cash.
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