Western Union 2007 Annual Report Download - page 25

Management’s Discussion and Analysis of Financial Condition and Results of Operations
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TRANSACTION FEES — Transaction fees are charged to consumers
for sending money transfers and consumer-to-business payments.
Consumer-to-consumer transaction fees generally vary according
to the principal amount of the money transfer and the locations
from and to which the funds are sent. Transaction fees repre-
sented 81% of Western Union’s total consolidated revenues for
the year ended December 31, 2007, and are most refl ective of
our performance.
FOREIGN EXCHANGE REVENUE — In certain consumer money
transfer transactions involving different send and receive curren-
cies, we generate revenue based on the difference between the
exchange rate set by us to the consumer and the rate at which
we or our agents are able to acquire currency. Foreign exchange
revenue growth has historically been driven principally by growth
in international cross-currency transactions. Foreign exchange
revenue represented approximately 16% of Western Union’s total
consolidated revenues for the year ended December 31, 2007.
COMMISSION AND OTHER REVENUES — Commission and other
revenues represented approximately 3% of our total consolidated
revenue for the year ended December 31, 2007. Commission
and other revenues consist of commissions we receive in con-
nection with the sale of money orders, enrollment fees received
when consumers enroll in our Equity Accelerator® program (a
recurring mortgage payment service program), revenue recorded
for reimbursable costs incurred to operate payment services
programs and investment income primarily derived from interest
generated on money transfer and payment services settlement
assets as well as realized net gains and losses from such assets.
COST OF SERVICES — Cost of services includes the costs directly
associated with providing services to consumers, including com-
missions paid to agents and billers, personnel expenses, software
maintenance costs, equipment, telecommunications costs, bank
fees, infrastructure costs to provide the resources and materials
necessary to offer money transfer and other payment services
(including reimbursable costs), depreciation and amortization
expense, and other operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE — Selling, general and
administrative, or “SG&A,” primarily consists of salaries, wages
and related expenses paid to sales and administrative personnel,
as well as certain advertising and promotional costs and other
selling and administrative expenses. Prior to September 29, 2006,
the date of the spin-off, SG&A also included allocations of general
corporate overhead costs from First Data.
INTEREST EXPENSE — Interest expense represents interest
in curred in connection with outstanding borrowings payable to
third parties.
INTEREST INCOME — Interest income consists of interest earned
on cash balances not required to satisfy settlement obligations
and in connection with loans made to several agents.
INTEREST INCOME FROM FIRST DATA, NET — Interest income from
First Data, net consists of interest income earned on notes receiv-
able from First Data, net of interest expense incurred on notes
payable to First Data. All notes receivable and payable were
settled in connection with the spin-off on September 29, 2006.
DERIVATIVE GAINS/(LOSSES), NET — Derivative gains and losses
include realized and unrealized gains and losses associated with
certain foreign currency forward contracts that did not qualify as
hedges under derivative accounting rules prior to September
29, 2006, and the portion of the change in fair value that is con-
sidered ineffective or is excluded from the measure of effectiveness
related to contracts designated as accounting hedges entered
into on or after September 29, 2006. Derivative gains and losses
do not include fl uctuations in foreign currency forward contracts
intended to mitigate exposures on settlement activities of our
money transfer business or on certain foreign currency denomi-
nated cash positions. Gains and losses associated with those
foreign currency forward contracts are included in operating
expenses, consistent with exchange rate fl uctuations on the
related settlement assets, obligations and cash positions.
FOREIGN EXCHANGE EFFECT ON NOTES RECEIVABLE FROM FIRST
DATA, NET — Certain of the notes receivable from First Data in our
consolidated balance sheets prior to September 29, 2006, the
spin-off date, were repayable in euros, and certain of those euro
denominated notes also had foreign currency swap agreements
associated with them. These notes receivable were translated
based on current exchange rates between the euro and the
United States dollar, and changes in fair value of the related
foreign currency swap agreements were recorded based on
current market valuations. The effect of translation adjustments
and recording the foreign currency swaps to market is refl ected
in our consolidated statements of income as foreign exchange
effect on notes receivable from First Data. All notes receivable
and payable with First Data were settled in connection with the
spin-off on September 29, 2006.
OTHER INCOME, NET — Other income, net is comprised primarily
of equity earnings from equity investments and other income
and expenses.
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Results of Operations
The following discussion of our results of operations refers to the
year ended December 31, 2007 compared to the same period
in 2006 and the year ended December 31, 2006 compared to
the same period in 2005. The results of operations should be
read in conjunction with the discussion of our segment results
of operations, which provide more detailed discussions concern-
ing certain components of the consolidated statements of income.
All signifi cant intercompany accounts and transactions between
our company’s segments have been eliminated.