Western Union 2007 Annual Report Download - page 27

Management’s Discussion and Analysis of Financial Condition and Results of Operations
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In addition, fl uctuations in the exchange rate between the
euro and the United States dollar have resulted in the following
benefi t or reduction to consumer-to-consumer transaction fee
and foreign exchange revenue (which represents over 80% of
our consolidated revenue) over the previous year, net of foreign
currency hedges, that would not have occurred had there been
a constant exchange rate:
Year ended December 31, (in millions) Benefi t/(Reduction)
2007 $78.8
2006 $11.5
2005 $ (1.4)
Overall, consolidated revenue increased due to the strong trans-
action growth in our international business, and due to the impact
of the acquisitions and the euro noted above. The revenue growth
experienced by our international business was offset by revenue
declines in our domestic business (transactions between and
within the United States and Canada), and to a lesser extent, the
Mexico business during the years ended December 31, 2007
and 2006 compared to the corresponding previous periods.
Revenue for the years ended December 31, 2007 and 2006 for
our United States to Mexico, United States outbound and domestic
businesses were adversely impacted by various factors which
began in the second quarter of 2006 in the United States, includ-
ing the immigration debate and subsequent general market
softness, in part due to the slow down in the construction industry.
Domestic and United States outbound transactions and revenues
for money transfers were also impacted by a decline in transac-
tions initiated on our website and on the telephone in the United
States during the year ended December 31, 2007. These declines
resulted primarily from additional controls implemented begin-
ning in early 2007 by Western Union, card associations and issuing
banks in response to credit and debit card fraud.
Foreign exchange revenue increased for the years ended
December 31, 2007 and 2006 over the corresponding previous
periods, due to an increase in cross-currency transactions primarily
as a result of strong growth in international consumer-to-consumer
transactions. The overall increase in foreign exchange revenue
during these periods relating to the increase in cross-currency
transactions was partially offset by reduced foreign exchange
spreads in selected markets. The acquisition of Vigo also con-
tributed to foreign exchange revenue growth in 2006.
We have and intend to continue to implement strategic pricing
reductions to reduce fees and foreign exchange spreads, where
appropriate, taking into account growth opportunities and com-
petitive factors. Pricing decreases and foreign exchange actions
generally reduce margins, but are done in anticipation that they
will result in increased transaction volumes and increased revenues
over time. The costs of such pricing decreases and foreign
exchange actions have averaged approximately 3% of our annual
consolidated revenue over the last three years.
Commission and other revenues
During the year ended December 31, 2007, commission and
other revenues increased over the previous corresponding period
primarily as a result of interest income from higher money transfer
and payment services settlement asset balances and higher
enrollment fees from increased participation in our recurring
mortgage payment service program. Commission and other
revenue increased during the year ended December 31, 2006
compared to the year ended December 31, 2005 as a result of
higher investment income on money orders pending settlement
and higher enrollment fees from increased participation in our
recurring mortgage payment service program.
Operating expenses overview
Incremental independent public company expenses of $59.1
million and $25.1 million in 2007 and 2006, respectively, are
classifi ed within operating expenses under the captions “cost
of services” and “selling, general and administrative” in the
consolidated statements of income. Incremental public company
expenses relate to staffi ng additions and related costs to replace
First Data support, corporate governance, information technol-
ogy, corporate branding and global affairs, benefi ts and payroll
administration, procurement, workforce reorganization, stock
compensation, and other expenses related to being a stand-alone
public company as well as recruiting and relocation expenses
associated with hiring key management positions new to our
company, other employee compensation expenses and temporary
labor used to develop ongoing processes. These expenses are
those in excess of amounts allocated to us by First Data prior to
September 29, 2006 or beyond amounts we presume First Data
would have allocated subsequently thereto. We expect most of
these expenses will continue to be incurred in future periods.
At the time of the spin-off, First Data converted stock options,
restricted stock awards and restricted stock units (collectively,
“stock-based awards”) of First Data stock held by Western Union
and First Data employees. Both Western Union and First Data
employees received converted Western Union stock-based
awards. All converted stock-based awards, which had not vested
prior to September 24, 2007, are subject to the terms and condi-
tions applicable to the original First Data stock-based awards,
including change of control provisions which require full vesting
upon a change of control of First Data. Accordingly, upon the
completion of the acquisition of First Data on September 24,
2007 by an affi liate of Kohlberg Kravis Roberts & Co (“KKR”), all
of these remaining converted unvested Western Union stock-
based awards vested. In connection with this accelerated vesting,
we incurred a non-cash pre-tax charge of $22.3 million during
the third quarter of 2007. Approximately one-third of this charge
was recorded within “cost of services” and two-thirds was recorded
within “selling, general and administrative expenses” in the
consolidated statements of income.