First Data 2007 Annual Report Download - page 52

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The spread between the transaction growth rate and the transaction and processing service fee revenue growth rate for the 2007 pro forma results
compared to historical 2006 remained relatively constant, after consideration of the ISO adjustment noted above, due to the mix of merchants and price
compression. The spread is caused most significantly by the mix of merchants. Most of the disparity is within the segment's portfolios of national merchants,
which drive significant transaction growth and experience the greatest price compression. Also contributing to this spread is a lower average transaction
amount due to increased usage at merchants such as quick service restaurants. The segment has historically experienced three to five percent annual price
compression on average, with price compression for the national merchants being higher.
Prepaid revenue for the 2007 predecessor and successor periods was favorably impacted by sales and processing of gift cards to merchants. Prepaid
revenue increased in 2007 on a pro forma basis compared to historical 2006 due to growth within gift cards, and to a lesser extent, payroll cards. Prepaid
revenue increased in 2006 compared to 2005 as a result of an increase in transactions.
Processing revenue charged to unconsolidated merchant alliances represents revenues earned from providing processing services to those alliances.
These processing fees are recognized as expense to the unconsolidated merchant alliances. Processing revenue for the 2007 predecessor and successor periods
was not impacted by significant events or trends. Processing revenue remained flat for 2007 on a pro forma basis compared to historical 2006. The decrease in
2006 compared to 2005 is largely a result of restructuring agreements associated with the Chase Paymentech and PNC Merchant Services alliances.
Equity earnings in affiliates in the 2007 predecessor and successor periods continued to benefit from strong performance by Commercial Service's
merchant alliances. Equity earnings in affiliates increased on a 2007 pro forma basis compared to historical 2006 resulted most significantly from increased
merchant transaction volume in the merchant alliances. Earnings of an alliance were also improved due to a beneficial change in its portfolio mix and lower
processing rates, which negatively impacted processing revenue described directly above. The increase in equity earnings for 2006 compared to 2005
principally resulted from increased transaction volume. The amortization of the intangible asset portion of the excess of the Company's investment balance
over its proportionate share of the investee's net book value is not included in the equity earnings reviewed by management as revenue. Such amortization is
included in the segment's operating profit.
The Company's largest merchant alliance, Chase Paymentech, is 51% owned by J.P. Morgan Chase Bank, N.A., and 49% owned by FDC. 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 merger. The Company has extended the time period to exercise this right to allow for further discussions regarding the alliance. If JPMorgan
exercises its termination right, FDC 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 consolidated EBITDA and the Company'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 Chase.
Check services revenue
Telecheck was favorably impacted in the 2007 predecessor and successor periods from the expansion of its ECA processing into more locations of large
national retailers but negatively impacted by a decline in the use of paper checks.
The increase in check services revenue for 2007 on a pro forma basis compared to historical 2006 resulted from an increase in the above noted ECA
processing. This increase partially was offset by the general decline in the paper check guarantee volumes. The increase in check services revenue for the year
ended December 31, 2006 compared to 2005 resulted from an increase in ECA processing revenue noted above, increased revenues from collections services
provided for a national merchant, and the acquisition of ClearCheck, Inc ("ClearCheck") in the first quarter 2006. These increases partially were offset by the
general decline in the paper check guarantee volumes.
Product sales and other revenue
Product sales and other revenue for the 2007 predecessor and successor periods was negatively impacted by decreased terminal sales. The 2007
predecessor period benefited from merchant portfolio sales and contract termination fees totaling approximately $22 million compared to $6 million for the
historical 2006 period.
The majority of the decrease in product sales and other revenues for 2007 on a pro forma basis compared to historical 2006 was driven by decreased
terminal sales partially offset by increased merchant portfolio sales and contract termination fees. The majority of the increase in product sales and other
revenues for 2006 compared to 2005 was driven by increased terminal sales and leases partially offset by decreases in hardware and supplies revenue and
professional services revenue.
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