First Data 2008 Annual Report Download - page 50

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The following provides highlights of revenue and expense changes on a consolidated basis for the successor year ended December 31, 2008, the
predecessor, successor and the pro forma periods in 2007 and the predecessor year ended December 31, 2006 while a more detailed discussion is included in
the "Segment Results" section below:
Operating revenues overview
Transaction and processing service fees—Revenue was positively impacted in 2008 compared to 2007 due in part to an increase in transaction and
processing service fees revenue upon consolidation of acquiring revenues from merchant contracts received from the termination of the Chase Paymentech
Solutions alliance effective November 1, 2008 partially offset by the loss of the processing revenue previously earned from the alliance on these same
contracts. This positively impacted the transaction and processing service fees growth rate by 1 percentage point in 2008 compared to pro forma 2007. These
revenues are now included within the Company's revenue but were previously netted within the "Equity earnings in affiliates" line within the Consolidated
Statements of Operations, as the alliance was previously accounted for under the equity method. Other items positively impacting 2008 compared to 2007
were acquisitions, growth of existing clients and annual fees that were not included in the 2007 successor period results due to purchase accounting related to
the merger. These benefits were partially offset by price compression, lost business, and the affects of a slowed economy particularly in the fourth quarter of
2008 and including the 2008 holiday season. The 2007 predecessor and successor periods were positively impacted compared to 2006 by acquisitions, growth
of existing clients resulting from increased transaction volumes, new business, the benefit from foreign currency exchange rate movements as well as an
increase in Electronic Check Acceptance ("ECA") processing revenue. Negatively impacting the 2007 predecessor and successor periods were price
compression and lost business.
Investment income, net—Revenue benefited in 2008 from reduced commissions that are netted against earnings on the official check and money order
business investment portfolio in the IPS segment. The reduced commissions were caused by decreased interest rates and modifications to the contract terms
made in conjunction with the wind-down of the official check and money order business. Investment income also benefited during 2008 from the
repositioning of the IPS portfolio to taxable investments at the beginning of 2008. Investment income was negatively impacted by investment impairments of
$60.3 million recognized in the third and fourth quarters of 2008 (related to the SLARS and other investments discussed above in "Economic Conditions"),
lower market interest rates and a decrease in the portfolio balances caused by the wind-down of the official check and money order business.
The Company expects that investment income will decline in future periods as the official check and money order business continues to wind-down.
From an IPS segment perspective, revenues were similarly impacted by the above noted items but were additionally affected by presenting the segment's
revenues on a pretax equivalent basis in the 2007 predecessor and successor periods but not in 2008. Such presentation is not necessary in 2008 due to the
repositioning of the portfolio to taxable investments. On a pre-tax equivalency basis, investment income decreased significantly in 2008 due to reduced
investment balances and lower interest rates as noted above. The impact of this segment presentation in the 2007 predecessor and successor periods was
eliminated for consolidated reporting purposes.
The investment loss was reduced in the 2007 predecessor and successor periods compared to 2006 due to benefits from decreased interest rates which
resulted in lower commissions.
Product sales and other—Benefited in 2008 from increased terminal sales in the International segment, higher royalty income within All Other and
Corporate and acquisitions. Negatively impacting 2008 were lower contract termination fees and merchant portfolio sales than in the 2007 predecessor period
within the Financial
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