First Data 2008 Annual Report Download - page 51

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Services and Merchant Services segments, declines in terminal sales in the Merchant Services segment due to slowing demand and price compression, and
declines in professional services revenue due to completed projects. The Company had portfolio sales in the fourth quarter of 2008, however no gain was
recognized due to the effects of purchase accounting for the merger. For the year ended December 31, 2008, royalty income increased approximately $27
million compared to the same pro forma 2007 period.
The 2007 predecessor and successor periods were positively impacted by acquisitions, royalty income and contract termination fees compared to 2006.
Reimbursable debit network fees, postage and other—Benefited in 2008 most significantly due to an increase in debit network fees upon consolidation
of revenues from merchant contracts received from the termination of the Chase Paymentech Solutions alliance effective November 1, 2008. These fees 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. This positively impacted the reimbursable debit network fees, postage and
other growth rate by 5 percentage points in 2008 compared to pro forma 2007. Also benefiting 2008 were increases in debit network fees resulting from the
continued growth of PIN-debit transaction volumes as well as rate increases imposed by the debit networks and an increase in postage rates. Increases in debit
network fees and increases in postage rates benefited the 2007 predecessor and successor periods compared to 2006.
Operating expenses overview
Cost of services—In 2008, cost of services increased due to an increase in commissions paid to retail independent sales organizations ("ISO"), an
increase in expenses associated with operating the Company's proportionate share of assets received upon termination of the Chase Paymentech Solutions
alliance effective November 1, 2008, global labor sourcing initiatives, consulting expense, data center consolidation costs, the impact of acquisitions and net
increases in various expense items not individually significant. Partially offsetting these increases were decreases due most significantly to charges recorded
in the 2007 predecessor period related to the accelerated vesting of stock options and restricted stock awards and units upon the change of control due to the
merger. Also decreasing in 2008 were employee related expenses due to a reduction in share-based compensation resulting from the Company's new equity
compensation plan implemented after the merger as compared to the pre-merger equity compensation plan, within All Other and Corporate, as well as merger-
related reductions in force, the largest of which occurred in the fourth quarter 2007, and lower incentive compensation. Cost of services increased for 2008
compared to the same 2007 pro forma period due to the items noted above excluding the impact of the 2007 accelerated vesting charges which are excluded
from the pro forma 2007 period.
Cost of services, as a percentage of transaction and processing service fee revenue, remained relatively consistent for 2008 compared to the pro forma
2007 period as a result of the items noted above.
In the 2007 predecessor period, cost of services increased significantly compared to 2006 due to an increase in employee related expenses, the impact of
acquisitions, increased net warranty expense and increased outside professional services. The employee related expenses resulted most significantly from the
accelerated vesting of stock options and restricted stock awards and units upon the change of control due to the merger. The impact from the accelerated
vesting of stock options and restricted stock awards and units was approximately $106 million, the majority of which was recorded in All Other and
Corporate. There was also an increase due to the presentation of certain ISO's commission payments on a gross basis in the 2007 predecessor period versus a
net presentation against transaction and processing service fee revenue in 2006.
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