First Data 2008 Annual Report Download - page 65

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Equity earnings
Equity earnings decreased in 2008 compared to the 2007 predecessor and successor periods due mostly to the termination of the Chase Paymentech
Solutions alliance effective November 1, 2008 but was also impacted by reduced interest income in the Chase Paymentech Solutions alliance results prior to
termination due to lower interest rates. The equity earnings presented as part of revenue at the segment level do not include the impact of amortization of
intangible assets which is netted against equity earnings in the Consolidated Statements of Operations. These decreases were partially offset by increased
overall merchant transaction volumes in the merchant equity alliances partially offset by a shift in transactions from smaller merchants to discounters and
wholesalers as discussed above. The net impact of the Chase Paymentech Solutions alliance being excluded from equity earnings and the Wells Fargo alliance
being included will result in equity earnings decreasing in 2009.
Equity earnings in affiliates in the 2007 predecessor and successor periods continued to benefit from strong performance by Merchant Service's
alliances. Equity earnings in affiliates increased on a 2007 pro forma basis compared to historical 2006 due most significantly to increased 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.
Operating profit
In addition to the impact of the items noted above, Merchant Services segment operating profit in 2008 was negatively impacted by increased
amortization expense resulting from the purchase price assigned to intangible assets resulting from the merger similar to the 2007 successor period. Also
negatively impacting operating profit were no gains being recognized for portfolio sales in 2008 due to the effects of purchase accounting for the merger,
incremental spending on platform consolidation, data center consolidation, call center consolidation and global labor sourcing initiatives and a slow 2008
holiday season. Employee related expenses in 2008 did not include the acceleration of expense related to restricted stock awards that occurred in the
predecessor period of 2007 resulting from the merger. The 2008 operating profit was also not impacted by a charge similar to that recognized during the first
quarter 2007 when the Company bought out a revenue sharing agreement as part of a new, larger relationship with Discover Financial Services LLC
("Discover"). The annual fees and change in pricing noted in the acquiring revenue discussion above also positively impacted the 2008 operating profit.
Operating profit for 2008 increased compared to the same pro forma 2007 period due to the items noted above excluding the impact of increased
amortization expense and the acceleration of expense related to restricted stock awards which were adjusted for in the pro forma 2007 period in order to have
comparable periods. On a pro forma basis annual fees positively impacted operating profit by 7 percentage points.
The sale of the 12.5% interest in the Wells Fargo alliance will negatively impact operating profit growth in 2009.
In addition to the items impacting revenue noted above, Merchant Services segment operating profit for the 2007 predecessor and successor periods was
impacted negatively by new incentive compensation arrangements implemented in 2007. Also negatively impacting the predecessor 2007 segment operating
profit as a result of the merger was the acceleration of restricted stock awards. In the 2007 predecessor period, the Company bought out a revenue sharing
agreement as part of a new, larger relationship with Discover resulting in an expense charge in the 2007 predecessor period with most of this charge being
recovered through increased processing fees in the predecessor period and the remaining portion in the successor period. Amortization resulting from
contingent payments associated with a merchant alliance also negatively impacted operating profit growth for the 2007
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