First Data 2011 Annual Report Download - page 29

contributed to the increase due most significantly to higher transaction volumes within the payroll distribution program as well as an
increase in card shipments to existing clients. Partially offsetting these increases were decreases due to price compression and lost
business. The termination of services by Washington Mutual beginning in March 2009 negatively impacted the transaction and
processing service fee growth rate in 2010 compared to 2009 by 1 percentage point.
Product sales and other. Revenue increased in 2011 compared to 2010 mainly resulting from an increase in equipment sales
internationally due in part to new regulations and new business, increases in the leasing business domestically and internationally
resulting from new lease originations as well as fees associated with lease renewals and an increase in investment income due to a
lesser impairment of Student Loan Auction Rate Securities ("SLARS") recognized in 2011 compared to 2010 as discussed below. In
addition, foreign currency exchange rate movements positively impacted the product sales and other growth rate in 2011 compared to
2010 by approximately 1 percentage point. Partially offsetting these increases were decreased contract termination fees mostly related
to Financial Services and a decrease in professional services revenue due to the completion of prior year projects in Financial Services
and All Other and Corporate
Revenue increased in 2010 compared to 2009 as a result of increased volumes due in part to increased terminal demand as a
result of new regulations, increased sales to existing clients, new business and the incremental impact of the BAMS alliance. Partially
offsetting these increases were decreases due to fewer contract termination fees recognized in 2010, lower investment income, lower
royalty income and the divestiture of an international business. The contract termination fees received in 2009 and 2010 related most
significantly to the termination of services by Washington Mutual Bank in the Financial Services segment and negatively impacted the
product sales and other revenue growth rate by 3 percentage points in 2010 compared to 2009. The decrease in investment income is
due to a $27.9 million impairment recognized in All Other and Corporate related to SLARS and a decrease in settlement portfolio
balances caused by the wind down of the official check business partially offset by decreased commission payments related to the
retail money order business as a result of its transfer to The Western Union Company ("Western Union") in October 2009.
Reimbursable debit network fees, postage and other. Revenue and expense increased in 2011 compared to 2010 due to growth
of personal identification number ("PIN")-debit transaction volumes as well as an increase in debit network fees resulting from rate
increases imposed by the debit networks. Partially offsetting these increases was a decrease due to the cap on debit interchange rates
imposed by the Dodd-Frank Act described above which impacted the reimbursable debit network fees, postage and other growth rate
by approximately 5%.
Revenue and expense increased in 2010 compared to 2009 due to an increase in debit network fees as a result of growth of PIN-
debit transaction volumes as well as rate increases imposed by the debit networks. Also contributing to the increase in revenue and
expense for 2010 compared to 2009 is the incremental impact of the BAMS alliance which benefited the reimbursable debit network
fees, postage and other growth rate by 9 percentage points. Partially offsetting these increases was a decrease in postage due to a
decrease in print and plastic volumes as a result of the termination of services discussed above. The termination of services impacted
the reimbursable debit network fees, postage and other revenue growth rate by 2 percentage points.
Operating expenses overview.
Cost of services. Expenses decreased in 2011 compared to 2010 due most significantly to decreases in certain costs
associated with the BAMS alliance and net check warranty expense. Certain costs associated with the BAMS alliance decreased due to
lower technology costs and improved expense management. Net check warranty expense decreased due to lower check volumes and
better risk assessment data. Expenses associated with outside professional services and lower merchant credit losses also contributed
to the decrease. Partially offsetting these decreases was the 2011 correction of cumulative errors in the amortization of initial
payments for new contracts related to purchase accounting associated with the Company's 2007 merger with an affiliate of Kohlberg
Kravis and Roberts & Co. ("KKR") which totaled a $10.2 million expense in "Cost of services" (the correction of related errors totaled
a $58.5 million benefit in aggregate) and occurred over a four year period. Foreign currency exchange rate movements also partially
offset the aforementioned decreases by approximately 1 percentage point.
The increase in expenses in 2010 compared to 2009 was due most significantly to the incremental third-party processing fees
related to the BAMS alliance and higher incentive compensation expense. The increase in incentive compensation expense for 2010
compared to 2009 impacted the cost of services growth rate by 1 percentage point. Partially offsetting the increases was a decrease in
employee related expenses as a result of reduced headcount.
Cost of products sold. Expenses decreased in 2011 compared to 2010 resulting mostly from the write-off of international
terminal inventory and leasing receivables in 2010 as well as exiting low margin businesses in 2011. These decreases are partially
offset by the write-off of capitalized commissions related to the international leasing business in 2011, growth in the leasing business
both domestically and internationally and foreign currency exchange rate movements. The net impact of the 2010 and 2011 write-offs
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