Acquiring Gains at First Data Despite a Tough Merchant Environment

First Data Corp. on Wednesday reported merchant-services revenue of $1.1 billion, up 18%. Excluding debit-network fees and Chase Paymentech Solutions LLC, revenue growth was 1%. First Data in November terminated its joint venture with JPMorgan Chase & Co. to operate Chase Paymentech. First Data signed nearly 116,000 domestic merchant locations, 22% lower than in the fourth quarter of 2007, due in part to the termination of the Chase Paymentech joint venture. “This still represents a very significant number of new merchant locations, especially in light of the slowing U.S. merchant activity,” said chairman and chief executive Michael Capellas in a conference call with analysts. Full-year merchant-services revenue was $4.1 billion, up 10%, despite a decrease in domestic merchant transactions. “During the fourth quarter, our total domestic merchant transactions were down 6%,” Capellas said. “However, a significant portion of this decline was due to the deconsolidation of Chase Paymentech. Excluding Chase Paymentech, transactions were up 5% in the fourth quarter on a comparable basis.” In the fourth quarter, First Data also sold 12.5% of its ownership in Wells Fargo Merchant Services, its merchant alliance joint venture with Wells Fargo & Co., to Wells Fargo. Wells Fargo increased its ownership to 60% of the alliance, with First Data owning 40%, effective Dec. 31, 2008. Wholesalers and discounters, quick-service restaurants, and grocery stores accounted for most of the growth in transactions, Capellas said. But because these types of merchants typically are part of large, nationwide chains, “there tends to be lower average revenue per transaction,” he noted. Average tickets declined by 8% in the fourth quarter, primarily due to lower gas prices and because consumers have become more cost-conscious, Capellas said. For the quarter, financial-services revenue dropped 4% to $695 million, primarily due to lower check volumes and price compression. Full-year revenue dropped 2% to $2.8 billion. First Data continued to see a shift among consumers to debit cards from credit cards, checks, and cash. Domestic debit transactions have been the fastest growing type of transaction. Overall, First Data reported a net loss of $3.8 billion for the fourth quarter, battered by the weak economy and consumers' increasingly cost-conscious spending habits. That compares with a net loss of $273 million in 2007's fourth quarter. However, fourth-quarter revenues totaled $2.3 billion, up 8% from $2.1 million a year earlier. The fourth-quarter loss included a $3.2 billion non-cash goodwill impairment charge triggered by a drop in share prices tied to the economic downturn and an increase in discount rates, said Capellas. For the year, First Data reported a net loss of $3.8 billion, including the fourth-quarter impairment charge. That compares with a $301.9 million loss in 2007. But revenue for the year increased 9% to $8.8 billion. “Despite a challenging environment, First Data had a successful quarter and year,” Capellas said. “Our financial position remains strong. With respect to cost savings, we realized $84 million in cost savings during the fourth quarter and $300 million for the year.”