Despite Strong Results, FDC Faces a Barrage of Questions

While First Data Corp. reported strong financial results today for its second quarter, its chief executive fielded a barrage of questions on concerns that have emerged recently for the company, including J.P. Morgan Chase & Co.'s decision to switch its account processing from FDC to rival TSYS Inc., with the goal of ultimately processing in-house. “We were extremely disappointed” in that move, which was announced earlier this month and will involve the loss to FDC of 87 million card accounts by late next year, said FDC chief executive Charles Fote. In a conference call this morning, analysts peppered Fote with questions concerning whether banks with which Denver-based FDC has established partnerships in the merchant-acquiring business might likewise look to dissolve these relationships, possibly with an eye to taking the business in-house. These so-called alliances include one with J.P. Morgan Chase that now embraces interests in both Chase Merchant Services L.L.C. and Paymentech L.P. Paymentech had been a joint venture between FDC and Bank One Corp., which J.P. Morgan recently acquired. Fote denied that J.P. Morgan's move to TSYS will influence banks' thinking on the acquiring side of the transaction business. “All of our allances are strong,” he said. “We get calls all the time to start new alliances.” He refused to comment on whether he expects Chase Merchant Services to merge with Paymentech. FDC owns half interests in both Chase and Paymentech. Fote also faced questions on the prospects for the Star System Inc. electronic funds transfer network, acquired in the merger earlier this year with Concord EFS Inc. Last year two major banks, Wachovia Corp. and Wells Fargo & Co., defected from Star to Visa's Interlink network, reportedly lured by higher interchange income. Fote insisted Star's growth rate is “positive even with the Wachovia and Wells deconversion.” The growth rate for Star going forward, he said, will at least equal the industry average. Beyond these concerns, Fote had plenty of good news to report. With an assist from Concord, First Data reported strong second-quarter results, announcing a 22% increase in revenue and a 33% jump in net income from continuing operations over the year-ago period. FDC, whose acquisition of Concord closed Feb. 26, reported revenue for the quarter of $2.53 billion and said profit hit $463.9 million. But, according to figures released today, growth for the company has been strong even without the addition of volume from Concord, which includes a merchant-acquiring operation as well as the Star network. For the second quarter, merchant-processing transactions climbed 71% to 5.16 billion, but even without 1.76 billion transactions from Concord the number still grew 13% to 3.41 billion. For the first half of the year, total merchant transactions grew 59% to 8.99 billion. Excluding 2.4 billion Concord transactions since Feb. 26, volume still increased 16%. The impact of the absorption of Concord has been more dramatic on the issuer side of FDC's business, which includes signature-debit, Star, and ATM and personal-identification-number POS debit transactions processed through gateway arrangements. Issuer transactions grew 193% in the second quarter, to 1.9 billion, but without Concord's 1.2 billion transactions the growth was only 8%. For the first six months of 2004, issuer transactions grew 149% to 3.06 billion; subtracting 1.67 billion Concord transactions leaves growth at 13%. As of June 30, FDC was processing 385.6 million U.S. card accounts, including 19.4 million contributed by Concord, up 34% from the middle of last year. Merchant services contributed $1.74 billion to FDC's revenue in the first half, up 38%, while payment services (which includes the Western Union money-transfer business) contributed $1.97 billion, up 14%, and card-issuing services kicked in 1.16 billion, a 10% increase. Operating profit, however, grew fastest in card issuing, where it increased 56% to $232.4 million. Profit in payment services reached $669.5 million, up 14%, and $392.3 million in merchant processing, a 24% jump. The NYCE EFT network, which FDC has sold to Milwaukee-based Metavante Corp., logged net income of $5.7 million in the first half, up slightly from $5.5 million in the first six months of 2003. But net income from the network plunged in the second quarter to $2.1 million from $3.7 million a year ago. The sale of NYCE is expected to close later in the third quarter.