First Data Corporation Q3 2008 (Qtr End 9/30/2008) Earnings Call Transcript

First Data Corporation (FDC)

Q3 2008 Earnings Call

November 14, 2008 10:00 am ET

Executives

Silvio Tavares – Senior Vice President, Investor Relations

Michael Capellas – Chairman, Chief Executive Officer

Phil Wall – Executive Vice President, Chief Financial Officer

Ed Labry – President, First Data U.S.A.

David Yates – President, International

Analysts

[Arun Shashadre] – Credit Suisse

Manish Somaiya – Citigroup

Peter Gingold – Angelo, Gordon & Co.

[Bryan Pierce] – UBS

Sundar Varadarajan – Deutsche Bank

Scott Cullerton – KKR Fixed Income

[Jeff Hartley] – Barclays Capital

[Jake Kemeny] – Morgan Stanley

[Henry Na] – Wells Fargo

Scott Goldsmith – Invesco

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to First Data 2008 third quarter financial results conference call. (Operator Instructions) Now I would like to turn the call over to Silvio Tavares, Senior Vice President, Investor Relations. Silvio, you may begin sir.

Silvio Tavares

Thank you [Cecelia]. Good morning everyone. This is Silvio Tavares and thank you for joining us. Speaking on the call today are Michael Capellas, Chairman and Chief Executive Officer and Phil Wall, Executive Vice President and Chief Financial Officer. Also joining us for the question-and-answer session portion of the call are Ed Labry, President of First Data U.S.A. and David Yates, President, International.

Now if you will, please turn your attention to the agenda on Slide 2. Michael will start by covering the financial highlights for the third quarter of 2008, followed by an update on recent developments. Next he’ll discuss the numerous strategic achievements for First Data since our last call. Next, Phil Wall will present the financial performance of our three primary segments, Merchant Services, Financial Services, and International. He’ll also spend some time covering the components of adjusted EBITDA and give an update on various financial metrics.

The remainder of the call will be devoted to answering your questions and the operator will provide you with instructions on how to ask your questions at that time. After the call is concluded, should you have any further questions please don’t hesitate to contact me on 303-967-8276 or you can also just send me an email at [e-mail].

Now please turn with me to Slide Number 3 for some important information about this call. Today’s call is being recorded. Our comments today include forward-looking statements and I ask that you refer to the cautionary language in our quarterly report on Form 10-Q that we filed today with the SEC, as well as the appendix on today’s slide presentation for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

During the call, we will discuss items that do not conform to generally accepted accounting principles and we reconcile those measures to GAAP measures in the appendix and on our website in the Investor Relations section. All statements made by First Data officers on this call are the property of First Data and subject to copyright protection. Other than the replay, First Data has not authorized and disclaims responsibility for any recording, replay or distribution of any transcription of this call. So with that I’ll now hand it over to Michael Capellas.

Michael Capellas

Thank you Silvio and good day to everyone wherever we may find you. Let’s begin with First Data’s third quarter 2008 financial performance as outlined on Slide 5. As a starting point, revenue was up 4% to $2.2 billion. Adjusted EBITDA was up 7% to $694 million. With respect to cost savings, we realized approximately $90 million in cost savings this quarter versus the same quarter of 2007. Approximately $60 million of those cost savings were from previous headcount reductions which continues to flow through.

Our balance sheet is in good shape. Our cash and cash equivalents balance was $579 million at the quarter end. In addition, we have ample available resources to meet all our obligations as well as invest in new products which will improve the business. We continue our investment in high growth areas such as multiple commerce, fraud prevention, analytics and loyalty. So overall we’ve had a solid quarter despite the fact that the economy slowed significantly.

Our total number of domestic merchants grew 9%. The secular trend, away from cash towards debit cards, prepaid cards and credit cards continue to aid First Data’s growth despite declining consumer spending.

I would like to mention a few significant developments at the beginning of our call. On

October 8 we welcomed Bob DeRodes as our new Chief Technology Officer. He brings an impressive track record of achievements, spanning a variety of industries including financial services, retail and airlines. Most recently he served as Chief Information Officer for Home Depot. As you know, First Data’s fundamentally a technology company and Bob will be responsible for our key technology platforms including Global Product Development, Systems, Infrastructure and Processes.

Let’s move to our transaction trends in the quarter. Merchant services credit transactions increased by 6% while pin debit transactions grew at 17%. The slowing economy tended to reduce transactions growth for smaller merchants and shifted transactions to some nationwide discounters and wholesalers. However, prepaid transactions showed a very strong growth at 36%. International transactions posted 21% growth. Third quarter was a time of enormous change for our clients in the financial services industry.

Some of our clients were involved in acquisitions, either as the acquirer or as the target. Our top financial services customers have announced U.S. Treasury investments totaling close to

$100 billion. The long in term impact on the financial services industry is difficult to predict. However, from First Data’s perspective there are a few things that are important to keep in mind. First, our revenue model has very little revenue concentration. We have over 500 client relationships with financial institutions and card issuers in our Financial Services segment.

Of the recently announced Financial Services [merger sures], none of the individual banks involved represent more than 2% of First Data’s consolidated revenue excluding reimbursable. However, the exact aggregate amount of potential revenue impact is difficult to measure at this time.

Secondly, the service we provide are mission critical for financial institutions. As a result, it normally takes a minimum of one year to discontinue service from our platform so any potential impact is typically long term rather than short term. Through the quarter we kept our focus on short term execution on delivering against the five key strategic initiatives. Please turn to Page 7.

As displayed on Page 7, these remain one; generate organic growth through accrued sales execution. Two, accelerate new product development in both extending our current offerings as well as entering additional markets such as mobile commerce, loyalty and analytics. Three, pursue targeted geographic expansion and strategic alliances. Four, reduce structural costs as well as invest in your products. And finally, five, improve technology delivery.

In the third quarter we delivered key accomplishments in each of these areas. Next page, please. Starting with our organic growth in the third quarter we signed more than 146,000 domestic merchant locations. This is 10% lower than in the third quarter of 2007. However, this still represents a very significant number of new merchant locations, particularly in light of slowing U.S. consumer activity.

In our domestic merchant services businesses we added 13 new independent sales organizations and 10 new referral partners. In our international business, we announced the new agreement with Allianz Bank in Poland. Under the terms of this agreement, First Data will provide Allianz with issuer processing services and ATM management for five years with the possibility of extending for another five years. In Germany, First Data TeleCash business renewed a contract with Ikea. We will continue to process card-based payments at Ikea’s 43 German retail furnishing outlets and restaurants.

Finally, in October we signed a five year agreement to provide card processing services on our [Vision Plus] platform for three significant Colombian banks. So as I’ve shown, we have made significant achievement with customer ends across our main business lines. In order to maintain that momentum in the future, we continue to invest on focused product development initiatives.

Mobile commerce continues to be an area of key focus for us. For example, we launched a very successful trial of our proprietary Go Tag contactless payment solution at the Democratic National Convention in Denver this August. Thousands of delegates and members of the press were able to experience the convenience of purchasing concession items simply by waving a commemorative pin in front of a contactless reader. We have signed letters of [temps] with major strategic customers. Shortly we hope to be announcing a major customer win in this area.

In Europe we’re seeing a strong take up of our ATM deployment and outsourcing services for banks and retailers in such countries as Austria and in the Baltic region. During the quarter we continued to develop the business geographically and through strategic alliance. We’ve closed on our acquisition of [Uka-Serve] acquiring a 50% equity stake in Uka-Serve’s Internet prospering business. The business has been renamed [Trionas]. Connecting the assets of First Data and Trionas will create a European payments network capable of accessing up to 74,000 ATM’s,

1.5 million point of sale terminals and 165 million debit and credit card accounts across Europe.

First Data and InComm have mutually agreed to terminate the planned acquisition of InComm. Instead, First Data and InComm have signed a distribution agreement that allows First Data and our merchants to sell general purpose reloadable and other prepaid products in InComm prepaid card malls.

On November 3, we announced the successful termination of our joint venture, Chase Paymentech Solutions with J.P. Morgan Chase. First Data has assumed its 49% share of the merchant portfolio which includes management, a full service ISO and Agent Bank unit of the joint venture. First Data has also assumed its proportionate share of the joint ventures asset and a portion of the joint venture’s employees into its existing merchant acquiring business.

We will continue to provide processing services for a portion of the business allocated to J.P. Morgan Chase. This transaction is expected to be neutral to adjusted EBITDA and we’ll see approximately $300 million in cash, net of applicable tax obligations.

Finally in the third quarter we focused on improving our infrastructure. We’ve increased our focus on improving our operating performance while reducing costs. We remain on track with our cost savings programs and as I mentioned earlier for the third quarter we realized $90 million in cost savings compared to the third quarter of 2007. As we have also commented on the past, we have a number of aggressive initiatives to improve technology delivery.

Taken individually and co-actively they will improve our service quality and enhance the customer’s experience, allow for faster deployment of new products and over time reduce operating costs. With respect to our data centers, we previously disclosed that we have completed our European mainframe consolidation from London’s [Frankfurt]. To date in the U.S. we have completed three of nine scheduled data center consolidations. In addition, all U.S. command centers have been consolidated.

Our Vision Plus standardization program is on schedule. Overall, we remain extremely focused on disciplined execution against our plan. Our achievements in the third quarter reflect that. Now I’d like to hand it over to Phil Wall to take you through the financials for each of our segments. Phil, over to you.

Phil Wall

Thanks Michael and good day everyone. Please turn with me to Page 13 of the presentation to review the third quarter results for our Merchant Services segments. A quick note on the presentation, the left column labeled Reported shows the quarterly growth rates using reported results for the third quarter 2008. On the far right and highlighted in yellow is the column labeled Adjusted reflects the results excluding purchase accounting adjustments relating to our merger transaction.

The purchase accounting adjustments are primarily comprised of increased amortization expense. We believe adjusted information more easily allows comparisons of prior periods. This will be the last quarter results will be provided adjusted as information because future periods will be comparable.

Now looking at the results for Merchant Services, adjusted revenue growth was 6% year-over-year or down 3% excluding reimbursable debit network fees. Revenue was positively impacted by 9% transaction growth. This in fact is offset by the slowing U.S. economy which reduced transaction growth for small merchants and shifted transactions to some nationwide discounters and wholesalers. This trend tended to lower our average revenue per transaction.

Our adjusted operating profit was down 9%. Adjusted operating profit margin, excluding reimbursable debit network fees was 36% compared to 38.6% for the third quarter 2007. Operating profit included approximately $19 million in costs incurred for the platform and data center consolidation. Global labor sourcing and other expenses related to cost reduction initiatives which impacted the adjusted operating profit declined by 7 percentage points. These costs also impacted the adjusted operating profit margin by 3 percentage points during the quarter.

As I mentioned earlier, domestic merchant transactions growth came in at 9% for the quarter. We saw a deceleration of transaction growth throughout the quarter which reflects the overall U.S. economy. Now let’s turn our attention to Financial Services.

Adjusted revenue was down 6% and excluding reimbursables was down 8%. Adjusted revenue reflects modest growth in the card issuing business, offset by lost business and declines in the TeleCheck business. The decline in the TeleCheck business is primarily the result of lower check transactions in our medium size and small merchants. In addition, the third quarter 2007 included approximately $16 million more revenue resulting from contract termination fees compared to this quarter.

Adjusted operating profit was down 3%. For the quarter, adjusted operating profit margin was 20.8% and excluding reimbursables was 28.1% compared to 26.5% in the third quarter 2007. Adjusted operating profit included approximately $18 million in costs incurred for our platform and data center consolidation, global labor sourcing and other expenses related to cost reduction initiatives. These costs impacted the 3% adjusted operating profit decline by 13 percentage points and the adjusted operating profit margin by 4 percentage points.

Finally, operating profit in the third quarter of 2007 included the contract termination fees I mentioned earlier. Domestic card accounts on file growth was slack. Domestic debit issuer transactions grew 3%. Debit issuer transaction growth was negatively impacted by lost business in the star network, which occurred in 2007.

Now let’s look at our International business on Slide 15. International achieved adjusted revenue growth of 18%. Adjusted revenue benefited from strong transaction growth which is in part due to acquisitions in prior quarters. Adjusted revenue growth on a constant currency basis, excluding acquisitions and divestitures, was 5%. In particular, we had strong revenue growth in our businesses located in Argentina, South Korea and Greece. Adjusted operating profit grew 79% and adjusted operating profit margin was 11.2% compared to 7.4% in the third quarter of 2007.

Adjusted operating profit included a partial reversal of the loss reserve for the failed airline in one of our merchant alliances and lower employee related expenses. These items were offset by approximately $16 million in incremental reversements in data center consolidation, platform initiatives and other expenses related to cost reduction initiatives.

Looking at the International key performance indicators, we closed the quarter with transaction growth of 21% over the same period in the prior year. Point of sale locations increased by 14% and card accounts on file were up 11%. All three indicators were, in part, driven by acquisitions. In the third quarter we did not see any evidence of a consumer slowdown internationally as we saw in the U.S.

Next I’ll walk you through our adjusted EBITDA results on Page 16. We believe that the inclusion of supplementary adjustments to EBITDA is appropriate to provide additional information to you about certain material, non-cash items. This is optimization project spend and other items related to the merger transaction. We will focus on the column labeled Success of Three Months Ended September 30, 2008. This is the column highlighted in yellow.

Starting at the top of the page, the loss from continuing operations was $164 million. EBITDA for the quarter was $578 million. The adjustments for stock based compensation was $9 million which reflects the reduced level of equity compensation. The next line is an adjustment for other items of $25 million, which is primarily comprised of non-operating net foreign currency gains, offset by an asset impairment charge and net restructuring charges.

Let’s move to the item labeled Official Check and Money Order EBITDA. Due to our wind down of the official check and money order business, we have excluded the negative EBITDA of that business in the amount of $42 million. Moving to the next line, we have $77 million in costs related to initiatives to optimize the business as well as reduce operating expenses. The increased level of this item reflects the continued, heightened activity related to these initiatives.

Skipping down several lines, adjusted EBITDA is $694 million, up 7% year-over-year. We believe this number better approximates the underlying liquidity of the business. In addition, there are a few quick points related to our other businesses as well as our financial model which I think will be helpful to you as you think about the company going forward. Please turn to Page 18.

A few moments ago I told you the results for our significant segments. I also want to spend some time on our other businesses. In our All Other and Corporate category we generated $27 million in royalties’ revenue in the third quarter of 2008, compared to $34 million in the third quarter of 2007. Year-to-date we recognized approximately $81 million in royalties. For all of 2007, we had approximately $63 million in royalties.

We sold two small businesses which proved to be non-core and did not fit our strategic direction. In the UK we sold the [Actus] business. In October we sold our piece software business which provides billing software for utility companies. The combined revenues of these two businesses is not significant. In the official check and money order business, our wind down continues to be on track. Our investment portfolio as of September 30, 2008 was $5.5 billion which is down from $6.3 billion at the end of the second quarter. Approximately $553 million of par value of the portfolio was in student loan auction rate securities.

Due to the unprecedented disruptions in the credit market, we recognized approximately $51 million in unrealized losses on official check and money order security through the investment income net line of our consolidated statement of operations. Included in the $51 million of unrealized loss was a mark to market loss of approximately $39 million on the student loan auction rate securities, $12 million of which have been previously disclosed and recognized through other comprehensive income.

The remainder of the $51 was comprised of $6 million in unrealized losses related to preferred shares issued by Freddie Mac and $6 million in unrealized losses associated with money market holdings issued by the Reserve Primary Fund. We will continue to monitor and revalue these assets as market conditions require and further impairments may be necessary.

Next in prepaid services, our revenues were up 13%. We’ve launched innovations in the open loop, closed loop and money network payroll card credit lines. We have seen strong growth in prepaid transactions which were up 36% in the quarter. Now moving to the bottom of the page, there are a few facts and figures contained in our Form 10-Q which are worth summarizing.

We delivered approximately $130 million in cash flows from operations in the quarter. Next with respect to our debt service obligations, our total cash interest paid in the third quarter 2008 was

$437 million. We expect our cash interest for the fourth quarter to be approximately $225 million. The level of cash interest will be lower in the fourth quarter because of the exchange of certain notes will result in semi-annual interest payments instead of quarterly interest payments.

At the quarter end, our cash and cash equivalents balance was $579 million. Our capital expenditures were approximately $108 million for the quarter and we expect to incur an additional $125 million for the remainder of 2008. And finally, effective tax rate on pretax loss was 46.9% of tax benefits. The effective tax benefit in the quarter was higher than the statutory rate due primarily to a release of a valuation allowance against foreign tax credits. Now let me hand it over to Silvio.

Silvio Tavares

Thank you Phil. We’re going to now open it up for questions. Just two quick ground rules. Please limit your questions to one and then an additional follow-up. That’s in order to be fair to all participants. As we approach the end of our time, I’ll let you know when we have time for one final question. Participating in the Q&A are Michael Capellas, Phil Wall, Ed Labry and David Yates. As we begin questions, Michael will give you an update on the economic environment and a few other matters of importance. Over to you, Michael.

Michael Capellas

Thank you Silvio. Looking forward we see some of the same trends we saw in the third quarter continue to fall into the fourth quarter. As I normally do on these calls, I’ll take a little time to give some insight on October transactions. For the first time in October we started to see general retailer transactions actually decline year-over-year. The general retailer category excludes wholesalers, discounters, grocery, gas stations and quick service restaurants.

General retailer’s same-store transactions growth declined 2% in October compared to flat growth in September. The average ticket also declined. Discounters and wholesalers are also slowing down. Change for transaction growth was a modest 3% in October compared to 5% in September. The average ticket price for discounters and wholesalers has started to drop meaningfully for the first time this year.

On the positive side, quick service restaurants, grocery stores and petroleum retailers all saw transactions growth increase or remain steady in October. Approximately 50% of First Data Merchant Service transactions are in these three merchant categories. Same-store transaction growth for quick service restaurants increased in October to 14% from 13% in September. This probably reflects U.S. consumers moving away from more expensive restaurants in order to dine at fast food establishments. This growth also reflects an acceleration of the secular trend away from cash in the quick service restaurant category.

Same-store transaction growth for grocery merchants remained at 6% in October compared to 6% in September. The average ticket also remained relatively flat. Petroleum merchant same-store transaction growth increased to 7% in October versus 6% in September. The average ticket increased slightly as gas prices dropped.

So looking forward I would make the three following summary points. One, overall transactions will continue to grow at far more modest levels. Consumer non-discretionary spending such as for groceries and gas will be more resilient. Two, transaction volumes will continue to shift to large discounters as consumers de-lever and stretch their purchasing power. And three, finally international markets will begin to show the same signs of weakness that we’ve seen in the U.S.

While we continue to focus on short term execution and a comprehensive product development plan, our outlook remains cautious. So let’s go on to your questions. As necessary I’ll address specific questions to either Phil, Ed or David and so operator may I have our first question, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Arun Shashadre] – Credit Suisse.

Arun Shashadre – Credit Suisse

First I just wanted to start off with just if you could give us like you traditionally give us sort of a – in your segments, sort of a breakdown of how transaction growth kind of – the link between transaction growth and organic revenue growth.

Michael Capellas

Sure, I’d be happy to do that. Let’s start with International first and then I’ll turn it over to Phil who will pick up on the specifics on merchant [fs]. Actually a pretty strong quarter. Internationally overall transaction growth was 21% as we predicted, but if you actually look at pure organic growth, we were just at a little over 5%, between 5 and 6% on the organic growth side.

The effect of currency was 3% and the effect of acquisitions was 10%. So if we just look at the revenue growth at 19% which closely approximated the transaction growth, acquisitions 10, currency 3, organic 5. And that sort of reconciled where we were. So as you can see, we picked up on the organic growth and the transaction growth held in there pretty strongly although we are starting to now see it deteriorate. So that will cover International. Phil.

Phil Wall

Yes, thanks, Michael. So on the merchant side, transactions grew at 9% whereas the revenue excluded in D&S was down 3%. So the way you reconcile this really is we’ve seen – we see price compression flowing through as we have done in the past is around 4 to 5%. Then the revenue mix, which is trending from the small merchants to the national discounters, probably accounts for around another 5% of the difference.

And then finally the shift of credit to debit transactions as Michael mentioned before, debit growing at 17% and credit at 6 causes around another 2% revenue impact. So we have 5, 5 and 2 almost pretty much accounting for the difference between the transaction growth and the revenue.

On the financial services side, I think you asked as well, that’s a little bit different and that’s more around the TeleCheck business and lost business of prior years goes in the reduction in revenue.

Michael Capellas

And Phil to do it as we also traditionally do, if we then take that transaction growth and pull it through the P&L which I’m sure you’ll want to do next for your model is revenue growth and aggregate dollars was about $93 million. If you back out reimbursables we had a net revenue growth of about $16 million.

Flow through that at 30% you get about 6 cost savings to 90 so you should see gross improvement about 92. We actually improved about 44, so that’s as the aggregate effects on profitability about 2% of revenue, which dives into the mix and price package.

Arun Shashadre – Credit Suisse

And then just a quick follow-up. Could you talk in general about your exposure to dollars per transaction versus simply transaction volume? My understanding is that on the credit side you’re more con – sensitive to size of transactions versus in debit you’re more – it’s more transaction volume driven. Is that generally correct?

Michael Capellas

That is generally correct. So the sensitivity – the big parts of the sensitivity come from a couple of things. First one is you have the continual shift to debit where obviously the profitability is much lower than credit. And that has, in general, been somewhere a factor of about three to one and we have seen some of that take place. The second one is the general shift in the – from retailers to - the classic retailers to the big discount guys and wholesalers.

And so that generally has a couple of effects. What is interesting about the affect of this mix relative to the transaction shift from credit to debit and retailer to discount is that it’s tended to hold fairly steady at about a 2 or 3% ratio. And so that’s what we’ve continued to see for the last two quarters.

Operator

Your next question comes from Manish Somaiya – Citigroup.

Manish Somaiya – Citigroup

Michael, in a severe discretionary environment, do you still think that transaction growth rate would hold up in the positive category? Obviously we have seen a slowdown, but do we still think that would remain positive?

Michael Capellas

Well, I’ll try not to go too forward-looking. I’ll put the data out and then we’ll interpret it. Very clearly our transaction growth has hung in there. The reason why we went through the different six categories is you can very clearly see the difference between them and so if you assume that 70% of the U.S. merchant transactions are in what we would call the sort of, you know, I’ve got to live category and those have held amazingly constant.

And what’s actually quite stunning is how transaction volumes have stayed relatively constant despite the fact that we’ve had oil pricing moving at just seismic volatility. There’s no question that we have sensitivity overall but the amount of consistency is pretty stunning. Same-store sales as that continues to go down has got to have an impact on transactions. We did see – everybody saw the same things that I saw this morning when I opened it up, you know, was one of the worst months of consumer spending.

So to try and get very specific you can sort of say 50% of our transaction growth should remain relatively constant. I don’t think we’ll be maybe the 4, 5, 6, 7% growth rate that we’ve seen in the last couple of quarters but should hang in there. And we will see a more economic decline on the other 50%. And so I would sort of look at that decline and severe recession may be 2, 3% but at netting out to relatively that flat baseline going forward in a severe recession. Just to reiterate, for the quarter, check me out here, Phil, but overall it was 9% for the quarter and it was not particularly a brilliant quarter for retail sales.

Manish Somaiya – Citigroup

And just a clarification from Phil then. The $42 million that you discussed, Phil, for the add back of the official check and money order EBITDA, obviously in the past it’s been an offset to the adjusted EBITDA. Can you just explain that again as to why this quarter it was an add back and in the previous quarter when the business was winding down, it wasn’t an add back?

Phil Wall

Yes, that’s a good spot, Manish, and you’re right it is unusual. It is a loss this quarter and the reason it’s a loss principally is because those impairments I mentioned, the $51 million the flowing through, $39 of which is for student loan auction rate securities, the $6 million is Freddie Mac and the $6 million on the reserve prime refund. So all of that has flown through the segment which has created a loss this quarter, hence, the add back.

Manish Somaiya – Citigroup

On Chase Paymentech, obviously, Michael, I think you mentioned that that would be cash taxes associated with the dissolution. But I wanted to get a sense for when the $300 million of cash would be coming in.

Michael Capellas

Okay, Phil?

Phil Wall

Yes. We’ve actually received $200 of that already in the beginning of November. And the other approximately $100 we expect to come in before the year end as we’ve finish up with truing up the balance sheets. And just to reiterate that is net of the tax obligations. So we will see a clear $300 by the end of the year.

Operator

Your next question comes from Peter Gingold – Angelo, Gordon & Co.

Peter Gingold – Angelo, Gordon & Co.

Is there any way when you do the reconciliation of the EBITDA you said $77.4 million add back for that cost saving initiatives. Can you just break that down by the three main segments?

Michael Capellas

Yes. Phil?

Phil Wall

Yes. Really I did mention some of those costs in the segments, actually. In Merchant Services we had $19 million, in Financial Services $18 and International was $16. So that’s about $50, $53 million. There are some other global sourcing and project work that flows through our other corporate lines that make up the difference basically.

Michael Capellas

And relative to the other breakdown, $60 million of it is pure compensation and that is a absolutely straightforward mathematical calculation. That is comp this year compared to comp last year. And that is from the previously actions taken on headcount. Headcount versus a year ago is down approximately 3,000.

Phil Wall

Yes. Those costs are generating those type of savings, Michael, exactly.

Peter Gingold – Angelo, Gordon & Co.

As you think about heading into tougher economic times, how does that actually impact the Financial Services segment? I mean, I’m assuming that people are still going to have credit card accounts. They’re not going to go away. I mean, you’re getting paid on really a number of accounts on file. Do you see the same sort of negative impact that you would have on the Merchant Services division, when you’d have declining transactions?

Michael Capellas

Yes, I mean, we get paid by the transaction in Merchant Services. And so it is – there’s very little of the revenue that’s actually residual that is paid on the ticket amount. So it is purely, purely transactions which is why QSR and petroleum hold up so well in this kind of an environment because people still go. They may spend less. They may not go in a QSR and buy coffee and donuts.

But the true transaction volumes may change relatively high, with 5 to 6% transaction drill. So it is the tale of two cities in merchant. One is just the flow through of the transactions stays the same, because people continue to use their credit cards for those. But on the retailer’s side – you’d asked about Merchant Services, correct?

Operator

Your next question comes from [Bryan Pierce] – UBS.

Bryan Pierce – UBS

Hi guys. Can I ask a question?

Michael Capellas

Sorry, one minute. We’re going to go back and clarify the last answer. I apologize. I heard Merchant Services. It was a little hard to hear. I think he asked what were the effects on FS transactions. On FS, you’re correct. Its cards on file which remains relatively constant. Obviously there are many fewer new cards as issuing has just about broken down. But on the credit transaction side we’d probably see a little more affect just simply because of the affects on the usage.

Silvio Tavares

Okay, operator, we can go to the next question now.

Operator

Bryan Pierce, go ahead, sir.

Bryan Pierce – UBS

My first question was about the revolver draw on the quarter. It looks like it was about $177 million. Are you going to be using the Paymentech proceeds to pay that down or is that something you’d expect to continue grow in the future?

Phil Wall

Just to correct you, actually we closed the quarter with the revolver drawn $307 million. And just to give the information now, we have zero drawing on that revolver at the moment. We took it up to $307 for one or two reasons. One is the delayed distribution on the reserve primary fund. We had reclaim of our funds for that. Again, we’re also not getting any distributions from Chase Paymentech in the quarter as we had done in previous quarters. But this is all fully paid off now so there isn’t a need to use the Chase Paymentech funds to pay down any revolver.

Bryan Pierce – UBS

The second question was about the cost saves. You mentioned $90 million more this year than last and also commented on the progress of the data center consolidation. How should we think about that going forward fourth quarter and first part of ’09 on the cost saves? Is – do you expect to grow that number on a year-over-year basis in the next couple quarters? Or is that stuff going to start anniversaring here in the fourth quarter?

Michael Capellas

I think what you’ll see is you’ll see its pretty well hold constant here. We have a number of initiatives which are a little longer term and I think some of the bigger initiatives relative to application and data center consolidations will continue to flow incremental cost savings, but probably later into next year. So that was probably third, fourth quarter of the coming year.

Operator

Your next question comes from Sundar Varadarajan – Deutsche Bank.

Sundar Varadarajan – Deutsche Bank

Talking often about the growth in credit versus debit on a transaction basis but in the third quarter could you give us what the actual mix was in terms of your transaction on the Merchant Services side between credit and debit?

Michael Capellas

What I can tell you is that credit grew 6% and pin debit grew at 17%, U.S. prepaid grew at 36 and international grew at 21.

Sundar Varadarajan – Deutsche Bank

No, but the actual mix, you know on what percentage of your transactions were debit versus credit?

Michael Capellas

We traditionally don’t disclose that and for competitive reasons and we’ll stay with that policy.

Sundar Varadarajan – Deutsche Bank

And in terms of the profitability, can you give us a sense for what the magnitude of difference would be between a credit and debit card transaction?

Michael Capellas

It’s got a fair amount of mix into it, but you can look. It’s somewhere placed between 2 and 3 to 1.

Operator

Your next question comes from Scott Cullerton – KKR Fixed Income.

Scott Cullerton – KKR Fixed Income

Similar question to the last one just in terms of the mix of the national discounters versus small merchants in the last quarter. Obviously there’s a growth trend, a shift towards the national discounters but just in terms of total volumes to one versus the other in the merchant business.

Michael Capellas

Again the same answer. We don’t separate that out specifically. We’ve given you the sort of – we’ve given the information as it’s 50% in all three categories and we’ve given you the individual growth rate. I think that’s granular and I think you can probably work on that.

Scott Cullerton – KKR Fixed Income

Just on the cash from Paymentech, J.P. Morgan had disclosed that they’d expected to receive I believe it was $800 million in cash and it sounds like you all have the $300 net of roughly $200 of tax expense. Can you give us a little color on the discrepancy between the split of the cash there?

Michael Capellas

Yes, I can. The $800 is a gain which has the bulk of consideration into it. That’s not the reconciliation to cash position. I don’t really know – I won’t give you their specific reconciliation but one of the gain and shouldn’t be construed to be all cash. They have an $800 gain, not $800 of cash proceeds.

Operator

Your next question comes from [Jeff Hartley] – Barclays Capital.

Jeff Hartley – Barclays Capital

Michael I just wanted to drill down a little more on the cost savings in terms of what are the actions that still need to be accomplished? I know you talked about three of nine data centers. Maybe you can talk about those international U.S. data center platform consolidation and it sounds like headcount is almost done. But maybe if you can go through that. And also how the add back should come down over time and your adjusted EBITDA from that?

Michael Capellas

I’m going to take the first part which is the management side of it and let Phil ponder an answer to the second part. If we look at sort of the overall technology piece on the data center side you have a European mainframe consolidation, which is the piece we moved from London to Frankfurt which encompasses most of the mainframe capacity except for what we have in Greece, which is a little longer term. It’s quite a large center.

The next piece to come will be the movement out of the distributed systems which we’re in the process of which should be completed in sort of the Q2, Q3 of next year period. So that would be international. We had a bunch of command centers, some small and some large ones, but of significant size there were seven in the U.S. and then some smaller ones. They have been consolidated and that work is complete. In the U.S. we have the larger data centers.

That program is on track, about a third of the way done and you can probably see that unrolling in the third or fourth quarter. We’re actually going to be quite sensitive to service quality related to that one. And then the [comp a] which we expect to roll. We have a Merchant Services application consolidation, which is taking our different front ends and back ends and consolidating them into common platforms and extending some of the functionality.

We’re into the design phase but you really won’t see anything probably flow through until probably the first quarter as we’ll probably take the full year next year, that being a complex project which needs to be carefully managed. And so if you really wanted to get to it is – European mainframe’s done, second phase to be completed, third of the way done through the data center. That’s to be completed next year. Pretty good progress on Merchant Services but not seeing it through the first quarter. And none of those are baked into any of the [comp] take numbers we have yet. So those are the largest programs we have in place.

The headcount is pretty well done. We continue to be quite disciplined around hiring and therefore as we would have normal attrition, which is not running terribly high, we get some efficiency from that. So that sort of gets you through. Now Phil on the FS.

Phil Wall

Yes. As Michael has outlined, some of those projects are quite lengthy in nature and some of them are only a third of the way through and on phase one. So you would expect to see that the affects are going to continue into the future, but to counter that you’ll see a lift in the projected near term savings as we look further into the future and some of those bigger projects start to realize the savings. You can see in the 10-Q on the consolidated EBITDA we’re projecting $200 million of near term savings and those are being generated from these type of cost add backs.

Operator

Your next question comes from [Jake Kemeny] – Morgan Stanley.

Jake Kemeny – Morgan Stanley

Just a little more on the previous commentary, could you just give us a dollar amount of how much of your cost savings are already achieved and actually reflected in your EBITDA and how much more to come?

Michael Capellas

First we’ll start with Phil on the reconciliation of cost savings.

Phil Wall

We’ve put $90 million into this quarter. There was a previously $60, $70 million at the last quarter. You know, what you see is you see the annualized savings coming through at over the $200 million and that’s how we’re projecting that going forward as well.

Michael Capellas

So if we recognize back to the original model, which we would be much farther ahead on the original model. The original model had two pieces. It had some efficiency savings and it had some technology savings. The $90 million in the quarter is significantly ahead of the cost savings that were originally modeled and if you want to annualize that, you can go by four and that would give us probably about $100 million more from the original savings that was modeled out.

The technology savings which are projected to be in the range of $150 to $200 million are yet to come and so you don’t see that. So we will over-achieve the cost savings fairly significantly with $90 million on a quarter basis now and a technology savings of $150 to $200 million to be achieved four quarters out when fully recognized. Is that specific for you?

Jake Kemeny – Morgan Stanley

Yes. I mean, so if I annualize the $90 or you’re almost at you know $400 just from that. And you’re saying another $200.

Michael Capellas

Yes. So the number is larger than previously reported. Okay?

Operator

Your next question comes from [Henry Na] – Wells Fargo.

Henry Na – Wells Fargo

Michael, you ran through like a ton of numbers pretty quickly, the October transactions growth. When you look at the picture as a whole throughout the whole company, how is that merchant transactions growth number looking in October?

Michael Capellas

It’s October, so I’m not going to project it. The absolute transaction growth – it is slowing.

Henry Na – Wells Fargo

Is it still flat or is it negatives?

Michael Capellas

No. It’s one of those that the answer is we’re not giving the absolute transaction growth. It was October so how should we pare it down? It was not negative in October but we are seeing declines as well. It’s pretty much flattening out. We still saw some growth in October. It was highly differentiated by category, but we still did have growth in October.

Henry Na – Wells Fargo

Just kind of following up on that, I mean, with some of the metrics you started having in terms of price compression, 4 to 5% and the shift to credit, debit contributing 2%, the revenue mix, I mean, do we see revenues in Merchant Services be down in 2009 over 2008? I mean, that seems like a pretty likely possibility.

Michael Capellas

Honestly, you know, we’ve given you a whole lot of information so now you’re sort of asking a question of how deep the recession, how far does it go? What we have seen is that we have got as we said way back when when Ed and I sort of went on the road show, it is that a fairly strong resiliency to downturn because of the mix we have of commodity pieces in our business. I mean commodity – I don’t mean our commodity business, I mean commodities people have to buy. So now you’re really asking the question – and by the way, this is we don’t have to go into the sort of general economic conditions that we all know.

I mean, this is as nasty as we’ve ever seen it. It’s held in there really strong and if you look at the third quarter alone, that’s pretty healthy transaction growth in a pretty ugly scenario. So we are pretty tight against recessionary pressure. So the action you’re asking is how bad does it have to get before you go negative? And you know I think we’re all sitting around trying to predict exactly where the economy’s going to go, when does it recover. I think your question is a macro level one.

I mean, the model and all the pieces and detail we’ve given you by category shows where we are shielded from the recession pressures. The question you’re asking is how deep is the recession. I wish I knew. I’d probably be getting a call from Washington if I knew. And so at this point I don’t think anybody who’s in the business community is ready to stand up and say I predict the recession will be x and will recover in y. All I can tell you is we have a pretty solid business model. We’ve given you the categories.

We’ve shown you where we have risk and where we have sort of shielded against the recession. And to answer your question could be go negative is a question of how deep and how long in 2009? And every economist in the world is trying to figure that one out. So we’ll remain cautious. We’ll stay focused. But I’m not getting into a prediction on the economy.

Silvio Tavares

And as promised I said I’d come back when we had time for one question. That time is now. So we’ve got one more. Operator, if we could go to our next question and after that we’ll have to wrap up.

Operator

Your last question comes from Scott Goldsmith – Invesco.

Scott Goldsmith – Invesco

I was just wondering if you could provide greater detail on the decision to terminate the income merger? Is it just a question of price? Because it was a merger where your sponsor was committed to putting in new cash equity. It seems like the numbers you gave – I forget exactly for prepaid and in terms of how strong prepaid was yet again, but you’ve talked about in the past your continued growth expectations for prepaid. So can you just talk about the decision to terminate that?

Michael Capellas

Yes. I mean, this was really mutual – mutual termination by both parties. I mean, and we have obviously signed into an agreement. We’re continuing to work with them in a fairly healthy way. We had ample available resources to complete the deal so it wasn’t a function of that. I would simply say that if you look at any kind of M&A activity in this kind of a market where it has to make sense for both the buyer and the seller, and there are other ways to achieve your strategic goals I think it makes logical common sense, both sides agreeing, to approach it in a different way, in a way that works for both parties.

And I wouldn’t read anymore into it than that. It’s a very good relationship. We still continue to go to market. But you know what the market looks like and so I think it’s pretty straightforward. It was not an availability of funds question.

Silvio Tavares

Okay. Thanks everybody for your time. We’ll continue to, I know Phil will still be available. We’ll continue to tune our program here so that it meets your needs the best we can. And like all of us in difficult times we continue to sort of, you know, look for the positive, keep our heads up and just go back to work. And the great thing about cycles is they all do end. I wish you all the very best.

Operator

That does conclude today’s conference, ladies and gentlemen. We appreciate your participation today and you may disconnect at any time. Have a great day.

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