First Data Q4 2005 Earnings Conference Call Transcript (FDC)

First Data (FDC)
Q4 2005 Earnings Conference Call
January 26th 2006, 8:00 AM.

Executives:

Gary Kohn, First Data Corporation
Ric Duques, First Data Corporation
David Bailis, First Data Financial Institutions, President
Ed Labry, First Data Commercial Services, President
Pam Patsley, First Data International, President
Kim Patmore, First Data Corporation, Chief Financial Officer
Christina Gold, Western Union, President

Analysts:

Saf Efford, Citigroup

Presentation

Gary Kohn, First Data Corporation

Starting Abruptly

I also want to remind you that our comments today include forward-looking statements. I ask that you refer to the Safe Harbor statement contained in this morning's earnings release and in appendix of the presentation. For information on the factors that could cause actual results to differ materially from projections.

Also want to remind you that everything today is going to be recorded, the statements are the property of First Data, and other than the replay on our website, there is a dial-in replay, First Data is not authorized in disclaims responsibility for any recording, replay, or distribution of any transcription of this call. During the call, we are also going to discuss the measures that don't confirm the Generally Accepted Accounting Principles. We believe that these measures provide useful information for investors and reconcile those in the appendix of the presentation.

The agenda today, Ric is going to start off the discussion talking about the results of our strategic review and the new business structure. He's also going to touch on Western Union and a little bit on the First Data Financial institutional segment. Ed Labry is going to discuss the First Data Commercial Services business and will talk about the First Data International business. Kim is going to touch on the financials, Ric will come back and provide guidance, give some concluding comments and as always, we'll have time for Q&A add to that. So with that, I will officially kick it over to Ric.

Ric Duques, First Data Corporation

It didn't used to be this big, let me tell you that. Thanks a lot for coming and, Gary, thank you for that introduction. First, I would like to introduce our management team. David Bailis, the President of First Data Financial Institutions. Where is David? Chief Information Officer; David Zibbel, Chief Technical Officer; Christina Gold, President, Western Union; Ed Labry, President, First Data Commercial Services; Kim Patmore, CFO; Pam Patsley, President, First Data International and Chief Administrative Officer and General Counsel.

During my first few weeks here, we expanded the card review that I think many of you know we announced in November, the way more comprehensive review of the entire organization. As a result of that intensive review, which included, believe me, many meetings with our Board and our advisors, we made some important decisions. But I want to thank our Board publicly here because we have some new Board members. And when you come onboard, you say, well, how many meetings are you going to have in a year. Well I think in the 60 days, we had used up the annual number of meetings we had. So that was pretty intense. Given the intensity, I think some of the Board members are looking for an increase in their Board fees. But don't worry, that is not going to happen, folks. Until we make the 2006 numbers, then we'll talk about it.

Anyway, here are the results of that analysis. Basically, we decided to separate the Western Union business into an independent company through a tax-free 100% spinoff to be completed this year. The transition structure is still being finalized but will be designed basically unlock shareholder value by creating two companies focused on their own unique initiatives and growth plans. The transaction will be structured to ensure very strong credit ratings for both companies. We will update you on both the structure and timing of this transaction when we announce the first quarter results in April. Second, after taking a hard look at the US card business, we have decided to retain it. We believe that our new strategic vision Operator Instructions stable cash flows, thereby deriving more shareholder value over the long term.

In addition, separating the Western Union business, we have reorganized our remaining businesses into three primary segments with 2005 revenues of approximately $6.5 billion. These businesses are fully aligned with our key customer groups. First Data Commercial Services with about $3.8 billion in revenue is aligned with Merchant Customers. First Data Financial Institution Services with about 1.9 billion in revenue is aligned with financial institution. And First Data International with little less than $1 billion in revenue is aligned with both Financial and Commercial Customers in the international arena, because basically that is the way this marketplace works there.

And lastly, we have a portfolio of 10 slower growth businesses that are reported under Corporate and Other index. And while some of these businesses had significant growth potential, the aggregate of these businesses is a drag on our overall growth, and I will touch on that when we hit the financials. We're in the process of selling some of these businesses. As we move through 2006, we will be taking a hard look at the rest of the businesses. And we're going to try to determine which businesses we can really grow, which can be fixed, which or strategic and need to be kept, and strategic there is a euphemism for we're losing money, but we need to keep them, and the last is which are going to be sold or discontinued.

In 2005, the revenue and profits from these businesses were approximately $630 million and $130 million in profit. We will get back to that at the end. The new First Data. The new First Data businesses will have an intense focus on their specific customers while leveraging our global infrastructure. We will increase our focus on those sales and marketing efforts to ensure that we maintain world-class functionality across all of our business lines. While we are rebuilding our organization, please remember, each of our businesses currently holds the number one or a very strong number two in the markets that they serve. The combined growth rate targets for revenue and earnings per share for the new First Data that excludes Western Union will be 8 to 10% and we're confident that we can meet or exceed that objective.

Our rationale for spinning off Western Union is as follows. We believe a separate Western Union will maximize shareholder value both in the short-term and the long-term by creating an independent company with a management team more focused on its own specific customers, strategic initiatives and growth plans. Western Union clients are consumers, not businesses. All of the other First Data businesses, their clients are businesses. Other than the obvious synergies, network, call centers purchasing powers,synergies are either aspirational, futuristic or very limited here.

This move significantly enhances Western Union's ability as a separate worldwide high-growth company to attract the best management talent from anywhere around the globe. There will be no competition for capital here. They will be very focused on expanding the power and scope of the Western Union brand. We ran a search of companies around the world and Western Union as a separate company would be one of only four companies in the world with over 4 billion in revenue, 30% profit margin, greater than 12% revenue growth and less than 5000 employees.

Now I am certainly not going to tell this group what the marketplace, how the marketplace is going to value Western Union, but the average market cap of those four companies is $27 billion. Now if you apply two other filters here after this test, one, which company has over 155 years of life, and which company was in and out of bankruptcy in the last decade, you only have one company left; this is Western Union, which will be unique in the world.

Now there are many open the items on this spin, and I know you have a lot of questions. I will give you a couple of answers here, but many more will come and we probably won't make many comments other than these before April. Christina Gold will be the CEO of Western Union. We will have a world-class management team in place at Western Union within six months, and that will include both internal and external candidates for the position.

The Board of both First Data and Western Union, the new First Data, will be guided primarily by independent directors with experience and skills appropriate for each business. Furthermore, we're going to take this opportunity to make sure that the governance of both boards will be in the top quartile of best practices for corporate boards. I might add that our existing Board feels that they are already there and may be at the top, so we will just duplicate kind of what we have; not duplicate the Board members, but….

Headquarters for First Data will remain in Denver. The cost of any changes we're making here are not in your 2006 numbers and the capital structure of each company will be designed to create very strong, as I said before, credit ratings for each company. While we still have Board approval for our stock buyback plan, we will discontinue that until after the spin. And we don't anticipate any changes in the pro rata dividend paid by First Data, but Western Union will have its own dividend policy, which will be determined as they go out as a public company.

Now let's take a look at Western Union. As you can imagine, Christina is going to be quite busy in the next couple of months, so I want to give her voice a rest and I'm going to take a run at describing Western Union business here. Our Western Union business generates over $4 billion in revenue and $1.3 billion in profit. It employs 4700 people with a physical presence in more than 200 countries and territories. We offer money transfers under the Western Union, Dego and Orlandi Valuta brands. In addition, we offer other services through our agent network.

The investment characteristics of the Western Union business are clear and easy to understand. We wire money with speed, trust and reliability. This business delivers strong revenue and profit growth year in and year out with outstanding operating margins supported by a first-class global brand. The significant both near-term and long-term potentials come pretty basically from the expansion of our agent networks location, continued growth in the global remittance market, global loyalty programs like our protection insurance product, which I'll describe in a minute, and alternative distribution points, like Western Union.com.

The two issues about this company and the marketplace that seem to reoccur all the time, particularly in the press, is called regulation and compliance and technology. Here are my thoughts on those two issues. With regard to regulation and technology, we helped write the rules. We operate the highest level of compliance in the industry and we work with regulators to ensure that the market is safe. There was recent article about the Red Cross and the Katrina disaster where there was some fraud there. We helped identify the fraud with two Western Union and with the regulators. Basically, we planned it down. The situation there was, there were some Red Cross call center folks that were a little weak in geography and they thought that the relief money should go to California as opposed to New Orleans. We straightened that out and got that working. But that is an example of how, when we monitor the system, we can see that.

I will give you one closer to home. My son got hooked up on the Internet with someone that was going to give him a plasma TV, this is a true story, for $2500. It was a $2500 plasma TV, he was going to give it for 500. He goes to Western Union and wires the money. Three o'clock in the morning that day, they call him up and say, you can buy the plasma but not through us, because we think this is a bad guy you're sending this thing to. So I want to thank you for the $500 you saved me here. That is a true story. I have other one this year Western Union. He did not know who we were either, so he wasn't just trying save my son here.

With respect to technology, we offer money transfers of all types. Our systems allow consumers to send money in many forms, cash to cash, direct to bank, cash to card, cash to ATM. But I want to make it clear, here technology does not drive this business, it's the consumer preferences that drive this business. We will meet consumer needs no matter how high or low-tech channels they choose to use in sending or receiving money. But for now, they want cash.

In 2005, Western Union's share of the worldwide cross-border remittance market, which includes Vigo, increased to 15%, up from 12% in 2004 and 10% in 2003. Every year, Western Union continues to gain share in this very fast-growing cross-border remittance market. Even with our past success here, we are not resting our laurels and we have developed what we believe are the right strategic strategies to continue our growth and maintain our market leadership. In 2006, we will expand our distribution network. We believe our strong distribution network, which is now 271,000 locations, I think that's a new number for most of you, includes Vigo's 18,000 locations in more than we have in Western Union, more than 200 countries and territories, as I mentioned before.

Additionally, we are focused on building our brand and enhancing our customer experience. Today, we have what we believe is the platinum standard in our marketplace and we remain committed to continuing to improve our customer service. Satisfied customers are repeat customers and repeat customers are key to driving our long-term growth with superior operating margins.

Finally, we will leverage the local knowledge, and this is really important, of the employees and agents. They know what customers want, particularly the agents that help us out here, for product and services as we go forward. In today's rapidly evolving economy, the customer needs change and it's imperative that we continue to anticipate those products and deliver the services they demand in the future. And I will give you a little more on these strategies.

One of our key successes in our global brand is our international footprint. We have carefully constructed over the last decade, the following is a very interesting statistic. In 1995, less than 40% of our consumer-to-consumer transactions touched a non U.S. location. Today, 80% of our consumer-to-consumer transactions touched a non-U.S. location. As you can see here on this slide, we have built a significant presence around the globe. The biggest gee-whiz on this slide is probably Europe, Middle East, Africa and South Asia. They now account for 50% of our agent locations and 45% of our revenue. 10 years ago when we started this, we had very little presence in this region. Basically, we had about 5% of our revenue coming out of there.

By developing a global digitation network, we have provided our customers with an unparalleled service platform and the ability to reach almost anywhere in the world. The growing international migrant population illustrates the opportunity for Western Union ahead. Today, there are more than 185 million people that live outside the country of their origin. This group is expected to grow to more than 283 million, about the size of the United States by 2050. Specifically, China, India, Mexico and the Philippines are providing an enormous number of immigrants to other parts of the world. As these individuals move and they continue to move around the globe, Western Union will continue to benefit significantly from this activity.

As I stated, one of the key elements of our successes to satisfy, retain and increase the lifetime value of our customers. We have identified the appropriate benchmarks which we can measure, on which we can measure our long-term success, and these are retention, frequency of use as well as U.S. same-store sales growth. By focusing on these benchmarks, we can react and make necessary operational adjustments or enhancements to our basic service, and then we can offer new products and services for those customers.

One example of an enhancement that we have brought to the marketplace is the loyalty program. You've heard a lot about those in the United States, we have one in Western Union. Our loyalty program offers our customers benefits like faster point-of-sale, service at the point-of-sale, rewards like free phone time and something, a very interesting product which I mentioned at the beginning, remittance protection insurance. That is basically, if you have a frequent user, someone comes in and wires basically the same amount of money every month to a loved one back at home, you can sign up for this remittance protection insurance. And basically, he tells the loved one, if anything happens to me, which basically means he dies, between when he sends the remittance one month and next month, they call up Western Union and Western Union will wire 12 consecutive months of payments that that consumer was sending before he died. A very strong product. We don't have that throughout the entire network now, but it's being very well accepted where it is. These and other enhancements allow us to cross-sell products and services into this marketplace. This cross-selling gives us an opportunity for additional growth.

In 2005, we had more than 5 million of these loyalty cards. That person would've been a member of the ability program. And we anticipate this to grow to more than 15 million by 2008. That loyalty program is now in 56 countries, not the remittance insurance, but the loyalty card, and we plan to be live in 115 countries by 2008. We believe by growing our customer loyalty programs, that will allow us to have the same long-term growth and profitability.

Now I would like to pause and welcome officially our colleagues at Vigo. The Vigo brand is well-established and highly regarded in the marketplace. The Vigo model basically complements the Western Union efforts to provide different services and different prices globally. Vigo is primarily a U.S. to Latin American money transfer Company. We believe that with our great opportunities to expand Vigo's money transfer business around the globe and to include services like bill payment and money orders in that network. The combination of Western Union's expertise with Vigo will enable us to bring many more choices and many more controls to customers around the globe.

The strategy at Western Union remains consistent. We continue to execute better and better each year. Over the long-term, we are confident in our ability to deliver mid-teen revenue and profit growth. In 2006, the addition of Vigo will help us deliver high-teen revenue growth and mid-teen profit growth. As always on a quarterly basis, we're committed to updating you on how the business is performing. We will continue to report on the key drivers, the number of locations, number of transactions, the transaction growth, the revenue and profit growth and the same-store sales growth.

My final comment on Western Union, and I've said it before but I will say it again, this is the best business I have ever seen. I have all of the confidence in the world that the performance will only get better as Christina and her team execute on their strategies as an independent public company. When we acquired Western Union in 1995, I asked the employees, I went around and asked them, why did Western Union have this problem since they had to declare bankruptcy. And the universal answer to that question was that we were in too many businesses. We lacked focus. With this move, they certainly won't lack focus. I think they will execute very well going forward.

Now look at what we call the new First Data. Building on a single focus, similarly the remaining business at First Data, which represents about $6.5 billion, that's 2005, will be aligned to ensure intense focus on meeting or exceeding our clients' needs. As I mentioned, our remaining business units will be structured as follows: First Data Financial Institution Service, run by David Bailis, who will include Card Processing, Debit Network, Output Services, which I will describe, and REMITCO. First Data Commercial services will be run by Ed Labry. It will include Merchant Domestic, Debit Merchant on the acquiring side, TeleCheck and Prepaid Card Service. And finally, Pam Patsley will run our First Data International business, a very high-growth opportunity for us.

Our senior management team is fully committed and excited about this business structure, and we are confident that we can deliver with great success in 2006 and beyond. The card business. In the two months since my return to First Data, I have spent, I think you probably would know, considerable time evaluating the card market and how our business fits into that market. From an industry perspective, the card market continues to grow. Transactions are growing pretty much because of debit card, prepaid cards and the cards. But secondly, the marketplace is still consolidating and that has been going on for a long time. But now, maybe 90% of the card receivables are held by the top 10 issuers. Active accounts and outstandings continue to grow in low-single-digits and you can appreciate that. Anyone that needs a credit card has four of them, and most of the people that have only one or two or three or four credit cards are topped out on them. So the receivable growth and the account growth is fairly low. This consolidation really causes us to have to, as a service provider, to have scalable solutions on a global platform and maintain high standards of operating performance. We think we are well positioned to compete here, very well positioned.

Our card business has world-class functionality across multiple product offerings which is equal to or better than any competitor. And I just want to repeat that one. We have world-class functionality across multiple product units which is equal or better than any competitor. We believe that, independent third parties that have looked at our functionality believe that and our customers who use our services know that. Our clients include many of the top financial institutions in the United States who have selected us for the value that we bring in system functionality and price. We have the opportunity to expand that relationship as we deliver the service they are expecting us to deliver to them.

Our best asset in this business is our employees. Their knowledge and experience are second to none in the industry and their loyalty that they have shown, particularly over the last several months, speaks volumes about the type of people we have working in this business. To our current customers and to our employees, let me say thank you for your support. This has been a tough few weeks, few months here. We're making a long-term commitment to this business and we bring enormous strength to this marketplace.

We are competitively priced, whether the decision is being made versus in-house solution, which I am sure we will always beat if we have an honest accountant, and they are hard to find, or versus other outsourcers. These factors, combined with the fact that the infrastructure of our card business is used extensively by other First Data businesses, that basically led me to the conclusion that we basically need to keep this core processing business and it's the right decision for our company in the long-term and the short-term. While we do have revenue challenges here, the business is far from weak. We are number one or a strong opportunity two in each of the revenue categories that we're going to go over.

Now just another comment here. In every part of our company, we treat our competitors with respect and we never assume a competitor is weak. To any of our competitors who think we're weak here, we will see you in the marketplace. We are back. If everything is so good, why are we struggling? Well, the environment with the issues of consolidation and slower growth are pretty much out of our control. There was a time in our history when the consolidation was running in our favor. Everything that was consolidated was on our system. Now, we have some of the other things happening. But there are factors that are under our control. It's going to take all of 2006 and most of 2007 to get this segment to an 8 to 10% revenue and profit growth that we are aspiring to. We need to focus on our customers to improve in three key areas.

We have a plan to revitalize the top line growth and we're committed to providing a cleaner look at this segment. And you will be surprised when you see on the next side what's in this segment. The cost space has not declined to match the decline in the revenue. That would be an important thing to do. Let me be perfectly clear here, this segment is not losing money and has always been profitable, but in absolute profit dollars and margins, it has declined. We're reducing our cost structure here and I will go through that plan with you in a little bit. Third, while we are confident in our systems and our ability to deliver unparalleled world-class service, we recognize that our customers need to, are continuing to be demanding, that we increased the features and functionalities and we're committed to delivering on those needs.

Now let's look at this segment. The components of the overall segment, $1.9 billion in 2005, would have been the revenue in those, the way we've organized them now, it would have been $494 million in core processing. That's what I think most of you thought with the card business. $568 million from postage. Now the accounting police make us report that as revenue, even though there was absolutely no profit to it and there's no sense to doing it that way, but that's the way we have to do it. So there's $568 million in revenue from postage. The government loves us, I think.

The next category: Output Services, which basically are plastics, print mail, statements. A huge number of our clients use that, but not enough, and we'll touch on that. REMITCO, that is where when you send in checks, all around the country, we have people who open that mail, post that, send it into the bank and post it for our bank clients. And then debit, and you know debit. PIN-based Debit, and that is probably the largest growth area in the card business. Those three items were $800 million out of this segment. This business is very profitable, having delivered $378 million worth of operating profit in 2005 with strong margins of 20%. Now if we did not have to put the postage in the revenue, the margins would have been 29%.

Historically, traditional card processing was the core of this business. Now, debit, REMITCO and output services are now becoming a larger part and more strategic for this business. My first action in this segment was to put a strong leader in place. We are excited to reintroduce David Bailis as the new President of First Data Financial Information Services, Institution Services. David is a veteran of the industry, having previously been with First Data for more than 12 years.

Second, we are 100% committed to meeting or exceeding all of our existing customer expectations. I didn't need a strategic review of the business to understand who pays the bill, and we will make sure they are satisfied. Along with our senior management team, and I am personally committed to strengthening our relationships with our customers, our near-term goal in this area is to convert 110 million accounts which are now the pipeline.

Third, achieving significant savings to decrease our cost space within the core processing business is a top priority. And in fact, we believe we can achieve an additional $75 million or more in annualized cost savings through process improvement, and that should be done by the end of 2007. These savings are in addition to the workforce reductions we previously announced in December. But I want to make one thing very clear here. These cost savings are going to be invisible to our existing customers or we won't to them. Our objective here is to get better cost and better customer service, but the customer service is the number one priority.

The fourth thing we're going to do is focus on all aspects of the service offerings to ensure that we continue to maintain world-class systems functionality for our customers. We want to make sure that we can respond to customer needs more rapidly than we're doing now and continue to create innovative solutions to meet the changing needs of the marketplace and our customers.

As I mentioned, we have outlined a plan to revitalize revenue growth. We will focus considerable sales and marketing efforts to capture the enormous opportunity within our existing client base, specifically by selling our Output Services, REMITCO services and debit services to those clients. Only a small portion of our client base used all four of our services: the core processing, REMITCO, Output Services and Debit. So we believe there's an enormous opportunity because these, our clients are very substantial financial institutions in the United States.

For our core processing offering, we believe we can provide an attractive processing option to some clients with our VisionPLUS system. This is a global platform and Pam Patsley is going to talk to you a little bit about that in the international arena. We think this is a one-stop global solutions for cards, lending products for banks and other processing needs. VisionPLUS is not, and I underline not, to be viewed as a replacement for the current U.S. system which we will continue to improve, but rather a possible alternative that better suits the needs of certain clients.

Yet another opportunity we see in the card business is the expansion of our STAR Network into other attractive markets. One example of this would be the addition of the STAR logo on other card products we may be processing and our clients may be using. While the execution of this plan will require a great deal of effort, we believe we have the right team and the appropriate strategy to implement the changes in this card business.

We believe our card business is world-class and the numbers seem to bear that out. In 2005, we managed more than 415 million domestic accounts on behalf of our customers, and these customers include people like Wells Fargo, Citi, GE and TNC. In servicing these accounts, we handled more than 7.9 billion transactions, 1.7 billion items were mailed out and in addition, we embossed 215 million physical cards, the embossing of cards. You can see that our ability to effectively service large quantities of accounts and transactions should give comfort to our customers that we can meet their ever-growing needs in this marketplace.

We are the largest retail card processor in the United States with more than 253 million accounts at the end of 2005. That represents a 33% increase from 2004. We process transactions for more than 300 different retail card programs, including the majority of all of the large retailers that offer private-label cards. Our systems currently support cards in more than, almost 60,000 retail locations and we expect that number to grow as our existing customers add to their retail footprint and we continue to add clients here. In this particular area, the consolidators in this industry are our customers, and that is a real good thing for us.

On the debit network, you can see on this slide we have extensive data capabilities and footprints, anchored basically by STAR. The STAR Network covers 1.6 million point-of-sale locations, 134 million cards that we process to debit, debit processing for. The PIN-based network that we have here is the number one debit network, number one in total volume, number one in cards, number one in acceptance points.

Now let me talk about the goals for First Data Financial Institution Services. First, by executing our plan, we believe we can achieve 8 to 10% in both revenue and profit growth by 2008. However, in 2006, we anticipate zero revenue growth and low-single-digit profit growth. In order to keep you informed, this is the transparency issue, folks with this business, we're going to provide you with quarterly updates on key drivers which are going to include new clients added, penetration of services to existing clients, new features, financial metrics that you've seen before and the growth in the revenue and the components in this business. We are excited about this business. There are challenges there, but we think we are up to those challenges.

Now I'd like to turn the presentation over to Ed Labry. He's the President of First Data Commercial Services segments, and I think you will see a lot of excitement in this segment for us, and so here he goes.

Ed Labry, First Data Commercial Services, President

Thank you, Ric. Good morning and welcome. First of all, I would like to say thanks for everyone's e-mails, phone calls, voicemails, analyst reports, all which seem to be very positive. I'm sorry, I did not get to call anybody back due to our being in the quiet period under the review. So thanks for being here. The good news is, we all agree. We are perceived as being too big and we are perceived as being hard to do business with, so what do we do? Immediately, we change. We move to a more sale-oriented, sales supportive organization with our client focus. We restructure accordingly. We have got to get very nimble at the street level.

So I am excited about introducing you to the Commercial Services segment. Roughly $3.8 billion in revenue, as Ric said, 2.4 of that coming from domestic merchant processing, 223 million of that coming from the STAR merchant acquiring side, 377 million coming from our Check Services division, verification and guarantee and 116 million coming from our prepaid offering, which is the open-loop cards, as well as our closed-loop gift cards, like Wal-Mart, Starbucks, Blockbuster.

Our operating profit in '05 was 893 million, moving to over $1 billion in '06. The transaction growth in '05 was 13% year-over-year. If we turn around and say, that's very positive, but I think it demonstrates that we're doing very well on the nationals, but it's not translating to the top line or bottom-line growth that we want to see in the segment. So it means that we have to go downhill to the smaller, more mom-and-pop oriented where we know where the margins are.

If you take a look at us by distribution channel, we must create the best sales force in the industry today. So if you look at our distribution channels, the alliances, our equity partners, PNC, Wells Fargo, We also have roughly 50 financial institution relationships, some very large, like Citibank and SunTrust, where we use our salespeople, our feet on the street, combined with their branch bank network for sales, referrals, servicing these accounts. It's a very powerful combination in which First Data owns the merchant relationship. We also have our industry experts which we help our partners sell and service the top 500 merchants in the United States today. And of course, we have a large telemarketing and ISO network business. This is how we will reach these smaller, more profitable merchants.

If you take a look at First Data's product offering, we really talk about our vertically integrated products by business segment. So what does that mean? Let's take a couple of them. If you turn around and say, the petroleum industry has been a great industry for First Data, that is true. But it did not come overnight. There are 2 to 300 different types of certifications of pay-at-the-pump technology, whether they are Wayne, Gilbarco, Schlumberger, Sun, different brands of those or different generations of those pumps, different certifications of software. And then you have to talk about the communication, whether it be IP, dial-up, satellite, frame relay, depending on the volume associated with those locations, and then you have to have the products.

So definitely credit, all of the PIN-based debit, EBT. But next time you go to the gas station, look at the number of connectivity points you have to have to be successful in the petroleum industry. You will see things like Voyager, PHH, Right Express, the fleet cards. So you have to have all of those things to be successful in that market, and we think we demonstrate that all across our different segments in the merchant industry.

Let's take QSR, for example. Yes, we have McDonald's, Burger King, Sonic, among others. But, if we turn around and say, we're the industry experts for the nationals, then what we have to do is we have to take this technology down to the mom and pop. So when I go to Burgers and Shakes, that I don't walk in and say, what do you want? I walk in and say David, you need this terminal, credit, debit and gift cards to be a successful small restaurant business. I'm changing jobs today. So we've become the experts to the industry.

What did we do in '06, what did we do that's different? And of course my perspective on the merchant business is probably a lot different than others, but I think it's fairly easy. Remember, I think we have overcomplicated this story in the past. So what do we do? We take an 80-byte record from a terminal or a store, we route it to ourselves, authorize it, settle it and report that back to the merchant. But we have to go back to the simple blocking and tackling in this industry today.

So what do we do? Sales focus. So we have to give our salespeople the tools to board their merchants, track their merchants, look at their commissions, we have to recognize our salespeople. We have to build out our retention tools. We need to look at the five or six reasons why merchants leave us, be very proactive in simply calling them and get them to stay on our service.

And then we must approve our processes. Our goal is to be able to sell, board, activate and begin processing a merchant in the same day. We must realign by distribution channels. With the importance of this segment on the new First Data, we must be clicking on all cylinders. So we will reorganize by distribution channel, we will have P&L responsibility inside merchants to monitor our progress and we must extend our reach. And we say that by extending nontraditional relationships for other merchants. Seventeen years ago, I got up here and talked about the acceptance of credit cards in supermarkets, and I think a lot of people thought I was crazy. And we talked about three years ago the acceptance of credit cards in the QSR market, quick service restaurant. It was a rewarding yesterday, if you saw McDonald's press release, they said one of the three things that has helped lead them is the acceptance of electronic payments. We continue to still see many opportunities as there's an acceleration of electronic payments in the U.S.

Let's look at our growth and let's keep in mind a couple of things. Through the realignment, First Data International is coming into its own segment. So there's roughly 5 to 7% of top line growth that was attributed to the rapid growth in FDI. So what does commercial look like? Our long-term goals are an 8 to 10% top line growth rate, and because of our efficiencies, we think that we can deliver 200 basis points to the bottom line above that.

What does '06 look like? We believe we can deliver a plus or minus 8% top line growth rates. Profit reported will be in the mid 20s due to the grow-over of the integration, but the double-digit on a normalized basis, but we begin the year with single-digits in the first quarter on a normalized basis and ramp up through the year. How are we going to judge our progress? I think there's some metrics that we could use in our industry that aren't talked about. And hopefully, they become a standard for all merchant processors to give you. But simply, just with pure number of sales by distribution. And then secondly, how are we doing on our retention? Is it a percentage or how are we retaining our customers? What is the reduction of that? And then thirdly, what is our speed to activate a merchant? Because that accomplishes a lot of things.

Of course, we will give you our new product releases and how we're doing. So in closing, I'm going to say this. I have been in the industry for 22 years, 20 of that was with a company called Concord. I think most people believe it was very sales oriented. It was good at depicting where the industry was going. I merged Concord into First Data, now called First Data Corporation, and I've been able to represent the combination of the two for the last two years.

If you take a look at our intellectual property, our technology, the redundancy that we have, the product set, it's overwhelming. So we put ourselves in a position after the integration to turn around and say, if you are a bank, if you're an ISO, if you're a small merchant or a large merchant, we've put ourselves in a position to never lose.

With that, I'm going to introduce Pam Patsley, President of First Data International. Thank you.

Pam Patsley, First Data International, President

Kohn who suggested I do that some time ago. So anyway. Thanks, I really appreciate your attention and interest today and we're very excited to tell you more about First Data International. We've really had a lot of success over the past three years. I feel perhaps the fact that we were combined within the other segments perhaps maybe created an opportunity for us to be a bit underappreciated by the market. And so as being our own segment today going forward, we really look forward to being able to give you a lot of detail about First Data International. And I know you will come to appreciate the extraordinary market position that we're in and the value we are creating here.

So with that said, let's have a brief review of First Data International. Our opportunity in the global payments market is extraordinary as we see growth in new and emerging economies, as industry consolidation continues and as an electronic payments continue to replace cash, and that is a global phenomenon. FDI provides payments solutions ranging from debit, credit and prepaid card processing, phones processing and ATM driving. Additionally, we provide merchant processing from front-end authorization and switching to back-end merchant accounting and acquiring for about 1.2 million point of sales locations. With a truly global presence, we are well positioned with a robust product and service offering and a real presence in key markets led by top industry talent. To me, the shorthand here is, we operate in a wonderful environment, our timing is excellent and we are particularly well positioned.

So we've built a significant business with 53 primary offices and more than 5800 people. We have the people and presence to drive growth for FDC around the world and we have the infrastructure to support an integration simultaneously in Korea, in Austria, in Australia, just to name a few. We exceeded our target and closed the year at 2.6 billion transactions, up about 39% over 2004. ATMs increased 50% to 15,600 and accounts on file grew 38% to 55 million. We exited 2005 on a $1.1 billion revenue run rate. Since 2002, we have experienced strong, profitable growth, achieving CAGRs and revenue of 34% and 31% for operating profit. Margins improved over 200 basis points to 12% in '05 from the previous year. And because of our acquisitions, amortization and depreciation expense exceeds our profits. In 2005, about two-thirds of the total non-cash charges was amortization.

So let me touch on a few growth figures for 2005. Revenue was up 18%. As you know, we calculate organic growth such that the first year of growth in an acquisition is not reflected in those calculations. We are reporting 3% organic revenue growth for this year. In February of 2005, the HSBC cards processing deconversion was completed. Growth rates were affected throughout 2005. As we have stated before, they gave us notice in 2001 that they were taking this processing in-house, and ironically now, I must say that it's to the VisionPLUS platform. Without the deconversion, our organic topline growth was over 6% for 2005. I'll also add that the performance of our acquisitions has been very, very solid. It has been at or better than our business cases.

Looking forward, projected organic growth for 2006 stands between 8 and 10%. In a few slides, I want to give you bit of color of the transformation we've accomplished in EMEA. We feel very, very good about the momentum underway across all of FDI as we enter 2006. Now our success is attributed to a couple of things. One, to an innovative sales approach, to our targeted acquisitions in markets with high-growth potential, product and service innovation and a solid and deep relationship with our partners. Some of our new product focus for 2006 and beyond includes a growing interest and momentum in loans, prepaid and the global acquiring space. We constantly are interesting in VisionPLUS to enhance its capabilities. Loans processing and prepaid are two of the key initiatives for all of our regions this year.

We are providing global acquiring solutions today to HSBC on our OmniPay platform. This has been operational since November. You will continue to hear more about these initiatives with other financial institutions and worldwide merchants. Global acquiring allows merchants to accept payments from virtually anywhere in the world, making it easier for them to conduct business globally. And initially, this capability is of most benefit to e-commerce merchants.

Now our efficiencies are achieved through the aggressive consolidation of our platforms for both issuing and acquiring through our operational excellence, through smart sourcing capabilities and leveraging our scale. We do not envision a collection of many different platforms running around the world. Through our operating centers, such as the recent addition in Bratislava, or our presence in Shanghai or Singapore or India, we are more flexible and creative in our ability to generate cost savings and scale for our customers. We are not restricted by the high-cost centers perhaps in the U.S. or Western Europe because of our own presence in these emerging markets.

I want to reinforce talent. Our management team is comprised of local expertise and a wealth of industry expertise. Our talent pool is really built from three primary sources, from our acquisitions, from our clients where we have such a unique opportunity and from other industry players. Our strategy is global, but we always execute on a local level.

Now our opportunity as I said in the global payments market is really remarkable. We remain focused on growing the business to deliver $2 billion in revenue sometime by the end of '07. Our sales approach is simple. We are proactive partner, we're transparent in our pricing, we offer contract flexibility, we're customer-centric and offer a complete value chain of products and services where FDI is the single source provider. This approach has worked as we've successfully renewed relationships and signed key new clients. We practice a clear and systematic go-to-market strategy. Our acquisition target must have good growth opportunities, a solid client base, and as I said, a very strong talent pool with local market expertise.

Now looking at some of the highlights from the fourth quarter, we are particularly excited about the revenue and profit opportunities in Germany, one of the largest economies in the world. GZS is Germany's leading processor of cashless card-based payment transactions and we hope to close on this acquisition mid-year. We will have significant synergies through GZS with our existing data centers, our operations and our sales approach in that market.

We also closed an acquisition of APSS, the Austrian bank-owned processor. Now First Data Austria processes for the largest banks in Austria and runs in the National Debit Network. Austrian banks are very aggressive in Central Europe where we already have a presence through our EPI acquisition this summer. This places us as the strongest solutions provider in Central Europe. We completed the acquisition of an 80% interest in KPMS, a front-end switch that provides a network between merchants and issuers and gives us a solid presence in Korea with more than 250,000 point-of-sale locations and its sales force across the country. Korea is a highly-penetrated electronic payments market and we are particularly energized by our starting position here.

And finally, we launched a new regional office in Singapore, which is directly related to our VisionPLUS processing and application management agreement initially for both cards and merchant with DBS in Singapore, Thailand and Hong Kong. We're extremely proud of this partnership as DBS is the largest financial institution in Southeast Asia. As you are aware and you've heard from Ric, VisionPLUS is our global issuing platform. We're committed to it for the long-term and truly appreciate the value of VisionPLUS that it is a fully-integrated single platform. Some of the attributes that make it such a winning platform are its multi-consumer product support, credit, debit, loans, prepaid, loyalty, to just name a few. Flexibility through parameters and service-based architecture. VisionPLUS is now running in a third-party processing environment in China, in the UK and in Panama with multiple clients in each installation.

I mentioned global acquiring, our OmniPay platform running in Ireland facilitates these transactions. OmniPay is our processing platform in the Netherlands, Germany, Australia, and we'll be adding at least Italy later this year. It also provides the DCC and multicurrency front end for some of our U.S. merchants. We have already benefited from several consolidations. For example, with the Cash Card acquisition, we own Australia's largest ATM network, and that was a truly synergistic acquisition. Within one year, we fully combined that with our legacy business onto one platform. We took literally the best of the best from both organizations.

One of our newest initiatives is building a common global front end for FDI. We don't have time to go deeply into all of the regions, but I would like to highlight EMEA. EMEA is our largest region and accounts for 62% of FDI revenue. Within EMEA, we're operating in 12 countries, we serve 88 financial institutions, more than 500,000 point of sale locations and have customers in 25 countries. And as you can see, we're positioned nicely in key European growth markets as well as in South Africa and several countries in the Middle East which are not pictured on this slide.

I mentioned earlier that we have really transformed this business. Primarily, that has been through our transition to VisionPLUS from our legacy equation system. We anticipate being fully converted in 2008. The good news here is our customer satisfaction has dramatically improved the past two years and we have renewed key pieces of business across EMEA. Quite honestly, without the platform switch, we did not really have a competitive, compelling offer. Clients are renewing and signing up for the VisionPLUS solution. Our market position and value proposition has improved such that I am pleased to tell you today, we are now in exclusive negotiations for processing services with Barclaycard, the largest issuer in the UK, and Barclays is truly a global financial institution.

As we grow in new countries, we rebrand using First Data. We expand the solutions and service offerings to include all First Data products. We are then perfectly positioned to match the needs of the large European banks that are growing across the region. We're uniquely positioned as a global partner with a satisfied and most importantly referenceable customer base who are more and more coming to us for more than just card solutions. They're also coming to us for loan processing which is possible with VisionPLUS and this is a growth opportunity.

But since the map isn't entirely green yet, we are actively pursuing recurring revenue opportunities across this region. For instance, we do have customers in Turkey, they are VisionPLUS license customers. We value those relationships, but our focus is on ensuring new agreements where we can get paid per transaction per account per card. We like recurring revenue, and that's our focus.

Looking forward, our results have been adjusted and are now presented for First Data International as a separate segment. First, let's look at 2006. We anticipate revenue and profit growth in the 45 to 55%, which includes planned 250 million of the end-year 2006 acquisitions. Without those acquisitions, revenue growth would be about 20 to 25% for 2006 and profit growth about 10 points higher. You can see the leverage we're beginning to realize.

Long-term, looking out over the next five years, our revenue will continue to exceed the corporate average, and most certainly, we will continue to realize leverage in our profit growth as we did this year and as we most certainly will in 2006 and forward. Creating shareholder value is top-of-mind for everyone at First Data International, and again, we're thrilled to be able to share more information with you as our own reporting segment.

What that, I will turn it over to Kim Patmore.

Kim Patmore, First Data Corporation, Chief Financial Officer

Thank you, good morning everyone. For the fourth quarter, we achieved $2.8 billion in revenues and $0.53 in earnings from per share from continuing operations. Profit growth across each segment is in part attributable to the decreases and certain compensation plan financial performance measures not being met. Full-year revenue was 10.5 billion and our effective tax rate from continuing operations came in at 25.4%, which was lower than our previous expectations due to reduced pretax income, as well as impact from foreign tax rates.

Earnings per share for the quarter was $0.53 and earnings per share includes $0.03 of integration expenses and $0.09 of other charges, $0.05 of which relates to the restructuring charge that we announced in December. As previously planned, earnings per share also includes $0.03 gain on the sale of a portion of our ownership interest in the PNC alliance. The $0.03 gain from the PNC alliance ownership interest change relates to the $35 million gain that we have had in our plan all year. The actual PNC gain was $36.3 million on a pretax basis and 22.7 million after-tax. Based on the nature of this transaction, the gain is included in the divestiture line rather than in the merchant segment revenue or profit results.

Our ownership in the PNC alliance is now 40% and we no longer consolidate the alliance. Therefore, the results of operations have been retroactively adjusted back to January 1, 2005 to convert to the equity method of accounting. We've provided a schedule for you today in the earnings release with this detail. Full year earnings-per-share was $2.04 from continuing operations. The $2.04 includes $0.12 of integration expenses and $0.11 of other charges, primarily restructuring in impairment. Earnings-per-share also includes the aforementioned $0.03 gain on the sale of the portion of our interest in the PNC alliance.

Our cash flow from continuing operations was $2.2 billion for the year and our free cash flow components were as follows: net income from continuing operations of 1.6 billion, depreciation and amortization of 777 million, CapEx of 398 million and dividend payments of 155 million. Cash flow from continuing operations was below our target as a result of our lower net income, lower incentive-based compensation accruals than last year and timing of tax payments and equity earnings distribution. We repurchased 42.4 million shares of stock for 1.7 billion at an average price of $40.36. At year end, we had a total of 1.2 billion remaining on our buyback program. We ended the year with a debt balance of 5.4 billion.

Finally, let me touch on integration. It has been a long two years, but I am happy to say we have now largely concluded the integration of Concord into our business and we achieved the companywide synergies of 205 million annually going forward. We feel the best way to highlight the successful integration of Concord from a financial perspective is to look at the margins in the Merchant segment over the past several years. When adjusting for debit network scenes and integration, which are largely related to the acquisition and then normalizing for gains which gives you a clearer look at the pure operating performance of this segment, margins have improved 450 basis points since 2003. To us, this clearly indicates the payoff of the Concord acquisition.

I will not turn the presentation back over to Ric, who will provide some 2006 guidance and summary remarks.

Ric Duques, First Data Corporation

I know we're running behind, so I'm going to be really quick on this for you, because I'm sure there are a lot of questions. 2006 we're confident in our ability to deliver revenue growth from the combined companies in the range of 10 to 13%. And remember, that includes $250 million, as Pam said, for in revenue 2006 that are planned acquisitions primarily in her segment. The Company expects to deliver earnings per share from continuing operations in the range of 235 to 242, and that includes a $0.07 charge for the impact of expensing stock-based compensation. Obviously, there are a lot of moving parts and we've made some big decisions in the last few weeks, including reorganizing the Company, adding two new executives to the team and moving from kind of an integration focus and merchant to a sales focus and merchant.

So as a result of that, and probably as a onetime only here, I would like to give you some guidance for the beginning first quarter. We anticipate first quarter earnings to be in the range of $0.47 to $0.50, with earnings steadily increasing quarter after quarter. The guidance provided does not take into account any gains from the sale of any business or portfolio and does not include any costs related to the spin. It is important to note that there is a drag of $0.03 to $0.04 on the earnings in 2006 which comes from the 11 businesses that show in the corporate and other and IPS category. I touched on that in the reorganization. As I said, some of these businesses have great potential, others need to be fixed, wound down or turned or disposed, we will do that. Finally, the guidance I'm providing is for the existing First Data Corporation. We will update the guidance for the new First Data without Western Union when we update you on the timing and structure of the spin.

Now I would like to just briefly recap the guidance for the four primary operating segments. First, Western Union, including Vigo, will deliver high-teen revenue growth, mid-teen profit growth. First Data Commercial Services, revenue growth will be 8% plus or minus a little bit; reported profit will be in the mid-20s as Ed mentioned with, that is without double-digits, I mean without the integration cost recognized. But if you normalize for the integration, there will be double-digit profit growth.

Please note that the profit growth will be in the mid-single digits for the first quarter, steadily improving through the year as we go from the integration focus to the sales focus. Financial Institution Services will have zero revenue growth in 2006, profit growth will be in the low-single digits. First Data International, that segment will have revenue and profit growth both in the range of 45 to 50%. Revenue growth for the segment as we said several times here includes $250 million in planned acquisitions.

In summary, our businesses are fundamentally strong. Our products are second to none, our employees are absolutely the best in the industry. We have strong and deep and important relationships with very leading institutions in financial institutions in the world. And our businesses remain the leaders in the market they serve and these markets have enormous growth opportunities. I am confident that the plan we have outlined will allow us to maintain or extend our leadership position while meeting or exceeding our growth targets.

Now I will be the traffic cop, I will open it up for questions and my colleagues up here will help, because clearly I need help. Hussein?

Questions &Answers

Q - Analyst

First, Ric, thank you very much, and it was a great move. A question for Ed. It seems like the merchant alliance strategy is complicated. How does he drive stronger sales in the alliance things where doesn't have control, and how does he manage all of the inherent conflicts with the alliance?

A - Ric Duques

I will let you answer that, Ed, but he just dropped in since I was kind of one of the authors of the alliance, I understands there are complexities there. Many of us, myself included, are going to be on these Boards, so we do have board participation in there and we have active discussions with them. They want to grow their business, just the way we do. We don't have direct control of that, but we have active discussions and when we're not meeting expectations, we are proactive in trying to nudge them. He has kind of reorganized the group a little bit to focus on that, so I will turn it over to you.

A - Ed Labry

I think, definitely, you have roughly $1 billion of the 3.8 that is, don't have control of the sales force. But what we do have is the products and services that we can give them to make them successful. We do have control of the $2.8 billion of other revenue, which, that's where we're going to concentrate our efforts on sales and product. And of course, anything we develop for that business goes on the alliance distribution channel as well. Go ahead, looking for an easy question.

Q - Analyst

I will try. With respect to the spin, realizing that you can't give a lot of details, will you think about the applicable structure of the two units. The comment was strong investment-grade, maybe gave us a little bit more clarity in terms of how you intend to allocate the existing debt between the two businesses. And what is your definition of a solid investment-grade rating?

A - Ric Duques

I really can't give you more description of that; that is absolutely being worked. It's the whole capital structure there, so it's going to be, let me answer it this way. The rating we need to effectively run these businesses in a quality way is what we're shooting for. So all things are on the table there, the structure is being carefully reviewed. We have more experts than on this than you could imagine, including working with the rating agencies, we will be working with them over time here. But rest assured, we have a high degree of confidence that will be able to run these businesses with the ratings that is appropriate to make that successful.

Q - Analyst

Welcome back, Ric. And, Ed, thanks for the career advice. Fast food's looking pretty good these days. Question for Chistina. What do you expect to do differently with Western Union as an independent company?

A - Christina Gold

I have the right team driving a public company. I think, I talked to my team this morning, they were in actually today. And they're pretty energized, so I think it's really getting focused and making sure to deliver on '06, then really looking at some of the opportunities in terms of products and services that with this new positioning that we might be able to expand more into some other areas and products to drive more.

Q -Analyst

This is a follow-up. Last year in R&D, advertising and branding and spending for '06. It looks like some of your competitors are really…..

A - Christina Gold

Basically, we are on-track to maintain the strategy of 7 to 8% and still also investing about 3% of our money transfer revenues in terms of pricing. So we're going to be consistent, but we target really those markets that we have the greatest opportunity to drive growth.

Q -Analyst

Okay. (Indiscernible)

A - Ric Duques

The question was the dis-economies that will occur by splitting two companies, can we give some range for that? And the answer is basically no. Obviously, there will be some infrastructure issues as a public company that Western Union does not now have, but,. It's a good question, but we don't have a good answer for you. As soon as we can size it for you, we will absolutely do that. You've got to come down a little bit with the mike because nobody in back will ever ask a question. That's not working, I don't think.

Q - Analyst

Quick question (inaudible - microphone inaccessible).

A - Ric Duques

We're making ongoing investments in those businesses, so I don't think it's dramatically different. I've mentioned them a couple of times though. It's not spending lots and lots more money, it's just being focused on the existing customers that we have and creating an organization that lets our people do that. And David is on this in a heavy way in cards. We have the talent and we have the people and we have the systems. Somehow, we have managed to not let it happen. So it's not like saying, oh, let's just double our capital expenditures by 15 or 20 or $30 million. That's not the case. It's I think listening to the customers and just executing more crisply. If we need more money, we'll do it. I don't have a number for you.

Q - Analyst

(inaudible - microphone inaccessible).

A - Ric Duques

The question from the back was, the fourth-quarter merchant was weak. Can you explain that? So I'm giving him time to try to explain that. And that the small merchant initiative, when is that going to open, how quickly does it ramp up, that type of thing.

A - Ed Labry

I don't have a great answer for the fourth quarter, Adam. I've been at the job for 2.5 weeks. So I've probably been more looking toward the second part of the answer, which is, what do we do going forward. So how quick does it take us to get there? I think very simply, if you look at how do you get to the smaller independent guys? This isn't like signing a national account that you have to, it takes nine months to board. As I said earlier, the goal would be to sign an account and have them effectively processing the same day. And those tools are done by some of the things that we did at Concord, which was have a tool in a salesman's hand to electronically board on the spot and it goes through the system to literally get that done.

We also can reach, we definitely not done a great job in the ISO market, the smaller institutional financial institutions. So those will be two areas we go to quickly. I think it's safe to say that we have relationships and connectivity to most of the ISOs in the industry today, but they're pointing the nozzle somewhere else. So we can quickly go in and build those relationships, give them product and bring them back in. So those are some of the things that we're doing. And definitely getting, I mean, I meant what I said when we turn around and said, hey, people perceive us as big and hard to do business with. As we look at these distribution channels, we're going to get pretty nimble at the street level.

A - Ric Duques

I think Kim would like to offer an answer for the fourth quarter weakness in merchant.

A - Kim Patmore

I think if you just go back and you look at the gain that we had in the fourth quarter, that went in the merchant segment. Like I was mentioning earlier, the PNC gain that's down below in the divestiture line, so they're not in the comparable line item. By if you take out that I-payments gain, we would have grown about 14% in the fourth quarter and 9% for the full year of '05 on the profit line. On the revenue line, if you take out, it's actually and your schedules, attached on the back of your page. If you go to slide 68 and you look at core domestic revenue growth, this is slide 68 in your books that you have there, your core domestic revenue growth for the fourth quarter was 8%, for the full year 7% and the core segment revenue growth was 6%. Again, as you recall, the core is taking out the domestic or the, and also any of the acquisitions which were payments, so that is back in your book.

Q - Analyst

(inaudible - microphone inaccessible).

A - Ric Duques

I think she wants to thank you for that.

A - Christina Gold

We're very excited out what we're doing in China. As I mentioned, plus running in a data center in Shanghai. We are so far the only first-party provided that has been licensed, authorized, granted approval, whatever you want to call it, from the government to be an outside processor. We've worked very closely with them, I don't think it haven’t been in the press release. We're very, very well connected. In fact, one of our bank clients that we process their cards for just launched a branded card, we helped them roll that out. It's called the Family Card, Offspring Card, and that will run on our platform and process with this brand. Bank is in the process of converting and launching their portfolio today. What we are really working on right now in terms of an initiative besides continuing to grow the issuance processing business, and I might just say on that, we also as you might remember, worked with four of the five largest Chinese banks are VisionPLUS license customers. So kind of file that as well. We are working aggressively on some ATM opportunities and some front-end switching on the merchant side. So we continue to remain very excited, like our position, like our presence, we have an office in Shanghai and in Beijing, salespeople in some other areas.

Q - Analyst

From your perspective, is the issue of scale more important?

A - Ed Labry

I think definitely scale, but we look at it through our verticals and through more our distribution channel. Now we do have 12 platforms that we process transactions on. Definitely, it would be a goal to take down the number of platforms. We won't just cut that off, of course. We'll do that in a systematic way where the development and the continuation of product development will be on some. And then as people cross-sell and so forth, we'll migrate over to different platforms. So I think in this particular case, the scale will continue to help us and we'll earn our cost per transaction. And over the last two years, the trend continues to go down.

A - Ric Duques

I'll just add to that. If there's scale and processing and there's scale in the sales force. We are very good on the sales force. The sales forces would be alliances, the revenue share alliances, it got people on the street and ISO, we're a formidable force out there. That is scale. Back in the back.

Q - Analyst

Thank you. If you look at the merchant (inaudible - microphone inaccessible) for year-over-year gross margin.

A - Ric Duques

I will start and then any of my colleagues can. I do not believe revenue tracks transaction growth. What we get from a large client, a very large client, generate lots and lots of transactions, but it's far less than we get from the mom-and-pop. So there is historically and will continue to be disconnect there. So you have a lot of transactions from a big retailer, a small number of transaction. So that's the fundamental pricing pressure, but I don't think that was really changed. Do you want to add something?

A - Kim Patmore

2005 really where we ended up was really on a historical basis have been 3 to 5% on a pricing pressure basis, sort of at the lower end of that scale in 2005.

A - Ed Labry

I'm just going to add that, I think I said that we have 13% transaction growth that I think that tracks the industry. So I think we admitted to the fact that we do a great job in the nationals and above and have not concentrated on the smaller to medium accounts. And then of course, that is where the margins are. So I think that's a little bit of my expertise. We have, we've demonstrated the ability to process both. We do have great traction in both, but I think we can make that distribution channel important. And as we said, we're going to continue what we do in nationals and take it downhill through our telesales and ISOs.

A - Ric Duques

This is the 120,000 location sign, 90% of them are the in the mom-and-pop. So we're signing them down there. That category has a higher tuition too. The big guys do not leave, they don't go out of business, but the mom-and-pop could go out of business. It's an interesting market.

Q - Analyst

You spoke about more focus on ISOs, more focus on the small mom-and-pop. Is that just having more salespeople or having a different product, or does it mean pricing? And you have the ability to lower price because you have such a great presence in the national account?

A - Ed Labry

I think it's a combination of both. As we talked earlier, we said we currently have the relationships with most of the ISOs. And I think there's other processes out there that over the last couple of years have probably done a better job with those relationships. And therefore, they are getting the spigot pointed toward them. So I think we quickly come back and let these relationships, you know, this business is very important to us, we increased our telesales. We also expand our reach in working with one of the agent bank community which addresses the small mom-and-pops as well.

Q - Analyst

The sales force, will that be a primary responsibility going forward?

A - Ric Duques

He wants to run the accounting department……..

A - Ed Labry

I do not want to run the accounting department. But definitely, I think I probably have a good grasp on the industry from all directions. The strength is the relationships and sales. And if we have great accounting and great IT, let's do what this group does the best, which is work on our relationship to just go put deals together. That is going to be my focus.

Q - Analyst

Thanks, Ric. I just wanted to understand a little but more. We are going to see charges next early in '06 for potential divestiture. Should we expect any other restructuring charges down the road, or at least in '06 for further headcount reductions, or are we done with that for awhile?

A - Ric Duques

I don't know, John. We're streamlining the organization, so there are none built into the plan. You said there would be charges for sales of business, those would not be charges, but profits. So I can't, there is no plan on the table for other restructuring charge. There will be charges at some point for Western Union. But I think we can give you some sizing of that in the fourth quarter on those kinds of charges. And if there is some kind of restructuring thing, we will come out with it. But there is nothing on them, not right now.

Q - Analyst

A few months ago, we heard that there could be some incremental costs. Are those flowing through…..

A - Ric Duques

I think we have put that through.

Q - Analyst

Great.

A - Ric Duques

That was in the fourth quarter.

A - Company Speaker

So there won't be additional….

A - Christina Gold

De minimus going….

Q - Analyst

Great, thanks.

A - Ric Duques

And I'm going on that Board, so there won't be any more of those.

Q - Analyst

Just a couple down the line. Old Western Union had two non-money product orders. I'm not 100%, are those still going to be at the new Western Union, or is that in the pile to be done with?

A - Kim Patmore

Harder Question.

A - Ric Duques

It's those integrated payment systems, and that's our official check business. That has a line by itself along with Corporate and Other. That is going to be under review.

Q - Analyst

Under review? And the 110-card backlog, is that net of, just to understand if today were day one and looking a year out, you're going to add 110 just go over what's coming off?

A - Ric Duques

Coming off?

Q - Analyst

Yes. I mean, what is the 110, and what you note today, if we were to project out a year, I know 110 are going on, but are there any major card deals, companies, whatever that coming on?

A - Ric Duques

There are no major ones that we know are coming off. Every year, there are large clients that we renew the contract and are under discussion, so that is happening all of the time. By the way, we're going to start to be selling a little bit more here too aggressively. So right now, there's nothing to report on that side, other than to say that large clients do come up to come from time to time for renegotiation.

Q - Analyst

Last question on the merchant integration. The profits are going to be up 20% or in the mid-20s, and then you said before integration, I'm not clear. In the spirit of transparency here, does that mean the margins are going to be reported at 20%, or the margins are going to be 5% because 20 minus integration?

A - Ric Duques

I was not talking about margin. We had integration expands last year in GAAP, so the profit went down, the margins went down, everything. We don't have that in this year. So if you just report it, you came from Mars and you looked at that the number and this number, and you say, it's up 20%. So when you took it out of last year, then compared the two, and that's where we got.

Q - Analyst

Reported number this year was higher than last year?

A - Ric Duques

Yes, the reported number this year will look very, very good.

Q - Analyst

That's the result of the integration.

A - Ric Duques

That's the result of the integration. We also show it without the integration so you can go with the number. But if you want to apply your multiples to the one that as the integration in one year and we would be happy to. In the interest of transparency, we have to tell you though, that's a mistake.

Q - Saf Efford

It's Saf Efford (ph) from Citigroup. If we can go back to the 8 to 10% growth goals for new FDC, what are you going to do with the substantial free cash flow there? That is before acquisitions or buybacks?

A - Ric Duques

If you can think of that exactly the old FDC was, you know acquisitions, dividends, it's stock buybacks, those are, and the general capital investments in the business, I see no change going forward with those categories of cash.

Q - Saf Efford

So the end number will likely be higher than 8 to 10, unless have you that all out in the dividend?

A - Ric Duques

I would like to stay with the 8 to 10, if you don't not mind, for at least the first part of this exercise here.

Q - Saf Efford

Thank you.

A - Ric Duques

There is no constraint on our executives from exceeding that. I made that very clear. That is not a boundary that they cannot step over, but they don't want to step under it. Any further questions? Well it's 9:30, so we'll let you go after a question (indiscernible) market's not going to open.

Q - Analyst

Yesterday in the press and I understand also in Russia, there was a new story at Western Union could be close to signing an agreement in office. Can you comment on that?

A - Ric Duques

We did. Pam, you take the credit for that.

A - Pam Patsley

Agreement with the Russian Post, and they actually have 40,000 locations are rolling out 2500, that's active right.

A - Ric Duques

Did we announce that?

A - Pam Patsley

Yes, the press release came out I think…..

A - Ric Duques

One more question here?

Q - Analyst

Can you talk about revenue per transaction at Western Union (indiscernible) dynamic?

A - Kim Patmore

On mix and the revenue per transaction, as you look at it in international because of the impact of the in-trust and also the impact of the euro. But in Mexico where we have seen pretty stable pricing and a really solid performance in terms of transactions, I'm very pleased with that. We've used the loyalty program, we've also got an outbound business. But we really see Mexico as a solid base customer, very nicely.

Ric Duques, First Data Corporation

Thank you very much for coming. We appreciate it.

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