First Data Corporation. Q4 2007 Earnings Call Transcript

First Data Corporation (FDC)

Q4 2007 Earnings Call

March 14, 2008 10:00 am ET

Executives

Silvio Tavares - SVP of IR

Michael Capellas - Chairman and CEO

Kim Patmore - EVP and CFO

Ed Labry - President of First Data USA

David Yates - President of First Data International

Analysts

Ryder Campbell - Barclays

Manish Somaiya - Citi

Guy Baron - Credit Suisse

Jay Kinley - Morgan Stanley

Adam Moss - Columbia Management

Doug Kahn - RBS

Goldman Sachs - Frank German

Lee Zolter- Merrill Lynch

Sundar Varadarajan - Deutsche Bank

Patrick Wang - SCM Advisors

Toby Lewis - Blackstone group

Brian Pears - UBS

Vivek Bhami - Lehman Assets

Presentation

Operator

Welcome to the First Data 2007 Fourth Quarter and Full Year Financial Results Conference Call. At this time all lines are in a listen-only mode. Today's conference is being recorded. (Operator Instructions)

Now I would like to turn the conference over to Mr. Silvio Tavares, Senior Vice President, Investor Relations. You may begin, sir.

Silvio Tavares

Thank you, operator. 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 Kim Patmore, Executive Vice President and Chief Financial Officer. Also joining us for the question-and-answer portion of the call are Ed Labry, President of First Data USA and David Yates, President of First Data 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 fourth quarter and full year 2007. Next he will discuss the numerous strategic achievements for First Data since our last call.

Next Kim Patmore will present the financial performance of our three primary segments Commercial Services, Financial Institutions Services and First Data International. She will also spend some time covering the components of adjusted EBITDA and give update on various financial metrics and the First Data's new segment structure.

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 guys have any further questions please don't hesitate to contact me on 303-967-8276. You can send me an email at [e-mail].

Now please turn to slide number 3 for some important information about the 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 the annual report on Form 10-K that we filed yesterday with the SEC, as well as the appendix of 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 Account Principles that 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.

Before I hand it over to Michael, I do just want to mention important presentation point. You will recall that our going private transaction with affiliates of Kohlberg Kravis Roberts & Co closed on September 24, 2007. The full year 2007 financial information that we will discuss today is presented on a combined basis. The combined full year 2007 results represent the predecessor period, January 1 through September 24, 2007 combined with the results of the successor period September 25 through December 31, 2007.

And so with that, I'll now hand it over to Michael Capellas.

Michael Capellas

Thank you, Silvio and good morning to everyone. Let's begin with First Data's financial performance as outlined on slide 5. For the fourth quarter of 2007, revenue was up 11%, adjusted EBITDA was up 5% excluding projected near-term cost savings and up 13% including projected near-term cost savings. For the full year, consolidated revenue were $8.1 billion, up 14%. Reimbursables contributed 3% to this growth. Excluding projected near-term cost savings, our full year adjusted EBITDA was up 6% and up 15% including near-term cost savings.

Full year net income from continuing operations was $163 million, but included $720 million of after-tax merger-related costs, and other costs directly attributable to our going private transaction, which are detailed in footnote 2 on this page. I will collectively refer to these costs as merger impacts. Excluding these merger impacts, full year income from continuing operations grew 4%. In our last quarterly call, we have had a number of significant achievements. Please turn to page 6.

We had four areas, where we had significant wins, strategic agreements, and contract renewals and acquisitions and joint ventures. Starting at the top of the page, in the fourth quarter we announced an agreement with American Express, whereby First Data will offer American Express Card acceptance as part of an integrated solution for small and medium sized merchants.

We also signed an agreement with Verizon, which deepens and expands First Data's relationship with Verizon business. We had a number of contracts wins, which significantly expanded our distribution channel in the Commercial Services segment. We signed two new revenue sharing alliances with financial institutions. In addition, we added 13 new referral arrangements and 12 new independent sales organizations. The best news is that we signed over 145,000 new merchant locations in the fourth quarter alone.

A number of our existing customers gave us vote of confidence as well. In January, Wells Fargo signed a multiyear contract extension under which First Data will provide debit processing services to Wells Fargo for its 19.6 million debit cards. This renewal was especially significant because we previously announced Wells Fargo's intention to deconvert this signature debit card portfolio.

National City Bank agreed to long-term contract under extension, under which First Data will continue to provide comprehensive processing services for 5.6 million signature debit cards and 3.8 million credit card accounts. Citizens Bank of Rhode Island also renewed their agreement with us for the processing of 6.1 million signature debit cards. And finally in the area of acquisition and joint ventures, we have made significant progress in closing acquisitions that had been agreed prior to our going private transaction.

In Brazil we completed the acquisition of Check Forte a payment transaction processing company providing data capture, switching end point of sale, terminal management and network processing services to banks for bill payment transactions. In Ireland we closed the acquisition of a specialist software solution provider for commercial payments called Deecal. Next with Standard Chartered PLC, we finalized joint venture establishing merchant solutions, which will provide acquiring services to merchants, initially across Asia and eventually across the globe. We are already operational in several countries.

In January, we launched AIB Merchant Services, a joint venture with Allied Irish Banks PLC. This alliance will provide card acquiring services in Republic of Ireland, the United Kingdom and elsewhere in Europe. So as you see in the page, we have strong momentum in the marketplace and are continuing to win on the individual account basis.

In order to more effectively execute going forward, we have realigned our operations in to five segments. These are Merchant Services, Financial Services, Prepaid Services, International and Integrated Payment Systems. Merchant Services continue to be core to our business and we have accelerated our product innovation and new product rollouts.

Financial Services include all financial institution clients in the US. Our focus here is to improve sales execution and be able to sell the entire portfolio of products to our largest accounts. In addition, we have lined our teams against specific market segments such as community financial institutions and large credit card issuers.

Our International Segment remains largely unchanged. In this segment, we continued to focus on increasing organic revenue growth and margin expansion. The Prepaid Segment is one of our fastest growing opportunity and we intend to be very aggressive in pursuing the segment of the market.

Kim, will give you an update on the Integrated Payment Systems business in just a minute. In addition to the achievements I outlined, we continued to pursue ongoing strategic programs such as accelerating product innovation, structural cost reductions and merchant acquiring alliances.

I will give you a brief update on [those in just a minute]. For example, in the product innovation area, we launched the nation's first trial enabling commuters on the BART Transit System in San Francisco to pay for their ride, download advertising coupons and pay for a meal at certain Jack in the Box restaurants, all just with a touch of the mobile phone.

With respect to strategic cost initiatives, we remain very much on target. We have now completed all of the actions necessary to deliver $200 million in annualized 2008 savings. Our US data center consolidation plan is complete. Internationally, our data center consolidation and platform initiative efforts remain on track. We have constructively completed our data center consolidation in Europe. In addition, our planning for the US platform initiative is progressing well.

With respect to our Chase Paymentech merchant alliance, we have extended the time period for JPMorgan Chase Bank to exercise its termination right, as we further discuss the future of the alliance. Chase Paymentech is 51% owned by JPMorgan Chase Bank and 49% owned by First Data. The current term of the existing alliance agreement expires in 2010. However, JPMorgan has the right to terminate the alliance due to the change of control upon the closing of the transaction of September 24, 2007.

If JPMorgan exercises its termination right, First Data has the right to receive 49% of the alliance's contracts by value and be allocated 49% of the alliance's sales force. A termination is not expected to have a material impact to income from continuing operations or adjusted EBITDA and First Data's reported revenues would increase accordingly. Since our conversations are ongoing, we will not be commenting further on this issue.

Now, I would like to turn it over to Kim to take you through the financials for each of the current segments. Kim, over to you.

Kim Patmore

Thanks Michael. Good morning everyone. Thank you for joining the call today. Let's turn our attention to First Data's business segments, starting with our largest segment Commercial Services. A quick note on presentation, the left column label reported shows the quarterly growth rates using reported results for the fourth quarter of 2007. On the far right, and highlighted in yellow, the column labeled adjusted reflects the results excluding purchase accounting adjustments related to the transaction. The adjusted information is more comparable to how we have reported our financials historically, so those are the results we will discuss today.

Now, looking at the results for Commercial Services, adjusted revenue reflects 10% year-over-year growth or 5% growth excluding reimbursable debit network fees. Lower revenue growth compared to the fourth quarter of 2006, was primarily the result of a large merchant rolling out our Electronic Check Acceptance products in the comparable prior year period. In addition, our bank deconversion from STAR Network in the fourth quarter and lower consumer transaction volumes in December 2007, resulted in lower transaction and processing revenue.

Our adjusted operating profit growth was 3%. The 3% growth in adjusted operating profit was negatively impacted by a revenue mix shift towards larger wholesale and discount merchants and a decline in the TeleCheck regional merchant portfolio. Adjusted profit margin excluding reimbursable debit network fees was 33.8%, compared to 34.6% for the fourth quarter of 20006.

Merchant transaction growth is a key performance indicator and came in at 9% for the quarter. We did see somewhat lower merchant transaction growth in December compared to the comparable prior year period. However, overall most of that lower growth was the result of a particularly large merchant rolling out the electronic check acceptance product in the fourth quarter of 2006.

Now let's turn our attention to Financial Institution Services. Adjusted revenue growth was 4% and excluding reimbursables growth was flat. Adjusted operating profit declined 2%. Adjusted revenue and adjusted operating profit in the quarter were impacted by previously anticipated price compression from contract renewals and by lost business in the STAR Network.

For the quarter adjusted operating profit margin excluding reimbursables was 29.1% compared to 29.9% in the fourth quarter of 2006. Domestic card accounts on file and domestic debit issuer transactions were up 14% and 5% respectively. Debit issuer transaction growth was negatively impacted by lost business in the STAR Network primarily resulting from two bank deconversion.

Now, let's look at our non-US business on slide 10. First Data International achieved adjusted revenue growth of 27%. Adjusted revenue growth on a constant currency basis excluding acquisitions and divestitures was 8% in the quarter. Adjusted operating profit growth was 5% and adjusted operating profit margin was 12.9% compared to 15.6% in the fourth quarter of 2006.

Adjusted operating profit included approximately $10 million of incremental investments in data center consolidation, platform initiative and strategic business development, which negatively impacted to 12.9% adjusted operating profit margin by 2 percentage points during the quarter. Additionally, the operating profit margin for the fourth quarter of 2006 benefited from a gain from a merchant portfolio sale of approximately $11 million or 2 percentage points.

Looking at the FDI key performance indicators, we closed the quarter with transaction volume of 15% over the same period in the prior year. Transaction growth was largely driven by acquisitions and point-of-sale locations increased by 11% and card accounts on file were up 41%.

Next, I would like to walk you through our adjusted EBITDA results on page 11. Adjusted EBITDA is defined as EBITDA adjusted to exclude certain items and other costs. We believe that the inclusion of supplementary adjustments to EBITDA is appropriate to provide additional information to you about certain material non-cash items, non-recurring items that we do not expect to continue at the same level in the future, and certain items we believe will materially impact future operating results.

Please note that the adjusted EBITDA presented here differs from the consolidated EBITDA defined for covenant compliance purposes in our senior secured credit facilities agreement. Please refer to our annual report on Form 10-K, which was filed yesterday for a reconciliation to consolidated EBITDA, pursuant to our senior secured credit facilities agreement.

We will focus on the column labeled “combined twelve months ended December 31, 2007”. This is the column highlighted in yellow. Please note the appendix to this presentation contains the adjusted EBITDA reconciliation for the fourth quarter. Starting on the top of page 11, income from continuing operations was $162.5 million, full year 2007 EBITDA was $1.7 billion.

The adjusted EBITDA reconciliation presented here is consistent with the description presented in connection with our going private transaction. I will briefly walk you through the significant adjustments on this page. The adjustments for stock-based compensation was $267 million, most of which was incurred in the third quarter in conjunction with going private transaction.

Moving to the next two significant items labeled pre-tax equivalency adjustments, and official check and money order EBITDA. Due to the wind-down of the official check and moneyorder business, we have excluded the EBITDA of that business in the amount of $53 million including the associated pre-tax equivalency of $231 million.

Moving to the next line, we have approximately $81 million in costs related to the initiative to reduce operating expenses all of which are considered one-time project. Skipping down several lines, adjusted EBITDA excluding projected near-term cost savings is $2.5 billion up 6% year-over-year. We believe this number better approximates the underlying liquidity of the business and shows our clear ability to meet our obligation and invest in the business for the future.

Moving to the next line, you see the annualized projected near-term cost savings of $200 million. We have now executed the actions required to delivery on these savings in 2008. In addition, there are couple of quick points related to our financial model, which I think will be helpful to you, as you think about the company going forward.

Please turn to page 13. While we don't provide financial guidance during these calls, there are few facts and figures contained in our Form 10-K that are worth summarizing to assist you in modeling the company going forward. First, with respect to our debt service obligations, our total cash interest paid in the fourth quarter of 2007 was $371 million. For the first quarter of 2008, cash interest paid is expected to be approximately $433 million. The increase in cash interest paid in the first quarter is because we paid the coupon on our $2.2 billion of (inaudible) 9/10 bonds semi-annually in the first and third quarters of the year.

Next with respect to our cash and cash equivalents balance as of December 31, 2007, the balance was $607 million. Going forward we expect our cash and cash equivalents balance requirements to be approximately $500 million.

Moving to our Official Check and Money Order business. In January of 2008, we completed the repositioning of the investment portfolio from short-term tax exempt variable rate demand notes into mostly short-term taxable securities. This transition to taxable securities did not result in material gain or loss to the company. Going forward, we will no longer have a pretax equivalency adjustment to our adjusted EBITDA. Primarily as a result of the repositioning of the Official Check and Money Order investment portfolio the company will convert to a classified balance sheet in the first quarter of 2008.

Our CapEx was $113 million for the quarter and $512 million for the full year 2007, excluding synthetic lease buyout costs of $98 million, as required by the change in control, our full year 2007 CapEx was $414 million. And finally, our effective tax rate was 36.2% for the fourth quarter.

Now, please turn to page 14. As Michael mentioned earlier, effective January 1, 2008 First Data adopted a revised segment reporting structure. The company's segments are Merchant Services, Financial Services, International, Prepaid Services and Integrated Payment Systems. Other small businesses are included within the category of their incorporate.

For prior year and quarterly periods, we will be providing financials realigned to these new segments. We also plan to request the standard five calendar day extension to file our first quarter 2008 results with the Securities and Exchange Commission in order to allow sufficient time to provide you with this additional realigned historical new segment financial information.

With that, I will hand it back over to Silvio.

Silvio Tavares

Thank you, Kim. And now we are going to open it up for questions. Just two quick ground rules, please limit your questions to one question and one additional follow-up, in order to be fair for all participants. As we approach the end of our time, I will let you know when we have time for one final question. Participating in the Q&A are Michael Capellas, Kim Patmore, Ed Labry and David Yates. And as we begin questions, Michael will give you an update on the economic environment. So, over to you, Michael.

Michael Capellas

Thanks again, Silvio. Well, for all obviously following the trends and the overall economy and I am sure you are interested in knowing how those trends have impacted us. As Kim mentioned in the fourth quarter, we did see domestic merchant transactions growth slow somewhat in the month particularly late in the month of December.

And we also witnessed two changes in our transaction mix. We saw higher domestic transaction growth with large discounters and wholesalers, where is a small retailers. We also had increased PIN debit growth in proportion to signature debit card growth. So far internationally, we have not seen any evidence of any changes in the traditional patterns or any real evidence of a consumer led slowdown.

In January and February of 2008, we have seen a return to low double-digit US merchant transaction growth and the mix shift to large discounters and wholesalers continues. Given the volatility of the economy, it's difficult to predict a trend for transactions going forward, but we do have access visibility in transactions on a near real time basis and we are certainly continuing to monitor our transaction trends closely and again, internationally, we have seen no dramatic changes in traditional patterns.

One trend that seems not to slowed a bit, is the continued secular trend away from cash to electronic forms of payments, we continue to see consumers use credit cards, debit cards, all forms of prepaid cards at the point-of-sale instead of cash.

One additional point, before we go to questions, is I would like to take the opportunities to thank Kim. Kim is elected to lead the company after 16 years of distinguishers; 8 years of those have been our CFO and certainly in the timeline out been there have been a friend and adviser on all fronts. She remains a committed friend of First Data and will continue to be here and to serve until a successor is named and we will be beginning a search for successor.

Again Ed and David are with us on the phone and so, operator, can we go to first question, please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ryder Campbell with Barclays.

Ryder Campbell - Barclays

Yeah, first with respect to the departure of Kim, can you tell us what the rationale is for that if it's personal or if its, is she is going somewhere else or and then secondly with respect to compensation. Can you tell us the kind of the total consideration that you will be receiving upon departure I'm guessing did it change the control provisions in the executive agreement that she has the ability to have kind of un-invested options investor that type of thing. I was hoping if you could give us some clarity on that?

Michael Capellas

Well, let me take the compensation question first. And then we can, we can have Kim comment on it and certainly it would be the best position to speak herself. I'm just going to refer you, okay. I mean every line item the compensation has felt that appreciating detail if and is public event. There is nothing that was in existing contracts before. But the disclosure is quite detailed. So, you can find it there. And by the way I have not memorized it; therefore I will simply direct you there. Kim, I'll let you take the rest of the question.

Kim Patmore

Yes. For me it's a just purely personal. I have been here 16 years date of which I have been as a CFO and it just time for me to do something else that no -- that something else had not been determined yet. And so more to come on that, but it will not be with the competitor of First Data by any means.

Ryder Campbell - Barclays

Okay, thanks. Secondly kind of looking at your operating cash flow I was hoping you could walk us through a little bit, the cash used for accounts receivables and payables specifically it looks like they are both pretty substantially uses during the quarter and I wanted to make sure there is something at not normal going on there.

Kim Patmore

Absolutely, I can walk you through that, particularly in accounts receivables, it's primarily related to some of the acquisitions that we done over the last couple of years internationally. A couple of big things with something we've done with merchants in Germany as well as Australia and some new business in Latin America as well as, just a little bit in Poland with POLCARD acquisition.

So, it's primarily related to those acquisitions although I will tell you, we have a fears attention to that detail and are trying to structure going forward with terms that are more in-line and install with what we've done in the past. And then from an accounts payable, it is normal accounts payable. We do try to run at 30 to 45 days period that mostly related to some of those acquisitions we've done around the globe.

Michael Capellas

Thanks, Ryder. Just one more point on Kim. Kim is not going anywhere tomorrow. This will be transition of however long it takes and remain committed to be here. The long-term personal situation to Kim and she will participate in the recruitment process for her successor and we will find highly qualified candidate in the next six months and it takes much longer -- it takes much longer, but there is not any appropriate departure here.

Kim Patmore

Absolutely.

Operator

We'll now move on to our next question from Manish Somaiya with Citi.

Manish Somaiya - Citi

Good morning, everyone. I want to get your thoughts on potential legislation that's being discussed in congress the lowest interchange fees. I want to get a sense from you guys as to what the impact on your business if the legislation does get passed?

Michael Capellas

Well, three points on this. One is first, at our heart, the most important thing that we're interested in is the merchant success when we were part and parcel for the merchant success that everybody does well. So, just to think about this, in our two parts of our business, if interchange went down, what our overall volumes go up or down and of course they would go up.

And so in general, even if the legislation would have passed -- I'm not the business to predict the legislatures so you draw your own conclusion. But even it wasn't it very preliminary, then the overall impact to us would be generally quite positive overall -- a little bit of price segregation on the sell side - you would see orient change. That would be divorced by the fact that overall merchant transactions would go up.

So, the affect would be positive and by the way is that, if the legislation passes and when we're again I don't predict legislation out, which [drawing your conclusion] for the way it is. But I don't think you're going to see this have any material impact and it's a word to pass it would be positive, not negative. Okay.

Manish Somaiya - Citi

Wonderful, that's helpful. And then just as a follow-up, on the International side, you'd seen organic growth rate at about 8%, both in the fourth quarter in '07. That seems a bit lower than what we had talked about a few months back. I think the expectation was for the both side to be sort of in the low double-digits. I just wanted to get your thoughts on what the differentials are?

Michael Capellas

Well, I think you have two things. I mean one of the things that we're focusing on is organic growth, but profit organic growth. And so, we have a couple of large contracts one particularly in the UK, which quite frankly we're on [the lot of it]. So, you don't see any fundamental change in the business that transaction growth is down a little bit because we did have -- we did have what contract, which was high volume transaction growth and low profitability.

We have really for the year run in the pretty much between 8% and 9% on year for a while. And so I don't think there is any fundamental shift other than we are being a little more selective, particularly in Western Europe and again there is two parts here. So organic growth and margin expansion and so I do think we are being a little more disappointed.

Manish Somaiya - Citi

Thank you. I will get back in the queue.

Silvio Tavares

Okay, operator lets us go to our next question.

Operator

And now we will hear from Guy Baron from Credit Suisse.

Guy Baron - Credit Suisse

Hi, good morning. First of, Michael you noted that you seen a resumption to double-digit transaction growth in Q1 so far. What would you attribute that to, given the economic environment appears actually to be worsening and then what's sort of your view on sustainability and what impact does the shift and the mix of those transactions actually have on the business?

Michael Capellas

Well, as you actually pair in to the data what you see is that, at the merchant transaction level we are extremely diversified. So, as we continue to say actually on the road show is that we have a high percentage of quick service restaurants, we have a high percentage of participation in all forms of we used to call him gas stations, with politically correct term is. But gas stations, we got a very high percentage of grocery. And so we don't get paid, we get paid per click per transaction and we don't actually take a percentage of the overall ticker.

So we have these strong positions with some of the leading discounters, the ticket with discounters. So, there is no question that the overall economy is swelling, but consistent to what we had said the data shows the transaction volumes in the segments we participate are the least affected. And so if average ticket price is declining, although it's not materially issue you might think. But the segments where in continue to have transaction volume.

So, I don't think -- I love to say that's a great barometer to the economy is stabilizing and in fact this is a waiting indicator and I'm not sure, I can make that conclusion. But what the data shows is our transaction volumes in those segments where people will have activity, even though the actual ticket price might come down. This is the pattern doesn't change and we have a natural hedge against overall transactions by the fact of the secular trend towards prepaid cards and debit continue in all forms of electronic form. So, honestly its pretty consistence to what we've been advance, while the numbers pair it out. And I wouldn't try to; even try to say that's a proxy for [clarzy] in the economy.

Guy Baron - Credit Suisse

Great, on the cost save front, how much did you actually realize cost saves in the numbers in the quarter, to what degree those sort of the current environment have any negative pricing dynamics and do those offset the nature of some of the progress you would have otherwise expected to make with these cost saves. And just final part of the question given that's you've now executed the full 200, is there a stage at which you essentially up the execution targets for the year?

Michael Capellas

All great questions. So, first question is, do you see an affect in the fourth quarter, not really most of this was late November and so well there maybe some marginal affect, it is pretty marginal. In effect where was there cost reduction most those people were physically -- for financial purposes approximately at the end of the year. So, I think you can sort of say, virtually no affect very module affect in the fourth quarter. As that is just part one.

Part two is, in the kind of an economy, I mean I don't think there is any question and on the overall mix of the business take in the whole, which you got to see some price compression and in effect is your question, where you simply offset any potential price compression with cost savings. The answer is, one logically have you to go there, so I can't point the material effect so far and what going to happen data behind this. But that is logical -- one would have to logically take a look at the economy right now and say we will see some price compression, I don't see we can't and that will be offset by the cost savings.

So, I think that's a fair assessment, but can I quantifiably just pin that down specifically no, but I think directionally that one would have to see that. Third point is, we have the targets of course we will. We improve everyday and so, I'm not prepared on this call to set a quantifiable target, but you can bet there were hard at work, was in other areas of business improvement and cost improvement. We do feel we have more leverage to pull. And you will probably be hearing specific plans. I think probably as you've already figured out, we tend to permit the things ones we have very specific plans in place and I'll tell you, we are working on plans for more improvement.

Operator

All right, now moving on to [Jay Kinley] with Morgan Stanley.

Jay Kinley - Morgan Stanley

Yes, can you comment on your exposure to auction rates securities, is sounded like there was about $1 billion that maybe have been reduced to a little over $600 million by February. Can you just talk about the liquidity there and the implications if that remains a liquid?

Michael Capellas

Well, lets going to have David Yates to comment on it, but I will ask Kim instead.

Kim Patmore

Yes, for us these are really still highly rated securities. It's really been more around just the liquidity in the auction market. And so we have seen some -- as you can see some colors on those, as time has passed and there has been a little bit of easing. We don't really see any investments exposure for us because we do have the ability to hold these long-term. As match up that small balance of the 600 against call it $11 billion or $12 billion we have the ability to hold those securities as we wind-down the business, because we will continually be winding down the business even through 2009, but again very highly rated securities AA.

Jay Kinley - Morgan Stanley

There is no immediate need to draw on any other type of liquidity to satisfy the liability of that roll off?

Kim Patmore

Correct, not whatsoever because when you think about how large the portfolio is, this is the very, very small piece of that. And we have, we are in short-term securities and these taxable securities related to the rest of the portfolio, absolutely adequate to me or obligations as pace come through on the Official Check and Money Order business.

Jay Kinley - Morgan Stanley

Okay. And then can you just talk us a little bit about the average price reduction on contract renewals in the Financial Institution business and how that pieces changed in '07 and in '08 you have any other significant Financial Institution clients that might be rolling off?

Michael Capellas

I'd say in general, we have seen a slowing of the price at time from the sort of couple of periods ago when there was sort of period of major in sourcing and little movement. However, I'll probably tune that. Ed, do you want to comment on this one?

Ed Labry

Yeah, I think the good news here is, instead of Financial Institutions leaving us, we have we have been able to renew some significant agreements like a Wells Fargo, Nat City or Citizens as Michael called out. So, we have taken a harder look at the relationships sales in this environment. I had two years of Commercial Services exposure, we pick this up across the country since September 24.

So, I think the strategy of just rekindling the relationship looking at First Data holistically with all the products and now just taken one product at a time and going to a low cost denominator and been able to leverage the expertise we have across all our products is beginning to help us.

So, that will be the theme as we continue on through '08 and looks like it's been working, especially in our Community Bank structure we have 4,000 to 5,000 community banks on our program. So, if you just take the numbers of how many it would be renewal on a weekly basis. So, we've actually seen the price compression and the short-term drop pretty significantly just over the last couple of months.

Jay Kinley - Morgan Stanley

Okay.

Operator

We'll now move next to Adam Moss with Columbia Management.

Adam Moss - Columbia Management

Hi, good morning.

Michael Capellas

Yes.

Adam Moss - Columbia Management

I wanted to drill down a little bit on Commercial Services and I'm just wondering if there is anyway you could provide, so in the fourth quarter what you saw in terms of merchant -- domestic merchant transaction growth in the fourth quarter relative to the fourth quarter of last year?

Michael Capellas

We can in detail -- the specific question was, what was merchant transaction growth fourth quarter versus prior year?

Adam Moss - Columbia Management

That's correct. And could you do the same for the PIN debit transaction growth as well?

Michael Capellas

Merchant service transaction grow in Q4 versus prior years was between 9% and 10%.

Adam Moss - Columbia Management

That's domestic merchant growth and how that the PIN debit growth?

Michael Capellas

Domestic merchant growth in the fourth quarter compared to the prior years was between 9% and 10% right?

Adam Moss - Columbia Management

Right.

Michael Capellas

Okay. Okay, I'm sorry, the second question?

Adam Moss - Columbia Management

And then just, if you could just drill down a little bit more PIN debit growth in the fourth quarter this year versus last year?

Kim Patmore

The debit issuer transactions were at about 5%.

Adam Moss - Columbia Management

Okay. And then finally, there has been I think one of your large Financial Institution customers had talked about exiting their private label business. And I don't know if there has been any update on GE, but how should we think about that, I mean if they do were to exit that business. What potentially, what kind of impact to that have on you, should perhaps if they were sell it to someone, who kind of did their own processing and how sort of would perhaps look to outsource it to someone else. Thanks.

Michael Capellas

We have a long-term contract and that contract runs, I believe it help me out, it's like 2016.

Ed Labry

Yes, there is no termination -- in the change of control. So, we have a long-term contract with them.

Adam Moss - Columbia Management

Great, thank you very much.

Michael Capellas

I'm pretty sure its 2016 but anyway, it is out there well.

Adam Moss - Columbia Management

Thanks.

Silvio Tavares

Next question please.

Operator

We will now move to Doug Kahn with RBS.

Doug Kahn - RBS

Yes. Hi, good morning, thanks. I have a question on the adjustments to EBITDA and two of the items there. The first is your confidence in achieving the near-term cost savings in the times that the time allotment that given for which is 12 months. And I wonder, when would you consider this start date on that still on schedule, you think the adjustments or the cost savings are going to be evenly distributed or they going to be more backend in the 12 month period?

Michael Capellas

Okay. On the 200, our confidence is extremely high and I'd say it is 95% already executed. Okay. So, that confidence level is quite high and I'll be point blank specific to what that is, that is some force reduction, which we announced previously, which has been, 100% completed and is it some structural stuff relative to data centers, particularly outside the US, which is 100% completed. So, of the first tranche of 200 million I'd say if 95% complete and we would see at least two months effect in the first quarter and then so that's what is done and you might just have a little leakage in January, but outside of that I mean we below of 200. The question was that a little bit early we will be another program following for some other things, the answer is yes. But we are just not prepared to commit to any numbers on it right now.

Doug Kahn - RBS

Okay and then now on the other item that pre-tax equivalency adjustment, little bit of a follow-up to the previous question. The movement in to the taxable securities, it sounds like that is going, on plan is on target. However, I did notice that the time of the initial transaction it was listed as 246. It's now around 231. Is that reflection is that accounting issues or is that a reflection of what you were able to achieve and will that number be changing again?

Michael Capellas

Hey, Kim will take that one.

Kim Patmore

Yeah, the pre-tax equivalency just ended up at 231 based on the actual balances that were outstanding during that fourth quarter. The 246 wasn't estimate when we were speaking in September estimating what the balances would be relative to fourth quarter. So, it's really just a balance driven number. But you are correct, we actually did move to the taxables right at the beginning literally the first week of January. So, going forward you won't see any pre-tax equivalency. However, you will still see some EBITDA related to the Official Check and Money Order business, which again in this reconciliation we will exclude because we are winding down the business.

Operator

And now from Goldman Sachs we have Frank German.

Goldman Sachs - Frank German

Thanks, guys. Most of my questions have been asked. Just one sort of follow-up on the comments you made earlier specifically with the cash requirements over 2008, I just wanted to clarify you ended the $607 million of cash on hand and you expect cash requirements of 2008 to be $500 million. Is that clear?

Kim Patmore

Yes, the $600 million at the time we knew that we would be using at least $100 million for our couple of those acquisitions that you saw we have made so far in the first quarter up to $200 million. So, we were holding that additional $100 million at the end of the year in anticipation of that acquisition. And so, in general to run the business, we think around that $500 million is probably the right number going forward.

Goldman Sachs - Frank German

Okay. And so, and that's on a -- that's a global base as I assume as well right, I just want…

Kim Patmore

Exactly.

Goldman Sachs - Frank German

Okay, great. Thanks.

Operator

Thank you. Now we'll take the question from [Lee Zolter] with Merrill Lynch.

Lee Zolter- Merrill Lynch

Hi, guys. Just a quick follow-up on the auction rates securities question. Can you actually quantify how much of your cash balance invested in those securities any other instruments might have had some compromise liquidly recently?

Kim Patmore

It's really just as of on the end of February, we just had $660 million and those are all primary student loans and again, government backed and AA rated. And we have those sub-prime exposures on any of the rest of the balances out there.

Lee Zolter- Merrill Lynch

Okay. And then another question with respect to your debt balance specifically on the [settling] rate debt, have you guys engage any swaps to fix those rates and if so if you can quantify how much at what level?

Kim Patmore

We have and it's about $7.5 billion notional and you can see actually in the footnote. You'll see the details of the rates at which we swap those out, so that's in the detail on the footnote.

Lee Zolter- Merrill Lynch

Okay. Do you that there is mention the timeframe as well, having those swaps on?

Kim Patmore

Yes, it does.

Lee Zolter- Merrill Lynch

Okay, thank you.

Kim Patmore

That primary three to five years. That you'll see in the detail.

Operator

We'll now move on to Sundar Varadarajan.

Sundar Varadarajan - Deutsche Bank

Hi, guys. Thanks. A couple of questions, in orders to be equity earnings from that affiliate number was down about $30 million this quarter year-over-year, you've been running at around 69 to 75 for each of the last four quarter. But in Q4 it was down to 44 since we include that number in our EBITDA calculations, could you comment on what might be going on there, is that were something anything onetime or any color there?

Kim Patmore

Yeah, if you look in the detailed footnote, it's actually primarily because of the transaction because as we valued all of the assets, of course we put a value around all of our equity alliances as well. So, it's primarily related to the increase in the amortization, the fundamentals of the business. So, a very similar to prior periods however, we had the increase amortization and we did try to footnote that one of the tables in the footnotes.

Sundar Varadarajan - Deutsche Bank

Okay. Thank you.

Kim Patmore

Sure.

Sundar Varadarajan - Deutsche Bank

And I noticed the, you were talking about the volumes in the debit transaction was around 5% this quarter, which is again, somewhat lower than the trends we've seen is the first two or three quarters you are up, significantly on the double-digit side. Could you give us some more color on what's happening there, you did mention some deconversions on the STAR Network side -- will that continue to impact competitively at least another couple of quarters. Any color in terms of what's going on there?

Kim Patmore

That was primarily related to those two bank deconversions and I can't remember the exact period, that I'll go through in 2008. But it will continue at least through the first quarter, I just can't remember the exact timing. But yes, that was primarily just related to those two bank deconversions.

Operator

Great, we will move next to Patrick Wang with SCM Advisors.

Patrick Wang - SCM Advisors

Yes, I just want to follow-up on the question, on the house bill that may pass to reduce the interchange fee. How would that possibly impact First Data like you said?

Michael Capellas

Well, remember I mean what happened here is that, firstly lets be clear, so we don't, this is very, very preliminary on this bill, okay. So, again, I don't predict legislation, but it's very preliminary. Constructively what would happen if the bill were passed -- if the bill would pass, the interchange rate would have a dramatic effect on those people, who get interchange fees, which would include us with the STAR Network.

If the interchange fee were to go down, obviously that would be generally good for us relative to overall merchant transactions. So, we would probably gain from the merchant transaction side and pay less interchange, which would be good. But we would see some fee aggregation on the STAR Network, which is a dramatically smaller piece of the business. So, you can just imagine the effect it would be have on Visa/MasterCard. So, I mean I think that is sort of where to direct your attention. We will be a very small player in this and would generally probably be higher merchant transactions. So, materially that almost no effect on us, and if it has effected it would be positive, not negative. Okay.

Operator

All right, moving next to [Toby Lewis] with the Blackstone group.

Toby Lewis - Blackstone group

Hi. Good morning. Just a few quick questions on the competitive landscape, just wanted to get a bit of an update developments as the year closed particularly in this market how the dynamics here might have change?

Michael Capellas

I'm so sorry. I just, can you repeat the question, specifically didn't hear the front of it.

Toby Lewis - Blackstone group

Sure, the competitive landscape. I'm just looking for a bit of an update there particularly on the debit side, what changes you are seeing in this marketplaces, you mentioned there is some price compression out there. I'm curious whether behaviors have changed and then in particular just to have a follow-up on these.

Michael Capellas

Okay, Ed.

Ed Labry

Yeah, I think competition is always been in this space throughout my career. So, is it really a landscape hadn't and changed that dramatically. I think that on the merchant side as Michael said we put in 145, 000 new merchant locations in the fourth quarter alone. So, I think actually we were winning in the market share on the merchant side quite effectively as we have, but we have a last couple of years as we accelerated the emphasis on customer service retention in new sales growth.

I think we're also shifting at over to the Financial Institution side, was we began the latter part of last year. I think you're begin to you see that payoff, as the new customers that we thought we are going to lose. I think the big -- the Tier II, Tier I banks that attrition has definitely stopped. We don't have any other deconversion schedule and then we been able to renew each one of those customer. So, I think as it relates to the bundling of products across First Data throughout the company, whether it's 20 different products we have that's given the financial institutions a holistic approach to what we do for the industry, I think is really paying off.

Toby Lewis - Blackstone group

Okay. And you mentioned obviously the contracts you have with Chase Paymentech JV and Wells Fargo, which you just renewed. Are there any other material contract that we should be aware of through '08 and '09 for that matter?

Ed Labry

We definitely have contracts that are doing the worst in different spaces, so our Financial Institution might have a multiple relationships like a Nat City we had -- we have a relationship with sig debit. We also have other relationship as then that it will be coming up that we are working. So, yeah, we do have current contract negations going on for renewals, but as I said nothing excess that we're going to lose any of them.

Toby Lewis - Blackstone group

Okay. And then just lastly on Visa, with the hope that they're going to go public, are you seeing any changes in their behavior in terms of aggressive nature to enhance their growth profile anything new debt we should think about?

Ed Labry

Actually think that will help us long-term because they're going to have the equity shareholders and people to content with and to make money. So, I think there'll have to behave consistent to what companies they have to make money to.

Silvio Tavares

Next question please.

Operator

(inaudible). Please go ahead with your question.

Unidentified Analyst

Hi, good morning. I want to go back to one of the earlier questions that was asked on the transaction growth in the commercial services side. Would it be possible for you to maybe breakout for us what you think pin debit growth and credit growth would have been had you not lost the customer and specifically what you saw in terms of classic versus cash growth and transaction growth?

Michael Capellas

We don't do granular transaction growth other than at the segment level and that has been consistent with that practice with proficiency and also they are consistent with other competitive positions. So, we will give you the top level but not going to go more granular that that.

Unidentified Analyst

Okay. Would it be possible to may be talk about, what you think growth would have been had you not have the deconversions?

Michael Capellas

At the transaction level, no, I am not going to comment on that. First place, I mean frankly we don’t have the data sitting right in front in of us. So, the overall 5%, obviously is somewhat below the markets as you know. And there are two de-conversions in there but I am not going to be get specific transaction growth numbers.

Operator

We will now move to [Brian Pears with UBS].

Brian Pears - UBS

Good morning, I wanted to follow-up on the IPS segment, discussed earlier. As you wind down that business over the next couple of years, the current settlement asset and liability is about $18 billion total and it looks like the IPS segment related securities was around $13 billion in the last couple of years. Is that the right way to look at it, that $13 billion portfolio will be going away over the next couple of years as you wind down that business?

Kim Patmore

Exactly, at the end of the year, we were at about $12 billion. We would anticipate that that will continue to wind down as the businesses that are using the Official Check and Money Order exit and take it back in-house. And we will honor all of the contracts that we have outstanding. And you are right. I mean, I think substantially we will probably be down another 70% of the [taxes] by the end of the year. But again it will continue in to 2009 as well.

Brian Pears - UBS

Okay, so then that would leave the settlement assets and obligations around $5 billion going forward once IPS is completely wound down. So my question regarding that is, are those funds coming on to the extent that you could if the auction rate securities, $661 million still remained at that time. Could you then shift it to the remaining portfolio there and use other cash to settle that liability, to say?

Kim Patmore

From the perspective of the settlement assets we do keep those completely segregated as we do share refunds. So there would be no ability to take other settlement assets to supplement that from the investment portfolio related to IPS. So it would have to come from our operating cash although we do have some operating cash within IPS today in addition to the settlement assets.

Operator

Thank you and [Vivek Bhami from Lehman Assets] has our next question.

Silvio Tavares

Okay it is 4 minutes to two. So great questions, I am afraid this, will the last one. So you are on record for the last question.

Vivek Bhami - Lehman Assets

Okay, great. First can I know what the adjusted gross margin is for ’07 and Q4. I know there is a lot of OpEx going in to adjusted EBITDA, but just to get a sense what the gross margin was?

Michael Capellas

Yes, do you have the second part of the question because we are?

Vivek Bhami - Lehman Assets

Sure.

Michael Capellas

We will get that in just a second.

Vivek Bhami - Lehman Assets

On the $200 million in cost savings, is that going to appear more in the SG&A is that kind of split between margin and SG&A.

Michael Capellas

It is about 25% on the market, as a general rule of thumb 25% on the margin line and the rest of it below the line, as a general rule of the thumb. Pretty good estimate.

Vivek Bhami - Lehman Assets

Okay. And then maybe why you are getting in that, you said it takes about $500 million to run the business in cash. You guys look you'll try to generate cash in '08. Do you foresee getting back into doing acquisition selectively or do you have kind of at least say, what near mine you'd want to use excess cash flow for?

Michael Capellas

Yeah, I mean, obviously we have -- we will be quite selective on acquisitions that obviously we always have the ability to buy down debt. And, we would expect to deliver over some period of time over the next couple of years positions. So, I don't think what's you're going to do is see us going on a flurry of small acquisitions, if we make an acquisition it will be a targeted area which really would bring us into older market. One of the reasons why we are spending so much energy and some of that capital to really drive our product development engine is because for areas where we previously had acquired, we will develop.

So, whether that's royalty program next generation analytics, next generation securities, so we are really cranking our product development. So on the longer term, two or three, four or five year period is more money on development, more tools in development, less on smaller acquisitions and when we acquire, it will be to enter into a new market space we haven't been. And then secondarily if not, if we don't have an overwhelming opportunity to participate in a new market space where we can get 15% to 20% growth, then we'll look at delever.

Vivek Bhami - Lehman Assets

Right.

Michael Capellas

Okay. Back to your specific question you could obviously tell we had to look it up, so we have the number now and we would like to be give you the specific answer.

Kim Patmore

If you go back to page 22 in the appendix, you'll see the fourth quarter of the adjusted EBITDA at 662.2 and if you take that over the fourth quarter revenue of the $2.1 billion, you’d have about 31% or 30.9% margin.

Vivek Bhami - Lehman Assets

And on the gross margin side but not on the EBITDA?

Kim Patmore

No, its adjusted EBITDA.

Vivek Bhami - Lehman Assets

So, you work with gross margin. I would say, what given that we're about to turn into, we are happy to answer the question, Silvio will get back to you and help you with that modeling is that okay.

Silvio Tavares

Yeah, it looks like he disconnected.

Michael Capellas

Okay. Anyway, Silvio will get back to you. We are right at the conclusion point. I do want to thank you for your participation. Obviously, great questions and we will be talking to you again last quarter and again, thank you for participation, thank you for the questions and all the best.

Operator

And that concludes today's conference call. Once again, thank you for your participation and have a good day.

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