Executives
Silvio Tavares - Investor Relations
Kimberly S. Patmore - Executive Vice President, Chief Financial Officer
Michael D. Capellas - Chairman, Chief Executive Officer
Ed Labry - President, First Data USA
David Yates - President, First Data International
Analysts
Guy Baron - Credit Suisse
Manish Somaiya - Citigroup
Jeff Harlib - Lehman Brothers
Peter Gingell - Angelo Gordon
Ryder Campbell - Barclay’s
Lionel Jolivot - Banc of America
Jake Kimini - Morgan Stanley
Dax Vlassis - Gates Capital Management
Brian Pierce - UBS
Sundar Varadarajan - Deutsche Bank
Doug Khan - Royal Bank of Scotland
Ken Goldberg - Lydian Asset Management
First Data Corporation (FDC) Q1 2008 Earnings Call May 16, 2008 10:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the First Data 2008 first quarter financial results conference call. (Operator Instructions) Now I’d like to turn the conference over to Silvio Tavares, Senior Vice President and Head of Investor Relations. Please go ahead, sir.
Silvio Tavares
Thank you, Gwen. Good morning, everyone. This is Silvio Tavares and I'd like to 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 session portion of the call are Ed Labry, President of First Data USA; and David Yates, President of 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 first quarter or 2008. 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 new primary segments: merchant services, financial services, international. She’ll also spend some time covering the components of adjusted EBITDA and give an update on various financial metrics. The remainder of the call will be devoted to answering your questions and the operator will provide you with instructions on how to ask your questions at that time.
After the call is concluded, should you have any further questions, please don't hesitate to contact me at 303-967-8276 or you can send me an email at silviotavares@firstdata.com.
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 our quarterly report on Form 10-Q 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 accounting principles and we reconcile those measures to GAAP measures in the appendix and on our website in the investor relations section.
All statements made by First Data officers on this call are the property of First Data and subject to copyright protection. Other than the replay, First Data has not authorized and disclaims responsibility for any recording, replay, or distribution of any transcription of this call.
And so with that, let me now hand it over to Michael Capellas.
Michael D. Capellas
Thank you, Silvio and good day to everyone, wherever we may find you. Let’s begin with First Data's first quarter 2008 financial performance, as outlined on slide 5. Revenue was up 16% to $2.1 billion, adjusted EBITDA was up 8% to $586 million. We delivered a solid performance despite a difficult market environment for financial institutions and merchants. Throughout the quarter, we kept our focus on short-term execution and on delivering against our five key strategic initiatives. Please turn to page six.
As displayed, there are: one, generate organic growth through improved sales execution; two, accelerate new product development in both extending our current offerings, as well as entering adjacent markets, such as mobile commerce, loyalty, and analytics; three, pursue targeted geographic expansion and strategic alliances to ensure that we have maximum participation in the fastest growing segments of the market; four, reduce structural costs as we invest in new products; and finally five, improve technology delivery.
In the first quarter, we delivered key accomplishments in each of these areas. Please turn to page seven.
Starting with our organic growth, in the first quarter alone we signed 156,000 domestic merchant locations, which is an increase of 5% over the first quarter of 2007. In our new prepaid services segment, we signed contracts to provided branded closed loop gift card programs for Office Depot and Best Buy. These companies are two of the nation’s largest retailers.
In our financial services segment, Capital Card renewed its contract with us. This was a long-term contract extension under which First Data will continue to provide comprehensive processing services for approximately 760,000 cards.
Particularly within financial services, the overall market conditions remain difficult but our sales teams are focused and we continue to gain momentum relative to the market. Please turn to page eight.
On April 28th, we announced our intention to acquired InComm Holdings Inc. for approximately $980 million, plus up to $250 million in performance contingent future payments. Based in Atlanta, InComm is a leading distributor of gift cards, prepaid wireless products, reloadable debt cards, digital music downloads, content, games, software, and bill payment. In 2007, InComm generated over $300 million in net revenues.
As part of this transaction, KKR Affiliates will contribute $250 million in incremental equity capital. We anticipate the transaction will close in the second half of 2008.
First Data's existing leadership in closed loop cards will be coupled with InComm’s industry-leading position in retail prepaid card distribution, which spans over 145,000 retail locations. This combination will make First Data one of the most formidable companies in the market.
We also had a number of contract wins which significantly expand our distribution channel and merchant services. Specifically, we signed 22 new independent sales organizations that resell our services and added one new revenue sharing alliance.
With respect to our Chase Paymentech alliance, J.P. Morgan Chase has the right to terminate the alliance due to change of control. We extended the time period to exercise that right to allow for further discussions. We expect the alliance to end prior to the current expiration date of 2010. Upon expiration, the 49% of the alliance business retained by First Data would be consolidated with no material impact to pro forma historical net income.
Because our negotiations are ongoing, I can provide no further comment at this time.
Finally, in the first quarter we also focused on improve our infrastructure. Please turn to page 10.
During our last call, we reported that we had constructively completed a program that results in $200 million in annual run-rate savings. We continue to look for areas of improved cost efficiency and we will take further steps to consolidated our administrative functions while we invest in new products.
In addition, we signed a strategic agreement with Accenture who will partner with us on IT application development.
As we’ve commented in the past, we have a number of aggressive initiatives to improve technology delivery. These programs, taken individually and collectively, will improve our quality of service, allow for faster deployment of new products, and over time reduce operating costs. These programs include U.S. data center consolidation, merchant services platform consolidation and deployment of our VisionPLUS issuing platform outside the United States.
While each of these programs are longer term in nature, they have the promise to both extend our market-leading capabilities as well as reduce our structural costs. One of the benefits of being private is the ability to continue to balance short-term objectives with longer term initiatives, even in a down market. And as you can see, we are active on both fronts.
Now I’ll hand it over to Kim to take you through the financials of each of our current segments. Kim, over to you.
Kimberly S. Patmore
Thanks, Michael. Good morning, everyone. Thank you for joining the call today. Let’s turn our attention first to First Data's new segment structure. Please turn to page 12.
As we mentioned on our last quarterly results call, effective January 1, 2008, we 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 all other and corporate. The activities for each of these new segments are described in the quarterly report on Form 10-Q, which was filed yesterday with the SEC, but we have also summarized that information on this page.
Today I will primarily cover the results of our three largest segments, merchant services, financial services, and international. So let’s start with merchant services on page 13. A quick note on presentation -- the left column labeled reported shows the quarterly growth rates using reported results for the first quarter of 2008. On the far right and highlighted in yellow, the column labeled adjusted reflects the results excluding purchase accounting adjustments related to the transaction. The purchase accounting adjustments are primarily comprised of increased amortization expense. We believe the adjusted information more easily allows comparison to prior year periods.
Now looking at the results for merchant services, adjusted revenue reflects 10% year-over-year growth, or 3% growth excluding reimbursable debt network fees. Revenue growth was primarily driven by continued strong transaction growth.
Our adjusted operating profit growth was 8%. This 8% growth was primarily the result of cost reduction initiatives executed in the fourth quarter of 2007. Adjusted profit margin excluding reimbursable debit network fees improved to 33.2% compared to 31.7% for the first quarter of 2007. As a reminder, in the first quarter of 2007, we incurred a charge when we bought our a revenue sharing agreement as part of a new larger relationship with Discover. This adversely impacted the first quarter 2007 margin of 31.7% by 1.5 percentage points.
Finally, domestic merchant transaction growth is a key performance indicator and came in at a healthy 12% for the quarter.
Now let’s turn our attention to financial services. Adjusted revenue growth was flat and excluding reimbursables, growth was also flat. Adjusted operating profit declined 4%. Adjusted revenue and adjusted operating profit were negatively impacted by anticipated price compression from contract renewals and by lost business in 2007.
For the quarter, adjusted operating profit margin excluding reimbursables was 27% compared to 28% in the first quarter of 2007. Domestic card accounts on file and domestic debit issuer transactions were up 12% and 4% respectively. Debit issuer transaction growth was negatively impacted by lost business in the Star Network, which occurred in 2007.
Now let’s look at our international business on slide 15. International achieved adjusted revenue growth of 23%. Adjusted revenue growth on a constant currency basis excluding acquisitions and divestitures was 5% in the quarter. This 5% growth was negatively impacted by price compression and by lost contracts, primarily in our Western European and Asia-Pacific businesses.
Adjusted operating profit declined by 32% and adjusted operating profit margin was 5.2% compared to 9.5% in the first quarter of 2007. Adjusted operating profit included a loss reserve of approximately $6 million for a failed airline in one of our merchant alliances. Adjusted operating profit also included approximately $5 million in incremental investments in data center consolidation, platform initiatives, and other expenses related to cost reduction initiatives.
The reserves, incremental investments, and cost reduction initiatives negatively impacted that 5.2% adjusted operating profit margin by 2.4 percentage points during the quarter.
Looking at the international key performance indicators, we closed the quarter with transaction volume up 13% over the same period in the prior year. Transaction growth was in part driven by acquisition and point of sale locations increased by 18% and card accounts on file were up 18%.
Next I will walk you through our adjusted EBITDA results on page 16. 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 and non-recurring items that we do not expect to continue at the same level in the future. We will focus on the column labeled successor three months ended March 31, 2008. This is the column highlighted in yellow.
Starting on the top line on page 16, the loss from continuing operations was $222 million. EBITDA for the quarter was $525 million. The adjustment for stock-based compensation was $4.4 million, which reflects the reduced level of equity compensation.
The next line is an adjustment for other items, which totals $43 million. Other items includes net restructuring, impairment, investment gains and losses, derivative financial instruments gains and losses, net divestiture gains, and foreign exchange gains and losses, operating and non-operating.
Let’s move to the item labeled official check and money order EBITDA. Due to our wind-down of the official check and money order business, we have excluded the EBITDA of that business in the amount of $34 million. Early in January 2008, we completed the repositioning of our investment portfolio into mostly short-term taxable securities. Therefore we no longer have a pretax equivalency adjusted to our adjusted EBITDA.
Moving to the next line, we have approximately $32 million in costs related to initiatives to reduce operating expenses, all of which are considered one-time projects.
Skipping down several lines, adjusted EBITDA is $586 million, up 8% year over year. We believe this number better approximates the underlying liquidity of the business.
Finally, I want to quickly mention something which is not shown on this page but which you might have noticed in our Form 10-Q. With respect to near-term cost savings, we expect to exit 2008 having achieved the necessary actions to deliver approximately $360 million of annualized savings in 2009. The increase in projected savings from the previously disclosed $200 million related to corporate overhead and operational business unit cost reduction efforts, some of which is already reflected in the quarterly results, is primarily comprised of the three categories Michael mentioned earlier -- U.S. data center consolidation, merchant platform consolidation, and vision plus deployment outside of the U.S.
In addition, there are a few quick points related to other businesses, as well as our financial model, which I think will be helpful to you. Please turn to page 18.
In our all other and corporate category, we generated approximately $39 million in intellectual property royalties revenue in the first quarter of 2008, compared to approximately $11 million in the first quarter of 2007. For all of 2007, we had approximately $63 million in intellectual property royalties.
In the official check and money order business, our wind-down continues to go smoothly and as a result, our investment portfolio balance is $9.6 billion, which is down from $13.1 billion at the end of the first quarter of 2007.
Finally, in prepaid services, our revenue growth was flat due to the termination of some truck-stop related ATM driving business. Going forward, our income acquisition, which is expected to close in the second half of the year, will be reported as part of the prepaid services segment.
Moving now to the bottom of the page, there are a few facts and figures contained in our Form 10-Q that are worth summarizing. First, with respect to our debt service obligations, our total cash interest paid in the first quarter of 2008 was $437 million. Next, with respect to our cash and cash equivalents balance, as of March 31, 2008 the balance was $702 million. Our quarter end cash balances were somewhat higher than forecast, in part because of certain timing considerations related to interest payments and deposits in transit.
Our CapEx was $94 million for the quarter and we expect to incur an additional $400 million for the remainder of 2008. This future level of capital expenditures includes outlays related to platform and data center consolidation.
And finally, our effective tax rate on pretax loss was 37%, a tax benefit. Now let me hand it over to Silvio.
Silvio Tavares
Thank you. And now we are going to open it up for questions. Just two ground rules, as you know -- please limit your questions to one question and one additional follow-up, that way we can be fair to 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. As we begin questions, Michael will give you an update on the economic environment and a few other matters. Now over to you, Michael.
Michael D. Capellas
Thanks again, Silvio. As I did last quarter, I’ll give you a brief update on some of the macroeconomic trends that are impacting the business. Within merchant services, one important trend to note is that there has been a greater level of month to month volatility in consumer spending patterns. We’ve continued to see higher growth rates among the larger retailer discounts as compared to the smaller, mid-sized merchants and I think this is something we’ve seen and everybody expected. That being said, while there was some slowing in transaction growth at the end of the first quarter, we continued to see a return to low double-digit transaction growth in April.
In our financial services business, we saw flat growth in the first quarter, which reflects the price compression and some lost contracts that occurred in 2007. We do continue to experience downward pressure on this side of the business, largely as a result of the difficulties being faced by our financial institution customers.
International growth has benefited both from the weak dollar and from the acquisitions we did in 2007 and in the [aggregate] continues strong.
So give this, let’s now go to the operator and we’ll take our first question.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question is from Guy Baron with Credit Suisse.
Guy Baron - Credit Suisse
Let’s see, first off I’m just looking at the cost saves here -- how much of a benefit was there actually reflected in the adjusted EBITDA this quarter and then as part of that same question, you talked about the new actions now being $366 million. How much of that will show up this year and what does that really mean for the entire basket? So in the past you’ve talked about 150, 200 this year, 400 overall over the next two to three years -- what does that 400 now look like?
Michael D. Capellas
I’ll break the question specifically -- in the quarter, you can assume there is somewhere in the range of $35 million to $40 million of the cost savings already reflected. The $200 million reflected those kinds of near-term things that we were able to accomplish quicker, the residual amount of 150 are in the three longer term programs, which we are in the process of implementing. The data center program is on track. We will start to see a number of those data centers, the smaller ones close in the third quarter. Those are all announced, some rolling out in the fourth quarter and full completion by mid-year 2009, so you will see that. So about three quarters of the savings of that program in place by the first quarter and the balance by mid-year next year.
The international data center consolidation is virtually complete but because of the way obviously international workers councils work that you will start to see some of that tick out in the fourth quarter. The merchant consolidation, you know, it’s a very, very big program. You will start to probably see the first elements of that kick in in real terms in the first quarter of 2009 and then probably roll into probably completion by mid-year.
The issuing of the rollout and the consolidation of the issuing business on VisionPLUS outside the U.S. was primary launched with two large customers, Lloyds and Barkley’s. That program is on schedule. We have spent heavily to get that platform in place. We will continue to roll that out throughout the rest of the internationals and that sort of has the same timeline.
So here’s the summary -- of the 235, 40 are already in the P&L. We’ll see the rest of that full run-rate certainly by the fourth quarter. The longer term projects which get the roughly extra $150 million are in three large technology programs. They are launched, they are in place, and you will see the benefit of that primarily start in the first quarter but certainly be implemented by mid-year.
Guy Baron - Credit Suisse
And then on the second topic here, Paymentech, and I know it’s a sensitive topic, but -- and you’ve been sort of adamant that this breaking up is neutral to you but what does it really -- what does it really mean and sort of what are the implications here? Are you now going to have to sort of fight for the same customers? Do you now need to find another partner? And then also, there’s a lot of cash sitting at that entity. What becomes of that cash after the break-up?
Michael D. Capellas
Well, I appreciate the question and obviously we are in negotiations and those negotiations are -- you know, they are ongoing negotiations and I don’t know how else to describe them, but the only thing I can comment on is what I’ve traditionally commented on, is that we are in this business. There are two platforms that run each sets of the accounts. We have a split-up of half the accounts, so it’s not like we are waking up tomorrow morning and having to reorient ourselves in this business. We acquire merchants every day. We process merchants every day. We service merchants every day and a lot of them. So as -- it has been a successful endeavor for both sides. As you probably know a little bit about the business, there are two sides to it but each side will get half the intellectual property, each side will continue to operate, each side will get half the customers and we will continue to service those customers and not much more that I can say about that, which is what I have said traditionally in the past. But again, I think the real takeaway here is we know how to do this business. We don’t have to go out and recreate any infrastructure to continue to service those accounts.
Operator
We’ll go next to Manish Somaiya with Citigroup.
Manish Somaiya - Citigroup
Good morning. A couple of questions; one, MasterCard recently launched a new debit card processing platform and I was hoping perhaps Ed could give some color around that and what that means on a competitive basis for First Data.
Michael D. Capellas
Ed, would you, since the question has been addressed to you, I will turn it over to Ed.
Ed Labry
We knew this was actually going to take place, so if you take a look at Visa and their processing arm is DPS and so MasterCard now has the equivalent, really the focus on processing signature debt and more holistic processing situation for their ATMs and so forth around the world. So really it’s -- there’s no surprise here that that was coming.
I think on the competitive landscape, MasterCard has always been out there from a standpoint of offering the services to other third parties, so it’s more really bringing this service in-house, so I don’t think it really changes the landscape that dramatically of what’s been taking place.
Manish Somaiya - Citigroup
And I guess I would figure that the contracts that you have with your customers, three to five year contracts so again, if MasterCard were to make any competitive signals to your customers, it would take time anyway?
Ed Labry
Yeah, and these contracts are relatively sticky too, so typically there’s not a lot of movement in the change of the accounts. Now historically you’ve seen some major conversions off of First Data and I think that since the latter part of ’07, we have really focused on the relationship management and the retention of our accounts. So I think that if you give us another two quarters and then look beyond that, I think we can stop the negative trends on the financial services side of our business.
Operator
We’ll go next to Jeff Harlib with Lehman Brothers.
Jeff Harlib - Lehman Brothers
Good morning. Can you just talk a little bit about the international business? There’s some slowdown in the organic growth there and you mentioned some loss in Europe and in Asia, as well as the lower margins.
Michael D. Capellas
A couple of things there is -- one is that what’s primarily reflected -- first place is there has been a slowdown in organic growth, so we would acknowledge that and if you go through where we’ve been traditionally and you adjust for foreign currency and some of the acquisition work that you are now sort of in the 5% to 7% sort of range as opposed to the strong double-digit that we sort of have seen in the past.
There are a couple of things which affect it, some positive, some negative. On the negative, we’ve had the loss of, as we reported last year, of a couple of major customers in the U.K. Those are now fully reflected in the numbers and that is primarily in the issuing side. And as a -- sort of as we saw in the U.S. a couple of years ago, we’ve seen some price compression in the U.S. side.
On the growth side, we are being selective. We had sort of in the past I think maybe pushed out for a little revenue without really being as disciplined around the margin side going forward as we might have been, and so I think we are being more disciplined, so that’s also reflected some of it. And it is taking us some time to launch and grow the merchant business. I mean, our next great area of growth will be to extend out the merchant acquiring business side in Europe and across the globe, as we have in the U.S. So we have a major program being launched, for example, to roll out to nine countries relative to the far east and that program started off with the rolling out of the first three, including a pretty exciting program in Hong Kong. And we are starting to win some business in the Middle East, which we think is a pretty strong growth market.
So the specific answer to your question, yes, the growth has slowed. It’s primarily price pressure on the issuing business plus the full effect of two contracts we lost in mid-2007, and we are being a bit more selective.
Going forward, we would expect this pattern to continue certainly for the next couple of quarters but then start the growth to come from a couple of new regions, particularly the Middle East and the Far East, and most of that growth to come through the merchant acquiring business.
Jeff Harlib - Lehman Brothers
Okay, and follow-up would be just the accounting with Chase Paymentech, if you can just talk about approximately how much is reflected in your adjusted EBITDA? I know you have some equity in earnings and then you have the processing part of it. And just also how distributions work from the JV, in terms of dividends?
Michael D. Capellas
I’m going to pass that question to Kim.
Kimberly S. Patmore
The equity and earnings you can see in our footnote disclosure in the equity and earnings footnote. You’ll see the majority of that is really related to Chase Paymentech. In terms of how we actually work from the perspective of a payout, we typically pay out 45 days after the close of any quarter. However, we do have, because of some of the pending negotiations, we’ve held some of those payments out between each of the parties, but typically it’s 45 days on any of our equity alliances.
Operator
We’ll go next to Peter Gingell with Angelo Gordon.
Peter Gingell - Angelo Gordon
Thanks for taking the call. I apologize in advance; I know you don’t want to dwell on the Chase Paymentech issue, I just have a quick question following up on Guy’s first comment. Michael, you made a great comment about the fact that you are in the business today, you are doing merchant acquiring, so there’s really nothing that changes on your end. Can you talk about what Chase has to do now when they take these customers back in-house? Do they have to go and build these capabilities and provide the merchant acquiring sales force, or are they sort of in the same boat as you guys?
Michael D. Capellas
Well, certainly we have great respect for the institution of J.P. Morgan, but I think you’d have to ask them. I don’t really feel that it would be my place to comment on that, but as an institution, they are a great institution and we have a great deal of respect for them. But any comment on their operating side would have to come from them.
Peter Gingell - Angelo Gordon
Okay.
Operator
We’ll go next to Ryder Campbell with Barclay’s.
Ryder Campbell - Barclay’s
Thanks. Could you tell us of the roughly $278 million or so that it looks like you guys booked in revenues for services performed for Chase Paymentech in ’07, roughly of that number what would you expect to keep or lose if you were to do this split?
Michael D. Capellas
The only thing I can say is the contractual agreement is that we have the right to 49% of the base and they have a right to 51% of the base, so certainly we would expect to split as pretty close to 50-50 to me. But I wouldn’t be able to comment beyond that. But clearly if you just simply looked at our prior disclosure and what the contractual language said, it’s 49-51.
Ryder Campbell - Barclay’s
Okay, and my next question is actually just -- I’m having some trouble doing some reconciliation on your adjusted EBITDA calculation. So the LTM number that you gave, I noticed that you have $21.9 million of pre-acquisition EBITDA of acquired businesses. But when I add basically 2007 plus first quarter ’08 minus first quarter ’07, I get $10 million. Can you help me understand what’s causing that difference there?
Michael D. Capellas
Kim.
Kimberly S. Patmore
From LTM, It’s really the calculation of the -- what we think is the last twelve months related to the acquisitions that we’ve done in the middle of the year but we are happy to go back and individually look at what you’ve got in your calculations, and we can do that offline with Silvio later today.
Michael D. Capellas
Is that okay with you?
Ryder Campbell - Barclay’s
Sure.
Michael D. Capellas
Okay, so we’ll get you hooked up with Silvio and go through it, but the reconciliation is there in the back and -- but if you having -- you know, we’re happy to walk through that with you line by line.
Kimberly S. Patmore
Absolutely.
Operator
We’ll go next to Lionel Jolivot with Banc of America.
Lionel Jolivot - Banc of America
Good morning. Just on Chase Paymentech again, I’m sorry, but do you have any non-compete provisions? So another way to look at it is if you terminate or if you split the JV, is there anything preventing J.P. Morgan to try to go after your customers, let’s say a year or two years down the road?
Michael D. Capellas
You know, this is one area which, and I am sure you can appreciate my answer, is in the middle of a negotiation, I just can’t -- I could not possibly comment on non-compete provisions. I apologize.
Lionel Jolivot - Banc of America
So that’s something that’s up for negotiation, basically?
Michael D. Capellas
What I said is I can’t comment on it.
Lionel Jolivot - Banc of America
Okay, and just on the same point, your equity and earnings have actually -- it was down quite a bit this quarter, it was basically $32 million in Q1 of ’08, down from 68 in Q1 of ’07. I mean, is there again some non-recurring items in it or is it basically a sign that the performance at Chase Paymentech is getting a little bit weaker?
Michael D. Capellas
I’ll turn that to Kim.
Kimberly S. Patmore
I think if you look in the footnote detail, you will see it is substantially affected by the amortization of the purchase accounting, so you will see the impact of that. And then in addition, of course, just as everything else from a transaction perspective, you can see from the 10% that we have down to the 3%, they are included in those numbers and we have a number of national accounts in our Chase Paymentech alliance as well, and so everybody continues to see the same kind of revenue growth impact. But probably the primary difference that you are talking about is the purchase accounting amortization and that’s detailed in the footnote.
Operator
We’ll go next to Jake [Kimini] with Morgan Stanley.
Jake Kimini - Morgan Stanley
Good morning. Have you seen any impact from GE selling its GE money business?
Michael D. Capellas
Ed, do you want to take that one?
Ed Labry
Yeah, not really. You know, most of the contracts are assignable and they are most long-term. I think there is some uncertainty in some of the large issuer accounts they have on the private label side, just now knowing exactly where the business would go to and who, so I think until you find out where that side of the business goes, there will be some uncertainty and unrest, but there is no movement yet.
Jake Kimini - Morgan Stanley
Okay, and then just a follow-up on Paymentech; understanding the 49-51 split, but are there any other services that you provide J.P. Morgan with today with respect to that that you could potentially lose as the affiliation breaks up?
Michael D. Capellas
There really aren’t. So let me be more clear with the -- the answer is no.
Jake Kimini - Morgan Stanley
Okay. Thank you.
Operator
We’ll go next to Dax Vlassis with Gates Capital Management.
Dax Vlassis - Gates Capital Management
Yes, can you explain to me in the Chase Paymentech deal why if it did break up for what reason you would owe over $200 million in taxes? Just the mechanics.
Michael D. Capellas
Kim.
Kimberly S. Patmore
Well, I think we are in the middle of negotiations but clearly from the perspective of if you end the relationship and you are dividing up the assets and it creates a taxable event, but in terms of the dollar amount and other things, I don’t want to comment just in light of the fact that we are still in negotiations.
Dax Vlassis - Gates Capital Management
Would you get an up-front payment for unwinding it?
Kimberly S. Patmore
An up-front payment from whom?
Michael D. Capellas
He’s asking the question, but let me help -- I’m going to rephrase the question for Kim. The question is -- he’s trying to say if you broke it up, would we take a cash payment and is that what is causing the tax liability?
Kimberly S. Patmore
Oh, not necessarily. If there is a cash payment, that could also create some additional taxes but not necessarily. It really is the dissolution of the arrangement that we have right now and the partnership.
Michael D. Capellas
So I have great sensitivity that this is a hugely important issue and the best thing we can do is as we get to conclusion on this, whenever that might be, that we discuss it more fully there. I really do want to be respectful. I know it’s a hot issue but I think we’ve probably just gone as far as we can go on the subject.
Silvio Tavares
Operator, let’s go to our next question.
Operator
We’ll go next to Guy Baron with Credit Suisse.
Guy Baron - Credit Suisse
I’m back again. A couple of other things here; on the airline or Frontier bankruptcy issue, can you maybe just walk us through the nature of your exposure in these types of situations? What are you sort of generally on the hook for and how much of your revenue is exposed to these airlines, cruise lines? And while that reflects the transaction portion or the transaction revenue, what does the exposure actually look like from a -- call it a notional kind of perspective?
Michael D. Capellas
Very fair question and you know, as you probably know, the exposure level is certainly not necessarily balanced with the revenue level, so I think I will turn that one over to Kim.
Kimberly S. Patmore
That would be great -- a couple of things just as background, because it might be helpful, and just as a reminder in the 10-K, in the critical accounting policy, there is quite a bit of detail in terms of our credit policies along with you can see sort of a notional value of what we clear total as well as then what we typically incur from a credit loss perspective, so that might be helpful. But just to summarize that page in general, and we’ve had airlines for a long period of time, along with our others and I’ll get to that in just a minute but in general, with our consolidated subsidiaries and FTC, we run about $40 million a year in credit losses. If you include the unconsolidated, you are probably close to $50 million, just to kind of give you a bit of a baseline. And that’s, you know, we clear over $1.5 trillion of transactions.
Having said that, from an airline perspective, what we typically do, which we do with all customers, is we do a lot of analysis relative to what the liability is out there for services that have not yet been performed -- in other words, tickets that had been paid in advance. And then typically, we assess the airline and the risk related to that and we also, in the case when it’s required, we ask for a deposit in advance.
So sometimes there is some difference in what we estimate as the liability of the outstanding tickets or credits that are out there and what actually happens when an airline goes bankrupt, as you can see with the $6 million in the airline that did go bankrupt. But in general, we require advanced collateral and we keep that collateral associated with the outstanding tickets.
I don’t really have a summary of all of the airline risk but that can give you an idea, and then there is additional detail overall on our credit policies and the critical accounting policies in the 10-K, not in the 10-Q.
Operator
We’ll go next to [Brian Pierce] with UBS.
Brian Pierce - UBS
Good morning. You had mentioned a return to double-digit growth in domestic merchant transactions in April. I was hoping you could provide any update as to what you’ve seen in the last couple of weeks. And also the shift of the consumer spend to national wholesalers and discounters, any color you can give on that, whether that’s -- whether you are seeing that trend increasing, staying the same, what have you. And then I have a follow-up. Thanks.
Michael D. Capellas
I apologize profusely. Let me repeat the question and if I didn’t get it right, just sort of -- you said what did we see in April, particularly what did we see in the last two weeks, and could I give any color on the make-up and change in the mix to larger retailers, was that the question?
Brian Pierce - UBS
Yes, correct.
Michael D. Capellas
Okay, sorry. Well, specifically, what we saw was January and February were relatively strong. March was just rounding to about 10% and April rebounded to just north of 12.
Brian Pierce - UBS
And then on the shift of the spend? You had noted the trend in the 10-Q of a shift to wholesalers and discounters among the consumer.
Michael D. Capellas
Yeah, and I think this is just sort of evident in just about everything we see. I mean, obviously what you see is -- in absolute dollars, you see sort of the mix swing to certainly petroleum and quick service restaurants. You see from the retail perspective, the higher end of the retail side getting softer and consumers with a clear choice to the more value or discount level discounters, particularly the larger ones. I think this is pretty relevant as you just sort of see the reporting out of the individual retailers, and I think what we have here is what one would expect in an economic downturn, is people are far more value-conscious and it is absolutely clear in the numbers. There is a slight, albeit slight 1%, 2% sort of decline in the average ticket price but what you are seeing is clearly an absolute common sense. People are spending more of the disposable income and making more stops to both quick service restaurants and petroleum stations and the high-end retailers are starting to feel it and people are certainly doing more value shopping.
I can cut it about a dozen different ways but that sort of summary comes out each time and it is fairly consistent across the four regions of the U.S., so I think that’s -- and I think that’s pretty consistent with what you see relative to the balance of the reporting of the retailers.
Same-store sales are holding pretty constant, a little bit of a one or two point sort of spread month to month, in the 6% to 7% overall range and pretty consistently in that with maybe a point movement each way. A little more volatility than usual, but not a lot.
Operator
We’ll go next to Sundar Varadarajan with Deutsche Bank.
Sundar Varadarajan - Deutsche Bank
Just one clarification -- in your answer to the first question in terms of how much of the cost savings have been realized, you said 35 to 40. Is that on an annual basis or on a -- for the quarter?
Michael D. Capellas
Quarter.
Sundar Varadarajan - Deutsche Bank
Okay, so it’s for the quarter -- so would it be times four for an annualized basis, that’s a fair way to look at it?
Michael D. Capellas
I think the way to look at it, $150 million to $200, actually $200 million run-rate ending the fourth quarter, of which we have certainly seen some of it take place and a little bit more of it just to residually roll out in the second and third quarter.
Sundar Varadarajan - Deutsche Bank
Okay, got it. Just moving on to the international side, you talked about a couple of customer disconnects, as well as some pricing being the drivers of lower organic growth. You talked about a customer in the U.K. last quarter -- were there additional customers that were disconnected during this quarter or deconverted during this quarter that caused a further pressure this quarter, or is it just kind of the residual impact of what we saw in Q4?
Michael D. Capellas
David, do you want to take that one?
David Yates
We had a pre-existing customer deconversion that took place in quarter one, which was the nationwide building society in the U.K. There was no other deconversion.
What did happen was that in the prior year, we had a lot of renegotiations of important contracts where we expanded the contract life out until 2012, 2013. The largest single one of those was with Lloyds TSB and that one did bite in the first quarter and caused a degradation of our growth rate and margins in the first quarter compared to the prior year.
Operator
We’ll go next to Doug Khan with Royal Bank of Scotland.
Doug Khan - Royal Bank of Scotland
A quick question on the margins -- you broke down for us merchant services, financials, and international on the slides and I’m just looking at these numbers on an adjusted basis and I see the profit margins you are reporting. If I were to look at those margins, obviously it does look like merchants and financials probably are closer when you get rid of certain items to where they may be historically going forward. Can you comment on each of those three areas and where you would like to see or where you are going to be comfortable longer term with profit margins?
Michael D. Capellas
Ed, do you want to take that one in the U.S.?
Ed Labry
I think just -- I think when you take a look on the merchant side of the business you are going to see continued slight improvement in margins just because we are taking some cost out of the system and then, of course, just with the acceleration of the growth and importance of sales, a lot of the transactions become incremental. So you are not going to get -- you know, we think the margins that are out there are very healthy, so we don’t see anything in our way of going down but they will be slightly up as we predict.
On the financial services side, I think that we will see a couple of flat to down quarters going forward on the top line and I think that just due to cost saves, we should be able to reverse some of the four to five-year trends of negative growth.
And then as you know, some of these larger accounts on the issuing side have a longer sales cycle, so even if we are having success in the marketplace, some of those new rollouts aren’t scheduled until the first and second quarters of ’09 on the deconversions from other people. And so I think that this is more a longer turnaround and you will see margins pick up when we take the revenue up on the financial services.
Doug Khan - Royal Bank of Scotland
And on the international side?
Michael D. Capellas
David, do you want to carry that one?
David Yates
We should see the margins improving on the international side. The number of contracts that we have renegotiated has slowed down, so we have a period of quiet where we should be able to continue the organic growth through and that should show itself in significantly improved margins throughout the business, in addition to which, as Michael mentioned, we have a couple of major programs going to consolidate the data centers to deliver VisionPLUS and those should yield dividends towards the back-end of the year.
Doug Khan - Royal Bank of Scotland
Well is it safe to say then on the international side, should we assume your goal would be a blended rate of what we see in the U.S. between merchant and financial -- is that a safe assumption longer term?
Michael D. Capellas
Yes, that’s a safe assumption.
Doug Khan - Royal Bank of Scotland
Okay, and then just two very quick housekeeping ones to follow-up; it looks like non-cash interest expense was somewhere between $70 million and $80 million for the quarter. I just wanted to make sure I understood fully what the non-cash interest was and then also on the income acquisition, you mentioned in the release that there would be about $450 million drawn on the revolver. I understand the ticking function of one of the notes but I wanted to make sure that that was pretty much if we saw debt increase next quarter where the debt increases would be coming from.
Michael D. Capellas
Kim.
Kimberly S. Patmore
The non-cash interest, you’re right, that’s really related to the pick instruments. And then, as you think about any draw-down on the revolver, you should be thinking about that as cash interest and that will be really at that LIBOR plus the 275 basis points. That’s the rate on there.
Michael D. Capellas
Yeah, and I think one of the things that, just from the income perspective, obviously we feel that this is a fundamentally delevering transaction, given that there was an equity contribution from KKR and a portion of the proceeds was done with stock, and then you sort of look at the EBITDA that’s attributable to the, the incremental EBITDA, so we feel this is actually good from a delevering point of view, all up.
Operator
We’ll go next to Ken Goldberg with Lydian.
Ken Goldberg - Lydian Asset Management
Can you tell us the incremental EBITDA you expect?
Michael D. Capellas
No, it’s a private company and because the deal is not closed, we can’t be disclosing the nature of the private company. Once the deal is closed, we are able to give you a much fuller color relative to what the synergies are, particularly on the revenue line because this is really a revenue synergies play, and also -- but they are a private company and we can’t right now disclose their private financials because the deal is not closed.
Ken Goldberg - Lydian Asset Management
Can you give us just a little bit more detail breaking out the 980, the components of that $980 million? And really I’m getting at the cash equity from KKR versus I guess the stock piece.
Michael D. Capellas
Yes. Kim will walk you through that in detail.
Kimberly S. Patmore
On the 980, really it’s the cash is the 665 and then the balance of that is in stock, and then the 250 earn-out would be -- you know, it’s contingent over a three-year period. That would be cash.
Operator
We’ll go next to Lionel Jolivot with Banc of America.
Lionel Jolivot - Banc of America
Just a quick follow-up; I saw you had an [increased] infusion from holdings of I think it was $105 million during the quarter and I think the 10-Q mentioned that it’s basically management buying some stock in the company. I’m just wondering, was it just -- was it part of the initial transaction and it just took a few quarters to happen or is it something completely new? Can you just comment a little bit about management buying shares of the business at this point?
Michael D. Capellas
I didn’t hear the question but Kim did, so Kim is going to take it.
Kimberly S. Patmore
The 105 really relates to the equity contribution by the management team, and you are right in terms of timing; it really came in the first quarter. Really that fourth quarter, we were really getting organized, getting the data out to all of the employees that were eligible to participate in the equity, and so that’s why you saw it really come in in the first quarter.
Lionel Jolivot - Banc of America
Okay, great. Thank you very much.
Silvio Tavares
We’ve got time for one more question, one or two more questions, so Operator, let’s go to the next question.
Operator
We’ll go next to Ryder Campbell with Barclay’s.
Ryder Campbell - Barclay’s
I also have another follow-up here; I noticed that some of your December 31st balance sheet items had changed from your 10-K to this 10-Q. It looks like deferred tax liabilities went up by $185 million and some offsetting changes to receivables and other assets. Can you give us a little bit of color around those changes?
Michael D. Capellas
I’m sure Kim would be happy to.
Kimberly S. Patmore
Yes, and what you saw primarily is the change in, as you probably noticed we had a classified balance sheet versus a non-classified before and what you are really seeing is a number of the deferred assets around taxes and things like that are longer term and so you saw a number of things there, but I do want to specifically mention about from an accounts receivable perspective, it is a bit seasonal for us and we typically do see a bit of a rise at the end of the year, and then pay down in that first quarter. Usually the first quarter is pretty good for us, so when you look to the -- when you -- there are some receivables that were longer term that were part of that, but I do want to be specific. It is typically, and we did see this order where we do get some cash in on the collections and we usually have a pretty good first quarter and you did see that in the statement of cash flows.
Ryder Campbell - Barclay’s
Sure. Actually, I’m talking about a change in the December 31st accounts receivable number. So in the 10-Q, it was $2.78 billion and then the December 31st number in the 10-Q this quarter versus the 10-K was down $370 million for the same timeframe.
Kimberly S. Patmore
Yes, what happened is, and when you are looking back on the -- in the December numbers, what we’ve done is we’ve recast the December numbers now into the classified balance sheet as well, and if you do want to go through those in detail with us, we’re happy to do that offline as well.
Ryder Campbell - Barclay’s
No, that’s fine. And then lastly, can you give us a little color around the change in the Chief Accounting Officer? I noticed there was just an 8-K filed maybe a week-and-a-half or two ago, but no press release or anything. I just wanted to know what the story was behind that.
Kimberly S. Patmore
Greg [Sonnan] is our Chief Accounting Officer. However, he has been here since 2007. Prior to him joining, Jeff [Billett] had been the Chief Accounting Officer. Over time, Greg has taken on additional responsibilities in the organization and it made sense to really shift the title from Jeff to Greg as his responsibilities have expanded. However, Jeff continues to be really our key technical person on all of our external reportings. So the good news is we still continue to have both of those individuals in our organization.
Ryder Campbell - Barclay’s
Thank you.
Michael D. Capellas
Just to give you the color for the question you were asking, this is purely just internal, the way our accounting department has been structured and it is -- both of them are still here.
Ryder Campbell - Barclay’s
Okay, great. Thanks.
Silvio Tavares
Operator, let’s go now to our last question.
Operator
We’ll take our last question from Guy Baron with Credit Suisse.
Guy Baron - Credit Suisse
Thanks for squeezing me in. Just a final one here on the acquisition front -- InComm was fairly large I think in relation to the sort of sense out there that you really wouldn’t be all that active beyond some tuck-ins, and maybe some stuff on the international front. Can you, Michael, maybe give a bit of background behind your looking at InComm and how does that now translate into us reevaluating your appetite for larger acquisitions?
Michael D. Capellas
I’ll have an opening comment and then I’ll let Ed, who’s incredibly passionate about the subject matter, speak. This is a space that we are incredibly excited about it. It was largely an acquisition that was made with both stock and obviously a sign of confidence in this market was a $250 million additional equity contribution that was done by income, so by the time you put the stock component and the equity component, but Ed, why don’t you comment a little bit on just the whole prepaid market? I mean, this just synergistically fits -- one, it is one of the fastest growing segments in the market but synergistically fits with just making us more relevant. Each of our large customers has been talking in this space, so Ed, over to you and then I’ll close up.
Ed Labry
I think overall that in the United States, that we really are not geared toward acquisition but I think we have mentioned several times the importance of prepaid. Just the overall market segment here is huge, with approximately 50 million under-banked and un-banked people and maybe an additional-- 50 million un-banked and 30 million under-banked. And so if you look at this, this is just another great recurrent revenue stream and in this market, it was prepaid -- it is a very fast-growing segment of the industry. So if you take a look at what we have at First Data with ValueLink, which is your gift and everyday spend cards of like Starbucks and Wal-Mart and Blockbuster, and then with our money network, which is the largest pay card offering, then if you look at income, you know, as Michael talked about in the release, just a holistic look at gift card malls and the telephony products and prepaid and games and music. Now we have a holistic product to our marketplace, so they currently have about 145,000 locations of distribution. If you think about our connectivity with 4.5 million merchants, we can really take this product down to the smaller regional chains and even independents. So these products through Blackhawk and InComm have traditionally only been in larger retailers and groceries, so we think this is a huge marketplace really to bank the un-banked and offer these services and literally in this economy, this should actually even outperform the market, so we are pretty excited about this.
Michael D. Capellas
We thought long and hard about this one and this is both strategic with compelling math with an equity infusion, and so you can go back to our appetite and sort of say do you think we will see a whole bunch more of this? No. But you think about the nature, where the economy was and one of these opportunities and quite frankly, this market is pretty well distributed -- the distribution side is pretty well locked in in the existing long-term contracts and it’s not exactly like you could build your way into this market. The distribution side is pretty well locked out for a pretty long period of time and again, we feel the math is quite compelling. But a very fair question.
I do thank everybody for their time. We have taken out to the appetite of the group for more details on a couple of key subjects which were relatively obvious and we will, you know, both in terms of the specifics of the placement of the financials of InComm as well as our situation with Chase Paymentech. We will certainly be forthcoming with that as soon as we possibly can. I do thank you for your questions and certainly they filled up the entire time and thank you for your ongoing support and we will talk to you again. Bye-bye.
Operator
Thank you, everyone. That does conclude today’s conference. You may now disconnect.
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