First Data Corporation Q1 2006 Earnings Conference Call Transcript (FDC)

First Data (FDC)

Q1 2006 Earnings Conference Call

April 21, 2006, 8:00 a.m. EST

Executives

Ric Duques - Chairman and Chief Executive Officer

Kim Patmore - Chief Financial Officer

Gary Kohn - Vice President Investor Relations

Analysts

Greg Gould - Goldman Sachs

Adam Frisch - UBS

James Kissane - Bear Stearns

Paul Bartolai - Credit Suisse

Mark Marostica - Piper Jaffray

Pat Burton - Citigroup

Bryan Keane - Prudential

Brandt Sakakeeny - Deutsche Bank

Andrew Jeffrey - Robinson Humphrey

Greg Smith - Merrill Lynch

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I’ll turn the meeting over to Mr. Gary Kohn, Vice President Investor Relations.

Gary Kohn

Good morning. Thank you for joining us today. With me today are Ric Duques, Chairman and Chief Executive Officer, and Kim Patmore, Chief Financial Officer. Today’s call is being recorded. Our comments today include forward-looking statements and I ask that you refer to the cautionary language and earnings release 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 GAAP. We have reconciled those measures to the GAAP measures on our website under the Invest section under the financial headings.

A reminder that 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. As always, we’ll have time for questions following our prepared comments. With that, I’ll turn it over to Ric.

Ric Duques

Thank you, Gary. Good morning, everybody. Well, 2006 is off to a solid start. The first quarter results were squarely in line with our first quarter operating plan for 2006. We are very pleased with the underlying strength in all of our major segments, especially commercial services, and we are on track to deliver our full year 2006 guidance.

When we met in January, we guided you to $0.47 to $0.50 of earnings, and I am pleased to say that our reported EPS is $0.48, and this includes a net negative of $0.01 impact, primarily from the settlement of a previously filed patent lawsuit. Excluding this settlement, earnings per share for the quarter would have been $0.49.

Revenue for the quarter grew a very solid 10%, the largest growth since the fourth quarter of 2004 for us. Organic revenue growth was 6%, which is a very nice acceleration from the 2005 full year organic growth rate of 4%.

Behind the story here is the performance of the segments, which was in line with our plan and sets us up for an exciting year. Total segment revenue growth was 10%. Total segment profit growth was 13%, or 8% excluding the 2005 integration spent. Now, let’s take a look at the segments in more detail.

Western Union -- in the first quarter, Western Union generated solid revenue growth and profit growth, while maintaining very strong profit margins. Each of these methods were in line with our operating plan for the first quarter of 2006. Total Western Union segment revenue growth was 16% in the first quarter, or 17% on a euro-adjusted basis.

Vigo added $31 million in revenue and accounted for 3% of that growth. Excluding Vigo, and a negative $10 million impact from the euro, Western Union growth was 13%.

Operating profit increased 13% in the quarter, with solid profit margins of 31.7%. Excluding Vigo, margins improved slightly to 32.8% from 32.5%. Western Union performance was driven by our strong consumer-to-consumer business, which accounts for more than 80% of revenue. Consumer-to-consumer transactions increased 31%, or 22% if you exclude Vigo, driven by strong performance internationally and in Mexico. C2C revenue growth was 18%, or 14% excluding Vigo. On a euro-adjusted basis, C2C revenue growth excluding Vigo was 15%. While we continue to build out our network, existing locations continue to drive the business. U.S. same-store transaction growth was a strong 16%.

We are excited about our Mexico business and continue to see one of our most competitive markets growing at phenomenal rates. Total Mexico transactions, which include all brands, increased 55%, generating revenue growth of 54%. Western Union branded transactions to Mexico, which excludes Orlandi Valuta and Vigo, increased 23%, driving very strong revenue growth of 27%.

The trends in the international business are exceptionally strong. International transactions increased 35%, or 28% excluding Vigo. International revenue grew 18%, or 15% excluding Vigo. China transactions increased 39%, while India transactions grew 96%.

International intra transactions, driven by the Philippines and Chile, more than doubled year-over-year. Let me share with you some of the key accomplishments this quarter that continue to position Western Union for long-term growth.

Today, we have nearly 274,000 agent locations worldwide, and we are on track to achieve a target of approximately 300,000 locations by year-end. During the quarter, we announced a key agreement to offer money transfer services to all Travel Ex’s 700 retail locations around the world. Over 500 of those locations now offer Western Union service. We also extended our relationship with the Irish Post, resigning this agent to a new long-term contract. Western Union continues to leverage its extensive network agent relationships and global reach to add new services, new customers, and new transactions.

In Mexico, we leveraged our agent base and started an outbound business from Mexico to the rest of the world. That was in late 2004. This business has been extremely successful and during the quarter, both revenue and transaction growth exceeded 100%. This business is on a $16 million annual run rate. Now let me be clear here. The numbers that I just mentioned to you are not included in the Mexico growth rate that I gave you earlier. So you can see that across the board, Mexico is very strong, primarily money going into Mexico, but now money coming out of Mexico.

In Chile, Western Union is now providing intra-country money transfer service through its agent partner, Chile Express.

westernunion.com increased both revenue and transactions 40% in the first quarter, and we continue to expand this product globally. westernunion.com is on plan to achieve about $100 million in revenue in 2006.

In addition to our new products, Western Union continues to focus on building and enhancing customer relationships through its global loyalty program. We now have $5.8 million active loyalty cards in the hands of our customers around the globe, enhancing our ability to offer customers the best service in the industry. Across the board, loyalty customers transact more frequently than non-carded customers. In the U.S., 34% of our C2C transactions were completed using a loyalty card that was up from 24% a year ago.

We are also seeing increases outside the United States. We introduced the gold card in Europe and Asia in 2004, and we are seeing similar levels of usage and retention in both regions. In Asia Pacific, we have countries where more than 80% of the C2C transactions are completed using a gold card, resulting in very high retention levels there. When you couple the enhanced customer relationship with the increased usage, you can see why we’re very excited about this program.

Finally, we have reorganized our consumer-to-business group, and we continue to see nice improvement there. Consumer-to-business transactions increased 12% in the first quarter here, driving revenue growth of 5%, which is slightly better than we had anticipated. Western Union had a great start to a year that will prove to be an historic one both for the Company in general and certainly for Western Union in particular.

Now let’s turn to Commercial Services. Commercial Services is off to an excellent start in 2006. First quarter results were fuelled by solid execution along with strong consumer spending at the point of sale, which drove both revenue and profit growth to the upper end of our expectations.

Revenue growth in the quarter was a strong 9%, or 6% excluding debit network fees lead by solid transaction growth of 15%. In January, we guided to a full year revenue growth of 8% plus or minus. We are pleased today to remove the minus sign, and now we project 8%+ growth for the year. Operating profits of $214 million in the quarter reflect a 24% reported year-over-year growth. Excluding integration costs reported in 2005, operating profit growth was a very strong 9%.

In January, we guided to mid single-digit profit growth for the quarter. We were able to far exceed those expectations, thanks to our renewed focus on operating cost efficiencies. Profit margins for the quarter were 23%. Excluding debit network fees and integration costs, margins improved to 28.4% from 27.6%, which reflects the hard work and focus of a very energized management team in this important segment of our business.

Segment revenue growth were even stronger considering that TeleCheck, while continuing its turnaround, negatively impacted growth by about 1%. We are very focused on TeleCheck performance, and we see signs of improvement. TeleCheck continues to gain momentum in the marketplace with the acceleration of electronic check acceptance at the point of sale. Our recently announced acquisition of ClearTek services, that’s a business that provides us with state-of-the-art return check management and collection systems for major retailers and supermarkets, will enhance our leadership position as we continue to rebuild this business. Finally, during the quarter TeleCheck settled its patent lawsuit with LML for about $15 million, including all past and future claims, but negatively impacting our earnings per share by $0.01 this quarter.

We shared with you in January the key success drivers for Commercial Services, which were the sales management, activation and retention. I am pleased to say that the new leadership team has done a fantastic job in the first 90 days of 2006 focusing on these areas.

First Data Commercial Services, through its five distinct distribution channels has the broadest and most diverse sales force in the industry. These sales channels are alliances, revenue-sharing alliances, our premier and national account sales group, ISOs (independent sales organizations), and our oldest channel, processing only clients. All of these channels have the ability to sell into any size merchant or any vertical market. Today, 85% of our merchant locations and 75% of our revenue comes from our regional and mid-market merchants, and all of our distribution channels have appropriate focus on driving this market.

During the quarter, our alliances performed in line with expectations. We expanded our financial institution network through the addition of two new revenue sharing alliances, and four new bank referrals. We added 10 new ISO’s to our third party distribution channel.

Sales productivity remains strong in our premier and national account group, where we added a number of name brand wins across credit, debit, pre-paid and check. Our oldest channel, processing-only clients, are still producing new locations in the regional and mid-markets. We have many processing only clients who have been with us for many years, and we will continue to actively support these loyal clients.

We also spoke about the importance of improving our activation process by reducing the number of days to activate merchants. We are excited to tell you now that we have begun to roll out our automated merchant activation system, called AMA, to our sales force. This system is designed to activate a merchant in as little as one day. We launched this ahead of schedule on April 10, and we expect to have this product fully rolled out to the entire sales force by the end of the third quarter.

Merchant attrition trends are improving as a result of expanded efforts across all of our business lines. We are just now beginning to see the positive results of our proactive initiatives and we expect to see the benefits in our financials in the second half of 2006.

Finally, I’d like to give you a quick update on business integrations which are in process as well. Chase and Paymentech will be fully integrated by mid-year, and our national alliance with Citi is ramping up and is on target to meet our internally set goals. During the quarter, we successfully converted Citi’s merchant portfolio from another third party on to the commercial services platform. We are extremely excited about this success we had in this first quarter.

Commercial Services business, which will be First Data’s largest business segment once Western Union is spun out, is making tremendous progress and we are very excited about the run rate active for the quarter. The fact that Commercial Services will generate approximately $4 billion in revenue in 2006, and had such strong revenue and profit growth in the quarter, is a very positive sign for the new First Data in 2007.

Now let’s move to Financial Institutions. Financial Institutions segments first quarter results were in line with our expectations. Revenue for the quarter declined 5%, or 8% excluding reimbursables. Operating profit declined 4%, margins for the quarter were 18.9%, which is up from 18.6%. Excluding reimbursables, margins improved to 28.8%, up from 27.6%.

The largest impact for the segment’s revenue and profit have been the rollover of the Chase, Fleet, and People’s deconversions and their resultant liquidating damage payments. We will anniversary the last of these deconversions by the end of July. In the mean time, to give you a little bit better view of the state of this business, we believe it’s important for you to look at the revenue growth from our existing client base without the impact of the reimbursables and without the impact of these deconversions.

During the quarter, Chase, Fleet, and People’s deconversions negatively impacted revenue growth by 13%. If you exclude the impact of these deconversions, revenue growth was actually plus 5%. Now, our goal is to have the Financial Institutions segment growing revenue and profit by 8% to 10% by 2008. I am confident that with the underlying revenue growth in this business of 5% today, we are well on our way to achieving that goal.

In the spirit of full transparency here, we told you in January that we report on the five components of revenue in this segment, so I’ll give it to you now. Core, credit and retail processing decreased 21%.Output services -- that’s plastics and statements-- was flat. Debit was flat. Reimbursables were relatively flat. Remitco, which is our remittance processing business here, grew 7%.

Now, this is clearly not where we want to be, and we still have a lot of work to do here. But to that end, we have programs in place and continue to execute on the fundamentals everyday. Our leadership team here has appointed a business leader for each of the major components of revenue, and has put a considerable amount of that focus on aligning our sales force within our debit output service, remittance processing, card processing businesses. Although these efforts are not reflected in this quarter’s revenue, we expect that they will show improvement in the second half of the year and into 2007.

During the quarter, accounts on file increased by $10 million, bringing our total accounts on file to $426 million. We also converted two new clients to our core processing business -- one in output services, and we renewed 92 clients in our debit business. During the quarter, we added five new portfolios to our core processing business, and 43 new clients to our debit business.

In the recent past, we talked about bringing new system functionality to our clients in this market. During the quarter, we launched customized color statement printing with a key customer. This product allows statements to be customized down to the individual customer level. We anticipate penetrating this product further into our client base throughout the year. This product is a clear differentiator and will attract new clients and retain existing clients.

Finally, let me update you on the $75 million worth of future cost reductions set by the end of [2000], which we announced in our January 26 call. As of today, we have identified approximately $25 million of targeted reductions and will have projects in place by the end of the year to ensure that we capture the benefits in 2007 and 2008. We continue to focus on cost reductions and will continue to update you on our progress here.

I will mention here before I go on to the next group, this team in the Financial Institutions group has done a really terrific job and is very, very focused on improving the performance of this segment, and I think we’re well on our way in this quarter to making that happen.

Now let’s turn to International. People ask me, what’s different since you came back? While many things are different, the most amazing thing is the opportunity in the international arena and the terrific job the team has done in capturing these opportunities.

Our International segment had another great quarter. FDI continued to perform well against its global strategy, delivering strong, profitable growth. Revenue growth in the quarter was 24%, with organic growth of 3%. On a constant currency basis, revenue growth was actually 30% and organic growth was 9%. Operating profit increased 35%, driven by very strong organic growth of 17%. On a constant currency basis, operating profit increased 43%. Operating margins improved to 11% from 10.1% last year.

Strong financial performance continues to be driven by our execution on our core fundamentals. We now have $1.2 million point of sale locations, up 70%, and more than 17,000 ATM’s, up more than 63% since the first quarter last year. These additions drove first quarter transactions to 955 million, an increase of 84% on the 518 million transactions in the first quarter last year. We ended the quarter with 47 million accounts on file.

We continue to be extremely pleased with the performance of our acquisitions. During the quarter, acquisitions accounted for 21% of the segment’s revenue growth. Our leadership team continues to execute on the three major planks of their global strategy:

Driving growth through processing for new clients and expanding our services in issuance, merchant, and ATM markets.
Driving efficiencies by consolidating and integrating into a common platform.
Targeting strategic acquisitions and partnerships.

We continue to build out our issuance processing business through our VisionPLUS platform around the globe. The marketplace is confirming the value of VisionPLUS with its selection by such prestigious institutions as G.E., HSBC, Citi, Westpac, four of the five largest banks in China, and many others.

In Latin America and Caribbean, our Processa operation base in Panama now processes for 25 banks in a multi-client environment, using VisionPLUS. Processa continues to outperform our original expectations.

In China, our Shanghai operation headquarters continues to gain additional business from our partner’s ICBC, which is the Industrial and Commercial Bank of China; the Bank of Communications in Hong Kong; and other third party processing customers. We are in a unique position to provide a single solution across multiple countries, as evidenced by our recently announced deal with Settlement, a subsidiary of BNP Paribas in Romania and China.

VisionPLUS processing in Europe, Middle East, and Africa continues to expand across the region, and we were working closely with Barclay's to finalize contracts and conversion schedules; again across multiple countries.

We are very encouraged by the prospects of our new merchant acquiring business built on OmniPay. OmniPay is a technologically advanced multi-country, multi-client merchant processing platform which provides First Data clients, banks and merchants with accounting, settlement, and dynamic currency conversions in all key international markets. We previously announced a global acquiring partnership with HSBC and ABN Amro.

In the issuance processing business, large multi-national companies continue to choose First Data to be their provider of global processing capability. While we continue to have success on the sales front, we remain very focused on driving efficiencies by converting previously-acquired businesses into common platforms.

In March we converted our merchant alliance with Bank West, which was formed in August of 2005, on the OmniPay platform. Our newly acquired alliance in the Netherlands will convert to OmniPay in the third quarter this year, and VNL, the alliance in Italy, converted in the fourth quarter.

Finally, an update on the acquisitions. We remain very focused in closing GZS and a mid-year close date looks very likely now. Our acquisition pipeline is very robust, and we are active in all markets around the world. We will continue our trend of closing on strategic acquisitions in key markets that offer attractive financial returns. It’s important to keep in mind that the timing of closing on an international acquisition is always difficult to project. We remain excited about our international business as a growth engine for First Data.

Turning to the spin for a moment. As you know, we will separate the Western Union business into an independent company through a tax-free, 100% spin-off. Today, we have dedicated teams focused on ensuring that the spin occurs as expeditiously as possible. We remain on plan for the spin to occur probably in the early part of the fourth quarter of this year.

What I can tell you today is that Jack Greenberg has been named non-Executive Chairman of Western Union, and will leave the First Data board at the time of the spin. We are very excited to have Jack as a new non-Executive Chairman of Western Union, as he was the former chairman and CEO of one of the world’s most prominent brand companies, McDonald’s. Knowing brands and the international marketplace the way he does is going to be a great help to this Company. In addition to Jack, we are actively searching for six to eight board members with strong international and consumer product experience.

We are actively working with the rating agencies on the new Company’s debt ratings, and we’re very encouraged by the progress we were making. While the final debt allocation decision has not been made, we are targeting strong investment grade ratings for both companies, especially those for First Data.

As a result of the large settlement and funding operation of First Data’s businesses, we hope to obtain a rating for First Data in the single A range, which is similar to what we have today. We would also hope to obtain strong ratings for Western Union, but potentially lower than First Data’s ratings on a final debt distribution allocation.

Earlier this month, we initiated conversations with the IRS relating to the tax-free status of the spin-off. We expect to submit a ruling request within the next couple of weeks. We are targeting to file Form 10 with the SEC in June, and we plan to host a conference call at the time we make that filing to review the details of the filing and to answer any questions you might have. Finally, the headquarters for First Data will remain in Denver, and Western Union will also be headquartered in Denver. We remain very committed to updating you on the progress as we move forward here. Now I’d like to turn it over to Kim Patmore. She’ll give you a little more vocal color here.

Kim Patmore

Thanks, Ric, and good morning. EPS for the quarter was $0.49, excluding items, and was $0.48 on a GAAP basis. Items in the quarter included a $15 million charge related to the settlement of the Alamo patent lawsuit; a $2.5 million charge related to external spin costs; and a $7.6 million gain on the sale of corporate aircraft and Bidpay.

Quarterly results included stock-based compensation expense of approximately $24 million, and incremental $22 million, or $0.02 per share principally, as a result of the adoption of FAS 123R effective January, 2006.

Overall, we had a solid revenue quarter. Revenue growth was a very strong 10%, and as anticipated during the quarter, product sales and other revenue increased $35 million, primarily related to incremental terminal and rental fee revenue, and incremental royalty income.

Cash flow from operating activities was approximately $621 million versus $523 million last year. Our free cash flow components for the quarter were as follows: net income from continuing operations was $375 million; depreciation and amortization was $202 million; CapEx was $143 million; and dividend payments were $46 million.

While we have suspended our voluntary buyback program, during the quarter we spent $170 million net of proceeds for treasury stock purchases related to employee benefit plans. We still expect full year CapEx to be in the range of $400 million to $450 million, and we expect to generate full year cash flow from operating activities of $2.4 billion to $2.6 billion. We ended the quarter with $5.2 billion in debt, down $182 million from year-end. Interest expense increased 44%.

The effective tax rate from continuing operations was 27.7% this quarter, the same as the first quarter last year. Remember, the effective tax rate takes into account the impact of the minority interest and equity earnings and affiliates. The 27.7%, while higher in this first quarter, we expect the full-year rate to be approximately 27%.

Finally, we told you in January that we would be reviewing our portfolio of 11 slower growth businesses, residing in IPS and corporate and other, to determine their strategic importance to First Data. We have concluded that six of these businesses will be retained. They are Integrated Payment Systems, Government Solutions, First Data Technologies, Voice Services, TeleServices, and Solutions.

In 2005, these six businesses accounted for about $450 million in revenue, and we believe long-term that these businesses can meet or exceed our growth expectations for both revenue process. IPS will continue to be reported as a separate segment, and the other retained businesses will continue to reside in the corporate and other line. The other five businesses will either be sold or minimized. Now I’ll turn it back over to you.

Ric Duques

Thanks, Kim. Looking ahead to the second quarter, and for the rest of the year, as we said in yesterday’s press release, we continue to expect full year EPS from continued operations to be in the range of $2.35 to $2.42, excluding future costs related to Western Union spin, or any impact from the spin, and the potential sale of businesses.

While it will not be our practice to provide regular quarterly guidance going forward, given the transitional nature of this year, we feel it’s important to articulate our EPS expectations for the second quarter. Specifically, we anticipate the second quarter EPS from continuing operations to be in the range of $0.52 to $0.55. Let me make it very, very clear: this guidance is squarely in line with our original 2006 second quarter operating plan. It is not a change to our expectations.

Furthermore, we are clearly on track to deliver on our original $2.35 to $2.42 EPS guidance for 2006. Thanks, and thanks very much to the 30,000 talented people working at First Data. Now operator, I will open it up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Greg Gould of Goldman Sachs, you may ask your question.

Greg Gould - Goldman Sachs

Ric, a couple of questions. On the consumer to business segment in Western Union, when should revenue growth converge toward the transaction growth of 12%? Should that happen in the next couple of quarters?

Ric Duques

Well, first of all, let me hope that you do a better job at retirement than I did. Secondly, I don’t think I can give you a real good projection on that. It’s a quarter by quarter basis. We’re encouraged, but that’s about all I can give you, Greg, on that.

Greg Gould - Goldman Sachs

Secondly on First Data International, can the 17%+ organic revenue growth continue for a while?

Ric Duques

Based on the way we’re doing with the acquisitions and how we’re integrating them, which we’ve done a really good job on that so far, the answer is when you get them in and you get them running well and you get them on some common platforms, the answer is yes. The future is unpredictable here, but we feel very encouraged by it.

Greg Gould - Goldman Sachs

Sorry, Ric, let me ask one last question. The tax rates, post spin-off, what do you expect the tax rate to be for each of the two entities?

Ric Duques

Kim’s going to give you the answer to that, but I think there’s still uncertainty on that one too.

Kim Patmore

I think on the tax rate, we will have clarity when we do the Form 10, and so when we have that separate session with you, probably early June, we’ll go through that. I think directionally though you can assume that the tax rate for Western Union separately will be higher than where we are today, as a consolidated First Data, primarily due to the tax exempts that we have in the IPS portfolio, which will be retained on the First Data side.

Greg Gould - Goldman Sachs

Okay, thanks. Congrats on the results.

Ric Duques

Thank you.

Operator

Adam Frisch of UBS, you may ask your question.

Adam Frisch - UBS

Thanks. Regarding the spin-off, you gave some clarity on the timing and so forth, but I just want to know the public company costs. How different should the margins be going forward once these two companies are split from the segment levels that were disclosed previously?

Ric Duques

We don’t know right now. I would not think they would be dramatically different, but there’s just too many moving parts here. We have teams working to minimize the impact. Obviously there are certain things that are not present in Western Union now that will be there, so as we weed through those items, we’re trying to compensate for those. Where there’s additions, we’re trying to make some subtractions; and we are at the conscience effort that we have a lot of folks working on. At the end of the day I wouldn’t think they’d be dramatically different, but they probably will be different.

Adam Frisch - UBS

A follow-up on Q2 guidance. It was a little bit lower than I think the consensus had, not that a quarter makes a difference if you’re confirming the full year, but anything in the quarter that we should be aware of? I know you said that earnings would kind of get better throughout the course of the year, and Q2 looks like it’s not following that train of thought.

Ric Duques

Yeah, since I thought you might ask that question, or somebody might, I have my laundry list here: IPS is impacting negatively the second quarter; interest is impacting negatively the second quarter; liquidating damages is impacting negatively the second quarter, the 10 businesses are a slight drag there; stock, the 123R stock options are in there; and we have more bonus accruals in the second quarter of ’06 than we had in Q2 ’05. The total of that is probably $90 million to $100 million.

So that’s what’s happening. Many of those start to turn the other way in the Q3 and Q4; that’s kind of an overarching thing there. We have a management team in place here in the growth businesses, Pam Patsley and Christina Gold are there, which gives us a high degree of confidence that what they’ve done in the past, they’ll continue to do. We have new senior executives, Ed Labry in Merchant, who is very sales oriented there. Do you think he is?

Adam Frisch - UBS

I think so.

Ric Duques

Then we have Dave Bailis, who’s on site in Omaha, and last year we basically had either an absentee manager there or no manager there for parts of the year, so that team is very energized also. I think we’re real happy with what we have going into the second, third and fourth quarter.

Adam Frisch - UBS

Great, if I could just sneak one more in, because you brought up Ed’s name. We were in Vegas this week for the ETA conference, and it seemed like the merchant businesses is finding some of its swagger again, that they’re making some improvement there and gaining some traction; and that was from people other than Ed, so you’d be happy to know that.

Ric Duques

Does Ed think it’s gaining traction?

Adam Frisch - UBS

He was fairly upbeat. It was kind of a shock. He was upbeat.

Ric Duques

That is surprising.

Adam Frisch - UBS

Yes. What is he doing in the organization? I think there was talk about restructuring sales and reinvigorating that engine, and signing 10 ISO’s in one quarter seems like a pretty big deal, so if you could touch on that.

Ric Duques

Well, listen, I attended the sales kick-off meeting, and to say that it’s energized is an understatement. I think that he just knows the industry well, so I don’t think he’s just a sales guy. I think he basically knows the industry extremely well and he knows a lot of the people here, he knows the “right” ISO’s to try to attract, and I think he’s done a great job there. He’s working the alliances too. We’re meeting with those alliances and trying to improve the performances there, and I think we’re encouraged by that.

It’s just an overall, this activation thing, for one thing. A lot of times, when you sign a merchant and you don’t convert them right away, they run away or something happens. So this AMA system he’s putting in the salespeople’s hands is a huge thing if that works.

The other thing is he’s actually putting people on major accounts to make sure that we retain them. Now, I don't have any empirical data on that yet, but as we get it, we said in the spirit of transparency we will start to give you those retention numbers, which I think will be really important to the growth side of it.

Adam Frisch - UBS

Okay. Thank you very much for taking the time.

Operator

James Kissane of Bear Stearns, you may ask your question.

James Kissane - Bear Stearns

Thanks, great job. Ric, in January you gave guidance for Western Union to grow high teens, and the first quarter was 16%. Are you assuming an acceleration for the balance of the year?

Ric Duques

Yes. Last year, I guess you could look and I think it was lower than this in terms of growth and then they accelerated through the year. So I think you can see the same type of thing happening there. Loyalty would be one. The thing I mentioned about loyalty is an important part of this thing. There's a Mother's Day promotion here -- Stand back. The $1 million -- I'm sure you are going enter this. It's a $1 million promotion. You can win $1 million. We have no real feel for what that is going to do, that could be very, very significant and if it is, you will probably see more of those. I suggested Father's Day but no one wanted to do that. We have new agent signings all the time. Russia is one, the Travelex thing that I mentioned. So promotions, new agent signings, loyalty, I think those are the things that are going to drive it.

James Kissane - Bear Stearns

The spread between -- this is excluding Vigo --the spread between the international transactions and the revenue growth widened again in the quarter. Is that more of the intra-country transactions, or is that more pricing pressure?

Ric Duques

No, it's probably more intra-country, and that's a trend that is going to continue. We are going to do more intra-country. Then we have some parts of the world where the pricing is just lower. So there's a mix issue going on, and it's so dynamic here that it changes all the time. I'm not trying to avoid the question but it's just sometimes when something starts up and the pricing is a little bit different; Vigo pricing is different, for instance, would be a good example.

James Kissane - Bear Stearns

Was there any residual concrete integration costs in merchant in the quarter?

Ric Duques

Now, we said to ourselves and we said to everyone, we're never going to mention integration costs again. So the answer is it was there, but we absorbed it.

James Kissane - Bear Stearns

Okay. Thanks, and good disclosure. Thank you very much.

Ric Duques

Thanks.

Operator

Paul Bartolai of Credit Suisse, you may ask your question.

Paul Bartolai - Credit Suisse

Thanks, good morning. Good job on the quarter and thanks for all the additional disclosure. First question, just on the commercial business had a nice pickup in growth there. Can you give us any more color on what was driving that maybe which of the different distribution channels showed some good improvement?

Ric Duques

I would say the ISOs kicked in there. The national accounts, a group that we have there did a real good job this quarter. With the two additional ISOs and with the national accounts, and the alliance were in line with our expectations. We think they are going to be getting even better by the way, though -- the alliances.

Paul Bartolai - Credit Suisse

Okay. Then on the margin side, again, good improvement there. Can you give us some sense of, again, what drove that and where you see margins going the rest of the year?

Ric Duques

I think what drove that are just operating efficiencies. Like I said, that management team is not just sales oriented. I think that they are basically taking out costs that are not focused on selling new clients or retaining existing clients. The excess cost is flying that out of the business and increased costs in terms of adding salespeople and arming them with the tools to do a better job. So I think that's driving it. A little improvement in the middle called the expense side, and a lot of improvement on the top side gets you those kind of margin improvements.

Paul Bartolai - Credit Suisse

On the cost side, on the commercial business, are you guys pretty much set with the platform and the systems, or is there spending that needs to be done there to upgrade anything?

Ric Duques

Not significant there. We are constantly looking at various platforms, prepaid would be one that we're looking at. But not a dramatic increase in any kind of cost there.

Paul Bartolai - Credit Suisse

Thanks. Good job on the quarter.

Ric Duques

Thanks.

Operator

Mark Marostica of Piper Jaffray. You may ask your question.

Mark Marostica - Piper Jaffray

Thank you. The first question relates to the First Data international business. You mentioned opportunity for further platform consolidation. Trying to get a sense for how many platforms you are currently operating on and as you look to the next year to two years, how many more platform consolidations you'd anticipate? And potentially any cost savings that you could comment on?

Ric Duques

The cost savings I can't project now. Think in terms of VisionPLUS, basically for issuance processing and OmniPay for merchant processing and so those are the two main platforms. There are some legacy platforms, the old FDR platform, which is operating in London. That's a platform we have, so that's three. Gesellschaft will have its own platform, there's four. I don't know that there are any other major platforms.

A lot of the people that are coming to us are old VisionPLUS clients who may look to go on to the shared service, but as we make an acquisition in some part of the world, they may have VisionPLUS, they probably won't have OmniPay if they are a merchant client, and we would be converting those. So it's client-by-client, country-by-country. We know their efficiencies when it happens but I couldn't quantify them for you.

Mark Marostica - Piper Jaffray

Then following up on the comment around the six portfolio businesses that you are planning to retain. Could you give us a sense of the relative profitability of those six businesses, and if and how much they are a drag on current operations, profitability, and when do you expect that to turn?

Ric Duques

I think Kim can give you a little local color on that one.

Kim Patmore

Yes, I think for integrated payment systems, in particular, as we have gotten to the bottom of the interest rate increases, we do expect that to increase over time, but I think you will see that as a drag during 2006, but improving in the last half.

Then the other five are really in the growth rates from a revenue perspective, that are in that 8% to 10% that we do aspire to. I think on the bottom line, though, they are not there on the 8% to 10% and that's what we are looking to improve. We really need to take some additional costs out of those businesses to get them up to the 8% to 10%.

Mark Marostica - Piper Jaffray

Great. One last question. Ric, you mentioned attrition trends are improving in merchant or commercial services, and you get a sense of quantification of benefits in the latter half of '06. Do you have any sense at this point what you might achieve from a financial benefit point of view as you kind of look to '06? In other words, what is embedded in your guidance?

Ric Duques

The danger in the attrition rate, why I'm a little concerned about that is I'm not comfortable with the metrics here. We may have some mix change in there, where we're into a marketplace where let's say, a small to lower marketplace, it's more going out of business losses versus we didn't do a good job, and they switched to a competitor.

So I need a little more historical information before I throw out a number. Because I throw out a number that maybe is misleading to you or anybody else, and so as change the mix of our business and how we capture this segment versus that segment we don't have as good a data as I would like right now.

If I had it, I would share it with you; particularly if it was good. We don't have it now, and I don't want to be misleading. We are working on it, and hopefully by 2007, we will have some data that means something to everybody.

Mark Marostica - Piper Jaffray

Fair enough. Nice job on the quarter.

Ric Duques

Thank you.

Operator

Pat Burton of Citigroup, you may ask your question.

Pat Burton - Citigroup

Hi. Congratulations on the quarter. My question, Ric, actually has to do with the Mexico corridor. It looks like for the first time, revenue is now growing faster than transactions. What is the dynamic behind that?

Ric Duques

Revenue is growing faster than transactions?

Pat Burton - Citigroup

Did I read that right? Western Union branded revenue up 27 and transactions up 23, where we normally have a negative gap.

Kim Patmore

I think it's really related primarily to the fact that as we have these retention of the customers, we are seeing them send a higher amount and so we are seeing a change, a little bit of a change in the mix; and we are seeing a stabilization in the pricing from the Mexico perspective. Lots of competitors, but an overall, from quality and a value that we are providing to the customers so the pricing has remained fairly stable.

Pat Burton - Citigroup

As a follow-up, is that loyalty program further along in the Mexican corridors than let's take the rest of the global business?

Kim Patmore

Yes, because we started the rollout in the U.S. with the loyalty cards. So I would say you do have a pretty good mix of U.S. loyalty sending to Mexico. So that probably, because we got our start from the U.S. base, that probably is having an impact as well.

Pat Burton - Citigroup

Thanks.

Operator

Bryan Keane of Prudential, you may ask your question.

Bryan Keane - Prudential

Hi, good morning. I think now although you don't want to give us the exact number, but I think the integration expenses are finally finished in 1Q '06. I was hoping, Ric, can you give us some perspective or an assessment on the success of the integration and the cost savings?

Ric Duques

Well, we said we would save $250 million, is that the exact number?

Kim Patmore

About $205 million, right, and we exceeded that.

Ric Duques

We've exceeded the $205 million. I think it's maybe a little bit more than that, as a matter of fact. Well, I said if to you, but it's kind of done now. So it is integrated into the overall business, and you would never be able to find it from this day forward, As I said, it will be just the same. There was some additional expense in the first quarter, but it was de minimus basically, and it's finished now.

Bryan Keane - Prudential

What about the retention of banks and how the property looks today compared to what plan was?

Ric Duques

It's a competitive market. Basically we are where we thought we would be. But I will tell you this market is clearly competitive there and the big banks that we lost; we are still lapsing maybe the last one; Bank One we were lapsing at the end of the second quarter. End of the second quarter, we'll be lapsing probably the last big one that we do.

So now it's kind of let's see what happens going forward because the big ones that we knew were going have gone. Now we're left with -- to answer your question, ask me that one year from now, and I will tell you how we feel.

Bryan Keane - Prudential

Okay. Just turning to Western Union, China and India, it looked like India accelerated towards 96% growth in transactions, China decelerated a little bit to 39%. Can you just describe those two markets? What's the total of Western Union, of those two countries? It used to be 4 to 5%. I think it was 4% last update about China and India combined.

Ric Duques

That's about where they are right now. There's really not much change there. I mean, it's tough to defend 40% growth, versus 96%. Sometimes we are rolling out promotions in certain parts of those countries that are more aggressive during one period of time or another, but the basic percentage of those countries to the total is still about the same.

Bryan Keane - Prudential

Okay. So both are to plan and still accelerating, there are no problems?

Ric Duques

Yes. Yes, definitely on plan.

Bryan Keane - Prudential

Just a last question on the guidance, obviously we all modeled 2Q wrong. Throughout the rest of the year, does 3Q get a little stronger, then 4Q is the strongest? How do we think about the seasonality of just the back half of the year?

Ric Duques

I would think about it just the way you said it. I think Q3 gets a little stronger and Q4 is very strong, and that's just kind of the way it flows out. I think you described it well. I mean, some of these things that I just went through in the second quarter clearly get better in the fourth quarter. Liquidating damages; when I went over the financial institution services group, where we had Chase, Fleet, Peoples liquidating damages, we are basically finished with that in the second quarter and maybe one month in the third quarter. So the last two months of the third quarter in the financial institutions group is not going to be burdened by those, so we're still going to see better performance there and even better in the fourth quarter.

Bryan Keane - Prudential

Okay, great. Thanks, guys.

Operator

Brandt Sakakeeny of Deutsche Bank, you may ask your question.