Despite Some Fourth-Quarter Improvements, Wall Street Punishes First Data

Leading payment processor First Data Corp. late Tuesday reported modest revenue and transaction growth in 2015’s fourth quarter, as well as better pre-tax profitability and an improved balance sheet in the wake of its October initial public offering, but investors still didn’t like what they saw. The Atlanta-based company’s stock in mid-day trading Wednesday was off approximately 10% from Tuesday’s close of $11.10 after earlier plunging by more than 13%.

First Data reported revenues of $2.96 billion for the quarter, up 3% from $2.88 billion a year earlier and slightly more than analysts expected. The company posted a net loss of $1.16 billion versus net income of $65 million in 2014’s fourth quarter, but attributed the loss to one-time charges for extinguishing debt, and for IPO expenses. Factor that in and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) grew 7% to $762 million, and the adjusted EBITDA margin expanded by 2 percentage points to 41.6%.

What’s more, while the company remains heavily indebted, post-IPO debt payoffs and refinancing of some borrowings are improving its balance sheet and cash flows. Long-term borrowings of $18.7 billion are down by nearly $2 billion, or 9%, from late 2014. Net interest expense totaled $338 million in the quarter, down 16% from $403 million a year earlier.

While investors and analysts normally love such financial improvements, Larry Berlin, a vice president at Chicago-based First Analysis Securities Corp., believes investors also are looking for more improvements in operations and transactions, the latter of which are growing slower than some competitors.

“A lot of the improvement in profitability is coming from financing,” says Berlin. “It’s a capital-table improvement, not an operational improvement.”

For example, First Data’s biggest unit, its merchant-processing segment known as Global Business Solutions, saw its North American (U.S. and Canada) transaction count increase 6% year over year to 11.2 billion in the fourth quarter. In the same period, rivals Total System Services Inc. (TSYS) and Vantiv Inc. posted merchant transaction gains of 8.5% and 8%, respectively, Berlin notes.

Total Visa and MasterCard credit and debit purchase transactions in the U.S. and Canada for the quarter ended Dec. 31, 2015, were up 11% from a year earlier to 21.1 billion, according to calculations by Digital Transactions News.

At a conference call with analysts this morning, First Data executives indicated that operational improvements are on the way. And Berlin notes that given the huge size of its merchant portfolio, big percentage gains are harder for First Data to achieve than for its smaller competitors. “Operationally, they’ve done a good job, they just have more to go,” he says.

First Data’s international merchant transaction count grew 14% in the fourth quarter to 1.88 billion, while transactions on its Star debit network and from debit card issuers and its big prepaid card operation increased 8% to 5.07 billion.

The company’s processing business for card issuers, called Global Financial Solutions, had 813 million cards on file as of Dec. 31, up 14% from 714 million a year earlier. International cards on file grew 11% to 146 million.

First Data’s share price has fallen about 39% since the stock began trading on the New York Stock Exchange last Oct. 15.