Data About First Data Show Transaction Growth but Profitability Issues Remain

A filing Tuesday by First Data Corp. in the wake of its recent initial public offering of stock paints a picture of a payment processor growing in many areas but still carrying a heavy debt load and challenged on profitability.

The filing, Atlanta-based First Data’s quarterly report to the Securities and Exchange Commission, offers more detail about the company’s operations than usually comes out in the corresponding earnings announcement, which was Oct. 26.

For example, the report reveals that First Data paid $65 million—$62 million in cash and $3 million in equity—for digital gift card distributor Transaction Wireless Inc. The companies did not disclose the purchase price when they announced the deal in July.

Transaction Wireless is now part of First Data’s Network & Security Solutions (NSS) segment, the smallest but fastest-growing of the company’s three major divisions. Third-quarter segment revenues grew 9% year-over-year to $374 million, while earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 7% to $162 million.

The major components of NSS include the Star debit network, debit card issuer transactions, stored-value services and security products and services. Debit and closed-loop and open-loop prepaid card transactions processed grew 10% in the third quarter to 4.68 billion from 4.26 billion a year earlier.

First Data’s biggest segment is its merchant-processing unit, Global Business Solutions, which serves about 4 million businesses in the U.S. and 2 million elsewhere. The segment’s total transaction count grew 8% to 13 billion from 12 billion in 2014’s third quarter. North American transactions increased 7% to 11.1 billion while the international count grew 21% to 1.86 billion.

Segment revenues, however, grew only 2% on an as-reported basis to $1.03 billion but were up 6% on a constant-currency basis, while EBITDA increased 4% (6% adjusted for currency fluctuations) to $431 million. Transaction and processing fees, which account for 78% of segment revenues, fell 2% in the quarter as pricing changes offset volume increases in North America and currency fluctuations overshadowed international growth.

First Data’s third major segment, Global Financial Solutions, handles card processing and production for general-purpose and retail card issuers. The unit long had been plagued by slow growth and mediocre profits, but has been staging a comeback in recent quarters. North American cards on file as of Sept. 30 totaled 809 million, up 13% from a year earlier, while international cards on file added up to 150 million, an increase of 15%. The total card count was 959 million, up 13% from 846 million a year earlier.

Segment revenue of $391 million in the third quarter represented a 3% increase as reported and a 9% increase adjusted for currency fluctuations. EBITDA of $145 million grew 9% as reported and 14% adjusted on a constant-currency basis.

Putting it all together, First Data reported third-quarter revenues of $2.92 billion, up 5% from a year earlier, and a net loss of $126 million, down 46%. The big drag on profits is the company’s interest expense, which totaled $389 million in the quarter.

First Data expects its interest expense to gradually decline because the IPO, which netted the company about $2.6 billion, enabled it to begin reducing its long-term borrowings, which amounted to $20.8 billion on Sept. 30.

The IPO “put them in a better position to refinance some of that debt at more manageable rates,” Gil Luria, managing director at Los Angeles-based Wedbush Securities, tells Digital Transactions magazine for an upcoming story on the post-IPO First Data. “But they still have a very long way to go.”