First Data Corp. said that despite its overall flat first-quarter results and a loss in its struggling card processing unit, the unit is growing.
The transaction processor's earnings conference call Friday included an update on its spinoff of Western Union Financial Services Inc., including naming a nonexecutive chairman.
Henry C. ("Ric") Duques, First Data's chairman and chief executive, told analysts that Jack M. Greenberg, a First Data director and onetime McDonald's chairman and CEO, would leave the director post to become Western Union's chairman when the spinoff is completed in the fourth quarter.
Christina Gold, Western Union's CEO, is to keep that title after the spinoff. First Data is looking for six to eight people to round out the Western Union board. Both companies will remain in Denver.
First Data's net income for the quarter was $373.7 million, or 48 cents a share, flat with a year earlier. Revenue was $2.7 billion, up 10%.
As in past quarters, Western Union was one of First Data's strong points. Revenue for the division rose 16%, to $1.1 billion, and operating profits 13%, to $337 million.
The card processing division's revenue fell 5%, to $445 million, and its operating profit fell 4%, to $84 million. The division has long been a weak spot for First Data, which said last year that it was considering selling it.
Instead, it announced during its fourth-quarter earnings report in January that it would retain card processing - which it said is a crucial piece of its core transaction processing business - and spin off the money transfer unit. That plan reorganized the card processing division and renamed it the Financial Institutions division.
Mr. Duques said the division had solid underlying growth and that the first-quarter drop was mainly a result of the loss of several major card processing contracts in the past few years - with banking companies like JPMorgan Chase & Co. and FleetBoston Financial Corp. - that pushed down the unit's revenue by 13%. The last anniversary of those deconversions will be in July, which will help with upcoming quarterly earnings comparisons.
"If you exclude the impact of these deconversions, revenue growth was actually plus 5%," Mr. Duques said. "Our goal is to have the financial segment grow its revenues and profit 8% to 10% by 2008. I'm confident that with the underlying revenue growth in this business of 5% today, we are well on our way to achieving that goal."
A big boost will come this quarter when Citigroup Inc., a longtime First Data customer, shifts over the private-label portfolio it acquired from Sears, Roebuck and Co. That portfolio, with more than 80 million accounts, is due to convert in May.
Gregory Smith, an analyst for Merrill Lynch, wrote in a note issued Friday that First Data had "a solid, clean, in-line quarter."
That had not been the case in other quarters in the past year. During that period, besides bringing in Mr. Duques to succeed Charles Fote, First Data has discussed multiple spinoff plans and has repeatedly had to defend its card processing business. Many analysts say all the moving pieces make the company hard to read, and First Data executives have said one of the goals of spinning off Western Union is to make it more lucid to outsiders.
"FDC's past quarters have been much noisier," Mr. Smith wrote. Issuing a clear report "is a minor victory."
The company said it is projecting second-quarter earnings per share of 52 to 55 cents, lower than Mr. Smith had expected.
"However," his note said, "management was adamant in their prepared remarks that this is consistent with their original expectations and full-year guidance was maintained so we are not concerned. We note that FDC has substantial seasonality and given all of the moving pieces, it is difficult for the Street to predict the quarterly progression of results."
When First Data announced the spinoff plan in January, it said it had identified 11 other units that had been a drag on earnings and that it would either fix or sell.
Kim Patmore, First Data's chief financial officer, said a half-dozen of those businesses have proved to be keepers: Integrated Payment Systems, Government Solutions, First Data Technologies, Voice Services, TeleServices, and First Data 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," Ms. Patmore said. "The other five businesses will either be sold or minimized." She did not name them.
Mr. Duques discussed the debate over national immigration reform, and downplayed any chance that the issue could affect Western Union's remittance business.
Congress is considering stricter immigration laws and increasing security along the U.S.-Mexican border. A good percentage of the nation's estimated 11 million illegal immigrants come from Mexico and a good number are Western Union customers.
"We don't know what's going to happen, but we don't think whatever happens will have a dramatic impact on the business," Mr. Duques said. "It's a populist issue right now, but I don't know when there's going to be any legislation."
He said the company has been negotiating with the ratings agencies on how to allocate First Data's debt during the spinoff.
"We hope to obtain a rating for First Data in a single-A range, which is similar what we have today," he said. "We also hope to obtain strong ratings for Western Union, but potentially lower than First Data's ratings."
Robert J. Dodd, an analyst with Morgan Keegan, said the remaining First Data companies will need high debt ratings to gain "access to relatively cheaper capital."
