The Denver processing giant First Data Corp. said slow sales in its check verification business and the ongoing expense of integrating Concord EFS Inc. caused the sharp drop in its second-quarter earnings.
On Friday, First Data reported that its net income dropped 16% from the same quarter last year, to $391.9 million, or 50 cents a share. Revenue rose 3%, to $2.6 billion.
"We had some overachievements and a couple of disappointments," Charles T. Fote, the company's chief executive, said during a conference call with analysts Friday. He called 2005 "First Data's transition year."
The overachiever was the remittance business Western Union, which remains First Data's revenue engine. Revenue from the business rose 14%, to $947.3 million, while consumer remittance volume rose 20%, and international money transfers rose 26%.
Some of the disappointments came in its merchant services business, where First Data took a charge of 4 cents a share to cover the ongoing cost of absorbing the processing company Concord and its Star Systems debit network, which were purchased last year.
Mr. Fote said the merchant services unit lost some business after First Data sold a merchant processing portfolio with 25,000 merchants in December to iPayment Inc. In mid-2004 the software vendor Intuit Inc. acquired a credit and debit card processing company and moved its processing business away from First Data. Also in 2004, several large banking companies, including Wells Fargo & Co. and Wachovia Corp., began to take their debit business to Star's rivals.
Results from TeleCheck Services Inc., the check verification company First Data bought in 1995, were also disappointing. Mr. Fote said the $14 million drop in revenue from the unit dragged down results in the check verification and guarantee services business.
"We had anticipated TeleCheck to be no worse than neutral from a revenue standpoint. We have not been that fortunate so far," he said.
Merchants use TeleCheck to determine whether a customer's check is likely to be returned.
Mr. Fote also said that First Data is repositioning TeleCheck from a standalone business to one offered to retailers as part of a portfolio of merchant services.
First Data also is retraining the TeleCheck sales force to promote other services to merchant customers, he said; about 70 of TeleCheck's 300 salespeople have been trained to sell First Data's other merchant services.
"We're struggling through that transition," Mr. Fote said. "We're getting them trained - understanding how to board merchants, what the right discount rates should be, and so on."
TeleCheck has cut its expenses, changed data processing applications, and reduced its headcount to boost its profits, he said.
Though consumers are writing fewer checks, checks remain an important payment option, and TeleCheck will remain a part of First Data's service portfolio, Mr. Fote said.
"To a merchant, that's a very valuable product offering," he said. "On Friday night, they want to sell that toaster, even if the money is not in the bank account until Monday morning. They don't want that transaction to be declined if they ask for a debit card."
Robert J. Dodd, an analyst at Regions Financial Corp.'s Morgan Keegan & Co., wrote in a note published Friday that he downgraded First Data's stock to "market perform," from "outperform," because of the company's "messy" earnings.
The second-quarter results "were below our expectations, with primary concern being the merchant services segment that reported flat operating income," he wrote.
