Poor profit margins at First Data Corp.'s merchant services division may be behind the latest management shake-up at the Denver processing company.
First Data announced last week that Scott Betts, its president of domestic enterprise payments, whose job includes overseeing the merchant services division, will leave by early March.
A string of executive changes at First Data has included the recent replacement of its chairman and chief executive.
The company is also thinking about selling off its card-issuing services division, generally considered its Achilles' heel. It is the only one of First Data's three divisions whose revenue and profit did not rise in the third quarter.
But analysts say a long decline in profit margins at the merchant services division may have prompted the company's new chairman and CEO, Henry C. 'Ric' Duques, to make drastic changes. Mr. Duques, who had relinquished the CEO job to Charles T. Fote in 2002 and the chairmanship to him in January 2003, got the CEO position back last November, when Mr. Fote resigned, and took over as chairman at the start of the year.
First Data spokespeople would not discuss the announcement about Mr. Betts, who did not return a phone call.
But Daniel R. Perlin, an analyst for Stifel Nicolaus & Co., said that Mr. Duques probably asked for Mr. Betts' resignation. Mr. Duques is "realigning the management team," he said. "I think … [Mr. Betts] was pushed out; he didn't voluntarily leave."
Brandt A. Sakakeeny, an analyst for Deutsche Bank, said that the merchant services division has been struggling. "We have seen in that business consistent erosions of margins over the last couple of years," he said. "If you look back several years ago, this was a high-20%-margin business, and today it's a low-20%-margin business."
First Data reported during its third-quarter earnings call, in October, that margins seemed to have stabilized, Mr. Sakakeeny said. "The Street got the impression that the issues were past them, and that margins had troughed, and things would start to turn positive."
But in December, Mr. Duques said the pricing and margins of the merchant services business were still under pressure. "I think that surprised everyone," Mr. Sakakeeny said. "The implication, clearly, was more margin erosion lay ahead."
Transaction processors are being squeezed between banks, merchants, and the major card companies, Mr. Sakakeeny said - and processors have the least leverage.
"The last place you want to be is between Visa, Wal-Mart, and Citi," he said. "You just don't want to be there, and that's where First Data is."
In last year's first quarter the merchant services division took in just $682.7 million of revenue - down 9% from the fourth quarter of 2004 and 31% from the third. By last year's third quarter it had risen to $1.06 billion. (First Data is scheduled to issue fourth-quarter results Jan. 26.)
Mr. Perlin said that last May, during an Omaha conference with analysts, First Data said 80% of the division's transaction volume came from about 20% of its clients, mostly large merchants.
However, First Data also said then that its smaller merchants were far more profitable. "Eighty percent of the profits were coming from smaller guys, who were only contributing 20% of the volume," Mr. Perlin said. Its larger merchants were "not that profitable."
John Kraft, an analyst for D.A. Davidson & Co., said there have been problems with the division's performance. However, he also said that the company is trying to expand abroad and may be investing in the division's technology to ensure that it remains competitive.
The international market is "a more competitive market. They're obviously looking ahead and saying we don't want to get into a situation like we had with card where we neglected it for a while and it got behind," Mr. Kraft said. "Maybe they're taking some steps ahead of time, seeing out a few years, rather than just waiting and being reactive."
First Data said that Ed Labry, the president of its prepaid services unit, would assume some of Mr. Betts' responsibilities. Mr. Labry was previously the president of the transaction processor Concord EFT Association, which First Data acquired in 2004.
David A. Trossman, an analyst for Wachovia Securities, said that Mr. Labry is good for the business. Mr. Betts came to First Data from Procter & Gamble in 2001 and is not a "payments guy - he came in from the outside," Mr. Trossman said. "Labry is a longtime payments guy.
"To me that's the biggest tradeoff here. You're putting a payments guys back in to run this business."
