Discover Financial Services misses by $0.13, reports revs in-line; in discussions with its regulators regarding card product misclassification; pauses share repurchases;
- Reports Q2 (Jun) earnings of $3.54 per share, $0.13 worse than the FactSet Consensus of $3.67; revenues rose 20.7% year/year to $3.88 bln vs the $3.88 bln FactSet Consensus.
- Co has decided to pause share repurchases while the internal review of compliance, risk management and corporate governance is pending.
- Co also discloses Card Product Misclassification. Beginning around mid-2007, Discover incorrectly classified certain credit card accounts into its highest merchant and merchant acquirer pricing tier. Incremental revenue resulting from this card product misclassification amounted to less than 1% of its cumulative discount and interchange revenue, gross, since that time, or less than two basis points as a percentage of sales over this timeframe. The misclassification affected pricing for certain merchants and merchant acquirers, but not for cardholders.
- Management is taking actions to correct the card product misclassification going forward and to prepare a program to compensate affected direct merchants and merchant acquirers. However, given differences in individual merchant agreements, changes in network terms, and availability of historical data, it is difficult to determine the final amount of potential refunds at this time. An investigation into this issue by an external law firm working at the direction of the Audit Committee of the Board of Directors is ongoing. Discover is in discussions with its regulators regarding this matter and corporate governance and risk management. In addition, the Company received a proposed consent order from the FDIC in connection with consumer compliance. This proposed consent order does not include the card product classification matter. Additional supervisory actions could occur.
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