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Why Discover Financial’s Operating Expenses Rose Year-over-Year

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Components of operating expenses

The components of Discover Financial Services’ (DFS) total operating expenses are employee compensation and benefits, premises and equipment, marketing and business development, professional fees, information processing and communications, and other expenses. In 4Q17, the company incurred total operating expenses of $1 billion compared to $897 million in 4Q16, which is a rise of 15%.

Among all the components of its total operating expenses, the highest rise was in professional fees, which were $189 million in 4Q17 compared to $152 million in 4Q16, a 24% rise. The rise was mainly due to expenses incurred in relation to technology and analytic capabilities.

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Marketing expenses

Discover Financial incurred employee compensation and benefits expenses of $411 million in 4Q17 compared to $352 million in 4Q16, which is a rise of 17%. Between 4Q16 and 4Q17, its marketing and business development expenses rose from $176 million to $213 million, implying a 21% rise on the back of a rise in acquisition costs and brand advertising.

Its information processing and communication expenses fell from $81 million in 4Q16 to $80 million in 4Q17. However, its other expenses rose from $113 million in 4Q16 to $117 million in 4Q17.

The company’s free cash flow (or FCF) yield is 4.9% over the last 12 months (LTM). Its peers (XLF) Ally Financial (ALLY), First Data Corporation (FDC), and Fidelity National Information Services (FIS) have FCF yields of -6.9%, 7.4%, and 2.7%, respectively, on an LTM basis.

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