Alliance Data Systems Corporation (

ADS

)

Q4 2011 Earnings Call

February 2, 2012 8:00 am ET

Executives

Ed Heffernan – President and CEO

Charles Horn – EVP and CFO

Julie Prozeller – Investor Relations and Media, FTI Consulting

Analysts

James Kissane - Credit Suisse Securities

Darrin Peller - Barclays Capital

Carter Malloy - Stephens, Inc

David M. Scharf - JMP Securities

Sanjay Sakhrani - Keefe, Bruyette and Woods

Presentation

Operator

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Good afternoon and welcome to the Alliance Data Fourth Quarter and Full Year 2011 Earnings Conference Call. At this time all parties have been placed on a listen-only-mode. Following today’s presentation, the floor will be opened for your questions. (Operator Instructions) In order to view the company’s presentation on their website, please remember to turn off the pop-up blocker on your computer.

It is now my pleasure to introduce your host Ms. Julie Prozeller, of FTI Consulting. Ma’am the floor is yours.

Ms. Julie Prozeller

Thank you, operator. By now you should have received a copy of the Company's fourth quarter and year-end 2011 earnings release. If you haven’t, please call FTI Consulting at 212-850-5721. On the call today we have Ed Heffernan, President and Chief Executive Officer and Charles Horn, Chief Financial Officer of Alliance Data.

Before we begin, I’d like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and the uncertainties described in the Company’s earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call.

Also on today’s call our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. A reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com.

With that, I’d like to turn the call over to Ed Heffernan. Ed?

Ed Heffernan

Thanks, Julie, and welcome. We are aware it is earnings season and everyone is pressed for time, so we will be respectful of your time. This morning and also hopefully we give everyone a very good start to the day as we talk about our record 2011 earnings, which came in nicely ahead of our expectations and also drove our decision to come out of the gate raising 2012 numbers. It does look like its going to be a superb year in 2012 thus far.

With that being said, let’s get right at it. I will turn it over to Charles Horn, our CFO. He just finished his cup of coffee and he is ready to go.

Charles Horn

Thanks, Ed. It was a great quarter to end another record year. We will start by looking at the fourth quarter.

Our revenue increased 12%, to $848 million. Our EPS increased 33% to $1.12 per share. A very meaningful core EPS number increased 9% to a $1.70, beating the company’s guidance of a $1.46. If we exclude the year-over-year build in phantom shares, which you see on the slide. Our core EPS increased 17% year-over-year. And Adjusted EBITDA, net of funding costs increased 21% to $194 million.

You routinely hear us talk about phantom shares, and many of you asked why do we point them out? The simple answer is because we never have to economically settle them. They come into our share count due to accounting reasons, but nothing else. So if you look at the slides, you can see our phantom shares added 4 million and 2. 8 million shares respectively to our diluted share count for the fourth quarter and full year 2011. As a result, it create a drag on core EPS of $0.12 for the fourth quarter and $0.39 for the full year 2011.

Summarizing for the year, we achieved double-digit growth in our numbers. Revenue up 14%, EPS of 57%, Adjusted EBITDA, net of our funding cost up 35% and core EPS up 30%, a remarkable year.

Let’s flip to the next page and talk about LoyaltyOne. LoyaltyOne came in consistent with our expectations for the quarter as we had anticipated an unfavorable exchange rate environment and lower collector redemptions as a result of active program management.

For the quarter, revenue was down $10 million or 4% due to $2 million negative impact from exchange rates and a $9 million decrease in redemption revenue. The decrease in redemption revenue was due to a conscious effort by management to pull back the burn rate compared to the fourth quarter of 2010.

Adjusted EBITDA for the quarter was consistent with the fourth quarter of 2010. Unfavorable exchange rates lowered adjusted EBITDA by approximately $500,000, while incremental costs associated with the expansion of the Dotz coalition program in Brazil with a $2 million drive to the quarter. Excluding these items, adjusted EBITDA was up 6% for the fourth quarter of 2011.

The key metric for AIR MILES. AIR MILES issued increased 10% for the quarter, the highest percentage increase of 2011 and the highest since the third quarter of 2008. This large increase shows that both collectors and sponsors remained highly engaged in the AIR MILES program. It also drives immediate cash flow and positions us for strong revenue growth in 2012 and beyond.

As discussed before, we continue to roll out the Dotz loyalty platform in Brazil. Enrollment in the program continues to exceed our expectations as we ended 2011 with over 1.6 million collectors. We estimate that this number will grow to over 3.5 million collectors by the end of 2012.

During the fourth quarter we announced a program enhancement for AIR MILES, the addition of an instant rewards option. Collectors in the AIR MILES program, beginning in the first quarter of 2012 will have the ability to allocate some or all of their AIR MILES collected into this option. It will provide collectors with an instant liquidity at the point of sale with participating sponsors. Both the sponsors and collectors have been asking for this enhancement and we delivered.

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