Alliance Data Systems Corporation ( ADS)

Q3 2011 Earnings Call

October 20, 2011 8:30 AM ET


Ed Heffernan – President and CEO

Charles Horn – EVP and CFO

Bryan Kennedy – President of Epsilon

Julie Prozeller - Financial Dynamics


David Scharf – JMP Securities

Daniel Perlin - RBC Capital Markets

Sanjay Sakhrani - KBW

Robert Dodd - Morgan Keegan

Robert Napoli – William Blair & Company

Dan Leben - Robert W. Baird



Good afternoon and welcome to the Alliance Data Third Quarter 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. At that time if you would like to ask a question (operator instructions)

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 third quarter 2011 earnings release. If you haven't, please call FTI 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 and Brian Kennedy, President of Epsilon.

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 are speakers who 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

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

Ed Heffernan

Thanks Julie. Alright! Why do we just dive in here? Joining me today again is the ever popular Charles Horn and our main man at Epsilon, Bryan Kennedy who is President and we are just dive right in. Charles?

Charles Horn

Thanks Ed. It was another strong quarter, a record quarter. Momentum continues to build as all three segments reported double-digit revenue and adjusted EBITDA growth. Consolidated revenue increased 20% to $845 million. As previously discussed, all three businesses achieved double-digit revenue growth with Epsilon increasing to 46% compared to the third quarter of 2010. Core EPS increased 39% to $2.16 considerable beating the company’s guidance to the $1.85 for the quarter while GAAP EPS increased and even better 67% to $1.60 per share.

Both increases were achieved despite a $3.6 million share increase and diluted share count due to phantom shares associated with our convertible notes. A reminder, phantom shares were covered by economic hedges with counter parties. The company has no obligation now or in the future to issue these shares.

Adjusted EBITDA increased 29% to $283 million, while adjusted EBITDA net of funding cost increased an even stronger 47% to $247million.

Funding cost benefited from a $9 million mark-to-market gain on the interest rate derivatives. As discussed in our earnings release this benefit of approximately $0.09 was excluded from core EPS for the quarter. In summary for the third quarter, we more than achieved our targets of double-digit revenue, adjusted EBITDA and EPS growth.

Let’s move on to LoyaltyOne on the next page. Overall LoyaltyOne had a strong third quarter with results exceeding the expectations. Notably, Revenues increased to 8% if you take off the foreign exchange translation gains. Adjusted EBITDA increased 22%, again excluding foreign exchange translation gains. And adjusted margins for Canada grew to a robust 29%. In addition miles issues grew 9% for the third quarter, the strongest quarter of the year that’s far. The issuance growth is attributable to three main areas. The first is favorable spend levels on credit card products combined with robust acquisition for premium cards. Second, the signing of several new specialty retail sponsors earlier this year continue to drive positive issuance momentum. Third, is one-to-one marketing initiatives that have increased customer or collector engagement and expanded promotional activity with key sponsors. All three are keeping the AIR miles reward program well on track to meet or exceed mid-single-digit issuance growth for the year.

Lastly, miles redeemed increased 3%. The Burn-Rate defined as current period redemptions over current period issuances was 71% in line with our expectations. As we have talked about for years, the AIR miles reward program is a dynamic program whereby we routinely make program changes the enhance the value preposition of the program, but also meet certain program designs. In the later case, this means marginally the redemptions to keep it tracking forward the ultimate redemption rate of 72%. Our current cumulative redemption rate is about 60% moving up 1-2% per year, trending consistent with our expectations. In summary, all of the trends are favorable below if you want.

Let’s turn to the next page. In our last earnings call we outlined three initiatives for the Dotz loyalty coalition program in Brazil. The team has delivered on each of these initiatives to propel the growth of this program. Let’s review the three initiatives and early results. One, we launched Dotz Banco do Brazil, its national anchor sponsored this first quarter. Conversion of a portion of Banco’s $20 million accounts has begun and we have already met near term expectations. We are on track to exceed $2-$3 million accounts by the end of 2012. Two, we’ve rolled out the second coalition market, with is Brasilia. This market has over 200 locations issuing Dotz. This is a continuation of our commitment of a phased and measured roll-out of market throughout Brazil. We continue to monitor our results to align future market expansions with financial and strategic considerations. Three, we continue to sign a renew agreement with high frequency partners in all major categories including grocery. These signings facilitate our ability to achieve and exceed our desired enrolment and issuance metrics by year end.

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