Alliance Data Beats on Q1 Earnings, Ups Guidance - Analyst Blog

Alliance Data Systems Corporation ADS reported adjusted earnings of $2.64 per share in the first quarter of 2014. Earnings topped the Zacks Consensus Estimate by 1.9% and were 12% above the year-ago figure.

Including amortization of purchased intangibles, non-cash interest expenses of $12.2 million and an income tax benefit of $20.2 million, Alliance Data reported net income of $137.4 million or $2.08 per share in the quarter. This compared favorably with $129.0 million or $1.92 per share in the year-ago period.

Alliance Data posted better-than-expected results based on strong performances across all its segments.

Operational Performance

During the quarter under review, Alliance Data generated revenues of $1.23 billion. Revenues were up 17% year over year, driven by double-digit increase in LoyaltyOne and Private Label Services and Credit and high single-digit increase in Epsilon. The top line slightly missed the Zacks Consensus Estimate of $1.24 billion.

Operating expenses escalated nearly 25% year over year to $951.1 million in the quarter, primarily due to a 25% increase in cost of operations and a 5.2% rise in general and administrative expenses.

First-quarter adjusted Earnings before Interest Tax Depreciation and Amortization (EBITDA) were $334.6 million, up 3% year over year. The upside was aided by improvement in all three segments.

The magnitude of increase in total revenue was lower than the magnitude of increase in expenses inducing operating income decline by 15.3% year over year to $281.8 million in the quarter.

Segment Update

LoyaltyOne: Segment revenues totaled $329 million, up 37% year over year.

Adjusted EBITDA was $65.2 million, up 4% from the year-ago quarter.

AIR MILES' reward miles issued decreased 4% in the quarter.

Epsilon: Segment revenues were $347.5 million in the first quarter, up 9% year over year.

Adjusted EBITDA was $55.2 million in the first quarter, up 1% year over year.

Private Label Services and Credit: Revenues from the segment came in at $561.8 million, up 13% year over year.

Adjusted EBITDA was $243.5 million in the quarter, up 7% year over year.

Financial Update

Alliance Data exited the first quarter with cash and cash equivalents of $706.6 million, down 27% from the 2013-end level.

Debt increased 5.7% to $2.96 billion at first quarter 2014-end from $2.80 billion reported at 2013-end.

Cash from operations in first quarter was $333.1 million, up 19.4% year over year.

Capital expenditure of Alliance Data increased to $43.5 million in the quarter from $28.3 million in the year-ago period.

2014 Guidance Raised

Revenue expectation was raised to $5.25 billion from $5.14 billion guided earlier. It translates into a year-over-year increase of 22% (9% organic growth).

Core EPS expectation is now raised to $12.25 from $12.20 (up 22% year over year).

In second-quarter 2014, the company expects to deliver core earnings of $2.75 per share on revenues of $1.25 billion.  While the top line represents 22% (9% organic) growth, the bottom line reflects a 12% improvement.

Our Take

Alliance Data has successfully managed to outperform the earnings expectation as well as its year-ago earnings number.

The company is well poised for the upcoming quarters based on continued strong performances across the segments and a solid financial position. Revenues in the reported quarter exceeded the $1 billion mark for the sixth time. Core EPS also managed to outperform the guidance.

Continued focus on strategic acquisitions to grow inorganically, the national rollout of its dotz coalition loyalty program in Brazil, and inking of long-term deals are expected to drive solid numbers ahead for Alliance Data. Alliance Data has expanded its dotz loyalty program to nine markets and seeks to enter four additional markets during 2014.

Furthermore, continued share repurchase programs at Alliance Data are also expected to boost its bottom line, thereby enhancing shareholders' value.

Zacks Rank

Alliance Data currently carries a Zacks Rank #2 (Buy). Other financial transaction services provider worth considering are Green Dot Corporation GDOT, Global Payments Inc. GPN and Visa Inc. V. All three share the same Zacks Rank as Alliance Data.