Alliance Data Beats Q2 Earnings, Raises Core EPS Guidance

Alliance Data Systems Corporation ADS reported adjusted earnings per share EPS of $3.07 in the second quarter of 2015, surpassing the Zacks Consensus Estimate of $3.02. Earnings also improved 13% year over year.

Including one-time items, net income came in at $2.11, up 3.6% year over year.

Alliance Data posted better-than-expected results courtesy of solid organic growth and a lower share count.

Operational Performance

During the quarter under review, Alliance Data generated revenues of $1.5 billion. Revenues were up 19% year over year on the back of double-digit increases in Epsilon and Card Services. The top line was almost in line with the Zacks Consensus Estimate.

Operating expenses increased nearly 24% year over year to $1.2 billion, primarily due to an increase in cost of operations, higher provision for loan losses and an increased impact of depreciation and amortization.

Second-quarter adjusted earnings before interest tax depreciation and amortization (EBITDA) were $432 million, up 16% year over year. The upside was aided by an improvement in Epsilon and Card Services.

The magnitude of increase in total revenue was higher than the magnitude of increase in expenses, leading to a 1.1% year over year increase in operating income to $285.7 million.

Segment Update

LoyaltyOne: Segment revenues totaled $302 million, down 15% year over year. Adjusted EBITDA was $66 million, down 24% from the year-ago quarter. AIR MILES' reward miles issued increased 19% while reward miles redeemed increased 10%.

Epsilon: Segment revenues were $495 million in the second quarter, up 39% year over year. Adjusted EBITDA was $113 million, up 66% year over year.

Card Services (previously Private Label Services and Credit): Revenues from the segment came in at $710 million, up 27% year over year. Adjusted EBITDA was $251 million, up 20% year over year.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of $822.3 million, down 23.7% from 2014 end.

At quarter end, debt increased 15.2% from 2014 end to $4.8 billion.

Cash from operations in the first half was $563.8 million, down 4.1% year over year.

Capital expenditure increased to $88.1 million in the first half of 2015, up 14% year over year.

2015 Guidance Updated

Alliance Data reiterated its revenue expectation of $6.5 billion. However, the company expects foreign exchange to remain a headwind.

Core EPS expectation was raised to $15.00 from $14.90, suggesting a 19% increase over 2014.

For the third quarter of 2015, Alliance Data expects revenues of about $1.52 billion (up 15% year over year) and core EPS of approximately $3.90 (up 12% year over year).

Our Take

Alliance Data continues to outperform earnings expectations as well as its guidance with year-over-year improvement.

The company is well poised for the upcoming quarters based on continued strength across its segments and a solid financial position. The inorganic story also remains impressive as its acquisitions are contributing largely to its financial performance. The company is banking heavily on the Conversant acquisition and expects higher contribution in the latter half of 2015 as initiatives there gain traction.

However, foreign exchange will be a major headwind this year, though the company expects to utilize its share repurchase authorization to offset the adverse impact.

Zacks Rank

Alliance Data currently carries a Zacks Rank #3 (Hold).

Some better-ranked service providers are Total System Services, Inc. TSS, Global Payments Inc. GPN and Xoom Corporation XOOM. All these carry a Zacks Rank #2 (Buy).  All are likely to report their earnings results next week.

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