Alliance Data Beats on Q3 Earnings & Revenues, Gives View

Alliance Data Systems Corporation ADS reported adjusted earnings per share EPS of $3.72 in the third quarter of 2015, surpassing the Zacks Consensus Estimate of $3.68. Earnings improved 13.8% year over year.

Including one-time items, net income came in at $2.08, down 24.1% 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 $1.6 billion, up 20% 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 30% year over year to $1.3 billion primarily due to an increase in cost of operations, higher provision for loan losses and regulatory settlement in the quarter.

Third-quarter adjusted earnings before interest tax depreciation and amortization (EBITDA) were $453 million, up 20% year over year. The upside was aided by an improvement in Epsilon and Card Services.

The magnitude of increase in total revenue was lower than the magnitude of increase in expenses, leading to a 10.6% year-over-year decrease in operating income to $285.7 million.

Segment Update

LoyaltyOne: Revenues totaled $299.1 million, down 8% year over year. Adjusted EBITDA was $64.5 million, down 7% from the year-ago quarter. AIR MILES' reward miles issued increased 5% while reward miles redeemed increased 7%.

Epsilon: Revenues were $532.4 million in the quarter, up 41% year over year. Adjusted EBITDA was $135 million, up 60% year over year.

Card Services (previously Private Label Services and Credit): Revenues came in at $764 million, up 23% year over year. Adjusted EBITDA was $289.2 million, up 14% year over year.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of $977.3 million, down 9.3% from 2014 end.

At quarter end, debt increased 21.1% from 2014 end to $5.1 billion.

Cash from operations in the first nine months was $1.03 billion, up 6.5% year over year.

Capital expenditure increased 22.3% year over year to $140.1 million in the first nine months of 2015.

Guidance

Alliance Data reiterated its 2015 core EPS expectation of $15.00 on revenues of $6.5 billion. However, the company expects foreign exchange to remain a headwind.

The company also expects core EPS in 2016 of at least $17.00 on revenues of at least $7.2 billion.

While core EPS translates into a year-over-year growth of 13%, revenues translate into a year-over-year growth of 11–12%.

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 has been banking heavily on the Conversant acquisition, which has started to reap results.

Foreign exchange will be a major headwind this year. However, 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 Fiserv, Inc FISV, Higher One Holdings, Inc. ONE and Xoom Corporation XOOM. Each of these stocks carries a Zacks Rank #2 (Buy) and are likely to report their earnings results next week.

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