Alliance Data Strong Segments Aid Q2 Earnings Beat, View Up

Zacks Equity Research

Alliance Data Systems Corporation (ADS) reported adjusted earnings per share (EPS) of $2.74 in the second quarter of 2014. Earnings surpassed the Zacks Consensus Estimate of $2.57 by 6.6% and improved 21% year over year.

Including amortization of purchased intangibles, non-cash interest expenses of $48.3 million and non cash interest expense of $8.1 million, Alliance Data reported net income of $137.4 million or $2.19 per share in the quarter. This compares favorably with $116.4 million or $1.71 per share in the year-ago quarter.

Alliance Data posted better-than-expected results courtesy of strong performance across all its segments.

Operational Performance

During the quarter under review, Alliance Data generated revenues of $1.27 billion. Revenues were up 23% 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 surpassed the Zacks Consensus Estimate of $1.25 billion.

Operating expenses increased nearly 29.5% year over year to $982.7 million in the quarter, primarily due to an increase in cost of operations and higher provision for loan losses.

Second-quarter adjusted earnings before interest tax depreciation and amortization (:EBITDA) were $332 million, up 8% year over year. The upside was aided by an improvement in all three segments.

The magnitude of increase in total revenue was higher than the magnitude of increase in expenses, leading to an increase in operating income by 4.9% year over year to $282.5 million.

Segment Update

LoyaltyOne: Segment revenues totaled $355.6 million, up 62% year over year.

Adjusted EBITDA was $77.4 million, up 17% from the year-ago quarter.

AIR MILES’ reward miles issued remained flat year over year.

Epsilon: Segment revenues were $357.1 million in the second quarter, up 8% year over year.

Adjusted EBITDA was $67.7 million, up 6% year over year.

Private Label Services and Credit: Revenues from the segment came in at $557.3 million, up 16% year over year.

Adjusted EBITDA was $210.4 million, up 5% year over year.

Financial Update

Alliance Data exited the second quarter with cash and cash equivalents of $631.2 million, down 35% from the 2013-end level.

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

Cash from operations in the first half was $587.3 million, up 10.7% year over year.

Capital expenditure of Alliance Data increased to $77.3 million in the first half from $59 million in the year-ago period.

2014 Guidance Raised

Revenue expectation was raised to $5.30 billion from $5.25 billion guided earlier. It translates into a year-over-year increase of 23% (9% organic growth).

Core EPS expectation was raised to $12.35 from $12.25 (up 23% year over year).

For third-quarter 2014, the company expects to deliver core earnings of $3.25 per share on revenues of $1.30 billion.  While the top line represents 19% (9% organic) growth, the bottom line reflects a 22% improvement.

Our Take

Alliance Data has outperformed the earnings expectation as well as year-ago earnings.

The company is well poised for the upcoming quarters based on continued strong performances across the segments and a solid financial position. Revenues continue to exceed the $1 billion mark. Core EPS also managed to outperform.

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. The company has expanded its dotz loyalty program to 10 markets and seeks to enter three additional markets during 2014 taking the tally to 13.

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 #3 (Hold). Better-ranked financial transaction services providers include Total System Services, Inc. (TSS), Xoom Corporation (XOOM) and Visa Inc. (V). While Total System sports a Zacks Rank #1 (Strong Buy), Xoom Corporation and Visa carry a Zacks Rank #2 (Buy). All these are slated to release their earnings in the upcoming week.

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