Alliance Data Systems Corporation (ADS) reported adjusted earnings of $1.75 per share for second quarter 2011, substantially ahead of the Zacks Consensus estimate of $1.54. Results increased 27% year over year and exceeded the company's guidance of $1.60. Adjusted net income for the quarter was $101.8 million, improving 30% from $78.6 million reported in second quarter 2010.
Including stock compensation expenses of $11.1 million, amortization of purchased intangibles of $19.2 million, non-cash interest expense of $21.8 million and an income tax benefit of $19.3 million, the company reported a net income of $69 million or $1.19 per share in the quarter, compared with $47.3 million or 83 cents per share in the year-ago period.
Strong performance across all the segments coupled with share buyback has helped Alliance Data to post better-than-expected results.
Operational Performance
Revenues in the second quarter were $740.5 million, up 11% from $669.8 million in second quarter 2010. The improvement is primarily driven by solid performance at Epsilon, supported by better performing LoyaltyOne and Private Label Services & Credit segments.
Operating expenses increased 8% year over year to $548.7 million in the second quarter of 2011, primarily due to a 19% increase in cost of operations.
Adjusted Earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review were $239 million, up 15% year over year, largely driven by solid results at Epsilon and Private Label Services and Credit.
Operating income increased 20% to $191.8 million in the quarter from $160.4 million in the year-ago period.
Segment Update
LoyaltyOne: The segment revenues totaled $203 million, up 12% year over year. Adjusted EBITDA was $53 million, decreasing 10% year over year. Operating income declined 8% year over year to $46.3 million in the quarter.
AIR MILES reward miles issued increased 5% in the quarter.
Epsilon: Segment revenues were $188.5 million, up 38% year over year while adjusted EBITDA was $39.3 million, up 26% year over year. Operating income surged 44% year over year to $15.8 million in the quarter.
Several significant program launches fueled the improvement.
Private Label Services and Credit: Revenues from the segment came in at $350.7 million, up 2% year over year while adjusted EBITDA was $163.7 million, up 23% year over year. Operating income increased 25% year over year to $153 million in the quarter.
Financial Update
Alliance Data ended the quarter with cash and cash equivalent of $232.8 million compared with $250.8 million at the end of second quarter 2010.
Debt increased to $2.4 billion at quarter end from $1.8 billion at second quarter 2010 end.
Cash from operations for the first half of 2011 totaled $406.9 million; lower than $446.5 million in the year-ago period.
Capital expenditures totaled $33.9 million in the first half of 2011, higher than $31.5 million in the year-ago period.
Share Repurchase
In the second quarter, Alliance Data bought back 0.6 million shares. As of June 30, 2011, the company had $211 million remaining under the current authorization.
Guidance
Third Quarter 2011: Alliance Data projects high double-digit growth in revenues as well as adjusted EBITDA.
The company guided core EPS to $1.85, a 19% year-over-year increase.
Full-Year 2011
Alliance Data expects LoyaltyOne to deliver mid to high single-digits growth in revenue and adjusted EBITDA.
Management guided revenue at Epsilon to grow in mid 30% while organic revenue to grow double-digit. Adjusted EBITDA growth is expected to follow the revenue growth path.
Revenue at Private Label is projected to grow in mid-single digits while adjusted EBITDA is expected to grow in the low-30% range.
The company raised the adjusted earnings expectation to $7.20 per share from $7.00, the previous guidance and 23% year over year increase. Net earnings are now expected to be $5.00 per share, up from $4.90 guided previously and a 42% year-over-year increase.
Peer Comparison
Discover Financial Services (DFS), which competes with Alliance Data, reported second quarter earnings per share of $1.09, came in dramatically ahead of both the Zacks Consensus Estimate of 72 cents and 33 cents recorded in the year-ago quarter.
The surge in profits was due to strong volumes complemented by lower interest expense, dramatic decline in provision for loan losses and delinquency rates based on improved credit quality, as well as escalated income from both direct banking and payment services business, which also drove the book value per share. However, these were partially offset by higher-than-expected operating and tax expenses.
Our Take
The company remains poised to fare well in the upcoming quarters based on continued strong performance across the segment, solid financial position and focus on boosting shareholder value. However, an increasing debt level makes us cautious.
Alliance Data also remains focused on expanding its global presence. Partnering Direxions will help the company to penetrate the Indo-Asian market. Adding Aspen Marketing Services to the portfolio will broaden Epsilon's agency business through scale, new agency capabilities and technology.
The quantitative Zacks #2 Rank (short-term 'Buy' rating) for Alliance Data indicates upward pressure on the stock over the near term.
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