Alliance Data Systems Corporation (ADS) reported adjusted earnings of $2.16 per share for third quarter 2011, substantially ahead of the Zacks Consensus estimate of $1.78. Results increased 39% year over year and exceeded the company's guidance of $1.85. Adjusted net income for the quarter was $126.6 million, improving 48% from $85.6 million reported in third quarter 2010.
Including stock compensation expenses of $12.3 million, amortization of purchased intangibles of $22.9 million, non-cash interest expense of $16.3 million and an income tax benefit of $18.9 million, the company reported a net income of $94 million or $1.60 per share in the quarter, compared with $53 million or 96 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 third quarter were $845 million, up 20% from $702.4 million in third quarter 2010. The improvement is primarily driven by solid performance at Epsilon, supported by better performing LoyaltyOne and Private Label Services & Credit segments. Results were also ahead of the Zacks Consensus estimate of $795 million.
Operating expenses increased 15.9% year over year to $617.5 million in the third quarter of 2011, primarily due to a 24.3% increase in cost of operations.
Adjusted Earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review were $283 million, up 29% year over year, largely driven by solid results across all the segments.
Operating income increased 33.9% to $227.7 million in the quarter from $170.0 million in the year-ago period.
Segment Update
LoyaltyOne: The segment revenues totaled $210 million, up 14% year over year. Adjusted EBITDA was $60 million, increasing 29% year over year. Operating income improved 38.6% year over year to $52.8 million in the quarter.
AIR MILES reward miles issued increased 9% in the quarter.
Epsilon: Segment revenues were $248 million, up 46% year over year while adjusted EBITDA was $59 million, up 33% year over year. Operating income surged 47% year over year to $29.9 million in the quarter.
Several significant program launches fueled the improvement.
Private Label Services and Credit: Revenues from the segment came in at $389 million, up 11% year over year while adjusted EBITDA was $152 million, up 62% year over year. Operating income increased 32.6% year over year to $176.7 million in the quarter.
Financial Update
Alliance Data ended the quarter with cash and cash equivalent of $239.6 million compared with $391.2 million at the end of third quarter 2010.
Debt increased to $2.3 billion at quarter end from $1.9 billion at third quarter 2010 end.
Cash from operations for the first nine of 2011 totaled $762.5 million; higher than $693.4 million in the year-ago period.
Capital expenditures totaled $48.5 million in the first nine of 2011, a trifle higher than $48.3 million in the year-ago period.
Share Repurchase
In the third quarter, Alliance Data bought back 0.8 million shares. As of September 30, 2011, the company had $140 million remaining under the current authorization.
Guidance
Fourth Quarter 2011
Alliance Data expects LoyaltyOne revenue to grow 2% and adjusted EBITDA to grow 5%.
Management guided revenue at Epsilon to grow 35%. Adjusted EBITDA growth is expected to grow 25%.
Revenue as well as adjusted EBITDA at Private Label is projected to grow 5%.
Alliance Data projects high double-digit growth in revenues as well as adjusted EBITDA.
The company guided core earnings to grow in mid-single digits and expects a decline of 6% in core earnings per share. Core earnings per share are expected to be $1.46.
Full-Year 2011
The company raised the adjusted earnings expectation to $7.40 per share from $7.20, the previous guidance and also a 26% year over year increase. Net earnings are now expected to be $5.20 per share, up from $5.00 guided previously and a 51% year-over-year increase.
Full-Year 2012
Alliance Data expects LoyaltyOne revenue and adjusted EBITDA to grow in mid single digits.
Management guided to a high single-digit organic revenue growth and high-teens total revenue growth due to the Aspen acquisition at Epsilon. Adjusted EBITDA growth is expected to follow the revenue growth path.
Revenue as well as adjusted EBITDA at Private Label is projected to grow 5%.
Alliance Data expects revenue to grow 9% to gross $3.46 billion. Adjusted EBITDA is estimated to be $1.13 billion, up 13%.
Adjusted EPS is estimated to increase 12% to $8.30 while net earnings are estimated to grow 14% to $6.00.
Peer Comparison
Discover Financial Services (DFS), which competes with Alliance Data, reported third-quarter earnings per share of $1.18, dramatically ahead of both the Zacks Consensus Estimate of 91 cents and 47 cents recorded in the year-ago quarter.
The surge in profits was driven by strong sales volume complemented by lower interest expense, reduced provision for loan losses and delinquency rates based on improved credit quality. The profit was also boosted by the escalated income from both direct banking and payment services business, which also drove the book value per share. However, these were partially offset by increased operating and tax expenses.
Our Take
Alliance Data posted a very strong third quarter with all the segments delivering impressive numbers.
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.
The company has adequate liquidity, which will help it to continue its share repurchases as well as focus on strategic acquisitions. The company also has inked deal with Petland, Marathon Oil and Pier 1 Imports, which will help the company to generate additional revenues.
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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