Alliance Data Systems Corporation (ADS) reported adjusted earnings per share (EPS) of $3.26 in the third quarter of 2014. Earnings surpassed the Zacks Consensus Estimate of $3.12 by 4.5% and improved 34% 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 $164.2 million or $2.74 per share in the quarter. This compares favorably with $132.9 million or $2.01 per share in the year-ago quarter.
Alliance Data posted better-than-expected results courtesy of strong performance across all segments.
Operational Performance
During the quarter under review, Alliance Data generated revenues of $1.3 billion. Revenues were up 20% year over year, driven by double-digit increases in LoyaltyOne and Private Label Services and Credit, and high single-digit increases in Epsilon. The top line slightly missed the Zacks Consensus Estimate of $1.33 billion.
Operating expenses increased nearly 23.5% year over year to $997.5 million in the quarter, primarily due to an increase in cost of operations and higher provision for loan losses.
Third-quarter adjusted earnings before interest tax depreciation and amortization (EBITDA) were $376 million, up 15% 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 11.4% year over year to $321.6 million.
Segment Update
LoyaltyOne: Segment revenues totaled $324.5 million, up 52% year over year. Adjusted EBITDA was $69.5 million, up 12% from the year-ago quarter. AIR MILES’ reward miles issued decreased 4% but reward miles redeemed increased 12%.
Epsilon: Segment revenues were $377.6 million in the third quarter, up 6% year over year. Adjusted EBITDA was $84.3 million, up 7% year over year.
Private Label Services and Credit: Revenues from the segment came in at $622.3 million, up 17% year over year. Adjusted EBITDA was $254.6 million, up 18% year over year.
Financial Update
Alliance Data exited the third quarter with cash and cash equivalents of $634.8 million, down 34.5% 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 nine months of 2014 was $968 million, up 21.2% year over year.
Capital expenditure of Alliance Data increased 24.8% year over year to $114.6 million in the first nine months.
2014 Guidance
Revenue expectation was reiterated at $5.30 billion, translating into a year-over-year increase of 23% (10% organic growth).
Core EPS expectation was raised to $12.40 from $12.35 (up 24% year over year).
Unveiling 2015 Guidance
Alliance Data expects to deliver core EPS in the $14.80 to $15.00 range on revenues of $6.625 billion. While it translates into a year-over-year increase of 20% for core EPS, it is 25% for revenue.
Adjusted EBITDA is estimated at $1.97 billion, up 24% over 2014.
Our Take
Alliance Data has outperformed earnings expectations 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.
In September, the company inked a deal to acquire Conversant, Inc. (CNVR), a leading digital marketing company, for consideration of $2.3 billion. This effort will boost Alliance Data’s digital marketing. (Read the whole story here.)
The company has also reached its year-end goal of expanding the dotz loyalty program to 13 markets.
Zacks Rank
Alliance Data currently carries a Zacks Rank #3 (Hold). Better-ranked financial transaction service providers include Heartland Payment Systems, Inc. (HPY) and Equifax Inc. (EFX). While Heartland Payment sports a Zacks Rank #1 (Strong Buy), Equifax carries a Zacks Rank #2 (Buy).
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