Alliance Data Systems Corporation (ADS) reported adjusted earnings of $2.03 per share for first quarter 2011, substantially ahead of the Zacks Consensus estimate of $1.54. Results increased 47% year over year and exceeded the company's guidance of $1.65. Adjusted net income for the quarter was $112.6 million, improving 47% from $76.5 million reported in first-quarter 2010.
Including stock compensation expense of $9.1 million, amortization of purchased intangibles of $18.6 million, non-cash interest expense of $13.6 million and benefit of an income tax effect of $15.1 million, the company reported a net income of $86.4 million or $1.56 per share in the quarter, compared with $416.7 million or 84 cents per share in the year-ago period.
Strong performances across all the segments helped Alliance Data to post better-than-expected results.
Operational Performance
Revenues in the first quarter were $740.4 million, up 12% from $663.5 million in first quarter 2010. Results also comfortably surpassed the Zacks Consensus Estimate of $723 million. The improvement is primarily driven by solid performance at Epsilon, supported by better performing LoyaltyOne and Private Label Services & Credit segments.
Operating expenses increased 5% year over year to $528.5 million in the first quarter of 2011, due primarily to an 11% increase in cost of operations.
Adjusted Earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review were $256 million, up 26% year over year largely driven by solid results at Epsilon and Private Label Services and Credit.
Operating income increased 34% to $211.9 million in the quarter from $158.2 million in the year-ago period.
Segment Update
LoyaltyOne: The segment revenues totaled $218 million, up 9% year over year. Adjusted EBITDA was $58 million, increasing 9% year over year. Operating income improved 13% year over year to $51.1 million in the quarter.
Revenues from Canadian operations totaled C$212 million.
AIR MILES reward miles issued increased 7% in the quarter after three years of flat issuance.
Epsilon: Segment revenues were $156 million, up 23% year over year while adjusted EBITDA was $34 million, up 23% year over year. Operating income increased 57% year over year to $26.5 million in the quarter.
Several significant program launches aided the improvement.
Private Label Services and Credit: Revenues from the segment came in at $369 million, up 9% year over year while adjusted EBITDA was $147 million, up 64% year over year. Operating income increased 33% year over year to $172.7 million in the quarter.
Financial Update
Alliance Data ended the quarter with cash and cash equivalent of $300.4 million, compared with $220.6 million at the end of first quarter 2010.
Debt increased to $2 billion at quarter end from $1.8 billion at first quarter 2010 end.
Cash from operations in the quarter under review totaled $210.4 million, higher than $206.6 million in the year ago quarter.
Capital expenditures were $18.6 million in first quarter, higher than $15.4 million in the year ago quarter.
Share Repurchase
In the first quarter, Alliance Data bought back 0.9 million shares. As of March 31, 2011, the company had $266.6 million remaining under the current authorization.
Guidance
Second Quarter 2011: Alliance Data projects high single-digit growth in revenues as well as adjusted EBITDA.
The company guided core EPS to $1.60, a 16% year-over-year increase.
Full-Year 2011: The company raised the adjusted earnings expectation to $7.00 per share from $6.75, the previous guidance. Net earnings are now expected to be $4.90 per share, a 40% year-over-year increase.
Peer Comparison
Discover Financial Services (DFS), which competes with Alliance Data, reported first quarter earnings of $465 million or 85 cents per share, significantly ahead of the Zacks Consensus Estimate of 52 cents. The prior-year quarter posted a net loss of $104 million or 19 cents per share.
The surge in profits was due to a higher loan loss reserve released by the company, dramatic decline in provision for loan losses and delinquency rates based on improved credit quality, as well as gains from the payments business driven by strong volumes. However, these were partially offset by higher-than-expected 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.
The quantitative Zacks #3 Rank (short-term Hold rating) for Alliance Data indicates no clear directional pressure on the stock over the near term.
ALLIANCE DATA (ADS): Free Stock Analysis Report
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