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Alliance Data Systems Corporation (ADS - Analyst Report) reported adjusted earnings of $2.38 per share for first-quarter 2012, substantially ahead of the Zacks Consensus Estimate of $2.06. Results increased approximately 17% year over year and outperformed the guidance of $2.13. Adjusted net income for the quarter was $146.9 million, improving 30% from $112.6 million reported in first-quarter 2011.

Including stock compensation expenses of $12.3 million, amortization of purchased intangibles of $21.1 million, non-cash interest expense of $16.4 million and an income tax benefit of $18.1 million, the company reported a net income of $115.2 million or $1.86 per share in the quarter, compared with $86.4 million or $1.56 per share in the year-ago period.

Alliance Data posted better-than-expected results based on strong performances across all segments.

Operational Performance

Revenues in the first quarter were $891.6 million, up 20% from $740.4 million in first-quarter 2011. The year-over-year upside is buoyed by a solid performance at Epsilon, augmented by better performing Private Label Services & Credit segment. Results surpassed the Zacks Consensus Estimate of $837 million.

Operating expenses spiked 21% year over year to $639 million in the first quarter of 2011, primarily due to a 29% increase in cost of operations.

Adjusted earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review was $303.6 million, up 18% year over year, owing to solid results in Epsilon and Private Label Services and Credit.

Operating income increased 19% year over year to $252.6 million in the quarter.

Segment Update

LoyaltyOne: The segment revenues totaled $257.8 million, up 18% year over year, primarily attributable to higher collector redemptions.

Adjusted EBITDA was $58.4 million, up from $58.3 million in the year ago quarter.

During the reported quarter, operating income edged up to $51.2 million from $51.1 million in the year ago quarter.

AIR MILES reward miles issued increased 11% in the quarter.

Epsilon: Segment revenues were $227.9 million in first quarter, up 46% year over year.

Adjusted EBITDA was $39.8 million in the first quarter, up 18% year over year.

First quarter operating income was $11.8 million, up from $11.5 million in the year ago period.

Private Label Services and Credit: Revenues from the segment came in at $407.3 million, up 10% year over year.

Adjusted EBITDA was $224.4 million in the quarter, up 22% year over year.

First quarter operating income improved 24% year over year to $214 million.

Financial Update

Alliance Data ended the quarter with cash and cash equivalent of $399.0 million up from $300.4 million as of first quarter 2012 end level.

Debt increased to $2.2 billion at quarter end from $2.0 billion from the year ago level.

Cash from operations in the first quarter totaled $239.6 billion, higher than $210.4 million in the year-ago period.

Capital expenditures increased to $31.4 million in the quarter from $18.6 million in the year-ago period.

Share Repurchase

Alliance Data bought back a meager amount of shares under its $400 million share repurchase program.

Guidance

Second Quarter 2012

Revenue is projected to grow nearly 13%.

The company guided core earnings to grow 15%. Core earnings per share are expected to be $1.85, up 5% year over year.

Full-Year 2012

Alliance Data expects revenue to grow 9% to gross $3.5 billion.

The company revised the core earnings guidance upwards to $536 million from $511 million, a 22% year over year increase.

Core EPS is reaffirmed at $8.45.

Shares outstanding at 2012 end are projected to be 63.4 million, up from 60.5 million guided earlier.

Alliance Data also projects free cash flow to be $600 million, up 20% year over year.

At the Peer

Discover Financial Services (DFS - Analyst Report), which competes with Alliance Data, reported first-quarter earnings per share of $1.18, substantially ahead of the Zacks Consensus Estimate of 92 cents as well as 84 cents recorded in the year-ago quarter. Net income spiked 35.7% year over year to $631 million from $465 million. Net income allocated to common shareholders also surged ahead to $624 million from $459 million in the year-ago quarter.

The surge in profits was elevated by sales volume growth, complemented by higher interest income, reduced provision for loan losses and lower delinquency rates on account of improved credit quality. Results were also boosted by the escalated income from both direct banking and payment services business, which also drove the book value per share.

Our Take

Alliance Data remains well poised for the upcoming quarters based on continued strong performance across the segments, solid financial position and its focus on boosting shareholder value via share buybacks. However, an increasing debt level makes us cautious.

The company’s adequate liquidity will help it to continue share repurchase as well as focus on strategic acquisitions. Alliance Data also has inked long-term deals, which will help it generate additional revenues going forward. The company also forayed deeper into Brazil with its Dotz program gaining momentum.

The quantitative Zacks #2 Rank (short-term Buy rating) for Alliance Data indicates slight boost on the stock over the near term.

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