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Alliance Data Systems Corporation (ADS - Analyst Report) reported adjusted earnings of $2.13 per share for second quarter 2012, substantially ahead of the Zacks Consensus Estimate of $1.77. Results increased approximately 22% year over year and outperformed the guidance of $1.85. Adjusted net income for the quarter was $136 million, improving 33% froma $102 million reported in second quarter 2011.

Including stock compensation expenses of $12.9 million, amortization of purchased intangibles of $20.9 million, non-cash interest expense of $15.5 million and an income tax benefit of $17.6 million, the company reported a net income of $103.8 million or $1.63 per share in the quarter, compared with $69 million or $1.19 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 second quarter were $866 million, up 17% from $740 million in second quarter 2011. The year-over-year upside is buoyed by a double-digit increase across all the three segments. Results surpassed the Zacks Consensus Estimate of $833 million.

Operating expenses spiked 14% year over year to $626 million in the second quarter of 2012, primarily due to an 18% increase in cost of operations.

Adjusted earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review was $292.8 million, up 23% year over year, owing to double-digit improvement in all the three segments.

Operating income increased 25% year over year to $240.5 million in the quarter.

Segment Update

LoyaltyOne: The segment revenues totaled $229.6 million, up 13% year over year, primarily attributable to higher collector redemptions.

Adjusted EBITDA was $60.6 million, up 14% from $52.9 million in the year-ago quarter.

During the reported quarter, operating income improved 15.3% year over year to $53.4 million from $46.3 million in the year-ago quarter.

AIR MILES reward miles issued increased 8% in the quarter.

Epsilon: Segment revenues were $235.5 million in the second quarter, up 25% year over year.

Adjusted EBITDA was $48.8 million in the second quarter, up 24% year over year.

Second quarter operating income was $20.5 million, up 30% from $15.8 million in the year-ago period.

Private Label Services and Credit: Revenues from the segment came in at $402.5 million, up 15% year over year.

Adjusted EBITDA was $206.1 million in the quarter, up 26% year over year.

Second quarter operating income improved 27% year over year to $195 million.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of $642.2 million, nearly a threefold increase from $216.2 million at 2011 end.

Debt increased 11.2% to $2.4 billion at quarter end from $2.2 billion reported at 2011 end level.

Cash from operations in the first half of 2012 totaled $417.7 million, up 2.3% from the year-ago period.

Capital expenditures increased to $55.5 million in the first half of 2012 from $33.8 million in the year-ago period.


Third Quarter 2012

Alliance Data projects mid single-digit increase in revenue.

It also estimates low double-digit growth in core earnings. Core EPS is expected to increase 1% to $2.18.

Full-Year 2012

Alliance Data raised its revenue projection to $3.50 billion from $3.46 billion. This also represents a year-over-year increase of 10%.

The company revised the core earnings guidance upwards to $542 million from $536 million, exhibiting a 23% year-over-year increase.

Core EPS is reaffirmed at $8.45.

Shares outstanding at 2012 end are projected to be 64.1 million, up from 63.4 million guided earlier.

At the Peer

Discover Financial Services (DFS - Analyst Report), which competes with Alliance Data, reported second-quarter 2012 earnings per share of $1.00, a penny ahead of the Zacks Consensus Estimate but lower than $1.09 recorded in the year-ago quarter.

Net income declined 10.5% year over year to $537 million from $600 million. Net income allocated to common shareholders also declined to $532 million from $593 million in the year-ago quarter.

The decline in profits resulted from lower reserve releases, which offset revenue growth and higher interest income. Results were also affected by higher expenses and a decline in the pre-tax income from the Direct Banking segment.

Total revenue, net of interest expense, increased 6.3% year over year to $1.85 billion.

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 continue with its share repurchase activity as well as focus on strategic acquisitions. The company forayed deeper into Brazil with its Dotz program gaining momentum. Its retail service business will acquire the private label credit card portfolio of The Bon-Ton Stores Inc. (BONT)

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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