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Alliance Data Systems Corporation (ADS - Analyst Report) reported adjusted earnings of $2.34 per share for third quarter 2012, substantially ahead of the Zacks Consensus Estimate of $2.14. Results augmented approximately 8.3% year over year and outperformed the guidance of $2.18.
Including stock compensation expenses of $12.4 million, amortization of purchased intangibles of $23.0 million, non-cash interest expense of $25.4 million, non-cash mark-to-market gain on interest rate derivatives of $7.5 million and an income tax benefit of $18.6 million, the company reported a net income of $119.5 million or $1.84 per share in the quarter, compared with $94 million or $1.60 per share in the year-ago period.
Alliance Data posted better-than-expected results based on strong performances across all segments.
Revenues in the third quarter were $911 million, up 8% from $844.8 million in third quarter 2011. The year-over-year upside is buoyed by a double-digit increase in Private Label Services and Credit and a low single digit increase at LoyaltyOne, partially offset by decline at Epsilon. Results surpassed the Zacks Consensus Estimate of $893 million.
Operating expenses increased nearly 5% year over year to $647 million in the third quarter of 2012, primarily due to a 15% increase in provision for loan loss and a 4% increase in cost of operations.
Adjusted earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review was $318.6 million, up 23% year over year, owing to improvement in all the three segments.
Operating income bolstered 16% year over year to $264.5 million in the quarter.
LoyaltyOne: The segment revenues totaled $215.7 million, up 3% year over year.
Adjusted EBITDA was $60 million, up 1% from $59.9 million in the year-ago quarter.
During the reported quarter, operating income inched up 0.6% year over year to $53.1 million from $52.8 million in the year-ago quarter.
AIR MILES reward miles issued declined 1% in the quarter.
Epsilon: Segment revenues were $240.8 million in the third quarter, down 3% year over year.
Adjusted EBITDA was $64.2 million in the third quarter, up 10% year over year.
Third quarter operating income was $35.9 million, up 20% from $15.8 million in the year-ago period.
Private Label Services and Credit: Revenues from the segment came in at $455.9 million, up 17% year over year.
Adjusted EBITDA was $214.5 million in the quarter, up 14.3% year over year.
Third quarter operating income improved 13.6% year over year to $200.8 million.
Alliance Data exited the quarter with cash and cash equivalents of $766.3 million, exhibiting more than a threefold increase from $216.2 million at 2011 end.
Debt increased nearly 12% to $2.4 billion at quarter end from $2.2 billion reported at 2011 end level.
Cash from operations in the first nine months of 2012 totaled $862.1 million, up 13.1% from the year-ago period.
Capital expenditures elevated to $77.3 million in the first nine months of 2012 from $48.5 million in the year-ago period.
By segment, LoyaltyOne is expected to post mid-single-digit revenue and mid-teens adjusted EBITDA increase while Private Label is estimated to deliver 20% revenue and mid-teens adjusted EBITDA increase.
2012 Guidance Raised
Alliance Data raised its revenue projection to $3.6 billion from $3.5 billion. This also represents a year-over-year increase of 13%.
The company revised the core earnings guidance upwards to $555 million from $542 million, exhibiting a 26% year-over-year increase.
Core EPS is revised to $8.60 from $8.45, reflecting a 13% year-over-year increase.
Shares outstanding at 2012 end are projected to be 64.4 million, up from 64.1 million guided earlier, representing an 11% year-over-year increase.
Alliance Data expects to generate revenue of $3.9 billion, up 8% over 2012 level.
Adjusted EBITDA is expected to improve 10% year over year to $1.3 billion.
Core EPS is estimated to be $9.50, up 10% year over year while EPS is projected to be $7.31, up 12% year over year. Share outstanding is projected to be 64.8 million.
By segment, LoyaltyOne is expected to deliver mid-single-digit revenue growth and high-single-digit adjusted EBITDA increase. Epsilon is estimated to post high-single-digit revenue and adjusted EBITDA increase, while Private Label is expected to generate double-digit revenue and adjusted EBITDA increase.
At the Peer
Discover Financial Services (DFS - Analyst Report), which competes with Alliance Data, reported third-quarter 2012 earnings per share of $1.21, beating both the Zacks Consensus Estimate of $1.03 and the year-ago quarter earnings of $1.18.
However, net income declined 3.4% year over year to $627 million from $649 million.
The decline in net income was due to lower loan loss reserve releases and higher legal expenses, which offset revenue growth and reduced charge-off rates.
Total revenue, net of interest expense, increased 9.8% year over year to $1.96 billion.
Alliance Data remains well poised for the upcoming quarters based on continued strong performance across the segments and a solid financial position.
The company’s adequate liquidity will help it continue to focus on strategic acquisitions. The company’s long-term deal with Westgate Resorts marks its debut into the travel industry vertical. It 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.