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Alliance Data Systems Corporation (ADS - Analyst Report) reported adjusted earnings of $2.55 per share for first quarter 2013, comfortably beating the Zacks Consensus Estimate of $2.43. Results augmented approximately 7% year over year.

Including stock compensation expenses of $13 million, amortization of purchased intangibles of $33.3 million, non-cash interest expense of $27.3 million, non-cash mark-to-market gain on interest rate derivatives of $6.3 million and an income tax benefit of $24.5 million, Alliance Data reported net income of $129 million or $1.92 per share in the quarter, compared with $115.2 million or $1.86 per share in the year-ago period.

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

Operational Performance

Revenues of Alliance Data in the reported quarter were $1.05 billion, up 18% year over year. The upside was buoyed by a double-digit increase at Epsilon and Private Label Services and Credit. Results surpassed the Zacks Consensus Estimate of $1.02 billion. Revenue in the reported quarter exceeded the $1 billion mark for the first time.

Operating expenses escalated nearly 19.3% year over year to $762.2 million in the first quarter of 2013, primarily due to a 16.6% increase in cost of operations and 35.1% increase in provision for loan loss and 36.7% increase in depreciation and amortization.

First-quarter adjusted earnings before Interest Tax Depreciation and Amortization (EBITDA) was $357.1 million, up 18% year over year. The upside was aided by improvement in all three segments.

Operating income of Alliance Data increased 15.3% year over year to $291.2 million in the quarter.

Segment Update

LoyaltyOne: The segment revenues totaled $241 million, down 7% year over year.

Adjusted EBITDA was $63 million, up 7% from the year-ago quarter.

During the reported quarter, operating income increased 9.2% year over year to $55.9 million.

AIR MILES’ reward miles issued decreased 3% in the quarter.

Epsilon: Segment revenues were $318 million in the first quarter, up 39% year over year.

Adjusted EBITDA was $54 million in the first quarter, up 37% year over year.

First-quarter operating income was $16.2 million, up 37.3% from the year-ago period.

Private Label Services and Credit: Revenues from the segment came in at $497 million, up 22% year over year.

Adjusted EBITDA was $227 million in the quarter, up 16% year over year.

First-quarter operating income improved 13.3% year over year to $242.4 million.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of $764.1 million, declining 14.5% from 2012-end level.

Debt inched up 0.6% to $2.87 billion at first quarter 2013 end from $2.85 billion reported at 2012 end.

Cash from operations of Alliance Data in the first quarter totaled $279 million, up 16.4% from the year-ago period.

Capital expenditures decreased to $28.3 million in the quarter from $31.4 million in the year-ago period.


Second Quarter of 2013

Alliance Data expects to generate $1.02 billion in revenue, representing an 18% year-over-year increase.

Core earnings are expected to be $150 million (up 10% year over year) or $2.25 per share (up 6% year over year).

2013 Guidance Raised

Alliance Data raised its revenue expectation to $4.25 billion from $4.20 billion. The new guidance represents a 17% increase from the 2012 level. Organic revenue growth is projected to be around 7%.

Core EPS was revised upward to $9.75 from $9.65. The new guidance represents a 12% year-over-year improvement.

Share outstanding are projected at 65.7 million, up 2% from 2012 level.

Our Take

Alliance Data continues with the trend of delivering positive earnings surprise. It remains well poised for the upcoming quarters based on continued strong performances across the segments and a solid financial position.

Continued focus on strategic acquisitions to grow inorganically, the national rollout of its dotz coalition loyalty program in Brazil (plans to enter 5 additional markets in 2013), and inking long-term deals are expected to drive sold numbers ahead. Dotz is on track to exceed $100 million in revenue in 2013.

Alliance Data currently carries a Zacks Rank #2 (Buy). Among other financial transaction service providers, Total System Services, Inc. (TSS - Analyst Report) is scheduled to release its first-quarter 2013 earnings on Apr 22, while Equifax Inc. (EFX - Analyst Report) will release results on Apr 24 and Fiserv, Inc. (FISV - Analyst Report) is scheduled to release results on Apr 30. All these stocks carry a Zacks Rank #2 (Buy).

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