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Alliance Data Beats Q2 Earnings, Lags Revs

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Alliance Data Systems Corporation (ADS - Free Report) reported adjusted earnings of $2.41 per share in the second quarter of 2013. The results beat the Zacks Consensus of Estimate of $2.18 and was ahead of the year-ago figure by 13%.

Including stock compensation expenses of $15 million, amortization of purchased intangibles of $33.1 million, non-cash interest expense of $28 million, non-cash mark-to-market gain on interest rate derivatives of $2.2 million and an income tax benefit of $26.2 million, Alliance Data reported a net income of $116 million or $1.71 per share in the quarter. This compared favorably with $104 million or $1.63 per share in the year-ago period.

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

Operational Performance

During the quarter under review, Alliance Data generated revenues of $1.03 billion. Revenues were up 19% year over year, driven by double-digit increase at Epsilon and Private Label Services and Credit. However, the results marginally missed the Zacks Consensus Estimate.

Operating expenses escalated nearly 21.2% year over year to $758.9 million in the second quarter of 2013, primarily due to a 21.3% increase in cost of operations and a 14.4% increase in interest expense.

Second-quarter adjusted earnings before Interest Tax Depreciation and Amortization (EBITDA) were $337.7 million, up 15% year over year. The upside was aided by improvement in all three segments.

Operating income of Alliance Data increased 11.9% year over year to $269.2 million in the quarter.

Segment Update

LoyaltyOne: Segment revenues totaled $220 million, down 4% year over year.

Adjusted EBITDA was $66.2 million, up 9% from the year-ago quarter.

During the reported quarter, operating income increased 10.7% year over year to $59.1 million.

AIR MILES’ reward miles issued decreased 5% in the quarter.

Epsilon: Segment revenues were $331.8 million in the second quarter, up 41% year over year.

Adjusted EBITDA was $63.6 million in the second quarter, up 30% year over year.

Second-quarter operating income was $24.2 million, up 19.8% from the year-ago period.

Private Label Services and Credit: Revenues from the segment came in at $479.9 million, up 19% year over year.

Adjusted EBITDA was $231.8 million in the quarter, up 13% year over year.

Second-quarter operating income improved 10.6% year over year to $215.6 million.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of $749.8 million, declining 16.1% from the 2012-end level.

Debt inched up 0.04% to $2.86 billion at the end of the second quarter of 2013 from $2.85 billion reported at 2012 end.

Cash from operations of Alliance Data in the first half of 2013 was $530.4 million, up 27.1% from the year-ago period.

Capital expenditure increased to $59 million in the first half of 2013 from $55.5 million in the year-ago period.

Share Repurchase Update

Year to date, Alliance Data has bought back 1.3 million shares worth $208 million.


Third Quarter of 2013

Alliance Data expects to generate $1.07 billion in revenues, representing a  year-over-year increase of 18%.

Core earnings are expected to be $170 million (up 10% year over year) or $2.60 per share (up 10% year over year).

2013 Guidance Raised

Alliance Data raised its revenue expectation to $4.275 billion from $4.25 billion. The new guidance represents a 17% increase from 2012. Organic revenue growth is projected at 8%.

Core EPS was revised upward to $9.85 from $9.75. The new guidance represents a 13% year-over-year improvement.

Shares outstanding are projected at 66.2 million, up 3% from the 2012 level.

Performance of another financial service transaction provider

Visa Inc.’s (V - Free Report) fiscal third-quarter (ended Jun 30, 2013) operating earnings of $1.88 per Class A common share comfortably exceeded the Zacks Consensus Estimate of $1.79 and the prior-year quarter figure of $1.56 per share.

Equifax Inc. (EFX - Free Report) posted second-quarter 2013 adjusted earnings per share of 92 cents, beating the Zacks Consensus Estimate of 90 cents. Results were up 27.8% from the year-ago quarter.

Total System Services Inc. (TSS - Free Report) reported second-quarter 2013 operating earnings of 34 cents per share, which came in a penny higher than the Zacks Consensus Estimate. However, it missed the year-ago quarter figure of 35 cents.

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. Revenues in the reported quarter exceeded the $1 billion mark for the third time. Core EPS also managed to outperform the guidance.

Continued focus on strategic acquisitions to grow inorganically, the national rollout of its dotz coalition loyalty program in Brazil (plans to enter 4 additional markets in the second half of 2013), and inking of long-term deals are expected to drive solid numbers ahead for Alliance Data. Dotz is on track to exceed $100 million in revenues in 2013 with 10 million collectors by the end of the year.

Alliance Data currently carries a Zacks Rank #3 (Hold).

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