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Alliance Data Misses Earnings, Guides High

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Alliance Data Systems Corporation (ADS - Free Report) reported adjusted earnings of $2.67 per share in the third quarter of 2013. The earnings lagged the Zacks Consensus Estimate by a penny but were ahead of the year-ago figure by 15.6%.

Including amortization of purchased intangibles of $33.1 million, non-cash interest expenses of $19.2 million, and an income tax benefit of $18.6 million, Alliance Data reported net income of $132.9 million or $2.01 per share in the quarter. This compared favorably with $119 million or $1.84 per share in the year-ago period.

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

Operational Performance

During the quarter under review, Alliance Data generated revenues of $1.09 billion. Revenues were up 20% year over year, driven by double-digit increase at Epsilon and Private Label Services and Credit. The top-line comfortably surpassed the Zacks Consensus Estimate of $1.07 billion.

Operating expenses escalated nearly 24.7% year over year to $807.6 million in the third quarter of 2013, primarily due to 18.7% increase in cost of operations and 11.9% increase in interest expenses.

Third-quarter adjusted Earnings before Interest Tax Depreciation and Amortization (EBITDA) were $357.7 million, up 12.6% year over year. The upside was aided by improvement in all three segments.

Operating income of Alliance Data increased 9.2% year over year to $288.8 million in the quarter.

Segment Update

LoyaltyOne: Segment revenues totaled $213 million, down 1% year over year.

Adjusted EBITDA was $62.2 million, up 3% from the year-ago quarter.

During the reported quarter, operating income increased 3% year over year to $54.7 million.

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

Epsilon: Segment revenues were $356 million in the third quarter, up 48% year over year.

Adjusted EBITDA was $78.5 million in the third quarter, up 22% year over year.

Third-quarter operating income was $38.9 million, up 8.3% from the year-ago period.

Private Label Services and Credit: Revenues from the segment came in at $531 million, up 16% year over year.

Adjusted EBITDA was $246.2 million in the quarter, up 15% year over year.

Third-quarter operating income improved 14.8% year over year to $230.6 million.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of $784 million, declining 11.1% from the 2012-end level.

Debt declined 6% to $2.68 billion at the end of the third quarter of 2013 from $2.85 billion reported at 2012 end.

Cash from operations of Alliance Data in the first nine months of 2013 was $798.8 million, down 7.3% from the year-ago period.

Capital expenditure increased to $91 million in the first nine months of 2013 from $77.3 million in the year-ago period.


2013 Guidance Raised

Alliance Data raised its revenue expectation to $4.3 billion from $4.275 billion. The new guidance represents 18% increase from 2012. Organic revenue growth is projected at 8%.

Core EPS was revised upward to $9.90 from $9.85. The new guidance represents a 14% year-over-year improvement.

Shares outstanding are projected at 66.6 million, up 4% from the 2012-level.

Unveiling 2014 Guidance

Revenue is projected at $4.64 billion, up 8% year over year.

Core EPS is estimated at $12.00 (up 21% year over year) and net EPS is estimated at $9.64 (up 31% year over year).

Shares outstanding are expected to be 61.5 million.

Our Take

Alliance Data failed to meet the earnings expectation but was well ahead of its year-ago earnings. However, the top-line fared well on both counts.

The company 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 fourth 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, and inking of long-term deals are expected to drive solid numbers ahead for Alliance Data. Alliance Data has expanded its dotz loyalty program to two new markets in Brazil's southern region – the State of Santa Catarina and the city of Curitiba in the State of Parana, taking the tally to 7. It also plans to enter 2 additional markets by year-end.

Alliance Data currently carries a Zacks Rank #2 (Buy). Financial service transaction providers Total System Services, Inc. (TSS - Free Report) , Visa Inc.( (V - Free Report) and MasterCard Incorporated (MA - Free Report) are scheduled to release their results on Oct 22, Oct 30 and Oct 31 respectively. All these shares have the same Zacks Rank as Alliance Data.

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