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Alliance Data Ends on a High Note

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Alliance Data Systems Corporation (ADS - Free Report) reported adjusted earnings of $1.84 per share for fourth quarter 2012, comfortably beating the Zacks Consensus Estimate of $1.68. Results augmented approximately 8% year over year.

Including stock compensation expenses of $12.9 million, amortization of purchased intangibles of $28.1 million, non-cash interest expense of $26.5 million, non-cash mark-to-market gain on interest rate derivatives of $6.9 million and an income tax benefit of $22.6 million, the company reported a net income of $83.6 million or $1.27 per share in the quarter, compared with $65.9 million or $1.12 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 fourth quarter were $972 million, up 15% 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 $941 million.

Operating expenses escalated nearly 13% year over year to $755.2 million in the fourth quarter of 2012, primarily due to a 15% increase in cost of operations and 22% increase in depreciation and amortization.

Fourth quarter adjusted earnings before Interest Tax Depreciation and Amortization (EBITDA) was $277 million, up 20% year over year. The growth was aided by improvement in all three segments.

Operating income increased 19% year over year to $216.7 million in the quarter.

Full Year Highlights

Adjusted earnings were $8.71 per share, exceeding the Zacks Consensus Estimate of $8.17. It also outperformed the year-ago number by 14% and the guidance of $8.60.

Net income was $6.58 per share, up 21% from 2011.

Revenue improved 15% over 2011 to $3.6 billion.  Adjusted EBITDA increased 18% to $1.2 billion in 2012.

Segment Update for the Quarter under Review

LoyaltyOne: The segment revenues totaled $216 million, up 1% year over year.

Adjusted EBITDA was $56.8 million, up 24% from the year-ago quarter.

During the reported quarter, operating income jumped 26% year over year to $49.6 million.

AIR MILES reward miles issued increased 6% in the quarter.

Epsilon: Segment revenues were $292 million in the fourth quarter, up 15% year over year.

Adjusted EBITDA was $69.4 million in the fourth quarter, up 9% year over year.

Fourth quarter operating income was $37.9 million, up 4.4% from the year-ago period.

Private Label Services and Credit: Revenues from the segment came in at $466.4 million, up 23% year over year.

Adjusted EBITDA was $178.3 million in the quarter, up 24% year over year.

Fourth quarter operating income improved 21% year over year to $162 million.

Financial Update

Alliance Data exited 2012 with cash and cash equivalents of $893.4 million, exhibiting more than a fourfold increase from $216.2 million at 2011 end.

Debt increased nearly 31% to $2.8 billion at 2012 end from $2.2 billion reported at 2011 end.

Cash from operations in 2012 totaled $1.13 million, up 12% from the year-ago period.

Capital expenditures increased to $116.4 million in 2012 from $73.5 million in the year-ago period.

Looking Forward

First Quarter of 2013

Alliance Data expects revenue to increase 17% year over year while earnings are estimated to grow 12%.

Core EPS is expected at $2.50, up 5% year over year.

2013 Guidance Raised

Alliance Data expects to generate revenue of $4.2 billion, up 15% from the 2012 level, largely driven by the Hyper Marketing acquisition.

Core EPS is estimated at $9.65, up 12% year over year while EPS is projected at $7.35, up 11% year over year. Share outstanding are projected at 65.6 million.

Our Take

Alliance Data 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.

The recent acquisition of Hyper Marketing will not only add Epsilon brands including Mars, Unilever, The Home Depot, and Kellogg to its portfolio but also enhance Epsilon’s digital capabilities to further develop primary digital channels. The company also has a new $400 million share buyback program under its authorization.

Alliance Data currently carries a Zacks Rank #3 (Hold). Among other financial transaction service providers, Heartland Payment Systems, Inc. and Equifax Inc. (EFX - Free Report) carrying Zacks Rank #1 (Strong Buy) and Fidelity National Information Services, Inc. (FIS - Free Report) with a Zacks Rank #2 (Buy) are yet to announce their earnings results.

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