Alliance Data Beats on Bottom-Line - Analyst Blog

Alliance Data Systems Corporation (ADS) reported adjusted earnings of $1.56 per share for fourth-quarter 2010, beating the Zacks Consensus estimate by 25 cents. Results decreased 7% year over year and exceeded the company's guidance of $1.40. Adjusted net income for the quarter was $86.4 million, down 8% from $93.6 million reported in fourth-quarter 2009.

Including stock compensation expense of $16.1 million, amortization of purchased intangibles of $19.0 million, non-cash interest expense of $20.0 million and benefit of an income tax effect of $86.4 million, the company reported a net income of $47.0 million or 84 cents per share in the quarter, compared with $41 million or 73 cents per share in the year-ago period.

Full year 2010 adjusted earnings were $5.86 per share, beating the Zacks Consensus estimate of $5.24 as well as guidance of $5.70. Earnings were much ahead of year-ago results of $5.16.

Including stock compensation expense of $50.1 million, amortization of purchased intangibles of $75.4 million, non-cash interest expense of $76.7 million and benefit of an income tax effect of $77.1 million, the company reported 2010 net income of $326.7 million or $5.86 per share, higher than $297.7 million or $5.16 per share in 2009.

Operational Performance

Revenues in the fourth quarter were $755.7 million, up 9% from $694 million in fourth quarter 2009. Results also surpassed the Zacks Consensus Estimate of $749 million. The improvement is primarily driven by strong performance at Private Label Services and Credit segment.

2010 revenue increased 11% year over year to gross $2.8 billion. Revenue was almost in line with the Zacks Consensus estimate.

Operating expenses increased 49% year over year to $615.1 million in the fourth quarter of 2010. It increased 39% in 2010 from 2009.

Adjusted Earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review were $193.4 million, up 10% year over year largely driven by solid results at Epsilon.  Full year EBITDA increased 39% year over year to $822.5 million.

Operating income increased 7% to $140.6 million in the quarter from $132.0 million in the year-ago period. 2010 operating income increased 54% year over year.

Segment Update

LoyaltyOne: The segment revenues totaled $223.9 million, up 7% year over year. Adjusted EBITDA was $45.9 million, down 15% year over year. Operating income declined 20% year over year to $36.9 million in the quarter.

Revenues from Canadian operations totaled $221 million.

Full year 2010 revenue increased 12% year over year. Both adjusted EBITDA and operating income improved 2% from 2009.

Epsilon: Segment revenues were $179.6 million, up 27% year over year while adjusted EBITDA was $49.6 million, up 22% year over year. Operating income increased 29% year over year to $26.5 million in the quarter.

Significant launches helped the segment post solid results during the quarter.

Revenue and adjusted EBITDA both increased 19% year over year in 2010. Operating income in 2010 increased 31% form 2009.

Private Label Services and Credit: Revenues from the segment came in at $354.2 million, up 82% year over year while adjusted EBITDA was $113.1 million, up 15% year over year. Operating income declined 14% year over year to $101.3 million in the quarter.

2010 revenue increased a whopping 96% from 2009. Adjusted EBITDA was up 68%, while operating income improved 73%.

Financial Update

Alliance Data ended 2010 with cash and cash equivalent of $391.2 million, compared with $213.4 million at the end 2009.

Debt increased to $1.9 billion at year end from $1.8 billion at 2009 end.

Cash from operations in 2010 totaled $902.7 million, much higher than $358.4 million in 2009.

Capital expenditures were $68.8 million in 2010, higher than $53 million in 2009.

Share Repurchase

In the fourth quarter, Alliance Data bought back 1.15 million shares. In 2010, Alliance Data spent $149 million to buy back 2.5 million shares. As of December 31, 2010, the company had $328 million remaining under the current authorization.

Guidance

First Quarter 2011: AllianceData projects single-digit growth in revenues and double-digit growth in adjusted EBITDA.

The company guided core EPS to $1.65, a 20% year-over-year increase.

Full-Year 2011: Alliance Data projects revenues of $3.0 billion.

The company guides earnings of $4.66 per share and adjusted earnings of $6.75 per share.

Peer Comparison

Discover Financial Services (DFS), which competes with Alliance Data, reported fiscal fourth quarter earnings of $346.5 million or 64 cents per share, well ahead of the Zacks Consensus Estimate of 42 cents. Discover also posted net income of $765 million in the fiscal 2010, as against $1.3 billion in the prior year, which included an after-tax gain of $1.2 billion related to the Visa/MasterCard antitrust litigation settlement.

The surge in profits was due to significant improvements in credit quality, as well as gains from the payments business driven by strong volumes. However, these were partially offset by higher-than-expected expenses.

Our Take

The company remains poised to fare well in the upcoming quarters based on continued strong performance across the segment, solid financial position and focus on boosting shareholder value. However, an increasing debt level makes us cautious.

The quantitative Zacks #3 Rank (short-term Hold rating) for Alliance Data indicates no clear directional pressure on the stock over the near term.

 
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