Alliance Data Systems Corporation, a leading provider of loyalty and marketing solutions derived from transaction-rich data, announced record results for the first quarter ended March 31, 2007.
Total first-quarter revenue increased 15 percent to $549.2 million compared to $477.2 million for the first quarter of 2006. Net income increased 1 percent to $56.9 million for the first quarter of 2007, or $0.70 per diluted share, compared to $56.4 million, or $0.69 per diluted share, for the first quarter of 2006.
Adjusted EBITDA for the first quarter of 2007 increased 19 percent to $160.1 million compared to $134.2 million for the first quarter of 2006. Cash earnings for the first quarter of 2007 increased 11 percent to $76.9 million compared to $69.2 million for the first quarter of 2006. Cash earnings per diluted share increased 12 percent to $0.95 per diluted share compared to $0.85 per diluted share for the first quarter of 2006. (See “Financial Measures” below for a discussion of adjusted EBITDA, cash earnings and cash earnings per diluted share.)
The difference in the net income per share versus cash earnings per share growth rates in the first quarter of 2007 is primarily attributable to the amortization of purchased intangibles and timing differences in the recognition of non-cash stock compensation expense. Nonetheless, the Company expects full-year growth rates in net income per share and cash earnings per share to be similar.
“We are pleased with our outstanding first-quarter results and our strong start to 2007,” said Mike Parks, chairman and chief executive officer. “This marks our 24th consecutive quarter of strong results as a public company. Additionally, our 12-percent cash earnings growth was attained despite a 10-cent abnormal benefit in the comparable quarter last year associated with bankruptcy reform legislation in 2005. Excluding the abnormal benefit, our normalized growth rate topped 25 percent. Based on our continued strong performance to date and increased visibility into 2007, we are raising our guidance for full-year 2007.” Please refer to the Outlook Section for the Company’s full-year 2007 guidance.
First-quarter results were driven by continued strong performance from the Company’s Marketing Services segment in both Canada and the United States. The Canadian loyalty business generated another solid quarter of organic growth, as the growing presence of the AIR MILES(R) Reward Program created opportunity for significant leverage and margin expansion. Momentum from the fourth-quarter win of Budget Rent A Car continued with the signing of a new sponsor agreement with Newfoundland Liquor, a provincial crown corporation responsible for managing the importation, sale and distribution of beverage alcohol within the province.
Epsilon, Alliance Data’s U.S. platform for Marketing Services, had another outstanding quarter, driven by a combination of organic growth and new client signings, including a number of well-known brands in its database, analytics and targeted permission-based email businesses. The marketing business was also complemented by the addition of Abacus — a leading provider of cooperative data, data management and analytical services for the retail and catalog industry — and its unique coalition of 1,500 client retailers that each provide data to enhance their marketing and loyalty targeting programs.
Over-performance in the private label business was attributable to solid portfolio growth combined with continued strong credit quality. Momentum continued with the signing of a new agreement with The Sportsman’s Guide, a leading catalog and Internet retailer offering name-brand, outdoor gear and general merchandise. The Company also signed an expanded multi-year contract renewal with top-five client Redcats USA, one of the largest multi-channel retailers in North America, adding co-brand credit card services to its existing private label program.
Marketing Services revenue increased 32 percent in the first quarter to $232.5 million compared to the prior year. Adjusted EBITDA increased 63 percent in the first quarter to $43.9 million compared to the prior year, with a 360 bps increase in adjusted EBITDA margin. Results were driven by the overperformance of the AIR MILES Reward Program related to the strong rollout of major national programs, combined with overall firm pricing and expanded commitments from existing sponsors. In the first quarter of 2007, AIR MILES reward miles issued increased 10 percent, and AIR MILES reward miles redeemed increased 16 percent. Revenue continued to surge ahead with strong double- digit organic growth, with adjusted EBITDA growing more than 20 percent. The AIR MILES Reward Program’s full-year outlook remains strong.
Epsilon also had an outstanding quarter, driven by strong organic growth, new client signings and the acquisition of Abacus. Even excluding the Abacus addition, Epsilon’s revenue growth was well in excess of 30 percent, with adjusted EBITDA growth approaching 60 percent. The Company expects the Canadian and U.S. marketing businesses to continue to be the leading growth drivers moving forward, as demand for targeted, transaction-based programs continues to escalate.
Credit Services revenue increased 8 percent in the first quarter to $215.3 million compared to the prior year. Adjusted EBITDA increased 16 percent in the first quarter to $91.1 million compared to the prior year. The Company experienced strong growth in average managed receivables, coming in just under 10 percent, compared to the first quarter of 2006. Funding costs were stable in the first quarter of 2007 and are expected to remain so throughout the year. The segment continued to grow despite difficult comparisons to abnormally low credit losses last year resulting from bankruptcy reform legislation in 2005. Finally, credit quality continues to be excellent. As expected, in the fourth quarter of 2006 credit losses fully normalized at just under 6 percent and remained at that level throughout the first quarter of 2007. Based on favorable delinquency flows, the Company expects a continued stable run-rate of credit losses around 6 percent for 2007.
Transaction Services revenue increased by 1 percent in the first quarter to $194.3 million compared to the prior year. Adjusted EBITDA decreased by 12 percent in the first quarter to $25.1 million. Revenue increases in private label were offset by the continued attrition in the non-core merchant services business while revenue from Utility Services was flat to last year. Adjusted EBITDA was approximately $4.0 million below the Company’s expectations due to accrued penalties for late system conversions on utility contracts, additional expenses due to these conversion delays and incremental expenses associated with the ramp-up of a new call center. Current expectations are that these cost overruns will carry into the second quarter and dissipate in the last half of 2007.
Based on continued strong performance to date and increased visibility into 2007, the Company is comfortable flowing through its first quarter over performance and thus raising its guidance for 2007 cash earnings per share to at least $3.60 per share versus previous guidance of $3.55 per share. Additional over-performance, if any, will be factored in, when appropriate.
For the second quarter of 2007, the Company expects a minimum cash earnings per share of 80 cents, reflecting the typical seasonal downturn in private label earnings, an 8-cent grow over from last year due to the benefit from the bankruptcy reform legislation, and the continued softness from Utility Services. The Company also anticipates a strong acceleration in growth rates in the second half of 2007, with low to mid ninety cent cash earnings per share quarters. Acceleration will be driven by private label’s seasonality driving earnings upward, the Credit Services grow over diminishing and Marketing Services driving toward its historically strongest two quarters, the third and fourth quarters.
In addition to the results presented above in accordance with generally accepted accounting principles, or GAAP, the Company presents financial measures that are non-GAAP measures, such as Adjusted EBITDA, operating EBITDA, cash earnings and cash earnings per diluted share. The Company believes that these non-GAAP measures, viewed in addition to and not in lieu of the Company’s reported GAAP results, provide useful information to investors regarding its performance and overall results of operations. These metrics are an integral part of the Company’s internal reporting to measure the performance of reportable segments and the overall effectiveness of senior management. Reconciliations to comparable GAAP measures are available in the accompanying schedules and on the Company’s website. The financial measures presented are consistent with the Company’s historical financial reporting practices. The non-GAAP measures presented herein may not be comparable to similarly titled measures presented by other companies, and are not identical to corresponding measures used in our various agreements or public filings.
About Alliance Data
Alliance Data (NYSE: ADS) is a leading provider of marketing, loyalty and transaction services, managing over 120 million consumer relationships for some of North America’s most recognizable companies. Using transaction-rich data, Alliance Data creates and manages customized solutions that change consumer behavior and that enable its clients to create and enhance customer loyalty to build stronger, mutually beneficial relationships with their customers. Headquartered in Dallas, Alliance Data employs over 9,000 associates at more than 60 locations worldwide. Alliance Data’s brands include AIR MILES(R), North America’s premier coalition loyalty program, and Epsilon(R), a leading provider of multi-channel, data-driven technologies and marketing services. For more information about the Company, visit its website, http://www.AllianceData.com.
For complete details on ADS’ first quarter performance visit CardData ([www.carddata.com]).