Alliance Data Systems Corporation, a leading provider of loyalty and marketing solutions derived from transaction-rich data, announced results for the fourth quarter and year ended December 31, 2007. The Company achieved full-year cash earnings per diluted share of $3.75, exceeding the Company’s October 17, 2007 guidance of at least $3.70.
Total fourth-quarter revenue increased 15 percent to $602.7 million, an all-time record for the Company, compared to $524.5 million for the fourth quarter of 2006. Net income per share decreased to $0.42 per diluted share compared to $0.48 per diluted share for the fourth quarter of 2006. Excluding merger and other costs, additional compensation related to modified stock awards and the loss associated with the sale of our Mail Services business unit, net income per diluted share would have been $0.70 for the fourth quarter of 2007, an increase of 46 percent.
Operating EBITDA for the fourth quarter of 2007 increased 25 percent to $175.4 million compared to $140.2 million for the fourth quarter of 2006. Adjusted EBITDA for the fourth quarter of 2007 increased 31 percent to $157.7 million compared to $120.7 million for the fourth quarter of 2006. Cash earnings per diluted share for the fourth quarter of 2007 increased 33 percent to $0.93 per diluted share compared to $0.70 per diluted share for the fourth quarter of 2006. See “Financial Measures” below for a discussion of operating EBITDA, adjusted EBITDA, cash earnings and cash earnings per diluted share. The segment information, adjusted EBITDA, operating EBITDA, cash earnings and cash earnings per share reported today exclude a pre-tax non-cash loss of $16.0 million associated with the sale of our Mail Services business unit and pre-tax merger and other costs of $7.4 million, including $4.1 million of expenditures directly associated with the proposed merger of the Company with an affiliate of The Blackstone Group and $3.3 million in compensation charges related to the departure of certain employees and other non-routine costs associated with the merger and Mail Services disposition.
“We are excited about our strong fourth-quarter results, marked by record revenue of over $600 million,” said Mike Parks, Alliance Data chairman and chief executive officer. “Results were driven by strong growth balanced across our big three engines — the AIR MILES(R) Reward Program in Canada, U.S. Marketing Services (Epsilon) and private label services. The AIR MILES Reward Program in Canada continued its over-performance, driven by strong double-digit growth in AIR MILES reward miles issued and solid operating leverage. U.S. Marketing Services (Epsilon) posted the Company’s highest growth rates. Marketing spend continues to shift away from traditional media channels and into specific, highly targeted ROI-based efforts. Additionally, the Company’s private label business also continued to post solid results with better than expected new wins further driving growth.
“As the Company has demonstrated through 27 quarters of meeting or exceeding guidance, visibility and predictability are key attributes of our business model,” continued Mr. Parks. “Despite market turmoil and concerns about the macro-economic environment, the Company expects its solid track record to continue in 2008. The increasing trend of marketing dollars shifting to highly targeted, full-scale loyalty and marketing programs with measurable results gives the Company confidence that 2008 will be another year of outstanding performance.”
Fourth quarter results were driven by continued leadership from the Company’s Marketing Services segment both in Canada and the United States. The Canadian loyalty business recorded a strong quarter of double-digit growth through the continued expansion of the AIR MILES Reward Program. During the quarter the Company announced that Visions Electronics, one of Western Canada’s leading home, auto and personal electronics retailers, joined Alliance Data’s Canadian AIR MILES Reward Program.
Epsilon, Alliance Data’s U.S. platform for Marketing Services, had another outstanding quarter, posting double-digit growth fueled by escalating global demand from new and existing clients. During the quarter Epsilon announced it had signed a multi-year agreement with Berkshire Hathaway, Inc. subsidiary Helzberg Diamonds, a fine jewelry retailer operating 269 stores throughout the United States, pursuant to which the Company will manage Helzberg Diamonds’ marketing database and provide data and analytical support for customer cross-sell and acquisition marketing efforts. In addition, during the quarter Epsilon announced it had signed a multi-year agreement to provide loyalty marketing and database services, analytics, permission-based email communications and strategic consulting to Charter Communications, one of the largest publicly traded cable providers in the United States, in support of their Live It with Charter(TM) customer loyalty program.
The private label services business also performed well as the portfolio continued to show solid growth and strong yields despite an uncertain macro-economic environment. Stable funding costs and on target loss rates also contributed to the segment’s performance. The private label business launched a new program during the quarter with Dell Inc., developed exclusively for Dell’s Spanish speaking customers. All customer support services will be available in Spanish, enabling Spanish speaking customers to better understand the program’s benefits, terms and conditions. Momentum continued with the signing of a multi-year expansion and renewal agreement with Alon USA Energy, Inc., an independent refiner and marketer of petroleum products with annual sales exceeding $3 billion, for Alon’s FINA-branded convenience stores.
Marketing Services revenue increased 30 percent in the fourth quarter to $319.1 million compared to the prior-year period. Adjusted EBITDA increased 44 percent in the fourth quarter to $72.0 million compared to the prior-year period. Strong financial results and margin expansion were driven by strength in the AIR MILES Reward Program, which continues to benefit from solid pricing power, the ramp-up of new sponsors, expanded commitments from existing sponsors and the trend of network loyalty as households frequent a growing number of sponsors. Epsilon also had another strong quarter, driven by new client signings and expanded client relationships. The Company expects strong double-digit growth and operating leverage to continue in Canada and the United States.
Credit Services revenue increased 9 percent in the fourth quarter to $189.1 million compared to the prior-year period. Adjusted EBITDA increased 34 percent to $64.9 million in the fourth quarter compared to the prior-year period. The Company achieved double-digit revenue and adjusted EBITDA growth for the full-year 2007 despite the loss of the Lane Bryant portfolio, which was taken in-house by Lane Bryant’s parent company. Portfolio growth was solid at 7 percent for the full-year 2007 and 4 percent for the fourth quarter (9 percent excluding the impact of Lane Bryant), driven by the ramp-up of new programs and expanding the market share of existing programs. Credit sales for the fourth quarter were down slightly due to reduced catalog mailings as a result of significant postal rate increases and the loss of Lane Bryant.
On the expense side, funding costs remained flat compared to the prior year quarter, and the Company expects funding rates to remain stable in 2008. Credit quality continued to be solid during the fourth quarter, with credit losses in the range of the Company’s 6-percent target, having normalized post-Bankruptcy Reform Act. The Company expects credit quality to remain solid for the foreseeable future and maintains a positive outlook for Credit Services in 2008.
Transaction Services revenue decreased 8 percent in the fourth quarter to $180.2 million compared to the prior-year period. Adjusted EBITDA decreased 7 percent in the fourth quarter to $20.8 million compared to the prior-year period. The revenue decrease was primarily the result of lower statements generated and the divestiture of the Mail Services business unit. Statements generated decreased slightly by 1 percent during the quarter due to the loss of the Lane Bryant portfolio. Consistent with the prior quarter, the Company was also impacted by an increase in costs related to the ramp-up of the Company’s client service and collections teams to support the growth of the private label business. Positive results were immediately realized and are reflected in the over-performance in the Company’s Credit Services segment.
2007 FULL-YEAR RESULTS
For the year ended December 31, 2007, revenue increased 15 percent to $2.3 billion compared to $2.0 billion for the year ended December 31, 2006. Net income decreased 13 percent to $164.1 million in 2007, or $2.03 per diluted share, compared to $189.6 million, or $2.32 per diluted share, in 2006. Excluding merger and other costs, additional compensation related to modified stock awards, non-cash asset write-downs, and the loss associated with the sale of our Mail Services business unit, net income per diluted share for 2007 would have been $2.75, an increase of 19 percent over the prior year.
Adjusted EBITDA for the year ended December 31, 2007 increased 25 percent to $642.7 million compared to $515.4 million for the year ended December 31, 2006. Operating EBITDA for the full-year 2007 increased 23 percent to $684.9 million compared to $558.3 million for the full-year 2006. Cash earnings per diluted share increased 19 percent to $3.75 per diluted share for the year ended December 31, 2007, compared to $3.14 per diluted share for the year ended December 31, 2006. This is a noteworthy achievement as 2006 included a $0.25 per diluted share benefit as a result of abnormally low credit losses due to the effects of the Bankruptcy Reform Act, which accelerated losses into 2005. Normalizing for this effect, cash earnings per diluted share would have increased 30 percent for the full year 2007. The segment information, adjusted EBITDA, operating EBITDA, cash earnings and cash earnings per share reported herein exclude a pre-tax non-cash charge of $40.0 million related to the write-down of certain assets in the Company’s utilities business, a pre-tax non-cash loss of $16.0 million associated with the sale of our Mail Services business unit and pre-tax merger and other costs of $19.6 million, including $12.4 million of expenditures directly associated with the proposed merger of the Company with an affiliate of The Blackstone Group and $7.2 million in compensation charges related to the departure of certain employees and other non-routine costs associated with the merger and Mail Services disposition.
For complete details on ADS’s fourth quarter performance visit CardData (www.carddata.com).