Dallas-based Alliance Data Systems reported third quarter revenue increased 20.5% year-on-year (YOY) to $1589 million. However, net income for 3Q/15 declined 20.9%to $130.4 million.
For the third quarter Card Services rose 23% to $764 million; Epsilon revenue increased 41% to $532 million; and LoyaltyOne revenue decreased 8% to $299 million, but up 10% on the FX basis.
Epsilon: The strong revenue growth was aided by the Conversant acquisition. The first-half of 2015 was devoted to the transition of Conversant’s business model from its historic site-based advertising approach to a richer, data-driven, audience-based approach. This transition entailed deemphasizing certain commodity-like offerings, which led to an 8% decrease in proforma revenue compared to the first-half of 2014. While the transition process is still ongoing, the negative impact of pruning these lower margin offerings is abating. For the third quarter of 2015, proforma revenue was flat, while proforma adjusted EBITDA increased a robust 9 percent.
Importantly, cross-selling efforts to Epsilon’s and Card Services’ clients continue to go well with over 16 contracts signed aggregating an expected $70 million in annual contract value.
Card Services: (previously named Private Label Services and Credit) Portfolio funding costs were $37 million for the third quarter of 2015, or 1.3% of average credit card receivables, 16 basis points better than the third quarter of 2014.
Credit sales increased 34% to $6 billion for the third quarter of 2015, supported by a 9% increase in core cardholder spending as tender share gains continued. Average credit card receivables increased 30% to $11.4 billion compared to the third quarter of 2014, while net principal loss rates for the third quarter of 2015 were 4.4%, up 40 basis points from last year. The increase is primarily due to the seasoning of the large 2013 vintage, which consisted mostly of start-up programs.
Previously, the FDIC notified Comenity Bank and Comenity Capital Bank, both subsidiaries of Alliance Data, that it planned to pursue an enforcement action against them with respect to practices associated with certain credit card add-on products. This matter was resolved during the third quarter with the banks collectively agreeing to a penalty of $2.5 million and restitution of approximately $62 million covering practices engaged in between 2008 and September 30, 2014. Before the FDIC’s review began, both banks had made changes to these add-on products that they believe substantially addressed the FDIC’s concerns.
LoyaltyOne: AIR MILES reward miles issuance increased 5% compared to the third quarter of 2014 primarily due to strength in the grocer vertical, while AIR MILES reward miles redeemed increased 7% compared to the third quarter of 2014, driven by redemptions related to the instant reward option. The instant reward option, AM Cash, represented 19% and 21% of miles issued and redeemed, respectively, for the third quarter of 2015.
BrandLoyalty’s North American expansion efforts continue to develop. Currently, contracts aggregating in excess of $40 million have been signed in Canada, and a pilot has been scheduled in the U.S.
ADS is maintaining its revenue guidance of $6.5 billion for 2015. A weaker than projected Canadian dollar entering the fourth quarter is expected to offset the $0.05 of over-performance during the third quarter.
ADS NET INCOME
3Q/14: $165 million
4Q/14: $76 million
1Q/15: $164 million
2Q/15: $130 million
3Q/15: $130 million
Source: Alliance Data Systems
Looking into 2016, the Company believes the overall global macro environment will not impact its ability to deliver on its long-term organic model of high single-digit revenue growth, or 3 times GDP, and low-teens core EPS growth. Accordingly, the initial guidance for 2016 is revenue of at least $7.2 billion, representing an 11 to 12 percent growth rate, on a constant currency basis.
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