Business context and reporting period
The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2017—not a filing under the name Bread Financial Holdings, Inc. The company reported LoyaltyOne, Epsilon and Card Services. Comparisons below are with the three months ended March 31, 2016 unless otherwise noted.
Financial performance and position
| Metric | Q1 2017 | Prior comparable period / change |
|---|---|---|
| Revenue | $1.879 billion | $1.676 billion; up 12% |
| Operating income | $352.4 million | $344.3 million; up 2% |
| Operating margin | 18.8% | 20.5%, calculated from reported figures |
| Net income | $146.4 million | $158.9 million; down 8% |
| Net income attributable to common stockholders | $146.4 million | $157.1 million |
| Diluted EPS | $2.58 | $2.35; up 10% |
| Adjusted EBITDA, net (non-GAAP) | $439.5 million | $439.5 million; flat |
| Operating cash flow | $487.5 million | $280.1 million |
| Cash and cash equivalents at quarter-end | $1.867 billion | $1.859 billion at December 31, 2016 |
Revenue growth reflected a 26% increase in net finance charges, partly offset by a 10% decline in redemption revenue. Provision for loan losses rose 83% to $315.1 million; total interest expense increased 27% to $125.2 million. Income before tax was $227.2 million, down 7%. The effective tax rate was 35.6%.
At March 31, 2017, total assets were $24.643 billion, total liabilities $23.279 billion and stockholders’ equity $1.364 billion. Gross long-term and other debt was $6.324 billion; non-recourse securitization borrowings were $6.203 billion; and deposits were $8.224 billion. These are distinct funding categories. The company had $500 million drawn on its revolving line and reported $822.5 million of total availability. Its credit-agreement leverage ratio was 3.0 to 1, versus a 3.5-to-1 maximum; it reported compliance with financial covenants. The bank subsidiaries were described as well capitalized.
Material changes and operating trends
- Card Services revenue increased 22% to $1.023 billion and adjusted EBITDA, net increased 8% to $330.7 million. Average card and loan receivables rose 16% to $15.685 billion. The higher portfolio and finance yield drove finance-charge growth, while higher principal loss rates increased loan-loss provision.
- Credit quality warrants attention: net charge-offs were $247.9 million, and the annualized net charge-off rate rose to 6.3% from 5.2%. Delinquencies were 4.8% of principal receivables, unchanged from year-end; balances 91 or more days delinquent were 2.2% versus 2.1%.
- LoyaltyOne revenue fell 6% to $333.1 million and adjusted EBITDA, net fell 20% to $58.7 million. AIR MILES redemption revenue was affected by the December 2016 breakage-rate change from 26% to 20%; issued and redeemed miles both declined 4% year over year.
- Epsilon revenue grew 7% to $529.4 million and adjusted EBITDA, net grew 5% to $85.0 million. Agency and CRM offerings grew, while technology-platform revenue declined 7%.
- Operating cash flow improved, while investing cash flow was positive $281.0 million, principally reflecting seasonal receivables paydown. Financing cash flow was negative $762.9 million, including $415.0 million of treasury-share purchases and net repayments of securitization borrowings. Cash increased $7.6 million during the quarter.
Outlook, risks and unusual items
- Management expected 2017 AIR MILES issuance growth of about 3% and a burn rate of about 78%. It expected LoyaltyOne adjusted EBITDA margins to recover in Q3 as program changes are implemented; BrandLoyalty major programs were expected in Q3 and Q4.
- For Epsilon, management maintained expectations of 4% revenue and adjusted EBITDA growth for 2017. It expected technology-platform negative growth to become flat by year-end.
- For Card Services, management expected double-digit 2017 revenue growth, approximately 10% adjusted EBITDA, net growth, and 15% receivables growth with stable gross yields. Delinquencies were tracking to management’s estimates. Credit sales grew 6% in Q1, with one-third through digital channels.
- Management stated that internally generated funds and other liquidity sources should meet working-capital, capital-expenditure and other business needs for at least 12 months. No consolidated EPS or cash-flow guidance was provided in the supplied text.
- In March, the company issued €400 million of 4.500% senior notes due 2022. It repurchased $415 million of shares during the quarter under a $500 million 2017 authorization; $85 million remained available at quarter-end. It paid a $0.52-per-share dividend and declared another $0.52 quarterly dividend in April.
- Principal stated risks include client demand reductions, higher credit losses and funding costs, AIR MILES collector losses or increased redemptions, dependence on securitization markets, foreign-exchange movements, regulatory and privacy changes, and cyber or service disruptions. The filing reported no material changes to previously disclosed risk factors, no material change in market-risk exposure, and no material adverse effect expected from ordinary-course legal proceedings. Disclosure controls were deemed effective, with no material Q1 change in internal control over financial reporting.
- Management was evaluating the impact of several forthcoming accounting standards, including revenue recognition and expected credit losses; adoption impacts were not yet determined for certain standards.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Track whether higher net charge-offs and loan-loss provisions persist, and how receivables growth affects allowance adequacy and earnings.
- Assess the assumptions behind the AIR MILES breakage-rate change, redemption funding requirements and the expected LoyaltyOne margin recovery.
- Review funding capacity and refinancing needs, including securitization maturities, revolving-credit availability, deposit costs and the upcoming debt maturities.
- Reconcile reported GAAP results with adjusted EBITDA, net, a non-GAAP measure; the filing cautions it is not a substitute for net income or operating cash flow.