Filing summary
Registrant identity: The supplied filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2015; it is not a filing by Bread Financial Holdings, Inc. Figures below are USD unless noted.
Business context and reporting period
Alliance Data operated LoyaltyOne (including AIR MILES and BrandLoyalty), Epsilon (marketing services), and Card Services (private-label and co-brand credit card programs). Results cover the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Conversant, acquired in December 2014, contributed materially to Epsilon’s growth.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1.589bn | $1.319bn | $4.691bn | $3.817bn |
| Operating income | $287.5m | $321.6m | $897.8m | $886.0m |
| Net income | $130.4m | $164.9m | $425.3m | $439.9m |
| Net income attributable to common stockholders | $128.4m | $164.2m | $422.3m | $439.1m |
| Diluted EPS | $2.08 | $2.74 | $6.51 | $6.98 |
| Adjusted EBITDA, net (non-GAAP) | $453.0m | $376.0m | $1.276bn | $1.043bn |
Operating margin was approximately 18.1% in Q3 (24.4% in Q3 2014) and 19.1% for nine months (23.2% in 2014). Net margin was approximately 8.2% and 9.1%, respectively, versus 12.5% and 11.5%. Adjusted EBITDA, net is a company-defined non-GAAP measure and excludes, among other items, securitization funding costs and deposit interest.
- Cash flow, nine months: Operating cash flow was $1.031bn, investing cash outflow $1.103bn, and financing cash outflow $7.1m. Cash and cash equivalents declined $99.8m to $977.3m.
- Balance sheet, September 30: Total assets were $20.301bn and stockholders’ equity $1.948bn. Long-term and other debt was $5.099bn; non-recourse securitization borrowings were $4.973bn; deposits were $5.222bn. These are distinct funding categories.
- Liquidity: The revolving credit facility had $551m available. Securitization conduit capacity was $2.05bn, of which $1.0bn was drawn. Management said available liquidity sources and internally generated funds should meet needs for at least 12 months; the company was in compliance with debt covenants.
- Credit quality: Loan-loss provision was $171.7m in Q3 and $461.9m for nine months, up 50% and 64%, respectively. The allowance for loan losses was $671.2m, versus $570.2m at year-end 2014. Delinquencies totaled 4.5% of principal receivables, compared with 4.0% at year-end; Q3 net principal charge-offs were 4.4% of average receivables, versus 4.0% a year earlier.
Material changes versus prior comparable periods
- Q3 revenue grew 20%, but operating income fell 11% and common-stockholder net income fell 22%; diluted EPS declined from $2.74 to $2.08. Higher loan-loss provisions, interest expense, amortization, and a regulatory settlement weighed on earnings.
- Nine-month revenue rose 23%, while operating income increased only 1% and common-stockholder net income declined about 4%. Adjusted EBITDA, net grew 22%.
- Card Services revenue increased 26% for nine months, supported by a 32% increase in average receivables and 35% growth in credit sales. Finance-charge yield fell 130 basis points over the nine-month period, partly reflecting growth in co-brand programs.
- Epsilon revenue rose 42% and adjusted EBITDA, net 70% for nine months, primarily reflecting Conversant. Conversant contributed $398.6m of revenue and $133.5m of adjusted EBITDA, net in that period.
- LoyaltyOne revenue declined 2% and adjusted EBITDA, net declined 7% for nine months; management attributed significant reported impact to the stronger U.S. dollar. Excluding currency effects, management reported growth in both measures.
Outlook, commentary, risks, and unusual items
- Management expected AIR MILES issuance growth to moderate from strong promotional activity, forecasting mid-single-digit issuance growth for the full year. LoyaltyOne said a U.S. pilot for short-term loyalty programs could launch in 2016.
- Management expected capital expenditures to remain approximately 3% of annual revenue. It cited currency movements, card credit losses, funding access and the performance of credit card receivables as relevant risks.
- The banks entered FDIC consent orders in September 2015 concerning marketing and sale of certain add-on products. The company recorded $64.6m of expense, primarily for approximately $61.5m of customer restitution and $2.5m in penalties. The banks did not admit or deny violations and agreed to compliance-process enhancements.
- Alliance Data repurchased 3.1m shares for $864.5m in the first nine months; $135.5m remained under the $1.0bn 2015 authorization at September 30. It also paid approximately $305.5m to settle BrandLoyalty acquisition earn-out consideration and $87.4m for an additional 10% BrandLoyalty interest, bringing its ownership to 70%.
- Funding commitments include short-term securitization facilities that may not renew on similar terms or at all. The filing also discusses potential regulatory restrictions on card products and fees, consumer-data and privacy rules, and possible effects of the EU court’s invalidation of the EU-U.S. Safe Harbor framework.
- In a separate Conversant shareholder matter, plaintiffs dismissed claims with prejudice but indicated they would seek attorneys’ fees and expenses; a hearing was scheduled for February 10, 2016. The filing says ordinary-course claims and lawsuits were not expected to have a material adverse effect.
- Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: this filing is for Alliance Data Systems Corporation, not Bread Financial Holdings, Inc.
- Track delinquency, net charge-off, provision and allowance trends as the receivables portfolio grows; assess whether higher credit costs continue to offset Card Services growth.
- Separate organic performance from acquisition contributions, especially Conversant, and assess the effect of currency translation on LoyaltyOne.
- Review debt maturities, securitization and conduit renewals, available revolver capacity, covenant headroom, and the distinction between corporate debt, non-recourse funding and deposits.
- Monitor the FDIC consent-order remediation and customer restitution, privacy and regulatory developments, and the outcome of the Conversant fee-and-expense application.