Alliance Data Systems Corporation (ADS) reported adjusted earnings of $1.55 cents per share for third-quarter 2010, beating the Zacks Consensus Estimate of $1.39 by 16 cents. Results also increased 31% year over year and exceeded the company’s guidance of $1.52. Adjusted net income for the quarter was $85.6 million compared with $76.7 million reported in third-quarter 2009.
Including stock compensation expense of $11.0 million, amortization of purchased intangibles of $20.7 million, non-cash interest expense of $19.4 million and benefit of an income tax effect of $18.5 million, the company reported a net income of $53.0 million or 96 cents in the quarter, compared with $45.3 million or 82 cents in the year ago period.
Revenues in the third-quarter were $702 million, up 14% from $481.4 million in third quarter 2009. This quarter marks the second consecutive quarter of double-digit revenue growth. Results also surpassed the Zacks Consensus Estimate of $690 million. The improvement is primarily driven by solid performance at Private Label Services and Credit segment.
Operating expenses increased 37.3% year-over-year to $532.4 million in the third quarter of 2010.
Adjusted Earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review were $219 million, up 25% year-over-year largely driven by solid results at Private Label segment.
Operating income increased a whopping 81.8% to $170.0 million in the quarter from $93.5 million in the year ago period.
Segment Update
LoyaltyOne: The segment revenues totaled $184 million, up 4% year-over-year. Adjusted EBITDA was $46 million, down 13% year-over-year. Operating income declined 13.9% year over year to $38.1 million in the quarter.
Revenues from Canadian operations totaled CDN$189 million, down 2% year-over-year.
Epsilon: Segment revenues were $171 million, up 29% year-over-year while adjusted EBITDA was $44 million, up 25% year-over-year. Operating income increased 31% year over year to $20.3 million in the quarter.
Significant launches, like VISA, Abbott Diabetes, Staples and GE Money, double-digit revenue growth in the Abacus and Direct Marketing Services acquisitions helped the segment post solid results during the quarter.
Private Label Services and Credit: Revenues from the segment came in at $350 million, up 16% year-over-year while adjusted EBITDA was $144, up 40% year-over-year. Operating income increased more than two fold to $133.3 million in the quarter.
Financial Update
Alliance Data ended the quarter with cash and cash equivalent of $391.2 million, compared with $449.6 million at the end of third quarter 2009.
Debt increased to $1.9 billion at quarter end from $1.8 billion at third quarter 2009.
Cash from operations for the nine months in 2010 totaled $693.4 million, compared with $306.1 million in the comparable period, a year ago.
Capital expenditures were $48.3 million in the first nine months of 2010, higher than $39.7 million in the year-ago period.
During the reported quarter, Alliance Data expanded its stock repurchase program. Per the new buyback authorization, the company may repurchase up to $400 million of stock till end-2011. Also, the repurchase authorizations increased to approximately $2.0 billion.
Guidance
Fourth Quarter 2010: Alliance Data projects double-digit growth in revenues as well as adjusted EBITDA.
The company expects a 5% increase in revenues and 20% in adjusted EBITDA over the fourth quarter of 2009 at LoyaltyOne.
The company estimates atleast a 20% year-over-year increase in revenues and adjusted EBITDA at Epsilon.
At Private Label, the company projects atleast a 5% year-over-year improvement in revenues and adjusted EBITDA.
Adjusted earnings are expected to be $1.40 per share.
Full-Year 2010: The company expects revenues of $2.8 billion. At LoyaltyOne, the company projects adjusted EBITDA to approximate 2009 results, up from the previous guidance of mid-single digits for 2010.
Alliance Data guides earnings of $3.48 per share and adjusted earnings of $5.70 per share. Diluted share is estimated to be 55.6 million.
Full-Year 2011: Alliance Data projects revenues of $3.0 billion. At LoyaltyOne, the company projects adjusted EBITDA to approximate 2009 results, up from previous guidance of mid-single digits for 2010.
At LoyaltyOne, the company expects a mid single-digit growth in revenues as well as in adjusted EBITDA. At Epsilon, the company projects double-digit organic growth in revenues and adjusted EBITDA. At Private Label, Alliance Data estimates high single-digit growth in revenues and mid-teens growth in adjusted EBITDA.
The company guides earnings of $4.66 per share and adjusted earnings of $6.75 per share. Diluted share is estimated to be 56.0 million.
Alliance Data expects free cash flows to be approximately $400 million or $7.15 per diluted share.
The company remains poised to fare well in the upcoming quarters based on continued strong performance across the segment, solid financial position and focus on boosting shareholder value. However, an increasing debt level makes us cautious.
The quantitative Zacks #3 Rank (short-term Hold rating) for Alliance Data indicates no clear directional pressure on the stock over the near term.
ALLIANCE DATA (ADS): Free Stock Analysis Report
Zacks Investment Research
