Alliance Data Systems Corporation (ADS) reported adjusted earnings of $1.70 per share for fourth-quarter 2011, substantially ahead of the Zacks Consensus Estimate of $1.36. Results increased approximately 9% year over year. Adjusted net income for the quarter was $100.3 million, improving 16.1% from $86.4 million reported in fourth-quarter 2010.
Including stock compensation expenses of $11 million, amortization of purchased intangibles of $22 million, non-cash interest expense of $21.5 million and an income tax benefit of $20.1 million, the company reported a net income of $65.9 million or $1.12 per share in the quarter, compared with $46.7 million or 84 cents per share in the year-ago period.
Strong performance across all the segments and share buyback helped Alliance Data to post better-than-expected results.
Fiscal 2011 adjusted earnings came in at $7.63 per share in 2011, ahead of the Zacks Consensus Estimate of $6.94 and 30% above $5.86 per share a year ago. Adjusted earnings were $441.3 million, 35% above the 2010 results.
Including stock compensation expenses of $43.5 million, amortization of purchased intangibles of $82.7 million, non-cash interest expense of $73.2 million and an income tax benefit of $73.2 million, the company reported a net income of $315.3 million or $5.45 per share in 2011, compared with $193.7 million or $3.48 per share in 2010.
Operational Performance
Revenues in the fourth quarter were $848 million, up 12% from $756 million in fourth-quarter 2010. The year-over-year upside is buoyed by solid performance at Epsilon, supported by better performing Private Label Services & Credit segments. Results, however, fell short of the Zacks Consensus Estimate of $850 million.
Fiscal 2011 revenue improved 14% year over year to $3.2 billion and was almost in line with the Zacks Consensus Estimate.
Operating expenses spurted 8.3% year over year to $666.3 million in the fourth quarter of 2011, primarily due to a 13.7% increase in cost of operations. Full year operating expense escalated 9.2% over 2010.
Adjusted earnings before Interest Tax Depreciation and Amortization (EBITDA) in the quarter under review were $230.8 million, up 19% year over year, thanks to solid results across all the segments. Fiscal 2011 EBITDA increased 23% over 2010.
Operating income increased 29% year over year to $181.3 million in the quarter while full year operating income increased 29.2% over 2010.
Segment Update
LoyaltyOne: The segment revenues totaled $214 million, down 4% year over year, primarily attributable to unfavorable exchange rates and lower collector redemptions. Full year revenue, however, increased 6% year over year.
Adjusted EBITDA was $46 million, inched up from $45.9 million in the year-ago quarter. In 2011 adjusted EBITDA improved 6% from 2010.
During the reported quarter, operating income improved 6.8% year over year while full year operating income increased 11.2% over 2010.
AIR MILES reward miles issued increased 10% in the quarter.
Epsilon: Segment revenues were $255 million in fourth quarter, up 42% year over year while full year revenue increased 38% year over year.
Adjusted EBITDA was $63.9 million in the fourth quarter, up 29% year over year. Full year adjusted EBITDA improved 28% over 2010.
Fourth quarter operating income improved 37% year over year while full year operating income increased 44% over 2010.
Private Label Services and Credit: Revenues from the segment came in at $380 million, up 7% year over year. Full year revenue also increased 7% over 2010.
Adjusted EBITDA was $143.6 million in the quarter, up 27% year over year while full year adjusted EBITDA improved 28% year over year.
Fourth quarter operating income improved 32% year over year while full year operating income climbed 31% over 2010.
Financial Update
Alliance Data ended 2011 with cash and cash equivalent of $216.2 million compared with $391.2 million at the end of 2010.
Debt increased to $2.2 billion at 2011 end from $1.9 billion at 2010 end.
Cash from operations for 2011 totaled $1.01 billion, higher than $902.7 million in the year-ago period.
Capital expenditures totaled $73.5 million in 2011, a higher than $68.8 million in the year-ago period.
In the fourth quarter, Alliance Data spent $53 million to buy back 0.6 million shares. For 2011, the company repurchased 2.9 million shares for $241 million.
On December 19, 2011, the Board of Directors authorized the company to buy back $400 million worth of stock in 2012.
Guidance
First Quarter 2012
Revenue is projected to grow nearly 12%.
The company guided core earnings to grow 10%. Core earnings per share are expected to be $2.13, up 5% year over year.
Full-Year 2012
Alliance Data expects LoyaltyOne revenue and adjusted EBITDA to grow in mid single digits.
Management guided high single-digit organic revenue growth and high-teens total revenue growth due to Aspen acquisition at Epsilon. Adjusted EBITDA growth is expected to follow the revenue growth path.
Revenue as well as adjusted EBITDA at Private Label is projected to grow 5%.
Alliance Data expects revenue to grow 9% to gross $3.46 billion. Adjusted EBITDA is estimated to be $1.13 billion, up 13%.
Adjusted EPS is estimated to increase 11% to $8.45 while net earnings are estimated to grow 13% to $6.15. This is a revision from earlier guidance of adjusted earnings of $8.30 and net earnings of $6.00 per share.
Shares outstanding at 2012 end are projected to be 60.5 million, up 5% from 2011 level.
Alliance Data also projects double-digit growth in free cash flows.
Peer Comparison
Discover Financial Services (DFS), which competes with Alliance Data, reported fourth-quarter earnings per share of 95 cents, modestly ahead of the Zacks Consensus Estimate of 91 cents but way higher than 64 cents per share recorded in the year-ago quarter.
The surge in profits was driven by sales volume growth, complemented by higher interest income, reduced provision for loan losses and lower delinquency rates due to improved credit quality. The profit was also boosted by the escalated income from both direct banking and payment services business, which also drove the book value per share.
Our Take
Alliance Data posted a strong 2011 with segments delivering impressive numbers.
The company remains poised to fare well in the upcoming quarters based on continued strong performance across the segments, solid financial position and focus on boosting shareholder value via share buybacks. However, an increasing debt level makes us cautious.
The company’s adequate liquidity will help it to continue purse share repurchase as well as focus on strategic acquisitions. Alliance Data also has inked long-term deals, which will help it to generate additional revenues going forward.
The quantitative Zacks #3 Rank (short-term Hold rating) for Alliance Data indicates no clear directional pressure on the stock over the near term.
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