Alliance Data (ADS) Q2 Earnings & Revenues Beat, View Up

Alliance Data Systems Corporation (NYSE:ADS) reported adjusted earnings per share (EPS) of $3.44 in the second quarter of 2016, surpassing the Zacks Consensus Estimate of $3.32. Better-than-expected earnings came on the back of solid segmental growth. Earnings also improved 12% year over year.

Operational Performance

Alliance Data generated revenues of $1.75 billion, beating the Zacks Consensus Estimate of $1.6 billion and improving 17% year over year.

Operating expenses increased nearly 16.7% year over year to $1.4 billion primarily due to a rise in cost of operations and higher provision for loan losses.

Adjusted earnings before interest tax depreciation and amortization (EBITDA) were $422 million, up 7% year over year. The upside was prompted by an improvement in Loyalty and Card Services.

The magnitude of increase in total revenue was higher than the magnitude of increase in expenses, leading to a 12.2% year-over-year increase in operating income to $320.6 million.

Segment Update

LoyaltyOne: Revenues totaled $352.3 million, up 17% year over year. Adjusted EBITDA was $79.3 million, up 26% from the year-ago quarter. AIR MILES’ reward miles issued decreased 3% and reward miles redeemed increased 8%.

Epsilon: Revenues were $518.8 million in the quarter, up 5% year over year. Adjusted EBITDA was $102.6 million, down 9% year over year.

Card Services: Revenues came in at $885.8 million, up 25% year over year. Adjusted EBITDA was $276.4 million, up 10% year over year.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of $1.3 billion, down 8.3% from 2015 end.

At quarter end, debt increased 14% from 2015 end to $5.7 billion.

Capital expenditure at Alliance Data increased 40% year over year to $107.6 million in the first half of 2016.

Capital Deployment

Year to date, Alliance Data bought back 2.6 million shares and exhausted half of its full-year authorization. Also, the company acquired the remaining 20% stake of BrandLoyalty in the reported quarter.

Guidance Revised

Alliance Data raised its 2016 core EPS guidance to $16.85 (up 11% year over year) from $16.75 guided earlier. The revenue expectation was raised to $7.15 billion (up 11% year over year) from $7.1 billion.

For the third quarter, the company expects core EPS of $4.42 on revenue of $1.78 billion. Both the top and the bottom lines represent 12% year-over-year growth.

Our Take

Alliance Data continues to outperform earnings expectations as well as its own guidance. It also has a solid track of year-over-year earnings improvement.

The company is well poised for the upcoming quarters based on continued strength across its segments and a solid financial position. The inorganic story also remains impressive as its acquisitions are contributing largely to its financial performance.

Alliance Data expects top- and bottom-line growth to gain pace as the year advances with lower yield compression at Card Services, lower loss rates and better performance at Epsilon.

However, adverse forex remains a dampener.

ALLIANCE DATA Price, Consensus and EPS Surprise

ALLIANCE DATA Price, Consensus and EPS Surprise | ALLIANCE DATA Quote

Zacks Rank and Stocks to Consider

Alliance Data currently carries a Zacks Rank #3 (Hold). Some better-ranked financial service providers are Visa Inc. (NYSE:V) , WEX Inc. (NYSE:WEX) and Total System Services, Inc. (NYSE:TSS) . While WEX sports a Zacks Rank #1 (Strong Buy), Visa and Total System hold a Zacks Rank #2 (Buy).