Oct. 21, 2009 (PR Newswire) --

DALLAS, Oct. 21 /PRNewswire-FirstCall/ -- Alliance Data Systems Corporation (NYSE: ADS), a leading provider of loyalty and marketing solutions derived from transaction-rich data, today announced results for the third quarter ended September 30, 2009.

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Total third-quarter 2009 revenue of $483 million, adjusted EBITDA of $141 million, net income of $46 million, and net income per diluted share of $0.83 represented declines of 5 percent, 17 percent, 29 percent, and 11 percent, respectively, versus the third quarter of 2008. Cash earnings per diluted share increased 15 percent to $1.40 from the prior year period, exceeding the Company's guidance of $1.34 for the quarter. See "Financial Measures" below for a discussion of adjusted EBITDA, cash earnings per diluted share and other non-GAAP financial measures.

Excluding changes in the foreign exchange rate for the Canadian dollar, revenue would have been $493 million, representing a 4-percent decline; adjusted EBITDA would have been $144 million, representing a 15-percent decline; and cash earnings per diluted share would have increased 18 percent to $1.44, in each case compared to the third quarter of 2008.

The Company has faced three major headwinds in 2009, which on a full-year basis compared to the prior year, are as follows: higher year-over-year loss rates resulting in a $90 million reduction in adjusted EBITDA; interest only strip grow-over of $30 million related to the Company's securitization program; and foreign exchange rate fluctuations resulting in a $40 million reduction in adjusted EBITDA. In total, the full-year impact equates to a $160 million reduction in adjusted EBITDA, or an approximate $1.75 impact to cash earnings per diluted share.

Ed Heffernan, president and chief executive officer of Alliance Data, commented, "In light of these headwinds, I am pleased with the Company's third-quarter performance, including solid double-digit cash earnings per diluted share growth. Of equal note were the positive trends related to our key metrics that continued to develop during the quarter, providing even more encouraging news.

"In our Loyalty Services segment, specifically our Canadian AIR MILES® Reward Program, our key cash flow metric, miles issued, continued to ramp up from a 4-percent decline in the first quarter and a 2-percent decline in the second quarter to a positive 3-percent growth rate in the third quarter and is still accelerating. In our Private Label Credit business, the growth rate in credit sales has moved from a negative performance in 2008 to growth of 3 percent, 6 percent and 13 percent in the first, second and third quarters of 2009, respectively. Most encouraging, this is the first quarter of double-digit credit sales growth in three years. Also, despite rising unemployment levels, our credit losses have remained stable for six consecutive months. Epsilon has had a record number of signings this year, which will drive growth in 2010, and its database business continues to expand as demand for these services grows."

SEGMENT REVIEW

Loyalty Services: On a constant currency basis, revenue was flat to the prior year period ($187 million for the third quarter of 2009 versus $188 million in the prior year period). Segment revenue, as reported in U.S. dollars, was $177 million, or a 6-percent decrease from the third quarter of 2008.

On a constant currency basis, adjusted EBITDA continued at a strong pace, growing 14 percent to $56 million versus $49 million in the prior year period. Results continue to be driven by prior years' strong issuance growth combined with firm pricing, virtually 100 percent client retention, a fully built-out infrastructure and strong leverage on reward costs. On a constant currency basis, adjusted EBITDA margin expanded to 30 percent, reflecting continued leverage in the program and operating EBITDA added $10 million of cash flow above the reported adjusted EBITDA.

AIR MILES reward miles issued, a key metric driving future earnings, rebounded in the third quarter with growth of 3 percent versus declines of 4 percent and 2 percent during the first and second quarters of 2009, respectively, in each case compared to the prior year period. The recently announced launch of BMO Bank of Montreal's significantly increased value proposition was largely responsible for the quick return to positive growth in reward miles issued during the quarter. Growth is expected to further accelerate in the fourth quarter of 2009 as the business anniversaries its first soft quarter in reward miles issued.

AIR MILES reward miles redeemed returned to positive growth of 6 percent in the third quarter of 2009 versus negative performance in the second quarter of 2009, in each case as compared to the prior year quarter, suggesting that Canadian collectors have become more secure with the macroeconomic environment and have returned to more typical redemption behavior. We expect this trend to continue, leading to further redemption growth in the fourth quarter.

Epsilon Marketing Services: Epsilon had a relatively flat third quarter with revenue up slightly to $132 million versus $131 million in the prior year period while adjusted EBITDA decreased to $35 million versus $40 million in the prior year period reflecting weakness in our data business due to the recession. The fourth quarter is expected to deliver solid growth and Epsilon remains on track to deliver single digit growth for the year.

During the year, signings continued to move ahead at a record pace with large full-service wins, as well as renewals across a wide variety of verticals including pharmaceutical (Astra-Zeneca), not-for-profit (National Geographic), CPG (R.J. Reynolds), and B-to-B (Reed Business Information). This trend is expected to drive higher growth going forward.

Private Label Services and Private Label Credit: The financial performance of the Private Label Services and Private Label Credit businesses continued to impact the Company's overall performance. For the third quarter of 2009, Private Label Services revenue was up 2 percent while adjusted EBITDA was down 10 percent, each versus the prior year period. Private Label Credit revenue and adjusted EBITDA were down 9 percent and 30 percent, respectively, versus the prior year period. On a combined basis, eliminating intercompany activity between the two, Private Label revenue (which is net of funding costs and credit losses) of $169 million was down approximately $17 million, or 9 percent, compared to the prior year period. Likewise, combined adjusted EBITDA was down $21 million, or 23 percent, from the third quarter 2008. The driver of the decline is attributed to higher year-over-year credit losses, which rose to 9.4 percent in the third quarter versus 7.0 percent in the prior year period, a $26 million headwind.

Against these financial headwinds, encouraging trends have started to emerge in Private Label. First, while credit losses were up 240 basis points versus the prior year period, they have remained stable for six consecutive months despite rising unemployment. This stability is expected to extend into the fourth quarter, which would result in a year-over-year headwind of only 100 basis points in the fourth quarter with the spread continuing to narrow into 2010. Furthermore, credit sales growth for the third quarter was double-digit for the first time in three years. The portfolio posted 12-percent growth in the quarter, with more than adequate funding and liquidity remaining available.

Private Label is expected to return to positive performance in the fourth quarter. Specifically, the modest year-over-year deterioration in expected credit losses should be more than offset by earnings generated by double-digit credit sales and portfolio growth combined with the expected addition of the Charming Shoppes files.

Other Matters

The third quarter results include a $12 million tax benefit. Historically, the Company has maintained tax reserves to cover various uncertain tax positions, including the potential impact related to the recognition of certain taxable income. Based on recent tax rulings and other factors, there is no longer uncertainty around this taxable income recognition and, as such, the related reserve is no longer required. The resolution of these uncertain tax positions will yield a $4 million on-going annual tax benefit, which will reduce our effective tax rate going forward.

For the third quarter of 2009, the Company's business performance combined with this tax benefit produced strong over-performance which enabled the Company to reinvest in certain opportunities. This includes completing a $1 billion TALF deal that locked down long-term fixed rate money and enhanced visibility, while effectively trading off short-term 2-percent funding for the benefits of longer-term 4-percent funding. Also, the Company incurred funding costs associated with our international coalition efforts. In addition, the Company reduced its activity in its share repurchase program effort resulting in a higher outstanding share count than originally projected.

The Company very recently received approval from the regulatory authorities to complete the Company's purchase of the Charming Shoppes private label programs and the associated portfolios. The Company expects to close the transaction shortly.

Capital Structure

Since the beginning of the share repurchase program in 2008, the Company has repurchased approximately 37 percent, or 30 million shares, of its shares outstanding for approximately $1.5 billion. During the third quarter of 2009, the Company spent approximately $100 million on share repurchases. Approximately $300 million remains available under the current repurchase program. The Company's net core debt to LTM operating EBITDA ratio is less than 2.5x as of quarter-end, well within the Company's target level of 3x.

FULL-YEAR 2009 OUTLOOK

The Company continues to face three major headwinds this year: higher credit losses, foreign exchange rate fluctuations and an interest only strip gain grow-over.