ADS - Alliance Data Systems

[decko]

Rev beat, Eps slightly down.  Expectations of 1st qtr 2019 is bringing it down today.  Does anyone have an opinion on the earnings and the outlook for 2019.?

[glorysk87]

EPS guide affected by provision build on new vintages in cards as well as the disposition of held for sale receivables. EPS guide also doesn't include any impact from the sale of Epsilon. In all likelihood actual 2019 EPS will be materially higher than $22.00.

[decko]

Agreed. But I have a concern with future earnings and it involves marketing.  With the sell of Epsilon where is the strength of marketing for this company?  They are transitioning out of the 1990's retail companies into leisure and ecommerce.  In the past they used Epsilon with their Card Services to provide an unique service.  As stated above they are selling epsilon.  Will ADS be strictly be a Card service company without marketing?  If not, if ADS will be marketing for their customers what will it look like?  I could ask more marketing questions but final picture im painting is the concern about their moat.  Has ADS unique moat disappeared because of the dynamic change in retail and how the new consumer interacts with these new retail companies?

[glorysk87]

Agreed. But I have a concern with future earnings and it involves marketing.  With the sell of Epsilon where is the strength of marketing for this company?  They are transitioning out of the 1990's retail companies into leisure and ecommerce.  In the past they used Epsilon with their Card Services to provide an unique service.  As stated above they are selling epsilon.  Will ADS be strictly be a Card service company without marketing?  If not, if ADS will be marketing for their customers what will it look like?  I could ask more marketing questions but final picture im painting is the concern about their moat.  Has ADS unique moat disappeared because of the dynamic change in retail and how the new consumer interacts with these new retail companies?

They have a 500-person data science and marketing team that's part of the cards business. So they will certainly still be offering targeted marketing and loyalty services to their cards clients. As discussed on today's conference call, the plan to fill the rest of the gap left by Epsilon is to sign service agreements between the two companies to maintain their access to Epsilon's technology. They intend to have service agreements for the digital channels and the demographic/psychographic datasets.

[decko]

I guess i should have done my homework first.. Apologies.
Edward Heffernan "Additionally, to the industry-leading growth rate, our industry-leading return on equity. So our ROEs are 30% and/or more, which is anywhere between 2 to 3x what the industry is at. A lot of people keep sort of scratching their heads saying, "How can you be growing so fast and have ROEs that are 2 or 3x the industry?" And the answer is, again, we play in a sandbox that, we believe, we have unique advantages. And the uniqueness of our advantage is the fact that everything we do is in-house, from the actual network itself, we don't outsource that. The customer care is done in-house. The collections are done in-house. The marketing, the database -- the databases that we build, they're all done in-house. And with that, that allows us to approach the industry in a holistic manner and allows us to have the uniqueness that comes with a close-loop type network that can extract not only who the customer is of the client, but also what she purchased down to the SKU level. And we use that type of information to then go back on a one-to-one personalized basis through the various digital channels as well as some of the more traditional channels to drive that incremental purchase. And it's those incremental purchases that sort of set us above and apart from sort of the more traditional banks and card players in the industry." 

So, the question now is this company extremely undervalued?  if they are able to navigate through this transition without any major permanent damage to the company?  It looks like they could be hitting $26-$28 eps in 2020.  That's pretty attractive even at a 10 multiple. Near 60% upside in 2-3 years. Please poke holes in this assessment

[kab60]

I think it is. Bought more today. Epsilon sale should be imminent, and with both PE and strategic bidders in the final round price should be good.

Can anyone explain this one?

Ramsey El-Assal

Okay. And if the end state of the entity here, let's just say that you have Epsilon and that, potentially, LoyaltyOne is to follow. I mean, at some point, does it make sense to change your corporate structure from this ILC structure? I mean, would that not unlock quite a bit of trapped capital that could be put to work? I was just curious about your philosophy of kind of the long-term maintenance of that ILC corporate structure.

Edward Heffernan

That would certainly be a possibility.

[Foreign Tuffett]

I think it is. Bought more today. Epsilon sale should be imminent, and with both PE and strategic bidders in the final round price should be good.

Can anyone explain this one?

Ramsey El-Assal

Okay. And if the end state of the entity here, let's just say that you have Epsilon and that, potentially, LoyaltyOne is to follow. I mean, at some point, does it make sense to change your corporate structure from this ILC structure? I mean, would that not unlock quite a bit of trapped capital that could be put to work? I was just curious about your philosophy of kind of the long-term maintenance of that ILC corporate structure.

Edward Heffernan

That would certainly be a possibility.

I believe the analyst was referring to this:

https://en.wikipedia.org/wiki/Industrial_loan_company

[ABM]

Sharpening my pencil so please forgive any oversights in commonly understood details.

How are you guys thinking about the asset sale impacts on op ex deleverage? I am wondering if it has been specifically addressed outside of the implications based on guidance.

I think op leverage is about 2x based on my model which checks out with Q1 guidance of low single digit rev decline driving high single digit eps decline.  Safe to assume 10% receivable sale presents 20% earnings headwind for full year?

Lastly, any opinions on the quality of the growth book relative to the existing book in terms of profitability?

[Foreign Tuffett]

Sharpening my pencil so please forgive any oversights in commonly understood details.

How are you guys thinking about the asset sale impacts on op ex deleverage? I am wondering if it has been specifically addressed outside of the implications based on guidance.

To my knowledge it hasn't been addressed. I don't know how one would parse this out of their 2019 guidance

I think op leverage is about 2x based on my model which checks out with Q1 guidance of low single digit rev decline driving high single digit eps decline.  Safe to assume 10% receivable sale presents 20% earnings headwind for full year?

There are enough moving pieces that I wouldn't be comfortable assuming that, but I will freely admit that my ability to model how the receivables being divested will affect earnings is amateurish at best. I would note this from the CC:

"provision for loan loss expense is no longer recognized after the reclassification to held-for-sale but, rather, the market value of these receivables is continuously adjusted through a charge recorded in operating expenses.The mark-to-market charges on held-for-sale receivables were over $100 million in 2018. Optically, the different classification makes provision expense look low and operating expenses look high."

Lastly, any opinions on the quality of the growth book relative to the existing book in terms of profitability?

Per CEO on CC, it should be similar.

"And you're spinning up the newer brands, which take a little bit of time before they can actually generate those types of returns, right? I mean, it's the nature of these vintages. So -- but steady-state, no, we -- we're keeping the same discipline we've seen before. And frankly, the people who are looking for the special sauce that we're -- that we offer, they're pretty focused on how you're going to drive that incremental sales and prove it to me. And as a result, I think we're -- we should be in good shape on the ROEs."

[ABM]

Thank you for the thoughtful response. 

How much downside to 2019 core EPS guidance do you think is possible? I understand the bull side fairly well, I think.

Thanks