Bread Financial Holdings Inc (BFH) 2003 Q3 法說會逐字稿

Good afternoon. My name is Brianna, and I will be your conference facilitator. At this time, I it would like to welcome everyone to the Alliance Data Systems third quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star then the number "1" on your telephone keypad. If you would like to withdraw your question, please press star then the number "2" on your telephone keypad.

I will now turn the call over to Ms. Stephanie Prince of Financial Dynamics, Ms. Prince you may began your conference.

Thank you, operator, and good afternoon, everyone. By now you should have received a copy of the company's third quarter earnings release. If you have not, please call Financial Dynamics at 212-850-5608. On the call today, we have Mike Parks Chairman and CEO, and Ed Heffernan, Chief Financial Officer of Alliance Data Systems.

Before we begin, I would like to remind you that some of the comments made on today's call, and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the companies earnings release, and other filings with the SEC. Alliance Data Systems assumes no obligation to update the information presented on this call. Also on today's call, our speakers will reference certain non-GAAP measures that we believe provide useful information for investors.

Reconciliation of those measured to GAAP will be posted on the Investor Relation page of our Web site at www.alliancedatasystems.com. Lastly, our registration statement relating to common share to be sold in a public offering has been filed with the SEC, but has not yet become effective.

Common market shares may not be sold nor may offers be accepted prior to the time the registration becomes effective. Nothing on this conference call shall constitute an offer to sell or the for the solidification of any offer to buy any securities of the company.

Now with that I'll like turn the call over to Mike Parks.

Thanks Stephanie. Good afternoon, everyone, and thank you for joining us. Our agenda as usual is to spend a few minutes reviewing our highlights over the quarter focusing on our three growth engines. Ed will then review our financial and some details and at the end we'll take your questions.

But before we get started I'm sure many of you saw today's announcements regarding the registration statement we filed with the SEC for limited brand still as remaining Alliance Data stock. This settles one of the top three questions we're frequently asked by shareholders when over (inaudible) deal with the remaining over hand issue.

Neither the company nor management will be selling any shares in this offering and Worlds (inaudible) our largest stockholder will not be participating unless the underwriters exercise the over allotment option. Due to legal restrictions while we're in registration we will not be able to address any further details about through offering during this call.

I would now like to turn to the third quarter highlights, turning on to the next slide we are obviously very pleased to announce that we posted another record quarter for the company. Our revenues increase by 17% to about $256 million, EBITDA up by 30% to $51.5 million, and cash earnings up 47% to 25 cents per share. All three growth engine, Private Label services, our loyalty annualize business, and our utility services group continue to drive strong performance. All three reported double digit growth, so let's take a look at each.

Turning to the next slide, we'll visit private label. This quarter our focus has been on converting key winds made in the first half of the year. All businesses have been converted and operation as well as we entered the peak retail season, including all 800,000-stage store account.

Additionally the operations were Spiegel, Eddie Bauer, Newport News, American Home Furnishings and Foot Star are often running strong. We also renewed one of our top 25 client limited to the new agreement private label services through 2010. We also will be providing authorization and settlement for bankcard and store value transaction expanding our services relationship with them.

We continue to benefit from the current funding environment, as well, as we completed a $600 million asset bank offering at historically low rate by refinancing maturing debt as well as some additional balances, and accounts funded at variable rates, we've locked in very attractive rates for the next five years. This will help lower our operating expenses, increase visibility, and dampen the impact of the future rising rate environment.

Private label has had tremendous quarter overall, all key drivers have out performed our expectations, double digit growth in credit sales and portfolio balances matched with refinancing benefits and improvement in credit losses as a result of an impressive quarter.

Turning to the next slide, in utility services, our utility services group had another strong quarter as well, as we signed agreements to provide billing and CIS management services for the Orlando utilities commission. Orlando utility serves more than 200,000 accounts in Orlando and the surrounding counties, providing residents with electricity and water. This months our first entry into a publicly owned municipal, and we believe this will add an important segment for new business opportunities in the future.

The recent survey conducted by Telepon (ph) International prevailed that interest in outsourcing by municipal is growing as they are faced with aging infrastructure. Also last month we announced the expansion of our utility offerings to include sub-metering services to the acquisition of conservation - billing services inc.

Sub-metering services as automated metering, billing, and collecting and customer service are clients that manage commercial properties which house multiple tents, which is malls or multiple familiar properties. These services is complementing our existing offering to provide future growth in on under penetrated market.

As you know we had a successful years in securing new business here and our major conversions are complete in this area as well. We are now in the process, however of migrating a major call center opportunity for our clients (inaudible) as we move from a third party provider to Alliance's operations here in Dallas. This will be completed by the end of the year and is another example of our deepening relationships with major clients.

Turning to the next slide, let's talk about the Air Miles business. Our Air Miles team continues to perform at a strong pace. This quarter we announced the launch of yourshops.CA, an online shopping mall that includes some of North America's most recognized retail brand, coupled with the wide appeal of our Air Miles award program, we believe this new shopping channel will prove to be a very popular shopping distinction in Canada.

Electors can purchase merchandize from more than 20 retailers including Eddie Bauer, Sharper Image, LL Bean, Brookes Brothers and Lianzin (you're yourshops.CA is another example of our business strategy, integrating marketing and transaction services working in a variety of the ways for our client.

This quarter we also renewed two of our top 10 Air Miles sponsors. LPBO and Grocher A&P, LPBO has 600 retailer locations where Ontarians (ph) can find a selection of product and services for entertaining. A&P Canada operates over 200 locations throughout Ontario, (inaudible) shopping at A&P and also food and drug stores. - a new rewards partner, universal music Canada.

Through this partnership our collectors are able to redeem for more than 1500 CD's featuring universal music's best selling recording artists. Collectors can redeem award miles for (inaudible).

Expanding our reward portfolio to exceed the expectations of our collectors is fundamental to our growth and appeal of this program, and as a result we continue to see strong uplift in our key metrics, miles issues and miles redeemed, both with double digit increases.

Turning to outlook for 2004, and 2003, our outlook is very bullish. We've had record result for the first nine months of this year, and we are confident we'll deliver on our revised guidance for the full year.

Revenue at a minimum will be $980 million, EBITDA minimum of a $180 million and cash earnings per share we expect to exceed in the range of .83 to 85 cents in our last guidance. Looking ahead of 2004, we have strong momentum and continue to build on our reputation to deliver in all growth segments.

As such we are confident we will achieve our long-term growth model of 12 percent on the top line, 15% increase in EBITDA, and a 18% earnings in growth share. This translates to $1.1 billion in revenue, EBITDA of $210 million in cash earnings per share of at least $1.

On the final note, I would like to thank our management team for your commitment to our client's success. The results are certainly very impressive as you deliver for them; you are also delivering for Alliance and our shareholders. Think you everybody for an outstanding effort. For more detail on our financials I'll ask Ed to make some comments. Ed.

Thanks Mike. If you could pull up a slide for this third quarter consolidated results. Things are tracking nicely to what we expected and what we shared with you during our last call. With perhaps a little bit of extra good news really across the board, we've now hit double digits in terms of quarters as a public company, as Q3 marked our 10th quarter, and more importantly further extend the track record of delivering or over-delivering on what we promised.

As Mike just mentioned, just to remind some folks, our long-term business model calls for top line of 12% growth, EBITDA 15 and cash EPS of 18. And we believe the holds up whether it's a recession like '01 or sluggish recovery like in '02 in this year, or a robust recovery sometime down the road. Against those targets, Q3 experienced continuation of results well above expectations.

Let's start with revenues, which were up in the high teens, and came in north of the a quarter billion dollars. The key message here was that all three growth engines, and those would the Royalty Air Miles program, Utility Services and Private Label services and hence alter reporting segments posted double digit growth.

In addition, growth was very sold and each engine's key drivers, and specifically every one of them kicked in double-digit growth ranging from both AIR MILESÂ(r) issued, and air miles re-deemed in our Canadian loyalty business, to credit card sales, portfolio growth, and statements generated in our Private Label business, and finishing up with statements generated growth, as well, in our utility business.

Operating EBITDA, proxy for cash flow, came in at $56 million, an increase of 23%, versus prior year. As a reminder, our operating cash flow generally runs a few million bucks ahead each quarter of our reported EBITDA.

Speaking of which our reported EBITDA surged ahead 30 percent to over $50 million, and perhaps of equal interest was that this large increase in earnings occurred despite a timing issue on our Canadian business, which effectively squeezed current period profits and deferred them to the future. And finally cash EPS is up 47% to 25 cents per share.

I have to sum up, pretty straight forward, it was another good quarter, stronger than anticipated performance, and all three-growth engines are firing all on all cylinders and we expect a strong Q4 as well.

Let's get into the detail little bit; in turn to the third quarter segment results. First up is transaction services, which house two of our three growth engines, Private Label services and utility services, as well as being the home of our traditional merchant acquiring business.

Both of the growth engines posted double-digit growth rates, which can be seen in their key driver with the statements generated. Also of interest is that our revenue statement held up strongly. This demonstrate the key fact of our model, and that is we focus on markets where we can grow volume, but also preserve pricing power.

In utility services, we continue to ramp up in both last year's wins as well as this year's new client such as AEP Antrica and TXU. The recent signing of Orlando in our new sub-metering initiative will begin to kick in during Q4 and into 2004. Private label services showed solid from the quarter, we started to see the beginnings of growth on the Eddie Bauer, Spiegel, Newport News, Foot Star start-ups, along with the inclusion of American Home Furnishings, and the Stage store portfolios. And this build will continue as well into Q4, and into 2004.

Together the growth engines accounted for about 80% of the segment, or about 40% of the overall company's revenues. And as we already noted Q4 looks string as well.

Next our credit services, which continue to outperform even our increased expectations, and to understand it, we usually walk -- step pack and walk through the four key drivers of the P&L, and those are credit sales, portfolio growth, funding costs, and credit losses.

First, credit sales remain quite healthy, and grew at a double digit pace, despite somewhat spotty performance of the specialty retail sector in general. Results were driven by both continued gains in wallet share that is the amount of dollars spent using our cards, as well as the ramping up of the new 2003 signing. Next up, portfolio growth came in at a solid 11%.

We expect a strong Q4 as well, for this driver again, as we mentioned earlier, Eddie Bauer, Spiegel, Newport News, American Homes, Foot Star, and Stage stores continue to ramp up.

Turning now to the operating side of the credit business, we saw a continuation of positive news. First, funding costs continued to benefit from the very slow gradual refinancing of large blocks of maturing fixed rated funds, which are being locked in at fixed rates for the next five years.

As an example our $600 million bond deal in August allowed us to lock in these favorable rates for five years, and as part of our ongoing process of stretching out our visibility for as long as possible.

Finally lets talk a little about credit quality and credit losses. Our guidance for this year has been to target average loss rate of around 7.5%, an average (inaudible) of around 6.5%, third quarter results added even more confidence to this guidance.

As expected, loss rates turned down from Q2, and came in bit better than our 7.5% target, while delinquencies are still running nicely below our 6.5% target. So all three drivers are running strong, and we expect this to continue into Q4 and 2004 as well.

I will pause just for a second here and step back a bit, lot of folks have asked especially during the past quarter we can see any trend in the Private Label business which may provide some insight into what's going on in the overall economy.

And I think our answer would be a resounding it depends. Specifically, we touch a bit under $10 million active card members each month, and these folks have high quality credit scores and represent the core middle to upper middle income segments of the population.

So those specific segments we do continue to see what we have seen over the past a couple of years and that is liquidity is still evident and sales continue at a decent phase coupled with very solid and stable track record. All these card holders for paying their bills on time, and not ballooning balances, so in our world, at least, we're seeing the continuation of very sold spending, albeit prudent spending.

Marketing services which franchise are worth Air Miles Program in Canada, as we noted earlier, the business fundamentals remain very, very strong. Last quarter we talked about the signing of the Cahn KA TU pharmacy in Quebec.

Already our penetration rate in that province has increased from 45% of house holds last spring to 50% today. Overall our program continues to dominate the loyalty state in Canada and as Mike mentioned the launching of our on-line mall yourshops.CA provides another example of new growth channel for us as we look to sustain our long term target of mid-teens top line growth for the business.

Turning now to the growth drivers. Q3 was our strongest ever, as miles redeemed rode over 20%, and miles issued came in north of 16%.

As a note, some people are still a bit confused as to why we keep pushing so hard to increase miles redeemed as some of you think all it does is just increase cost for us so why go do it? The answer is two fold.

First our goal is to push for higher and higher redemption level and this ensure the program remains successful and our value to our sponsors as well as to our members.

Second is the key point, it doesn't at all recurred profits because we've already reserve front for very high level of redemption's, and were well covered to handle the continuous phase activity. So therefore although it seems ahead of sponsors, drive redemption and I think increase loyalty.

So turning top line revenue surge double-digit, $68 million, up 11%. The outlook is for strong top line growth to continue. I'm going to spend a little time discussing recorded EBITDA number while the segment posted record results in revenues, and miles issues, and miles redeemed, that performance still understated the true strength of the business.

Introduced last quarter, we've tried to illustrate this by showing growth on a constant currency basis versus last year. Key point can be seen in the constant currency number that we provide, and specifically you have to exclude the very dramatic impact from the run up in the Canadian dollar this year, the core business results would have showed an impressing 43% growth rate in EBITDA. We expect solid core performance to continue.

Wrapping up the segment results. Real simple, all three engines firing on all cylinders and expect more or the same going forward. And let's now turn to a brief review of the Canadian dollar impact. I know, we went through it extensively last quarter what we do one more time this quarter.

And if you turn to the slide, marketing services loyalty Air Miles program, step back a second and recalled that as the U.S. dollar fell off the cliff this year, the Canadian dollar skyrocketed 18%, we are 9.5 year high earlier this week most dramatic news coming during the later part of Q2 and into Q3. There is good about (inaudible) put simply, the stronger Canadian dollar is beneficial us to us, because it means more revenues cash flow and profits when transferred back to U.S. dollars.

What is different for us however is the timing when those profits flow into earnings and specifically our Canadian program follows deferral accounting. For example when mile was issued a couple of years ago to gas station and the grocery store, and we got paid our cash upfront.

We required to book that revenue to the balance sheet, this then translated back to U.S. dollars are at the aren't current rate of $1.68, that would be one dollar of Canadian was worth 68 cents.

Pass over to Q3 that mile was than moving off the balance sheet and into the P&L but it's moving off at 68 cents, while all of my expense are being booked at think higher and more expensive spot rate of $73 cents, I would mean the Canadian dollar appreciated.

Result is a squeeze on reported earnings, and clearly this an accounting mechanism only, and doesn't change the cash flow of the business, and that's why we will also show the constant currency growth rate in the case you need help. If you are following the math, what squeezes now were actually reversed over time, and hence the timing issue.

Come up, revenues remain robust, cash flow is unaffected, and constant currency basis shows the true health, and is up strongly. To give you a sec of how much that hit the segment, the reported EBITDA got squeezed about $4 million U.S. in Q3, and probably close to $6 million in Q4, assuming Canadian U.S. dollar rates start leveling off, this year anniversary in the mid to late '04.

Timing issue actually starts to reverse itself after that, as the older dollar rate stock is cleaned out of the balance sheet and finally, if you are wondering where all of those squeezed profits went, just look to our balance sheet.

Deferred revenue and earnings account grows less than $30 million over the first three quarters of the year but this year it is more than double that, and up $60 million, so bodes very well for the future.

Let's move to balance sheet. Capital structure perspective, our key metric is core debt to cash flow, also called operating EBITDA, since this is used in all of our bank evidence.

Our target is to maintain a healthy investment grade profile, which we believe require as ratio of two timers less. In this quarter, we actually came in below one times for the first time ever, as the businesses continued to throw off substantial amounts of free cash.

Also note, if you were to compare it to last quarter, our cash is down, and the vast majority of the decline is a timing issue related to merchants flow, all that means is due to the day of the week during which the quarters end, we had three days of flow at the end of Q2, and only one day at the end of Q3. Any additional cash reduced pay down our core debt.

Turning to our proved revenue, all which again relates to our loyalty program in Canada, now stands at over $417 million. It's up close to $60 million since the year begin and has already noted again, this is more than twice the (inaudible) of past years.

As we just discussed this represents new revenues in earnings that are being put on the balance sheet at a much higher Canadian exchange rate in the future. This excess will flow into the P&L.

So wrapping up the balance sheet: Both balance sheet and capital structure are getting stronger every year, as the business model continues to generate double-digit growth while throwing off significant free cash flow.

All right. Turning to the full year outlook. Mike talked a little bit about it earlier. During Q2, we did significantly raise our guidance, and suggested that we expect revenues to come in at least 980, EBITDA 180, and cash EPS of 83 to 85 cents.

Despite the timing issue in Canada, which has certainly dragged down one of the segments from a timing perspective, and again that will reverse going forward, we feel very comfortable saying the following, that is we are tracking comfortably on all key metrics from a cash EPS perspective of 83, 85 cents.

There's no question about it. We think we're tracking above the high end of that range, all the engines are very, very strong. If you would say that could hold back things in Q4? Obviously the foreign exchange issue is going to be a bigger nut in Q4 than it was in Q3. Also we have a fair amount of expenses from ramping up call center and holiday season expenses in the launching of shops at CA.

But overall, nothing should really slow us down (inaudible) from tracking above the high end of the range. Quite honestly, whether it's against the 85 cents, whether it's a couple of pennies or a nickel, it's hard to say right now. We'll see how everything sorts it step up, but clearly we're nicely ahead. So, so far so good.

What we want to do now is turn to the next slide, which is the top questions, list our top three for the quarter that we've had with a number of meetings with both investor groups, as well as analysts. Probably, the first one we keep getting is what happens when interest rates go up, are you going to get squeezed? The answer is if you've been watching what we've been doing the last couple of years, we're doing everything we can to continue to lock down five-year fixed rates and we expect to do that through next year as well.

The good new is we still have some older deals that have yet to mature, that are going to be maturing over the next year or so and those are at rates that are significantly higher than today's rates, so we expect some good news there, and so even if rates in the curve does start shipping up over the next twelve months or so, we should be in good shape. Feeling pretty good about that one.

Next, Mike also talked about the filing, and we get questions about what is up when the lock up expires. And really I get the - I saw it in the registration filing. We filed 7.5 million shares, limited it basically taking theirs stake down to zero.

It should be noted that last year we locked in limited and all its divisions through 2009, which is great news. Management is not participating, the company is not participating, and Welsh is not participating unless the shield is exercised.

So, I think we're almost at the end here. At this time of the year, we usually talk little about the upcoming year's guidance. The number one question we sort of had is, you folks have had such a nice run for the past three years if there any gas left in the tank, and I think answer that let's go to the next slide and I think the answer is pretty sure.

We're feeling very good about 2004. We expect revenues to come in at around $1.1 billion, EBITDA around 210, and cash EPS of at least a buck. Also one of the key metrics we also throw out there is free cash flow per share, which effectively takes our EBITDA and adds to $20 million of free cash and loyalty that has been deferred put on the balance sheet, hasn't include get into the P&L, less any CAPEX, interest and taxes, and basically how much do have left in our pockets at the end of the year.

We would expect to do about $1.30 next year. So, I think as we look in '04, and Q4 this year, we are doing very solid, very positive, and we think '04 is going to be another great year. That being said, I'll turn it over to Mike.

Thanks Ed. I think the last slide you see is the bar chart, really The five-year kind of trend. I think the key message here is, as we said over and over, we focused on our long-term growth goals. Sometimes we'll exceed those, but if you're focussed and happy with these kind of long-term growth goals, I thing you'll be pleased with our continued performance.

We've certainly demonstrated our commitment to clients and shareholders alike, and we're off to another good start for the next year. so we'll turn over to questions now and operator, if you would key up the questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jim Kissane of Bear Stearns.

Hello, Mike and Ed, you always been on a role in terms of new business signs. As you look at the pipeline across the three businesses, do you think it will enable you to sustain the momentum going into '04? I know on the P&L things looks great, but there in terms of building the business for '05 and beyond?

No problem with conversion. As I mentioned that went very smoothly. We picked up a call center here in Texas and have integrated that into our automated writing and call handling business. Certainly we have focused on delivering what we promise to our clients, premium quality is top of mind. You heard me mention ramping up of Centrica call center and that would be almost a 300 - 353 call center. So we are very focused on quality and feel there comfortable with our progress.

Thank you, if I can get one for Ed? Earlier in the year, you were saying that card holders were paying down balance a little bit faster than expected. Is that continuing?

No, it's not. I think what we saw was an initial spike up in payment rates from perhaps the mid-teens to the higher end of the teens, really starting the end of '01, and into '02, and then its kind of has flattened out over the last year or so, so there was the initial upsurge late '01, into '02, but it has leveled off, and it look like folks are spending and paying off, and not really driving up their balances.

OK. Thanks.

Operator Your next question comes from Dirk Godsey of J.P. Morgan.

Good afternoon. Congratulations, guys. Sounds like you have very good progress in ramping up the last year's new business. Can you give us a feel for how much of the annualized new business that were signed in the last 12 months is now reflected in the current run rate?

I'll take stab at that. I probably won't do it justice, of course. But as you know, you probably have to cycle through each of the businesses. If you were who to look at the Private Label business that Mike mentioned, it's really a combo of start-ups which take 9, 12, 15 months to really start moving the needle on the P&L.

That's just beginning to happen, and that would be the Eddie Bauer, Newport News, and Spiegel deals, so we should see some nice P&L pick up from those portfolio as we go into the later part of '04. The other portfolios like the American home and the Stage, we've now completed, we have converted they're up and running, so you're go going to see most of that that in it's run rate stage hasn't been in for a full quarter yet, it will be in Q4. So that should give lift on that business.

On utility, I think Orlando and the sub-metering piece hasn't hit the run rate yet, so that should give us a nice jump off for 2004, and in Canada, we think the big signing of the Quebec pharmacy that should be in the run rate, but as your shop start CA and some other new sponsors come online that should help solidify that mid teens e growth rate for next year.

I think the very long answer Dirk is that as we look into what we need to get done for next year, the combination of start-ups ramping, and Private Label, the utility business that is coming on line, and what we see in the hopper for loyalty, we're very comfortable with that 12, 15, 18 for next year.

It is almost like the normal adding 3 to 4 new accounts in each of the major categories is probably less for the requirement looking into the next year than? Do you have a kind of momentum? Going into 2004?

Yes, I would be because that's an accurate statement. You know we continue it from on pipe perspective to be our normal historical announcement that we talk about it finding 3 to 4 per segment, but we're probably a little ahead of that going into '04.

I was wondering just a follow-up here looking at the fourth quarter, I guess it's not wanting to get too far ahead of you. It traditionally looks like the fourth quarter has been pretty much flat to up from the September quarter some of the (inaudible) year little bit maybe a penny or two words of extra headwind here in relative to the foreign currency issue. But can you want to see some of the other seasonal issues that we had think about each and lines of businesses as we try to recast this quarter?

I think your analysis probably a great place to start. Obviously we don't know where everything is going turn out, but at this point, we would say everything is running quite strong, and probably what is going to hold back a little bit will be a little bit of a ding from the FX conversion, a couple of million bucks more than expected, and again, we are investing heavily, as Mike talked about, in some of the expenses to make sure the start-ups have a very strong holiday season, but overall, I think it's going to be a very strong quarter.

Al right. Thanks. Look forward to it.

Operator Your next question comes from David Trautman (ph) of Wachovia.

Thanks a lot. Mike, do you guys expect cost savings as you move that Centrica cost center operation from third party into your own facility?

We would expect to see some long-term cost savings over the current contract, but, as you know, it's fairly expensive here in the next short term as we build out this facility, train some 400 people that really we have to hire, and duplicate, for a good 60 days, before it actually gets over, and then the training curve, so eventually, yes, we think we can do it better than the competitor, because of our knowledge in this particular space, but it will be several months before we get there.

Thanks. And a couple of quickies for Ed. At the new metering business, is that going to be something that we'll continue to see in the metrics, in the formal statements these guys actually send out statements to those multiple ten ants, and we'll actually see those in the metric?

Yes, for sure. And right now the number is very small right now, probably less than 100,000 statements per month, but store sure we'll roll it in.

And one more thing. Can you walk I us through, just for our financial modeling, I think you've got some swaps that expire next year, so we'll see a little less interest expense, maybe a little less EBITDA as we model that out? Is that correct, and can you quantify that?

Yes, you're right on. That fabulous swap that required us to do a non cash to cash market, that was the Bain of our existence for a little bit, that finally matures in the spring of nest year. And you'll dead on. What that will essentially too is we'll replace it as part of some fixed rate asset backed teal, which means the interest expense, which is running, oh call it $2.5 million a quarter moves from below the line to above the line, so it will move about $5 million from below to above.

Good. Thank you.

Your next question comes from Danpar Land (ph) of Legg Masson.

Thanks. I was wondering if you could help me wreck con sail part of the credit businesses with the private sales up 11 and the average portfolio up 11, but revenues up 26%. What's the Delta there?

Yes, the key thing is actually four pieces that go into the revenue line. We -- we effectively net the funding costs and the credit losses with gross revenue, and report just net revenue, so to the extent that -- pointing you the right direction?

Yes, I'm surprised could it would be that big a Delta, even with lower funding cost and interest rates moving down.

Yes, it's a good run.

How much of the portfolio do you have locked in so far? You just did the $600 million trounce. What does that bring your total to right now.

We had six, six, we had 9, that's $2.1 billion. We had a swap, that's 200, so 2.3 to $2.4 billion -- is about right.

And that's, like 80% or so complete?

The swap matures next year, and then the 900 matures in the third quarter of next year, so what we hopefully will do is probably do two $600 million deals next year, but in terms of our $2.5 billion portfolio, it's essentially all fixed, except for just a small piece.

OK. And then also in the transaction services segment, you processed the transactions were 20%, revenues were up 4. It looks like the average per transaction was down. Is that correct, one? And, two, if that's not correct, what's the Delta there?

Yes, the easiest way to look at the transaction services segment is again look at the two big growth engines which would be Private Label, and utility, and those combined had roughly 20% growth in statements generated without any decline in revenue per statement.

So the Delta there, and the reason revenue didn't grow the full 20% is in fact that final piece, which is the old merchant acquiring business for share revenue per is down, and, you know, pretty much the same story you've been hearing the past couple of years. But the two big growth engines are cooking along.

That leads me to my next question, which is I think you mentioned earlier in the call you are going to process bank cards for the limited too, and that struck me as kind of a surprising, as that seems like a business you are kind of trying to get out of.

We are not necessary apply trying to get out of it. We proved last year that some of the smaller relationships, but we continue to provide a variety of what will call ancillary products for our major relationship. So the limited too or any of our major accounts will provide that service to our major accounts, but we're not going to focus on those smaller accounts which we got rid of last year.

OK, great. Thank you very much.

Operator Europe next question comes from David Scharf of JMP Securities.

Ed, quick question on transaction services, trying to get a fix on -- you know, ultimately how high margins can head in that area. They were pretty much - Looks like EBITDA and floor margin were sort of flat issue from last quarter. And is it temporarily being weighed down by the some of the conversion cost of the new Private Label processing, and moving of Centrica call center? Are we going to see a acceleration in that shortly?

Yes, that's a great question. It's less conversion costs, it's more of start-up costs, so it's less of the conversion costs attributable to like a Stage Stores portfolio, because that has within it sort of inherent revenue and earnings out of the gate. It's more if you look at Eddie Bauer, Newport News, and Spiegel and stuff, starting that stuff up is not cheap and that's exactly what going weigh us down through the holiday season. Weigh us down, meaning, do we still expect nice solid double-digit growth in Q4? We should do, but that can explain some of the lumpiness you'll see.

Any year we have a whole bunch of start-ups that take 12, 15 months to really start moving the P&L, you are going to eat some cost upon, that' what we are seeing right now.

Essentially in Q4, are we probably going to see lower margin, just because you got more merchant acquiring revenue there --?

Correct.

Lastly, same segment -- couldn't get assess for the outlook on the revenue per statement, which increasingly is going to be dominated by utility out sourcing, just curious, without throwing out specific contract numbers, the large municipal down in --, does that command a little higher average ticket than these large investor-owned utilities you typically go after? Is there a little more leverage there on the pricing front, or is everything pretty much trending toward these large IOUs?

I probably wouldn't say so. This is our first big munic (ph) client. Remember, the Orlando deal is 200,000 accounts, but it's really primarily sort of core processing without the call center, so the revenue per is probably about half of what we would run for a full scale utility client. I guess at this point it's probably neither better nor worse, but -- ballpark.

And lastly, for your existing utility clients, where you're just doing sort of processing statement generation, is there a likelihood that you're going to be able to up sell some additional customer care services? Is there some organic growth still to be weeded out of those existing clients?

Yes, there is. You know, we do already -- Centrica is an example of bringing one on, but George and natural is another client for example, we are doing the full game into the services, and others we are just doing the billing and statement remittance and that sort of thing, so we continue to add more and more services. One thing we focus on recently is adding a collection arena, and they never really focused on before and leveraging our kind of retail skills in collecting delinquent balance, so that's a new service, empower service that we're ramping up now as well.

Thanks a lot.

You bet.

Your next question comes from Don McArthur of Stifel Nicolaus Hanifen Imhoff, Inc.

Good afternoon, guys, great quarter. Within a credit services segmentary breakout the finance charge portion about

Sure. Financial charge generally runs about 2/3 of the segment, so if we did little north of $100 million, the net finance charge is probably about 2/3.

OK, and then what was the delinquency rate in the quarter?

a little below 6%.

What about the charge-off rate?

Charge-off was a little below 7.5.

And then there was a -- did Stage delinquency has come down to more of your level?

It's way too early to tell on that. We just got it on. Our game plan with Stage, which has higher than sort of our average loss rate across all 59 of our other portfolios, but the same credit profile would be gradually over an 18-month period. Our goal would be to get that trending down toward the median of our portfolio, given its average fee co is 700, in all of our portfolios are 700. So slow process, we think we are going to get there.

It's been 10% of the portfolio, really won't lose the (inaudible) overall charge-off rate better?

Right.

Thank you very much.

Operator Your next question comes from Greg Smith of Merrill Lynch.

Hello, good afternoon. I'm not sure if you gave the charge-off in delinquency numbers for the quarter?.

Yes, but I would be more than happy to do them again. The loss rates is a little below 7.5% which is sort of our long-term goal. We're running probably 20, 25 bits better than that. You know, delinquencies, our long-term goal is about 6.5%, and we're actually little below 6.

Are you anticipating any -- And Ed, I think you talked about kind of a late summer in increase of delinquencies? Are you expecting any other share?.

I think what you saw in the third quarter was that. Usually in Q2, if you go back, your losses seasonally move up, and your delinquency tend to move down, and then they go the other way as the third quarter approaches, and that's what happened.

Our losses versus second quarter improved, and our delinquencies trended up little, which is exactly what I think you're referring to, we call the sloppy summer pay, when folks are having vacations and things like that, and don't get around to paying off their bills. That's exactly what occurred as we look in Q4, we would probably expect to run about where we are in Q3.

OK, had a run rate of 25 cents in cash EPS, you're talking about $1 next year. I'm trying to think what could be some bigger drags that are reasons for being so conservative with some of these numbers that you're giving out.

Well, I'll take a stab at it, then kick it over to Mike. But, I think from our viewpoint, it's October. We think we can do our -- we're in good shape to do our 12, 15, 18, which is our growth model. For sure do we have nice momentum going into next year? We do. But there are number of things out there that can sneak up on - I mean for example, less I doubt it will happen, but let's take the case of U.S. dollar craters again next year.

What that could mean is we probably lost a dime off our earnings this year, it could be another dime next year. The good news is obviously it's meaningless from cash flow, cash flow stays the same revenue, will clip along and eventually reverse itself and flood in '05, 06, 07, but it could happen, so, we're going to be pretty cautious

and come out of the box here and say what we're comfortable doing, and that's, that's what we're comfortable saying at this point.

OK, thanks a lot. Nice quarter.

Sir, next question comes from Andrew Jeffrey of Need ham.

Good afternoon. How many different utilities processing platforms are you currently running?

If you break it out between the types of businesses, the best way to look at it. We have a regulated platform that we have started with our, so far our only major regulated account that we Puget sound, then you look to the deregulated investor-owned model, which is a different platform, and then our recently-acquired sub metering platform. So you really have to look at it from each of those three specific ones.

Within the deregulated, we have a couple of platforms that we're focussing on, but we'll most likely, that's one of the topics for 2004, as the industry continues to look at deregulation, is there ever a way to have a deregulated system operate for regulated accounts, and is it really worth putting in the uniquenesses for each of those, and is it going to be more expensive than the leverage, so if they get closer and closer together in terms of functionality, and all of the rating systems and inspections that might make sense, but right now we'll leverage the ones within those primarily three target markets.

Are you comfortable with two deregulated platforms, or would you be desirous of going to one or would you add a third if your customer asked you to?

Our long-term strategy would be to focus on one system. Right now with the infancy of the deregulated billing environment, with each of the PUCs having their own kinds of billing and rating kinds of systems, don't give you the -- quite the same ability to focus like you would in a Master card or Visa world, where you have industrywide, countrywide rules defined.

As the industry matures, we think we'll get there, but that will be several years. So, we will continue to operate, and if another customer brought one on that made sense, that they thought comfortable with us as their provider, and knew that we were their best long term solution to ultimately getting the lowest costs, yes, we would take others on, but it's not to say that's what our strategy will be long term.

Great. Thank you.

Your next question comes from Charles Trasin of America's growth capital.

What is the run rate revenue of the utilities business right now?

I think our guidance was we did about $80 million last year. We expect to do a bit north of 120 this year, so it's -- I would use a little bit north of 120.

Even accounting for the acquisitions and deals in the last few months? I mean run rate after this quarter?

Yes, that would add a little bit more to it. I'll tell you, our goal for next year would probably be to get north of 150, 150, 160.

Exiting '04?

We're somewhere between 120, and where we want to be in '04.

What's your appetite for additional MNA in that area? Is that where you're focusing on acquiring more businesses in utility?

We'll continue to look at that. We think we have a strong reputation in the area, particularly certain segments that are very fragmented that would lend it self to some smaller rollup opportunities. We very much take a look at those. You bet. That's probably -- if you look at our three segments of the business, the one that lends itself a little bit more to the acquisition arena would be in that utility arena.

And, yes, I think as you guys have got to know us the last 10 quarters, we don't do big stuff.

Right. Any additional key sponsors in the next couple of quarters that are up for renewal in Canada, and if you started talks with them?

As we've mentioned before, we have two major sponsors, both the bank of Montreal card business that's due up next year. I believe that goes out through November of '04, right now, and we're -- and have been in discussion for a good period of time, but would expect to bring that to conclusion here rapidly soon, and then shell Canada is the other major sponsor that is coming up, I think, earlier in '04, and we're in negotiations with them right now, too. But going fine.

OK. Great. No comment on starting the call in the middle of the third inning by the way?

I was going to say it was we won nothings Yankees when we started.

5-4.

5-4? Who?

Yanks.

Oh, man, go Socks.

Next call, please.

Your final question comes from Lou Misousia of Lehman Brothers.

Congratulations guys on a great quarter. This is Jordan (ph) for Lou, what was the cash balance last quarter since the numbers declined quite a bit?

Yes, cash balance was north of 100, let me check, about 130, I think, and we're probably down closer to 50. So over $50 million of that was the merchant float issue. We had it for three days in the Q2, and we only had it for one day at the end of Q3, so that was over $50 million of it. And then the remainder would be, if you were to lock at my core debt, we took that from 185 to 150 public so that it was down 30, and that's essentially where everything went.

Great. And also the last question, have you guys thought about moving some of the centers to India, in terms of production, cost reduction, et cetera?

We have been looking at a variety of opportunities just from an evaluation perspective, but have no plans at this point.

OK. Great. Thanks, guys.

Thank you.

I think that was our last question. I again want to thank everybody for participating. We're certainly excited bout our momentum as we've said before. We look forward focus all our clients, and really focusing on integrating our marketing and transaction services models across all of our growth segments. And lastly, as I mentioned when I came to the company, to all of the associates here, we pride ourselves on delivering what we promised, and we look forward to continuing that in the future. So thanks everybody. Look forward to the next quarter.

This concludes Alliance Data Systems Corporation third quarter 2003 earnings conference call. You may now disconnect.