Bread Financial Holdings Inc (BFH) 2004 Q2 法說會逐字稿

Good afternoon. My name is Derrick and I will be your conference facilitator. At this time I would like to welcome everyone to the Alliance Data Systems second quarter 2004 conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer period. (Caller instructions.)

Thank you. I would now like to turn the conference over to Ms. Julie Prozeller, of Financial Dynamics. Please go ahead, ma’am.

Thank you, operator. By now you should have received a copy of the company’s second quarter 2004 earnings release. If you haven’t, please call Financial Dynamics at 212-850-5608. On the call today we have Mike Parks, Chairman and CEO and Ed Heffernan, CFO 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 company’s earnings release and the other filings with the SEC.

Alliance Data Systems has no obligation to update the information presented on the call. Also on today’s call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliations of those measures to GAAP will be posted on the Investor Relations website at www.AllianceDataSystems.com.

Now with that I’d like to turn the call over to Mike Parks. Mike?

Thanks, Julie. Good afternoon and thank you for joining us. Our agenda as usual is to spend a few moments reviewing our highlights of the quarter, with a focus on our three growth engines. Ed will then review in more detail the financial performance and then we’ll talk about the outlook for the remainder of the year. At the end we’ll take your questions.

Before we go to the next slide, there’s one noteworthy item I’d like to mention. In June, Standard & Poor’s announced that Alliance Data has been added to the S&P mid-cap 400 Index. We believe this inclusion into the S&P 400 acknowledges our consistent growth and stability as well as a great recognition of the performance of our 7,000 associates across North America. Congratulations to all of you who are listening in. Thanks and great job.

All right, let’s turn on to the next slide and we’ll talk about the highlights for the quarter. We posted another great quarter. Revenue came in just over 300m, or 20% increase over last year. And an important note, this is 100% organic. EBITDA increased 29% to 59m and our cash EPS was 37 cents, 54% increased. All three growth engines; Utility Services, Private Label Services and our Loyalty AIR MILES program all continue to drive the strong performance.

Starting on the next slide, let’s take a look at Utility. Our Utility group continues to deliver strong and steady results. This quarter we announced and implemented our CIF solution for the Metropolitan St. Louis Sewer district, serving 430,000 customers. Our solution offers them highly flexible customer management services as well as increased functionality.

We’re right on track to deliver the three to four new clients as planned for 2004. This includes Entergy, an integrated energy company that delivers electricity to utility customers in Arkansas, Louisiana, Mississippi and Texas. I know some of you have seen an announcement about a letter of intent in the local press. We will serve as their strategic partner as they expand their footprint into the Texas market. We’ve not signed a contract. We’re hopeful that in this coming quarter that will be concluded and we’ll share more details in that formal announcement.

We also remain on track converting Orlando Utilities Commission Customer Information and Billing system. Orlando is also one of the country’s largest municipal utilities.

All right, let’s turn to the Private Label group, another outstanding quarter. Last month we announced our agreement with Little Switzerland, a sub of Tiffany. They operate duty-free stores that sell fine jewelry, watches, gift ware and other luxury items. This win, along with our earlier announcement, Design Within Reach and Peebles, keep us on pace to deliver the three to four new Private Label clients this year.

We also announced that we extended the relationship with The Buckle for another five years. They operate over 300 apparel stores for young men and women.

Key metrics for a minute. The business is continuing to perform very well. Credit sales increased 16% over last year and we see growth coming from core and new portfolios alike. As we have mentioned on earlier calls, card holder spending remains solid, despite being some slow down in retail sales last month. Growth in portfolio balances grew 19% over second quarter 2003. This increase reflects the success we’ve had over the last two years in securing new businesses, including great names like Stage Stores, Eddie Bauer, Anne Taylor and [Fortuna].

Now turning to the Loyalty group and AIR MILES program. If you recall, last quarter we announced the launch of the BMO/WestJet/AIR MILES tri-branded card, providing yet another new growth opportunity for our AIR MILES program. The card provides enhanced opportunities for collectors to earn reward miles while bringing a unique set of MasterCard and WestJet benefits. While it’s been in the market less than three months, we are very pleased with how it’s tracking to plan.

The card is another example of how we attract new collectors and enhance existing collectors’ participation in the program. Over the last 12-months our collector base grew nearly 7% and in Quebec our growth rate was double that. Now more than half of all Quebec households have enrolled in the AIR MILES program.

For the quarter reward miles issued and redeemed grew 12% and 27% respectively. This growth demonstrates the ongoing strength of the program, whose success is defined by a higher and active collector base, a wide variety of sponsors where collectors can shop and earn miles and a broad array of reward options that appeal to collectors.

Turning to the next slide and the full year outlook, we’ve had an exceptional quarter. Each of our growth engines are performing and turning in strong results. Our business drivers are all moving just like we like and we’ve effectively executed on our new business plan, as demonstrated by top line for this quarter and our organic businesses. Having said this, we’re comfortable with raising our guidance for the year to $1.44-$1.48, an increase of 40% over last year.

This new guidance reflects one, solid performance and operations, including new client billings as well as day to day delivery excellence. Two, a completion of our $500m asset backed deal in May that enabled us to lock down very attractive five-year fixed rate. And lastly, a continued spending on our future growth initiatives research and pilot activities.

All in all it’s been another strong year and we fully expect to end the year strong as well. For more details on the financials I’ll turn it over to Ed.

Thanks, Mike. If you turn to the slide, 2nd Quarter Consolidated Results we can start there. As Mike mentioned, no question that we believe we had another pretty good quarter. Q2 marked our 13th quarter as a public company and further extended the track record of delivering or over-delivering on what we promised.

Starting with revenues, they’re up 20%. And that’s, again, as Mike mentioned, all three of the growth engines. And that would be Loyalty AIR MILES, Utility services and Private Label services enhance all three reporting segments, contributed solid double-digit growth.

The significant book of business put on over the last couple of years, plus solid performances from our more seasoned client base, drove the results.

[Indecipherable] EBITDA, which came in around 70m, is up close to 30%. This better than expected performance was achieved, despite having to contend with an usually strong Q2 last year for our Loyalty AIR MILES group.

Operating EBITDA, which is the proxy for operating cash flow, grew over 30% to 77m, which was about 8m above reported EBITDA. And it continues on track to run about 20m ahead of reported EBITDA on a full year basis. And finally, cash EPS jumped over 50%, to 37 cents per share.

To sum up, the results were certainly above our expectations. The results cut across all three of the growth engines. We didn’t see any weak spots and the results were entirely organic, basically meaning there hasn’t been any M&A activity so far this year.

We’ll talk a little bit about our outlook later on, but based on the first half of the year and what we’re seeing as we look into Q3, it looks like it’s time to move up our guidance again. But first, let’s hit the segments.

Segment results; first up is Transaction Services, which houses two of our three growth engines. That would be Private Label services and Utility services, as well as being the home of our traditional merchant acquiring business. Understanding the segment is pretty straight forward. Basically two items drive results. First, look at the number of statements generated, since this captures the activities of both Private Label and Utility Services.

Combined, these engines achieved statement or account growth of 17% in the quarter. Of equal importance is the ability to maintain pricing power while growing statements. And once again, pricing remained firm during the quarter. Firm pricing and strong mid-teens growth in the key driver, cover over 80% of the segment’s results and 100% of its growth, the remaining piece being our traditional merchant bank card business.

Behind the growth was the huge book of business put on over the last couple of years, plus solid performances from our more seasoned base as we mentioned before.

On the Utility side, last year’s signings of folks such as AEP and Centrica in Orlando, combined with the [Oracom] and CBSi Talking acquisitions, continue to drive growth. With St. Louis up and running as well and a couple of more to come, Utility services remained our fastest growing engine.

Private Label, same deal. Last year’s signings, which included Eddie Bauer, Spiegel, Newport News, Stage Stores, American Home, Shop At Home, Fortunoff, they continue to do well. Add in the three deals announced so far in 2004, that would be Peebles, Design Within Reach and Little Switz, and things look pretty good.

Looking at the full year picture we expect another solid year of double-digit organic growth in this segment for both revenue and EBITDA.

So let’s talk a little bit about Credit services, which continue to outperform. This performance at a high level can be explained by three things. One, the significant book of new business put on during the last couple of years. Two, the solid performances achieved by our more tenured clients, despite the so called “headwinds” afflicting the consumer. And three, continued good news on operating expenses.

Let’s walk through the four key drivers of the P&L in this segment, which are credit sales, portfolio growth, funding costs and credit losses. The first, credit sales, continue to track well above plan and came in at 1.5b, a 16% growth rate. Credit sales drive earnings in two ways. First, we earn merchant discount fees on every purchase. And second, a portion of sales turn into new cardholder balances, which eventually drive finance charge income.

During the quarter sales were very strong and cut across both existing clients as well as the newer ones. Regarding overall consumer spending trends, our 10m active card members have yet to show any ill effects from the much publicized economic headwinds, such as high gas prices and climbing interest rates. We just haven’t seen it. We believe this is due to the strong loyalty focus of our card programs as well as the prime credit quality of our typical customer, which demonstrates the strength of the model.

Moving along, regarding portfolio growth, which is up 18%, same factors were at work. On the operating expense front we saw a continuation of positive news. Credit losses, which tend to seasonally peak in Q2, came in just under 7.5%, a bit ahead of expectations and solidly below last year at this time.

Looking ahead, we expect the typical seasonal pattern in Q3, where credit losses start to drift lower, that is, improve. And overall we’re comfortably tracking to come in a bit better than our 7.5% full year target.

Same story for delinquency rates, which while they don’t hit the P&L, they do give us a very good look at future credit losses. Again, we’re comfortable that rates will continue to beat our 6% target.

Okay, finally funding costs remain steady as we completed a 500m asset backed bond deal during the quarter. This essentially involved much of our new business from the last two years, which had been seasoning in private funding vehicles. We moved them from floating funding rates and locked it all down at fixed rates for the next five years. We will be looking to do one more deal this year with the objective of being able to enter 2005 essentially fully locked down. So that a rising rate environment shouldn’t impact the business in any meaningful way.

Wrapping up credit, another strong one, with the rest of the year shaping up nicely so far.

Finally, marketing services, which is our Loyalty AIR MILES program in Canada, had a very strong quarter. As miles issued and miles redeemed both rose solidly in the double-digit range. This activity helped drive revenues up over 18%.

Regarding EBITDA, Q2 of last year was unusually strong, while Q2 of this year included some marketing and advertising expenses that had been delayed from Q1. CapEx was a non-issue and for the first six-months of the year, revenues and EBITDA are tracking solidly to another year of 100% organic double-digit top line and EBITDA growth. With all major clients renewed in the launch of the WestJet/Bank of Montreal card, AIR MILES continues to roll.

All right, that’s it. Let’s turn to the balance sheet. A couple of items. First, talking about capital structure and strength. Our key metric is core debt, which excludes CDs, divided by LTM operating cash flow or operating EBITDA. It's important, since this is the key ratio used in all of our debt covenants, we target two times or less ratio to be consistent with what we believe is an investment grade profile.

For Q2 we ended with around 150m of debt and 280m of LTM operating cash flow, resulting in a ratio of well below one time. Solid free cash from operations continues to drive down this ratio. All in net debt, which includes core debt in CDs and cash, improved by $150m, versus Q1, due to the strong operating cash flow plus the securitization deal, which freed up the balance sheet.

Deferred revenue of 465m, relating to our Canadian business, was flat to Q1. The strong redemption activity moved revenue from the balance sheet to the P&L. Versus a year ago, it’s up around 35m.

That’s pretty much it, nothing else new to see on that front. Overall rock solid and getting stronger. And let’s now turn to full year outlook.

To review, during our Q1 release we raised guidance to $1.30-$1.33, representing a 26%-29% growth rate year over year. Based on Q2’s over performance and additional upside for the remainder of the year, we are now expecting full year earnings to come in around 40% higher than last year’s $1.03. Specifically, we think that $1.44-$1.48 seems about right.

For Q3 and Q4, we expect over performance to continue. Note that some of the over performance will be a bit dampened as CapEx will probably ding Q4 just a little bit and Q1’s delayed marketing and new product rollout expenses will hit both Q3 and Q4.

Okay, on to free cash flow, next slide. Almost done here. Looking at free cash, we moved that higher as well, from $1.60 to $1.75 per share. Our free cash flow reflects the benefits of certain profits generated and cash received in our Loyalty AIR MILES business that are deferred for accounting purposes. Also included are CapEx costs, interest payments and taxes.

As such, pure free cash flow of $1.75 runs about 25+ cents higher than our expected cash EPS, our reported number, which is targeted at $1.44-$1.48.

Let’s now wrap up with the top questions that Mike and I have received over the past quarter. No question, the three keep coming up over and over and over again. So hopefully we can hit them head on here.

Impact of rising interest rates? We have already locked down large, large portions of our funding book. And again, the impact of rising interest rates does relate to the cost of financing those balances on the Private Label cards. Again, we’ve locked down a huge chunk of the book and we have one more deal to do. That will be in the fall. The way rates are looking right now, even if rates move up a considerable amount, we should still be able to refinance that deal without having a higher rate.

So, the deal that is maturing is at a higher rate. We think we should be in real good shape going into next year. Our number one goal right now is we want to enter 2005 basically 100% locked down. And I think we’re in good shape to do that. So far so good there.

Foreign exchange rates? Clearly, things were a little exciting last year. Things have now pretty much settled down, where Canadian-US rates have been relatively stable, really since a year ago, May, with everything around 75 cents. FX did add about 2 cents to our Q1 results. They were neutral in Q2. We expect it to be neutral in Q3 and maybe a penny or so negative in Q4. But nothing too exciting. Overall relatively flat for the year. It's just how it flows out in the quarters. So we expect that to be in good shape as well.

And then finally, the biggest question has been around consumer spending and what we’re seeing. In two of our growth engines we don’t really think it’s relevant. We don’t think consumer spending will really move around the results in our Utility or Loyalty business. However, we did want to take a look at our Private Label business. We do have 10m active card members. And what are we seeing? I mean, we all read the same stuff in the paper and it suggested that June was a little bit lighter than the first part of the quarter. But we didn’t see it show up in our numbers.

We think part of it had to do with our card members tend to be extremely loyal, very sticky, they use the card as a loyalty tool, not as a financing tool, they’re prime quality credit. I think our opinion here is that the headwinds that we all hear about with higher gas prices and higher rates and everything else out there probably impact not the prime segment of the population. And since we only deal with prime quality credit, we haven’t seen any of it show up yet. So far so good on that front.

That being said, I’ll kick it over to Mike.

Thanks, Ed. Well, as I said earlier, great quarter. We’re excited about the rest of the year and we’ll take your questions now. Operator?

(Caller instructions.) Your first question comes from Dris Upitis, with CSFB.

Hi, thanks. Nice job in the quarter, guys. First of all, could you help us quantify how much of a delayed first quarter expenses on marketing services were picked up in the second quarter and what we might think about for a normalized margin in that unit for the full year?

Yes, I think probably if you were to look at the consolidated level first, Dris, the Q1 delayed expenses of let’s call it 5-6 cents, that would include both the Canadian piece and the US piece, we pretty much returned to normal spending on the US side in Q2. And Q3 and Q4 probably are going to pick up the load in terms of they’re going to be absorbing a couple of pennies each quarter there from the Q1 deferral.

From the Canadian side, I would say probably 2m would be a fair number. That we think going forward on a full year basis, we would expect the business to track to probably mid-teens EBITDA growth.

Okay, and the 2m you mentioned in Canada, was that basically from 1Q to 2Q or is that spread over the rest of the year?

No, from 1Q to 2Q.

Okay. And then you mentioned the lower delinquency rates and that should start to translate into credit losses the rest of the year. Can you give us a little better sense of the magnitude of that, potentially, on the credit loss side?

Well, I can try. I think clearly the trend is moving in our favor. If you were to look at Q2’s loss rate, versus Q2 of last year, we probably picked up about 40 basis points, which is fairly significant. If I were looking at Q3’s loss rate versus Q3 of last year I would probably say there’s another 40 or 50 basis points there as well.

So I think as we look out for the remainder of the year, right now we would think last year’s total loss rate came in at about 7.5%. This year we’ll probably come in in the low 7, so probably a 30 or 40 basis point improvement on a full year basis. To the extent more of it breaks through, it’s a little bit too early to tell right now, but certainly things are heading in the right direction.

Yes, definitely. And then lastly, just on the consumer spending trends, Mike, I think you mentioned despite a slowdown in retail sales. Was that a comment on the industry? And then can you just give us a sense for how things look so far in July?

Yes, it was commentary on general industry retail spend, not our particular client segment. And I think everyone’s read in the paper, most people think that’s kind of a blip and continues. July so far seems to continue to be pretty strong.

Your next question comes from Jim Kissane, with Bear Stearns.

Thanks. Hey Mike and Ed, great job. Is it possible to break out how much of your growth in the credit business and I guess in the transaction business as well, is coming from the new programs that have ramped up over the past two years? And then if you can look at those new programs, are they ramping consistently or are there some of them that are ramping faster and some of the factors on why that would be?

I can take a stab at it. If you were to look at portfolio growth or even credit sales, which I think you’re heading towards, it will also show up in the statement growth. In other words, statement growth, portfolio growth, credit sales growth, they’re all kind of hovering around that mid-teens level. And that’s why both of the segments should line up.

If I were to look at the growth rate, I would probably, let’s say credit sales are running 15% and I’m swagging it a little bit, Jim, I would say there are three layers to what I call the birthday cake. I would say the first layer is the core base that has been around for three years or more that is fully ramped up in terms of us having as much wallet share as we’re going to have. And that’s probably running 5-6 points right there.

I would say the next part of the birthday cake would probably be only a couple of points coming from the folks that we sign this year. So between those two layers, that’s probably half of it. And really, the big chunk, which is another 7 or 8 points of growth, are the folks that we have signed over the last 2-3 years. We are not only growing with their overall growth in retail sales, which could be 5% or so, but we’re gaining wallet share as it’s ramping up to maturity. So those are the three layers of the cake. Obviously we’re not going to get into specific clients. But right now it looks like across the board, the general statement is things look pretty strong.

And would that 7 points be consistent with your history or are these better brands, better retailers?

I’ll probably kick it over to Mike, but it does seem like people are embracing the Private Label product as a Loyalty tool a little bit more, a little bit faster. They are putting their shoulder into spending the money to get these programs off the ground, up and running. Because again, we’re not out mailing a bunch of stuff out to folks. This is all done in the store and a lot of it depends on the retailer stepping up and working with us. And I think as a general statement, they seem to really be, as I call it, putting their shoulder into it a little bit heavier.

And it also depends on the mix, too, between converting an existing file, versus a startup from scratch. Obviously someone’s going to have high percentage growth rates when they’re starting from a startup position, versus starting from a position of having had a program.

Just following up on that, Mike, if you look at your short-term pipeline, would it be skewed towards brand new programs or existing programs that you’re taking on?

About 50-50. It continues to be, any given point, getting on the 12-18-month kind of outlook that we’d look at the prospect pipeline.

I’d say the three that we announced so far this year, Peebles was an existing program we took over. But the other two, Design and Little Switz were both startups. So that’s probably a good ratio to us.

Okay, but one last question. Ed, you said you’d probably do one more asset-backed deal this year. At current rates, if they just hold steady, would it create savings or is this more of lock down?

Right now it would certainly create some savings.

Your next question comes from David Scharf, with JMP Securities.

Hi, good afternoon. Ed, I’m wondering, in the credit business, is there much pricing leverage from here, when you think about the rates you’re charging as well as the one-time fees? I mean, is there any possibility that a rising rate environment benefits you at all or on the fee side, annual fees, renewals, other things like that to cardholders, is there any leverage there?

Yes, obviously, I think 90+% of our fees are fixed, so we’re not going to get a lift on the fee side, except for that small remaining piece that is at variable. So you have fixed rates on the assets themselves. We try to lock in fixed rate funding. So to the extent there’s a bit more of a pick up going into ’05 on the funding side, we’ll wait and see. Certainly we’re not going to be hurt on it, we don’t think.

So, I would say the leverage as we look, going into 2005, 2006, probably going to be coming from can we continue to drive credit sales and drive that merchant discount income into the segment? Can that in turn turn into new balances, which drive finance charge income? And then the third driver would certainly be credit losses right now look like they’re heading in the right direction. So I think that’s where you’re going to see a lot of the growth come from, and less from sort of the overall refinancing of the existing book. So, that would be my guess going forward. Clearly on the operating side, hopefully we’ll get some general lift in overall margins as we grow.

Just a point of clarification. We don't charge annual fees to any of the Private Label. That tends to be a bankcard kind of program.

I see. Now what about thinking about normalized margins in the Private Label business. It seems like when credit sales grow into the mid to high teens your EBITDA margins are well north of 20%, when they’re more in that 10-12% long term portfolio growth range, the EBITDA margins are in the mid-teens. How should we think about modeling this over the next few quarters or better yet, going forward, are there any new thoughts on what normalized margins are in the credit business?

Boy, that’s a good question. If I were to go back to ’03 I think we were more in the high teens. As we look into this year, we seem to be running more in the low to mid-20s. I think certainly we would probably put them all together in the low-20s as sort of a starting point for us. And then of course you’ve got to see where credit losses and merchant discount fees are heading from there. But that’s probably a fairly good place to start.

Okay. And lastly, in the AIR MILES business, Ed, it’s about four quarters in a row where we’ve seen redemption activity growing well above the 20% level. And you’ve talked in the past about how obviously you don't want to curtail that. That’s ultimately how you help your customers. But the formula that you kind of stuck to about growing miles issued 10% and miles redeemed 20%, should we still think about that or is there anything in your business that tells us redemption activity is going to be more in that 25+% for the foreseeable future?

Listen, I’d love to say that we expect that to continue, because obviously that’s great news. But if you’re correct in saying the last four quarters we’ve been 20%+. But if I remember last year, on a full year basis, we came in right at 20, and I think that’s probably a pretty good number to use for this year and probably around 10 on the miles. It's our 10-20 model that we throw out there. And as we all know, it chops quite a bit through the quarters. But I think last year, I’d have to look, I think we came in right at 10% miles issued and 20% miles redeemed and I think we’re probably heading there this year as well.

Okay. So you’re not seeing any increased promotional activity by your sponsors that’s leading to increased redemptions on a more sustained basis?

Nothing that would suggest it.

Not enough to change the long-term model.

Your next question comes from Tien-Tsin Huang.

We must have lost him. Why don’t we try someone else and come back to him in a minute.

Your next question comes from Greg Smith, with Merrill Lynch.

Good afternoon, guys. First question, just any reason we shouldn’t expect the normal kind of seasonality in the business? And I guess I’m looking at revenues by segment, but really it’s the same overall, where we should see kind of sequential upticks in Q3 and Q4, just given seasonal kind of spending patterns, things like that?

That’s a good question. We think we’ve baked in some pretty good growth for Q3 and Q4. Our expectations right now, certainly on a top line perspective, is we would expect Q3 certainly to be flat to Q2, if not slightly up a bit. So I’d say yes to that one. And then Q4, gosh, it’s a little too early to call that, but I would say that should be running a bit ahead of Q3. So I would say yes, it should follow the typical seasonal pattern. How much those increases will be, we don’t know right now.

The only thing I would comment on is if you bring it all the way back down to EPS, we do want to make sure folks remember that Q3 and Q4 will also be eating some of the Q1 delayed Canadian marketing and US product rollout of probably a couple of pennies each quarter and probably a penny on FX staying in Q4. But other than that, it should be running pretty strong.

Okay, that was exactly what I was looking for. The Entergy deal, what’s the hold up from an actual definitive agreement being announced?

It's just the normal process of contract language and discussion, nothing unusual. The primary reason for kind of the early press announcements from the client perspective was just kind of a PR in their own home state. It is not a traditional way we like to do it, but they were very strong in their desire to do it and we said, fine. So we’re just in the normal process. We expect something here this quarter.

Okay. And then just to shift back to kind of modeling and looking ahead. I know I hate to nail you guys down to anything on ’05, but is there anything you see? You’ve had this tremendous out-performance these first couple of quarters. When you add it all together and think about ’04 and start to think about ’05, is there any reason why you don’t see yourself kind of reverting back to the long-term model you’ve given?

Well, certainly we’re far away from ’05 and probably won’t get to that kind of guidance until our normal end of year discussion. We’ll always guide toward our long-term model being our focus and we hope to do at least that well. So as we get closer to the end of the year, we can give some better guidance for ’05.

Yes, I think to Mike’s point, if you look back at what we’ve done in the past, usually in October we come out and we kind of look into the following year and take a look at guidance. But as Mike alluded to, we don't see any cliff out there right now, so we’re probably feel pretty comfortable with maintaining sort of our consistent approach of here’s our long-term guidance and that’s our starting point.

Okay and then just one last question. On the competitive front in the Private Label business, I mean at least from what we’ve seen it looks like the usual cast of characters. Anything changing there, new entrants? And then also on the Utility side, you’ve mentioned Accenture before and anything changing in the dynamics in either of those businesses?

No. It's very much consistent with the historical competitors. In the Private Label, been around for a long time, all the finance groups, obviously. And on the Utility side it tends to be, as you probably came to know, investor relations, very much the barbell approach. It's going to be folks like us on one end of the spectrum have set deep strategic relationships and integrated pretty much into their day to day along the billing, customer care, collection and marketing, which is our hallmark.

Or clear to the other side of the barbell, they would seem to be the entrance of the Accenture and Cap Gemini to the very, very broad, as opposed to the very broad pole climbing HR, everything under the sun. I’ve only seen two of those, haven't seen much of that come up from an RFP perspective in the pipeline. So I don’t know if that’s going to be a long-term comparative model. But certainly those are the two that I think will probably be there for the long-term and anybody that wants to compete is going to have to fit in there. You don’t want to get caught in the middle of the barbell as we’ve often talked about.

Your next question comes from Andrew Jeffrey, with Needham.

Hi guys, good afternoon. You’ve talked about some of the drivers that have been good for credit services. Could you just reaffirm that nothing sort of fundamentally in the way you look at the business has changed vis-a-vis credit underwriting or along those lines? The growth in the average securitized portfolio is pretty impressive and it looks to be accelerating. So I guess two questions. One, is anything sort of changing underneath that number? And two, can we expect that kind of growth to be sustained for the balance of the year?

I’ll take a shot at it. From a credit side, certainly nothing’s changed there. We’re still targeting the same type of median FICO. We are seeing, Andrew, better results. There are people out there a lot smarter than we are when it comes to explaining it, but the idea of whatever headwinds are out there, they certainly seem to be overwhelmed at least by the stronger employment picture and the stronger just those [indecipherable] come up, at least our 10m cardholders. So I would say that’s a positive trend. But we haven’t picked up the actual credit screening itself. It's pretty much the same gold.

In terms of the growth rate itself, for sure. It's been very, very strong growth. We would expect the strong growth to continue for the rest of the year. Don’t forget that in Q4, that is the anniversary of when we brought on Stage Stores last year, which was a $2m file. So, while results we expect to be very strong, clearly you’ll see a little down tick in terms of growth. But the results should be very strong. So I don’t know if that answered your question. I don’t see really anything else out there.

(Caller instructions.)

All right, operator, I think we’re done for the day. I just want to wrap up and say thanks to everybody for joining. We’re excited about the year and we’ll talk to you next quarter. Take care.

That concludes today’s Alliance Data Systems second quarter 2004 conference call. You may now disconnect.