Bread Financial Holdings Inc (BFH) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Nickie [ph] and I will be your conference facilitator today. At this time I’d like to welcome everyone to the Alliance Data First Quarter 2006 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’d like to ask a question during this time press star, then the number one on your telephone keypad. If you’d like to withdraw your question, press the pound key. Thank you. It’s now my pleasure to turn the floor over to your host, Julie Prozeller from Financial Dynamics. Ma’am, you may begin your conference call.

Thank you, Operator. By now you should have received a copy of the company’s first quarter 2006 earnings release. If you haven’t, please call Financial Dynamics at (212) 850-5608. On the call today we have Mike Parks, Chairman and Chief Executive Officer, and Ed Heffernan, Chief Financial Officer of Alliance Data.

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 other filings with the SEC. Alliance Data has no obligation to abate 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 web site at www.alliancedatasystems.com. With that, I’d like to turn the call over to Mike Parks. Mike?

Thanks, Julie. Good afternoon, everyone. Thanks for joining us. Today we’ll spend a few moments reviewing highlights of the last quarter. I’ll focus on our three growth engines, and then I’ll talk a little bit about our outlook for 2006. I’ll turn it over to Ed for the review of our financials, and then we’ll take your questions after that, so let’s turn on to the next slide.

We certainly had a tremendous quarter posting the largest quarter in our company’s history for revenue, EBITDA, and cash earnings. This enormous growth rate and over performance was driven by the following: Double-digit growth in revenue and EBITDA across all three reporting segments; the ramp-up of new clients; abnormally low credit losses in the first quarter of this year, which offset our high credit losses in the fourth quarter of 2005, both a result of the new bankruptcy law; and generally favorable macro-business trend.

For the quarter our revenue was 477 million, a 27% increase over last year. EBITDA increased by 51% to 134 million, and cash earnings per share was up 63% to $0.85. As we approach our five-year anniversary as a public company, we mark our 20th consecutive quarter of meeting or exceeding our plan, and I want to take a moment to thank our management team and all of our associates for your hard work and outstanding commitment and effort. Great job.

Now let’s take a look at the quarter’s highlights starting with utility services. And on the next slide utility services had an impressive quarter delivering 20% outlying growth. We’ve gained further momentum from recent wins this quarter. In addition to our January announcement of a ten-year agreement with the Green Mountain Energy Company where we’ll host and manage their CIS platform and billing operations, we announced the signing of a multi-year agreement with Wisconsin Public Services to provide a full-service offering for their regulated natural gas customers in Michigan and Minnesota. Our services will include CIS hosting, customer care, billing, credit and collection, and outage management services for approximately 360,000 accounts. We announced in late 2005 that we will provide a full suite of billing and customer care services for First Choice Power’s 200,000 plus residential and business customers. This quarter we expanded that relationship to include implementing and supporting a points-based loyalty program. This is a testament to the business strategy of helping our clients create more loyal and profitable customers and it’s resonating in the utility market.

Lastly, we're very confident in reaching our growth targets by signing two to three deals yet this year. Turning to private label, we continue to be very excited about the private label service offering, and the first quarter has started off with a bang. The record new business signings of 2005 ramped up nicely resulting in double-digit growth in both credit sales and portfolio balances. This quarter we expanded two key relationships, both of which are Top Ten private label clients. For New York and Company and Good Use Family Stores we announced program credit card programs to complement their existing private label program to be offered to a select customer segment. The co-brand card features a points-based loyalty program to help our clients forge stronger relationships with our customers, as well as appeal to a broader customer base.

We also extended our agreement with the United Retail Group, a specialty retailer of women’s fashion apparel operating under the Avenue brand, a long-time client of Alliance Data. This new agreement goes through 2012.

As I said, we expect another strong year. We’ll continue to see the impact of new business from 2005 on the rest of this year, and we're on track to deliver four to five announcements in new business this year. Aside from the new business activity, we expect to see some upside from public trend in funding and in credit quality. Ed will cover this in more detail in a few moments, but all in all a very nice quarter.

One brief comment before we move on to our marketing business, a small client, ShopNBC, will be leaving us effective in June. It represents less than 10 million in annual revenue, and this was not too unexpected, since the parent company is GE, which is where it will be migrating.

Now let’s turn to our marketing services group comprised of Air Miles reward program and the Epsilon businesses. The marketing service group had another great quarter. Air Miles reward program, our coalition loyalty program in Canada had 20-plus% organic growth. Both miles issued and redeemed grew by 20% over last year. This program, as we’ve said before, has very solid fundamentals including the broadest sponsor base where collectors can shop and collect miles, plus over 800 rewards from which to redeem.

We also announced the acquisition of Toronto-based ICOM Information and Communication. ICOM is a leading providing of marketing data and communication solutions for the consumer package goods industry. Strategically, this further augments our database and data analytic capabilities, as well as expands our footprint into a new vertical. ICOM’s key claims include P&G, Nestle and Unilever.

Now switching to our U.S. business, we announced in February that we would acquire DoubleClick Email Solutions, an operating unit of DoubleClick and one of the largest permission-based email marketing service providers. This acquisition brings additional management talent, new vertical clients, and international presence in Europe and Asia and significant scale to our Epsilon interactive business. The combined energies will generate nearly 20 billion permission-based email communications annually.

We also signed a multi-year agreement with Citibank to provide a comprehensive loyalty solution that will support Citi’s points-based customer reward program called The Thank You Network. The program, one of the largest loyalty programs in the U.S. allows customers to earn loyalty points across their consumer products, including credit cards, checking, debit and mortgage, et cetera. This type of internal coalition, loyalty model is designed to increase frequency for an individual product while cross-selling other services. We have now created three powerful loyalty models that virtually support any large consumer-oriented business based on their objectives. Whether it’s a coalition loyalty, as in our Air Miles, or an internal model like Citibank’s or the many proprietary one-to-one loyalty programs like Hilton Honours, our collective services and expertise are the broadest fit of loyalty and marketing solutions in the industry.

Let’s turn to the next slide and talk about guidance. We’ve had an exceptional quarter for sure. All segments reporting strong results and really better than we had planned. As a result, we are raising our guidance for the year. Revenue will be raised 100 million from 1.68 billion to 1.78 billion, EBITDA from 400 million to up to 440 million, and cash EPS will move from $2.36 to $2.60 a share.

While this represents a significant increase in this year’s expectation, we actually view it as a solid base that you can count on. We also want to make sure that the company retains the flexibility to engage in new projects and invest today for our future. Specifically, we expect this new guidance to provide comfort, that a record year is underway, while also allowing us to make decisions which further enhance our earnings performance into the future. To the extent over performance continues, this would flow through as the year progresses.

Again, congratulations to the entire Alliance team. Ed?

Thanks, Mike. The slide you should have in front of you is the first quarter consolidated results. As Mike mentioned, Q1 marked our 20th quarter. Yes, we’ve made five years as a public company and further extended our track record of delivering or over delivering on what we promised.

Regarding Q1 for sure it was a tremendous quarter and by far the largest in our history. We would like to stress really two items. The first and a key take-away here is balance. This was the first quarter since 2004 where all three segments posted double-digit growth in both revenues and EBITDA. And second, all of our key drivers also show double-digit growth from 10% per statements generated to low to mid-teens for credit sales and portfolio growth to 20% for miles issued and redeemed. This bodes extremely well for the rest of ’06.

Revenues, they grew close to 30% as Air Miles, Epsilon, Utility and private label all grew near or above 20%. EIBTDA powered ahead 51% and again all units contributed plus an extra kiss from abnormally low credit losses.

Operating cash flow, that is operating EBITDA, was also up 50% and is expected to run at least 25 million ahead of reported EBITDA. Then of course finally cash EPS surged over 60% as strong business results combined with strong free cash flow drove earnings. So as promised, here is no pause for ADS in 2006, so let’s go ahead and hit the segments.

First up is Transaction Services, which houses private label services, utility services, and our traditional bank card business. Once again, as we talked about and as we promised last year, the momentum continued to build. The combination of a huge book of private label wins last year like The Gallery, Hanover, Blair, Crescent Jewelers, Gander Mountain, Carter, and the Spiegel and Newport News co-brands, plus solid traction in utility’s big new clients Direct Energy and Entergy, drove revenues up double digit and the key driver statements generated up double digit as well.

EBITDA margin was up close to 300 basis points driven by solid results across all units. With the number of client conversions coming up, we don’t expect that type of huge improvement to repeat itself every quarter, however, we're quite confident that full-year margins will be up very nicely versus prior year.

All right. Let’s talk about credit services. Despite rumors to the contrary, the demise of credit is nowhere in sight. Let’s walk through the drivers. First, credit sales came in solidly at 12% growth. The ramp-up of last year’s client wins, plus decent performance from the core demonstrates that momentum continued to build from last year to this year, once again as promised.

Second, portfolio growth at 14% confirms that our 11 million active customers remain comfortable using their cards and maintaining balances. Yields remain quite strong, once again in stark contrast to the bank card world. This is due to the strong loyalty program attached to these vehicles.

Third, funding costs improved versus last year, despite a generally rising rate environment. This is due to our ability to lock down rates several years ago. Also, note that EBITDA is a bit overstated versus last year since the interest incurred on our on-balance sheet receivables hits below the line. So if you want, you can ding it by 3 or 4 million and take it out of the below-the-line expense if you really want to do an apples-to-apples comparison. It doesn’t change the bottom line, however. Anyhow, funding costs are solid all this year.

And finally, credit losses were abnormally low this quarter, 4.2% versus 6% last year. Much of this had to do with the bankruptcy reform enacted last fall, which caused early filings to hit us for extra expenses last quarter, which we got back this quarter. The total impact, about $0.10 positive for the quarter.

Looking ahead, we expect gloss rates to normalize going forward and based on current trends should still be running a bit better than last year.

So let’s sum up private label. The momentum promised has arrived with good growth and positive news on credit sales, portfolio growth, funding costs, and credit loss causes. Overall, it should be another very nice year.

All right, let’s finish up with marketing services, which most likely will be the fastest growing segment by the end of the year. Top line growth of almost 30% was led by 20% plus organic growth in Air Miles, plus very strong growth at Epsilon. We expect Air Miles to continue to perform throughout the year as usual and we look to either fill out existing sponsor categories such as liquor, as well as add new categories such as perhaps entertainment. Regarding Epsilon, the Citibank ”internal coalition model” is quite exciting as it adds a new product to our line-up.

Equally exciting is the joining of the premiere loyalty programs found in Air Miles in Epsilon businesses with the ability to deliver customized messaging on a one-to-one basis through a permission base that is opt-in email. With Bigfoot and now DoubleClick, as Mike mentioned, over 20 billion customized messages will be sent annually. Looking ahead for this segment, very strong growth to continue.

All right. Let’s talk a little bit about the balance sheet. Three items here. First our deferred revenue balance related to our Air Miles grew about grew to about 620 million, which is up about 70 million from this time last year, and we normally run at a trend rate of about 40 million. Obviously, this is very positive news for ‘07, and ’08, and 2009 as this deferred revenue and earnings flow into the P&L.

Second, the share buy-back program. In 2005 we spent 150 million buying back just under 4 million shares at an average price of 38 per share. We have another 150 million currently targeted for share repurchases during ’06. In Q1 we spent roughly 30 million buying 670,000 shares at an average price of 44 and change, and we will continue to be very, very aggressive in supporting any weakness or pullbacks in the stock.

Finally, capital structure. Overall net debt improved 100 million from last quarter despite the purchase of ICOM and the share repurchase program. Strong free cash flow plus the post-holiday pay down of some on-balance sheet credit card receivables accounted for the strong results. Note also that despite the share buy-back program over the last quarter -- over the last year, I’m sorry plus some tuck-in acquisitions, our core debt to LTM operating cash flow or operating EBITDA is still only 1.2 times. So that means there’s lots of room for certain ”opportunities” to present themselves.

Turning now to guidance. I think Mike did a -- covered the guidance in detail earlier. Essentially, we obviously expect a heck of a year. We talked about the fact that we expect it also to be a very balanced year across all of the segments. Mike also mentioned that while we raised the guidance considerably, we view this as more of a base case, that is, what you can count on. There’s no big cliff that’s approaching our way in the latter half of the year.

So a good increase in guidance, but it allows us to make decisions to enhance performance for future years. For example, we have a new bond deal coming up. Maybe we’ll pay a little bit more to stretch out the maturity, things like that.

Regarding Q2, we expect at least a solid 25% growth and cash EPS. Not forgetting Q2, we have seasonality in the private label business, which results in lower yields and higher losses than other quarters. As people pay down their balances post holidays credit will eventually normalize. We expect that to occur as Q2 unfolds. And in marketing and transaction segments, we expect very solid results to continue.

So given this is our new base case to the extent that some additional over performance occurs, it would naturally flow through during the balance of the year. Obviously, if you did the math on Q1 and you looked at Q2 and you know us, you can view this as a fairly conservative case with clearly this type of upward bias in the numbers as the year progresses. However, as we talked about, let’s leave that for the quarters to unfold and we’ll use some of this excess to fund certain projects with some of the excess no doubtedly to flow through to higher numbers.

Okay. Moving on to free cash flow, now that EBITDA has moved up to 440 million, the loyalty cash flow adjustment will save a minimum of 25. Our operating cash flow, our operating EBITDA is about 465 million. When you take out capex and interest and taxes, our pure free cash flow, that is, what do you have in the pocket at the end of the year to help finance acquisitions or buy-backs or whatever else, is about 233 million or $2.84 per share.

Okay. Let’s move now to the top questions. Really not a lot this quarter. I did have a few questions that I think hung over from last quarter, especially about our marketing margins. Obviously, you saw in transaction services margins went through the roof. There seem to have been some folks saying it doesn’t look like marketing is really getting some leverage. We haven’t quite figured out how that can be or where that came from, but if you were to look in 2002 our EBITDA margin was 12%. In ’05 it was 16, and we certainly expect another 100 basis point pop this year. So marketing is very nicely marching up the margin curve, and we would expect it, you know, over the next few years to certainly enter the 20s as it gets more and more leverage.

And then second, something Mike and I debated a little bit, but we figured we’d bring it up anyhow and that’s the bear case. For those of you who were around and knew us for a good portion of last year, it was a fairly exciting time certainly from the market’s perspective, even though the company’s financials were quite strong. But to review very briefly what the bear case was or I guess is, it’s very simple. When you actually strip away all the noise and all the nonsense that went on the bear case is as follows, and that is that this company, the credit cycle has peaked, the growth metrics are no longer there. Their biggest position, private label, is slowing and will eventually basically cause the company to miss.

Where are we today? We’ve never had a stronger quarter in the history of the company. All three businesses are doing double-digit growth, top line and EBITDA. Specifically in our private label business growth has accelerated dramatically with double-digit growth in statements and sales and portfolio. We do not see that tapering off. We do not see 2006 being anything less than a very, very strong year for all three business.

So in our opinion, the model and the model being a loyalty-based model that the cards themselves in the private label business continue to demonstrate the characteristics that we’ve described all along, very much unlike the bank card world, and as a result you’re seeing it in the ongoing results of the company. So long story short, hopefully we’ve put this bear argument to bed at this point, because we expect, as we’ve said, to have one heck of a year.

Let’s turn now to operating leverage. We have a goal of roughly 50 basis points per year. Really, if you go back six, seven, eight years, we’ve been averaging over 100 basis points. In 2006 we actually could potentially do 200 basis points. Why? We think in all three segments, margins are going to be up. Margins in marketing will be up. Margins in transactions will be up and margins in credit will be up as well. Essentially what we're saying is the machine is cranking on all cylinders at this point.

Then finally, our typical slide that we end these calls with the 2006, the company has done against our original model of 12, 15, 18. We’ve been averaging 18, 30, and 37 for revenue EBITDA and EPS respectively. That being said, we look forward your questions. Mike, anything else?

Nope, that’s it. We’ll take questions now, operator.

(OPERATOR INSTRUCTIONS.) The first question comes from Jim Kissane from Bears Stearns. Please go ahead.

Thanks and great job, guys. Ed, are you seeing any evidence right now of your credit losses normalizing, because I think you said during the call that, you know, charge-offs be a bit better this year, but the last delinquency number I saw, I think, was 4.3%.

Yes, the delinquency themselves, again our credit losses are sort of broken into two buckets, one being bankruptcies and one being sort of aged losses that you can sort of see through the delinquency trends. The bankruptcy thing is clearly a one quarter effect that we covered in Q4 and got the benefit back in Q1, but to your point because delinquencies continue to be extremely low, we would expect the rest of this year even after the bankruptcy impact is over, which it is, we would expect to see losses running below last year. How much lower, we're not really sure. Could it be 20 or 30 basis points? I think so.

Okay. But you haven’t seen any significant deterioration just over the past month to a more normalized level?

we're beginning to see the bankruptcies beginning to start creep back up for sure, but the bankruptcies only represent about 25% of our overall losses. The aged losses, which are the ones that flow through for 180 days have actually shown some improvement.

Great. And Mike, can you talk about some of the projects or investments that you alluded to in the release and on the call?

Yes. Well, obviously we you were just talk about projects in the past like our dynamic value gift card program. We’ve talked a little bit about some of the payment cards to attract from a merchant centric perspective and look at ways to reducing interchange. There’s some pretty interesting discussions going on now between our Epsilon interactive group and the rest of our businesses. We talked last quarter about Epsilon making good in-roads with the existing Epsilon clients, but we're spending a lot of time right now with our retail group and our utility group to increase the speed with which we can grow out statement notifications and marketing communications. And then we're looking at other verticals to get in, so it’s mostly some R&D dollars looking at, you know, three and four years down the road, Jim.

But it’s all discretionary. It’s not like the billing platform consolidation of last year, right, where you had to do it eventually?

That is correct.

Okay. And if I could get one last question. I think it was $2 million in additional spending in the marketing segment. Can you give us a little insight there?

You bet. It’s really just a question, but obviously in Canada we have a fairly large marketing budget and if you were to compare it to last year there was a [pok] on that expense line. I mean, specifically if you want to know what it is, we publish a big magazine up there. Last year we published it in April. This year we published it in March. We also did a fair amount of extra TV work in the first quarter that we didn’t do last year, so it’s just one of those timing things. And that’s why as you see the year play out, what you’re basically going to see is the very nice margin improvement, will be more back-end loaded this year, like Q3 and Q4 and a little less front-end loaded.

Great job. Thanks.

Yes.

Thanks, Jim.

The next question comes from Greg Smith from Merrill Lynch. Please go ahead.

Yes, hi, guys. First question, just remind us when the ICOM and DoubleClick acquisitions actually closed.

DoubleClick didn’t close till the second quarter, beginning of second quarter. And ICOM closed for two months in the first quarter, so February and March. So there was nothing in there from DoubleClick and a few million from ICOM.

Okay. And then the financing costs, Ed, what is 8.5 million a good run rate to use or what could impact that over the next few quarters?

I would say that’s a good run rate, Greg. I think that’s a fair number. Obviously, it will be influenced by a couple of things. One, to the extent we grow additional receivables on balance sheet before the fall securitization, we’d have to probably put up a little bit more debt against that and/or if there’s some shock to the system and we had to step in on the share buy-back in a significant way, obviously that would cause it to go up as well. But barring that those two items or an acquisition, I think that’s a good number to use flat for the year.

Okay. And then the transaction services D&A fell sequentially. What was going on there?

Transaction services D&A?

Yes. Went from 14.5 million to 13.5 in 1Q ‘06. I’m just looking sequent -- well, it was down year over year, too.

Yes. There’s nothing specific there. I think just some of the ending of some of the projects that we had going on. If you recall, we had a couple of projects like the DV, dynamic value card a year or so ago that has been falling off, so I wouldn’t read anything into that. It will probably start ramping back up again.

Okay. And then just as we look at the private label business. Obviously everything is firing on all cylinders with charge-offs low, funding costs good. When does it start to become when do you start to worry about the operating profit growth getting impacted as maybe interest rates rise and the credit cycle normalizes? I mean, is this an ’07 issue or how is your visibility? I mean, I know I’m asking you to look into a crystal ball. Is this more of an ’08 issue? How do you think about that?

Well, I guess We’ll go ahead and try to look into the crystal ball a little bit. I think we're in pretty good shape when it comes to the funding because we're really -- what’s coming due this year is only about 450 million, Greg, out of a 3.5 billion portfolio, so it’s not a lot. We’ll roll that over probably into five or seven-year money. We’ll also -- we have some on-balance sheet assets that we would like to get some longer term funding on as well. That will still leave us with a huge chunk of the portfolio that will have step-downs in their interest rates on a go-forward basis.

So long story short is if there continues to be an upward shift in the yield curve, and again, we key off of the five-year money, which really hasn’t moved all that much, we should be in good shape I would say through ‘07. ’08 there’ll probably be a little bit of a head wind, so that’s the funding side we're not too concerned about.

On the credit quality in the credit law side, obviously we're seeing numbers We’ve never seen before. We thought last year’s average of about 6.5% was about as low as it would go. Obviously, we have the bankruptcy benefit so far in the first quarter. That will begin to normalize, but I’ve got to tell you. Based on the delinquency trends that are still lower than last year, and have nothing to do with the bankruptcies, we would expect really the bulk of the losses, the aged losses to continue to drift below last year throughout the remainder of this year. So do we drift from a six down to a five -- I’m sorry, like a 5.5 for the year. It’s possible. Let’s just say just from 6.5 to about 6% for the year. I think that’s probably more reasonable. And then as we go into 2007, we're already seeing delinquencies in, what month is it, April that give us a very nice picture 180 days out, and we are seeing absolutely no upward pressure, that is deterioration in those delinquency numbers.

So as far as we can tell, things look very, very good on the delinquency side and the law side, and really what we're looking at more in ’07 is obviously a little bit of a grow-over issue in the first quarter, because of the bankruptcy sort of one-time benefit. But other than that, we would expect ’07 to be a very stable year for loss as well.

So that sort of takes of ’07. You're now moving into ’08. We think there’ll be a little head wind on the funding side, and on the law side, look, it’s tough to tell. I can’t look out that far, but we think even if the macro environment really deteriorates, the biggest we're going to get whacked would be about 50 [bips] on the portfolio.

Wonderful. Thank you.

Thanks, Greg.

The next question comes from Tinjin Way [ph] from JP Morgan. Please go ahead.

Thanks and congrats on the results. First on Air Miles. Looks like issued and redeemed metrics were very strong and really as high as I can remember. Can you give us more detail on what’s driving that? Is that a direct result of the increased marketing on your end or is there something macro going on?

Yes. It’s as we said in the past over and over again, never look at Air Miles just on a quarterly basis, because things can jack around quite a bit throughout the year. Obviously, I would say I’ll state the obviously. It’s a good thing it started off as strong as it did. A couple of comments about the really the super-strong issuance. Part of it was tied to a very, very successful ongoing rollout of the tri-brand card and the Bank of Montreal credit card business up there. Very successful first quarter and this is a big national program.

The second, although we won’t give the name, one of our large grocers up there was very active with promotional miles where if you buy certain products you can get two for one or three for one or something like that. So that really drove the extra high issuance on the redemption side. Another great question. Very strong interest in the gift cards and the certificates, but what was interesting in the first quarter, and I don’t know whether it was just the super cold winter up in Canada or not, but the flight segment really, if you’ll pardon the pun, took off and there was very a lot of activity on the flight side.

So that’s basically the drivers that kicked it to 20 plus on both of them. I would not expect this to be a normal run rate for the year, but do we certainly expect double-digit growth in both mild issued and regained for the year? You bet.

Gotcha. And then I guess in the U.S. Epsilon business, the Citi win was interesting given Citi’s position I guess as a competitor in your private label card business. What put you over the top there and was this a competitive win? And maybe if you can size the bill for us on a relative basis in terms of revenue and margin relative to some of your other larger marketing clients, I think that’d be helpful.

We’ve had kind of an ongoing working relationship with the Citi guys for a bit of time, Tinjin, and certainly it was competitive, but we kind of had an inside track. We’ve been practicing different kind of programs with them, so we're very excited about it. Yes, it will be a significant contract, at least a 5 million this year for that business. I don’t want to speak to individual client deals and prices and margins and things like that on the particular account, but no question We’ll have a good, long relationship with them.

Yes, I think to Mike’s point, this year it’s just really scratching the surface to the extent that the products all across the Citi Group family be inter-rolled onto the platform. Obviously, there’s additional revenue there, and to the extent perhaps this goes international, obviously that gets to be real exciting. So we would expect this to be one of our larger relationships in the next two to three years.

And it’s really a total consumer banking relationship. It isn’t just a card program relationship, Tinjin. It hits all of their products, so it’s a nice program.

Understood.

If I can sneak in one more on the utility side? Any deals that you guys won that today include or require any up-front asset or platform purchase?

No. Actually, we if you were to look at the three deals over the last few months, which was First Choice Power, a couple of hundred thousand accounts there, Green Mountain 100,000 accounts, and Wisconsin which is 400,000 accounts, and you have almost three-quarters of a million accounts, none of which had any type of up-front asset purchase as well. They’re all being migrated and will be converted to one of our existing core platforms sometime over the summer. So I think we’ve hit the point now where we have critical mass and we don’t have to worry about taking up another dozen call centers and half a dozen platforms.

Good. So I guess we're still tracking sort of in the 13-plus% rage for EBITDA margins in utility?

Yes, I think what I think Mike has always said is we're at 10-ish and we want to get to 20-ish and call it 200 basis points or so a year for the next five years. That’s still our game plan. That’s still our goal and hopefully these conversions will be clean and smooth and we’ll get there.

Great. Thank you. Nice job.

Thanks.

Our next question comes from Andrew Jeffrey from Robinson Humphrey. Please go ahead.

Hi, guys. Sorry. I’m in an airport if there’s background noise. Guys, just to follow-up to Tinjin’s question on Citi on the Thank You Network, Mike and/or Ed, would you guys suggest that this is a -- represents a change in emphasis or a change in strategy in terms of the types of business you’re going after at Epsilon? And as an additional follow-up question, can you discuss the pipeline a little bit of that? It certainly sounds like the underlying demand characteristics of the market are strong and potentially accelerating.

You bet. There is a broadening of the market and the market opportunity. This is why the whole segment is growing and, as Ed alluded to earlier, probably going to be our fastest growing. Our Epsilon traditional database marketing business continues to be strong. The Epsilon interactive permission-based business is going to be a great winner. It’s going to integrate with all of those platforms and we see a variety of other loyalty platforms as we talked about, whether it be the one-on-one programs that we have today, whether it be this new model, which was some of the very, very large consumer franchises. This internal model is a great new idea, and then ultimately the harder one to implement, but has the potentially the bigger potential would be a broad-based coalition model similar to Canon, so no, it’s an expansion of business opportunity versus a shift.

Yes. And I would add to that that what we're seeing and what we very strongly believe here is we finally hit the convergence of marketing, loyalty, database, analytics and the ability to take the output from all of those efforts and utilize Bigfoot and DoubleClick to do very, very specific one-to-one target marketing. So that type of convergence, in our opinion, is fairly unique with our products and is going to drive a lot, I think, of new business going forward.

Okay. And just one follow-up too in credit. You mentioned the $0.10 one-time benefit, if you will, from lower charge-offs. Was there any meaningful IO true-up or contribution credit in the quarter?

Flat to last year.

Again, airport noise, Andrew. Did you hear the answer? Okay, Operator, we're going to have to go on to the next question. Next caller, please, thanks.

The next question comes from David Scharf from JMP Securities. Please go ahead.

Hi, good afternoon.

Hi, David.

Hi, Dave.

Hey, checking back to air Miles, because this is about the biggest increase in issuance we’ve seen in probably five, six years. Is your concentration among your top five sponsors lessening with this kind of growth? Is it staying roughly the same? I mean, how is the diversification of that rapid history?

I think the big five will probably always be the big five. I think it’s more of a function of we're getting bigger commitments from more of our long-term existing sponsors and there’s some type of whatever people call it, a network effect that when you’re hitting critical mass with all these sponsors and the Bank of Montreal, for example, is now offering reward points for not just the credit card, but for their consumer products as well. What you’re seeing here is basically more and more miles being issued. The velocity is going up on that as well.

To is your point about, as Ed talked about, the WestJet tri-band card, WestJet now being a sponsor issuer, so to speak, not just a supplier, is becoming a nice kind of size sponsor for us as well.

I see. And on the supply side given how much scale you continue to gain each year as we look at the redemption assets, I mean, are you getting increasingly more and more benefits of scale in terms of purchasing power on rewards as you get this large?

It’s I think what we’ll probably leave it at as it’s not hurting us.

Fair enough. Lastly, shifting you to utility, I think you spent about, what, like $0.06, $0.08 of earnings last year in the first half on some platform upgrades. But as I recall, those were primarily upgrades in terms of helping the board accounts quicker and so forth. You haven’t done any actual platform consolidation yet have you?

Yes, we're halfway through consolidating a couple of the competitive market platforms, but we still have we’ll still have more to do throughout this year and, again, fortunately we're off to a good start, and that’s some of the discretionary spending we can continue to do. But we have reduced our operating expenses as a result of platform common platform use.

So how many different CIS platforms are you running now?

There’s really three primary ones that we're using and then as Mike said, there’s some more legacy platforms that are out there where I think we talked about this last year. We are not going to force clients to migrate to one of the big three. We certainly want to encourage that over the next few years, and there’ll be bells and whistles added to the big three, but like the big wins that we’ve already talked about with First Choice and Green Mountain in Wisconsin, they’re all going on one of the big three.

Gotcha. Perfect. Thanks a lot.

Thanks, David.

The next question comes from Wayne Johnson from Raymond James. Please go ahead.

Yes. Good afternoon.

Hi, Wayne.

Hi. Just a follow-up on the convergence point that I think Ed was making earlier. It sounds terrific. What and we look forward to it. What can the customer expect to see and is there like a metric in terms of percentage improvement, in efficacy per marketing program? How do you guys quantify what you think the improvement could be?

Boy, that’s a great question. I’ll take a stab and kick it over to Mike, but what we're really saying is the best we’ve done thus far over the years, as you know, Wayne, is the ability within our private label group to because of the closed-loop system right to collect SKU-level information, so that I know that Wayne goes into J crew and he only goes in when there’s a sale, and he only buys khakis. And we can do a very effective sort of segmented-type target marketing offer to folks with similar characteristics.

The imaginative types, right?

Exactly. And what DoubleClick and what Bigfoot allow us to do is to take that even a step beyond. And the ability to actually do literally one-to-one targeted marketing, so for example if I know Wayne’s been working really hard all year and he’s flying all over the world and he’s staying at his Hilton hotels, maybe come January or February or whenever it’s a quiet time, he’ll get a very focused one-to-one offer from Hilton saying, guess what. You’ve built up so many points, you’ve hit a certain threshold, we have an excellent opportunity for you to go to Maui, bring your wife, have a ball. And that’s the type of effort that we think is going to happen when you merge sort of the DoubleClick, Bigfoot one-to-one marketing ability to the big engines and the databases of the loyalty businesses that we have. So you’re not only going to have a higher hit rate than more traditional means, which would be a phone call or a direct mail piece, you’re just going to have a much more targeted focus, and it’s also going to be a lot cheaper, too. I mean, targeted email is a lot cheaper than putting a stamp on an envelope.

And you wrap that with our model, as you’ve seen in all of our lines of business where we provide the complete service from the analytics to the developing of the programs, then operating of programs, the total communication from a 360-degree perspective gets pretty complicated and trying to manage that in-house with a variety of platforms becomes very cumbersome. So we're really excited about the movement of the marketplace toward our individual one-to-one marketing model.

Okay. Terrific. Thank you.

Thanks, Wayne. Okay.

The next question comes from Moshe Katri from Cowen & Company. Please go ahead.

Hey, thanks. Nice quarter. Specifically looking at EBITDA margins and credit services, Ed, what do you think are more normalized levels as we go from here?

Moshe, I think it’s a good question. Obviously we’ve got a couple things going on. You have in the EBITDA margin this quarter effectively no bankruptcies, so you’d have to put those in, and let’s say that’s $15 million, something like that. Then you also have us funding some of the on-balance sheet receivables below the line, so if you wanted to apples-to-apples to last year and drop another 3 or 4 million out, you’re really down to probably around 60 million on a normalized basis, probably in an equivalent margin to last year. I’m sorry, it was slightly better than last year. Maybe like a 32% margin versus the 31 last year. And I think we're going to see about a third we did last year we did about a 29% full-year margin. This year I would expect things to normalize out 30 between 30 and 32%.

Okay.

EBITDA margin.

And then since some people will look at this topic as well, if we’re trying to kind of analyze what drove the up-side, obviously the up-side was about $0.23, $0.24 versus I’m talking about cash EPS versus your guidance. I’m getting about $0.15 of that came from credit services and the rest came from the other part of the business. Am I looking at the right numbers or do you think the numbers are a bit different?

I think about $0.10 came from credit via the bankruptcy issue. And the remaining $0.13 I would say I would spread between transaction services would probably get a third of that, and the remaining dime would be in marketing services. I think in the private label space, we had anticipated, as you know, that the momentum was going to be there, and sales and portfolio growth were going to hit double-digit in the quarter, so that was not a surprise. We knew what our funding costs. That wasn’t a surprise. So really the only surprise there was the lower bankruptcies and the surprises, I guess, in the other two segments would be more along the lines of we got very a very nice lift in leverage and transaction, and in the marketing side obviously just massive issuances and redemptions in the Air Miles business plus Epsilon, and that’s why interactive had quite a strong quarter.

And then finally, Ed, did you -- I think the effective tax rate for the quarter came at a bit higher than what I was looking for. Can you remind us what sort of an effective tax rate we should use for the quarter? And then at the beginning of the call did you quantify the revenue contributions for the quarter from acquisitions?

I didn’t. I think our overall sort of normalized tax rate is just over 37% and I think you can keep that for the remainder of the year, like 37.2%. In terms of quantifying how much came from acquisitions, we really didn’t. We had the two acquisitions of ICOM and DoubleClick. DoubleClick doesn’t, as I say, click in till April, so it had no impact whatsoever in Q1. And so what was left was the ICOM business that we had for two months, which was probably around $5 million of top line, and half a million of EBITDA, Moshe.

Thanks. Nice quarter.

Thanks.

Thanks a bunch.

The next question come from Mark Marostica from Piper Jaffray. Please go ahead.

Okay. Thank you. Just on the topic of acquisitions, I was curious with your relatively low core debt to EBITDA ratio what your thoughts were on future acquisitions and perhaps your strategy as far as with those might be or areas that you might focus on.

EBITDA. We obviously with the hot marketing sector right now, that’s the majority of our focus. Anything to do in developing marketing services space to expand and build on our platforms to leverage out much like we’ve done with DoubleClick would be a target, and then secondly to the extent that we can expand from a vertical perspective, whether that be further into the packaged goods area or the analytics area would be the next kind of target area. But we're open to looking at other verticals as well in some of the payment streams that I talked about earlier, so we’ve got a fairly broad look.

And from if you were to go through the businesses on the utility side, as we said, we're not actively searching to take on more platforms or more back-offices, so we prefer pretty straightforward signing the client and get the conversion onto our existing group of platforms. Obviously out there there’s always the possibility there’s a few private label portfolios that exist out there that if they look of interest to us and we can get them at a reasonable price, we may step in front of those, but it would have to be at a decent price. we're not going to pay out for that. So as Mike said, you’re really left with that very broad, very large marketing space and really, as we talked about, the convergence of marketing, database, analytics, and the ability to take that information on a micro level to the end user.

And then last I know the call has gone on for awhile here could you update us regarding your progress with some of the new initiatives with the Limited and perhaps also if you’ve had discussions with the Limited or others regarding the additional Interactive Services you could bring to bear, how those discussions have been going. Thanks.

Yes, SR Interactive has been received very well all across all of the current Epsilon clients, our retail clients as I mentioned earlier. Red Caps is a big new client that’s coming in as part of our DoubleClick group. It’s also a large private label client. We're rolling out permission-based emails to do statement notifications, so and it’s also we're also having discussion with our utility client, so it’s probably the most leveragable platform that we have across the company. We're very excited about it.

And then regarding the Limited, any update there?

The Limited relationship, as you know, we renewed last year. It’s going great. We're continuing to build more marketing programs and build on our team of support there, so there’s nothing specific to communicate with regard to any specific program. It’s just an expansion of the existing relationship.

Fair enough. Thanks.

Thanks a lot.

The next question comes from Cannon Carr from CIBC World Markets. Please go ahead.

Hi, Mike and Ed. Just want to go back quickly, if I may. Just want to have you on the credit spreads and clarify, it looks like they?re probably pretty close to 20%. And I was just curious about the growth yield line. Maybe you could just give a little color. Was there anything abnormally strong just on the absolutely top line on the APR side?

You bet. I think what we saw in the first quarter was that we had yields, gross yields that were, in fact, higher than last year. That was partially offset by lower merchant discount. I think what we're seeing and what?s going on with some of the newer deals that we have is that the retailer is opting for a little bit of a lower merchant discount rate of a little bit higher. We want we're going to get the same amount of money, but a higher sort of APR rate to the cardholders. So on some of the accounts, the APR rates have been a little bit higher. we're also seeing very strong revolving behavior, right. You have two types of cardholders. You have those who use it and pay it off each month and don’t incur a finance charge, and then you have those who use it and roll it over where we earn a finance charge. In the first quarter, it was very strong revolving behavior as well. So overall, I would say that pushed up the gross yield.

And then don’t forget and this is a little bit of geography here that because we didn’t have a securitization deal last year, and we had $400 million or so of extra receivables on the balance sheet, the revenues are not netted against funding costs or credit losses. And that will also bump it up a little bit.

Okay.

If that makes sense.

No, that makes sense. So was there any change? It sounds like there was change in kind of consumer revolving behavior even year over year beyond seasonality. And is that a function of just the state of the consumer? And it sounds like that may revert to more normal later or not?

No, I don’t think it was a big one. I think it was a small one.

Okay.

It was enough to juice it a little bit and then the on-balance sheet stuff we talked about, some change of terms where you?re trading off gross yield against a merchant discount. It’s a combination of all that. I don’t think anything was big enough to really say there was something that there was as fundamental shift anywhere.

Okay. And then last question. It sounds like funding costs probably came down year over year almost as much as 100 basis points. Would that be fair?

No. No. Not even close. Funding costs probably came in about 20 basis points.

Okay. All right. Thank you.

Thanks a lot. Okay. Next?

The next question comes from Paul Bertalia [ph] from Credit Suisse. Please go ahead.

Thanks. Good afternoon, guys. Question on the private label side. It looks like the last couple deals you guys have signed have had a co-brand component. Just curious to what you?re seeing that’s going to cause that next shift, and what you see in terms of differences with the co-brand card in terms of some of the key metrics like average balance and loss rates, things like that.

You bet. I think what you?re actually seeing if you were to look at our 75 private label clients the co-brand card is really just a product that’s been added to the private label card. So, for example, if we have a client where we have 30 percent wallet share to the consumer private label, obviously There’s been a whole bunch of inactive accounts that haven’t used the card since they opened it. And maybe the solution is a co-branded offer where there is more utilization. You can use it outside of the store. There’s a bigger reward program. And as a result, maybe that will add, Paul. This is an add-on. Maybe it adds another five points of wallet share, so you?re really talking going from 30% of sales on the consumer card to 35% when you include the co-brand. And from a financial metric perspective, you bet. You?re going to have higher balances. Say, balances maybe three times as high and your sales may be quite a bit higher as well, but you?re going to have a lower APR, so at the end of the day, We’ll probably make the same amount of money on either type of product. They just have different characteristics.

And when you look at the private label pipeline is this more of what we're probably going to see?

I think you?re going to see what we're definitely going to do is you?re going to see new private label accounts for sure, new consumer programs that we have in the pipe ready to ramp up that We’ll be announcing over the next few months. But we are making a concerted effort to go to our existing client base and say, hey, this can drive some additional sales. So think of it more as going to the existing base and use it as a product add-on as opposed to a stand-alone co-brand.

I do want to give some color to that, though, Paul. It isn?t necessarily anything new. It has happened to be new this past year because of the failures of some of the other programs a couple of years ago. We had actually begun to roll out the co-brand initiative well over a couple of years ago, and we went head to head against some of the big banks that offered up fairly large expectations of balances and expectations of sales to the retailers that we just didn’t think would happen. They were expecting $2,000 and $3,000 balances and promised very large incremental sales as a result of that and lots of data that they were going to get from these bank card programs. And you can go back and look at nine out of ten of them failed because they set expectations that weren?t in line with the merchant centric loyalty-type program.

Now that that’s happened, We’ve had many customers start to come back and say, we like your model now. We think that model is going to work, so we are very excited about the prospects for this in the next few years.

Appreciate the question. Any more, Operator? Any more calls

The last question comes from

Last question.

Yes. It comes from Dan Herman from Stifel Nicolaus. Please go ahead.

Thanks. I just had a couple of follow-up questions as it pertains to the utility business. I?m wondering, the sexy part of that story has always been beyond just outsource billing and more loyalty within that component, so what percentage would you say of the whatever revenues or customers or however you want to describe it are taking that loyalty piece along with the outsource billing?

First of all, the loyalty piece is directed predominantly at the deregulator markets right now as a compete for consumers, and we have just seen now our third out of probably a dozen of our deregulated clients start to ramp up that program. So we're starting to see some good results of that. I think you?ll see that contingent.

Okay. And then as it pertains to the deregulated space, I?m wondering what you?re seeing from an industry standpoint where actually customers are converting over from the incumbent to that deregulated player or the switching rates.

Sure. I can?t quote you specific switch rates, but we have seen consistent growth from the competitive side with our Texas-based accounts. Those that we service from the incumbent side have been slightly declining, but we're not also I want you to remember, we're not totally dependent just on the deregulated market. I know there were some concerns expressed in past year about slowing of the deregulated market, and certainly that has impacted the speed. But we have also shifted to the regulated side of the house and having much bigger context in contracts because of conversions of existing portfolios, much like we described in the Wisconsin relationship as opposed to start-up. So We’ve got new growth prospects in both the deregulated and the regulated side.

And I think, Dan, There’s also There’s different types of retailers and different types of hooks out there in the utility space. Take Green Mountain, if you?re not familiar with it. They?re the ones who focus on clean energy, hydro, solar, and wind and the estimates of the surveys are roughly 5% of all U.S. households are extremely interested in that type of offering. So it’s not just reg and dereg. It’s actually individual utilities that have sort of unique offerings within those spaces.

Okay. And then lastly when you shifting gears over to the air miles program. When you talked about customers you mentioned a large gross. You?re doing incrementally more promotional miles?

Yep.

In a two-for-one or something like that. Is that change are there any economics of change from your standpoint? Are you still getting paid per air mile issued or is there bundled pricing that changes that dynamic?

It’s pretty straightforward stuff. What you need to be careful about is, let’s say, There’s a grocer out there who pays us make up a number of $50 million a year. It may be, in fact, that only half of that $50 million is the standard you know, Dan?s going to the grocer every week to spend his 100 bucks, and the remaining $25 million are various promotional efforts that can hit any quarter throughout the year. That’s why it’s extremely difficult for us to tell you what the growth rates are going to be each quarter in these metrics, but we have a very good idea on a full-year basis, because we have the budget and they have a budget up to spend.

Okay.

They?re also subsidized from time to time by the packaged goods folks as well to help promote and push particular brand. So we get our full price, but the grocer gets some help from some other marketing partners.

Okay. Great. Thank you so much.

Appreciate it, and want to wrap up and again say thanks to the team for a great quarter. we're excited about having a record year and We’ll talk to you next quarter. Thanks for joining us, everyone. Bye now.

This concludes today’s Alliance Data First Quarter 2006 Conference Call. You may now disconnect.