Bread Financial Holdings Inc (BFH) 2013 Q3 法說會逐字稿

Good morning, and welcome to the Alliance Data third-quarter 2013 earnings conference call.

(Operator Instructions)

It is now my pleasure to introduce your host, Mr. Michael Cummings of FTI Consulting. Sir, the floor is yours.

Good morning, everyone, and thanks for joining the call today. By now, you should have received a copy of the Company's third-quarter 2013 earnings release. If you have not, please visit www.alliancedata.com or call 212-850-5721. On the call today, we have Ed Heffernan, President and Chief Executive Officer; Charles Horn, Chief Financial Officer; and Melisa Miller, Executive Vice President and President of Alliance Data Retail Services. 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 the uncertainties described in the Company's earnings release and other financial filings with the SEC. Alliance Data also 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. Reconciliation of those measures to GAAP will be posted on the Alliance Data investor relations website. With that, I'd like to turn the call over to Ed Heffernan. Ed?

Great. Thanks, Michael. And I would like to say welcome to our 50th earnings call, which are 50 quarters since going public. I've had the privilege of being on all 50, and look forward to many, many more to come. So, welcome. Joining me today is the always-energetic Charles Horn, our CFO; and Melissa Miller, our EVP and President of ADS Card Group. Charles will discuss Consolidated LoyaltyOne and Epsilon results. Melisa will go through the Cards results, and I will wrap up discussing our revised guidance, our outlook, and our first cut at 2014. Charles?

Thanks, Ed. It was another terrific quarter for Alliance Data, with the revenue increasing 20% to $1.1 billion, bolstered by 9% organic growth. EPS and core EPS increased 9% and 13%, respectively, dampened slightly by a higher share count. Core EPS beat guidance by $0.07 for the third quarter. Adjusted EBITDA net of funding costs increased 14% to $328 million, driven by double-digit growth at Private Label and Epsilon.

Excluding the effects of unfavorable FX rates, LoyaltyOne also had a solid quarter, with adjusted EBITDA up 8% versus last year. Diluted share count increased by 1 million shares to 66 million for Q3 2013 due to incremental dilution from convertible notes. This trend of increasing share count should be over with the maturity of the first tranche of convertible notes in August of this year. Ed and I spent a lot of time talking about share count. To make life easier for everyone, we have attached our forecast of diluted share count for both Q4 2013, and by quarter for 2014, on page 11.

Let's flip over and start looking at the business units. LoyaltyOne's revenue decreased 1% to $213 million, while adjusted EBITDA increased 30% to $62 million for the quarter, both hindered by unfavorable exchange rates. On a constant-currency basis, revenue increased 3% and adjusted EBITDA a robust 8%. The adjusted EBITDA margin increased to 29% for the quarter, driven by operating efficiencies and less drag from international expansion efforts.

Miles issued increased 11% compared to the third quarter of last year, due to increased promotional activity within our credit card and gas sectors, coupled with the ramp up from the sponsors added earlier in the year. Miles redeemed remains relatively flat versus last year, as program management implemented during the quarter softened redemption activity. AIR MILES cash, added as a program option in 2012, continues to build momentum, with over 1.7 million collectors enrolled. Currently, eight sponsors have opted into the program, and we will continue to focus on high-frequency retail sponsors. We expect AM Cash to account for slightly over 10% of our 2013 issuances.

Lastly, dotz, our Brazilian venture, added another 1.5 million members during the quarter, bringing the total enrolled member count to 9.6 million, slightly below our 10 million target for the year. In addition to member expansion, the dotz program expanded into two new southern markets, both of which are strategically important for the rapidly expanding loyalty program. This expansion was facilitated by the signing of grocer Angeloni, which is a large regional chain and one of Brazil's 500 largest companies. Our plans were to enter two additional Brazilian markets by year end. Let's now turn and look at Epsilon.

Epsilon had an excellent third quarter, with 48% revenue growth and 22% adjusted EBITDA growth. Organic revenue growth was strong at 16%, while organic adjusted EBITDA growth of 6% was dampened by new business, which had not produced revenue yet. In essence, we incurred the front running of expenses before revenue recognition, or basically a timing issue between Q3 and Q4. Now, let's look at each line of business within Epsilon.

Agency continues to be strong, with the revenue increasing 121% to $187 million. Excluding HMI, revenue growth was about 29%. Agency, especially Aspen, has had great success this past quarter with new business wins. Technology revenue was up 10% compared to last year. Top-line growth was largely driven by over performance at database, as digital remained soft for the quarter. Database revenue increased 14%, driven by a record number of wins, coupled with the launches of several new clients. Digital, or e-mail, revenue declined slightly due to some softness in project work.

Importantly, our new Harmony platform was successfully launched during the quarter, which should drive revenue momentum entering 2014. Our data offering in terms of positive revenue growth is 6% during the third quarter, due to strength in the Abacus catalog and online survey offerings. Overall, the data business is exceeding expectations for the year, supported by a very strong pipeline.

Looking ahead, the continuation of strong macro trends, as well as increasing global opportunities, should bode well for several of Epsilon's verticals, especially auto. Increased emphasis on loyalty programs, and an ongoing expansion into new verticals such as the restaurant space, should also benefit growth. Recent big wins within agency positions to growth well to meet 2014 growth, expectations of high-single digits of organic growth and provides for substantial revenue of sale cross-sell opportunities next year. A strong backlog of double digits, compared to the same time last year, should provide momentum for the remainder of 2013 and most of 2014. I will now turn it over to Melisa Miller to talk about Retail's results for the quarter.

Thank you, Charles. Good morning, everyone. I am delighted to give you an update. Private Label continues to drive strong revenue and income growth, with revenue increasing 16% and adjusted EBITDA net of funding costs up 17% compared to the third quarter of 2012. Now, these results are driven by very strong cardholder spending, up 15%, and that is translated into average card receivables growth of 15% and ending receivables growth up 14%. All this performance while maintaining portfolio quality and leveraging competitive funding costs. So, some of you may be asking how we are able to achieve these results, and why we are so bullish that we are able to maintain our confidence in our 2013 targets and strong performance into 2014.

While, certainly, some of this growth is attributed to the success in signing new partners during the year -- we had notable successes, such as Caesars Entertainment, PayPal and Barneys -- we expect this growth to continue into 2014 as we onboard a number of recently announced new signings, including Coldwater Creek, and a number of new signings not yet announced. And, thanks to this combination of core growth and new signings, our cards are now active and in the wallets of 1 out of every 10 employed adults in the US. That compares to 1 in 12 just two years ago. And so, while clearly represents growth, and a bit of cause for celebration, it also highlights what we believe is the tremendous opportunity we have to further increase our consumer penetration. Beyond our new signings, our core business saw a strong growth of 9%, driven by improved cardholder retention and steady levels of spend per account.

And, although this environment is still very discount focused, our cardmembers are shopping more often and, frankly, putting more items in their shopping basket. And, despite this promotional environment, our cardholder loyalty, as measured by retention, continues to improve. Our customers are shopping, and they are shopping in large part because of our marketing efforts and close partnership with our brand partners. These efforts have been key drivers in attaining that 1-in-10 consumer penetration I mentioned just a moment ago.

So, frankly, by leveraging our brand partners' growth and helping them identify and nurture their best customers, together we continue to drive consistent improvements in our program. You have heard Ed and Charles say this call after call -- we believe we are best at leveraging the rich data analytics and the multiple channels to promote our programs. We continue to deliver on our promise to be a high-touch, marketing-oriented organization. So we say that we do many things with a single focus, and that is to drive loyalty for our clients.

By way of example, our wallet share, which is a percentage of spend on our card, averages in the mid-20%s overall. But in our most-established, well-engaged partnerships, we see wallet share north of 40%. So far this year, we have successfully increased our wallet share 100 basis points. And that translates into roughly $300 million in sales. So, yes, we see our growth as being sustainable.

We have opportunities, certainly, within our existing programs to gain share of wallet. There are a number of relevant partnerships in the marketplace today, meaning our prospect pipeline is rich and the opportunities are there for us to win. And we would also tell you that, as our partners are pressing into this omni-channel approach, we do see trends in digital that represent growth opportunity for us as well. Within our major brick-and-mortar relationship, digital sales represent roughly one-quarter of their total credit sales. And it is the largest growth channel, with double-digit increases year over year.

In comparison, we're seeing physical store sales growth in the low-single digits, with physical store count growth essentially flat. So, with this consistent shift to digital, those clients that have mobile capabilities are going to continue to really press their shoulder into mobile applications. And, in fact, we're seeing our approval rates dramatically increase year over year. That signals to us that the initial credit seekers have been replaced by highly credit-worthy, mobile-engaged customers. So, with the appetite for mobile growing, you will see us become more assertive in this channel. We will pilot some new location-based, geo-fencing campaigns, mobile couponing, and gifting.

Finally, I wanted to chat just a bit about what holiday 2013 may suggest. Candidly, we are still very optimistic. Our brand partners are generally expecting modest improvements over last year, somewhere in the range of 3% to 4%. But, year to date, our card programs are consistently outpacing that of our brand partners by a factor of 2. So, overall, the outlook for 2013 remains very positive, with strong receivables and revenue growth, low charge-offs, and stable funding. With a strong pipeline of new prospects, we are confident in once again over-achieving our 2013 targets and delivering very, very strong performance into 2014. Charles, back to you.

Thanks, Melisa. On now to the riveting topic of liquidity. It remains very strong at September 30, 2013, with $1.7 billion at the corporate level and $3.3 billion at the bank subsidiary level. Leverage level to both the corporate and bank level remain very modest. During the quarter, we entered into a new, upsized $2.4 billion credit facility. Incremental liquidity from the credit facility, plus cash on hand, was used to retire $805 million of convertible notes in August. Also, we renewed our $440 million Master Trust III conduit on favorable terms, including all bank financing needs for 2014.

From a dividend perspective, our two banks paid $107.5 million to the ADS parent during the quarter while maintaining strong regulatory ratios. Cumulative strong earnings allowed us to increase the size of the dividend this quarter. With the steady momentum in our stock, we did pull back some on our share repurchase program during the quarter, but year to date we have still spent $231 million of our $400 million authorization. With that, I will turn the call back over to Ed for an update on 2013 guidance and the initial look at 2014.

Okay. If you could, everyone, pull up the slide, new guidance. I think it is slide number10 or so. Yes. New guidance raising all key metrics. Again, if you were to look across what we view as our key financial drivers, you will see that revs, we've bumped up; core earnings, we've bumped up; and core EPS, we've bumped up. I think we are at 985 before. We're looking more like 990. And, again, that is versus the 950 we had initially set out at the beginning of the year. So, we continue to see nice growth across the business. We continue to see a bit of over-performance each quarter, and so we are hopeful that this trend will continue into 2014.

I think one of the things to highlight, as Charles mentioned earlier, is that we are beginning to see the flip in share count. So, again, in Q1, where you had total share counts of 67 million versus 62 million last year, obviously it makes it a bit more challenging to grow. And we had high-single-digit growth in Q1. Then we moved into sort of mid-teens growth in Q2 and Q3. And then, as we move into Q4, you are beginning to see the flip, where we will actually have fewer shares in Q4 of about 65 million versus about 66 million last year. And again, that will be the beginning of what we call the slingshot, where you're going to have strong growth in the business itself, combined with a share count that lowers as we move into 2014. The combined effect, obviously, is a nice little zing on the earnings per share.

Turning to the next page, 2013 highlights. I think Melisa and Charles obviously went through most of these. But, if you put it all together, there's not a lot of areas where we are disappointed at the performance. I think, overall, it's been a very strong year. Probably of note, obviously, is in the Private Label group. We've never seen a year like we've had thus far. Typically for us, if we signed a business that would ramp up to maybe $300 million or so of new receivable growth after 3 years, that was typically a decent year for us. And then last year we saw a jump to over $1 billion. And this year we were hoping to get another $1 billion as well. And it's October and we are already north of $2 billion.

It speaks volumes about what we are seeing in the sector. It speaks volumes about where the trends are going. And I think what we're basically seeing here is a real adoption by retailers of this overall package of bringing to bear, not only the traditional Private Label card, but all the data and marketing elements that allow us to do very, very focused targeting market, trigger marketing that, again, as Melisa talked about, enhances retention rate and engenders loyalty and drives sales. So, it does seem to be playing out. As she also mentioned, 2014 looks quite strong as well.

In Loyalty, as we've been alluding to in the first half of the year, reward miles issued, which is basically how we make money, was negative 4% in the first half. As we've -- those of you who followed us for years know that the very, very choppy stat. But it was a little bit lighter than even we had anticipated in the first quarter. And so we were -- wanted to make sure that this thing would rebound pretty significantly in the back half. And, sure enough, it actually came in better than we had anticipated at plus 11% issuance in Q3. And Q4 looks quite good as well. So, overall, a big shout out to the folks up there in terms of getting this metric turned very nicely. A lot of it from promos, a lot of it from the new client signings, and it looks pretty nice for the rest of the year.

On Epsilon, again, no major changes, other than we had talked about before that the agency piece, of course, was killing it, and continues to kill it this year. Data, though, has come in quite strong in Q3. And then what we're seeing now is the big, big database builds are really beginning to drive very significant revenue growth as we enter the back half of this year. So you have got -- the big pieces are really cranking along.

The one piece that is weak, and has been weak for a while, has been our e-mail platform. And with the rollout of Harmony, we should start seeing that -- the turn there, hopefully in the latter part of the first quarter into second quarter 2014. So the rollout went well, and now we need to just see if we can bring on the new clients.

Consolidated, strong organic revenue growth. Again, as everyone seems to be focused on this new, new environment of very modest GDP growth of roughly 2%, it is very hard for companies to post big, organic top-line growth. However, we are looking at 4x overall GDP growth rate, where we should come in about 9% organic for the year. And we will also end the year with share count beginning to decline. And so that should give us strong momentum going into 2014.

Speaking of which, if we move to the initial guidance for 2014. Again, we do try to give it as early as we can. The initial guidance for 2014 should not come as much of a surprise. We are basically saying, look, we continue to look to grow our organic top line as much as 4x GDP. Our goal is somewhere between 3x and 4x, but we figure about 8%. Seems to be a good number, high-single digits for revenue. Again, that's organic.

We will get some leverage down to the core earnings line. That should be up double digit. And then, as we talked about, when you toss in the fact that the shares are finally coming down, now that these phantoms are going away, you get the slingshot. And you'll see earnings up over 20%. So we are going to peg $12 as our starting point for 2014. And you will also note that we used the current spot price of $2.25 a share.

When we made this in the past, as you know, when the share price went up, it tended to, obviously, bring more shares into the share count. You're not going to run into that issue as we go into 2014, as the share price hopefully goes up. There's not much sensitivity. In fact, I think it's like 30,000 shares for every buck.

So, it is really a round-off at this point, which is good news. And, again, as Charles alluded to, you will see down below our share count from 2012, we ended at 66 million. In 2013, we ended at 65 million. And in 2014, we will be down around 60 million. It's a nice story to tell, along with very, very strong organic growth across the board.

Turning to the 2014 outlook. There's not a lot of things that are of major concern at this point. I think -- being as straightforward as I can -- it is, basically, I think the nums are in good shape. I don't think we are going to have a lot of issue on the financial side, or posting these nums. I think the issue is going to be more of, we need to make sure we don't have any hiccups when it comes to bringing on board 15, 16, 17 new Private Label clients. That's a tremendous amount of work that needs to work precisely at our Private Label shop, and that's a big one.

We need to make sure that our Harmony platform is successful in its rollout. We need to make sure, at LoyaltyOne, that the issuance of our miles continues and we don't find ourselves in a hole in the first half of next year, as we did this year, that we had to dig out of. And then, finally, I think, overall, there are not a lot of things that are keeping us up at night on 2014. I would say from -- if you were to ask me what are the two or three things that could go wrong, or that could really impact the financials, right now I don't see a lot. I would say it is more external than it is internal.

I would say, obviously, we are keeping a very close eye on the swirling privacy debate that is going on in Washington. And, obviously, we want to be part of that discussion. But, other than that -- other than, are there any other regulatory-type issues that we are not seeing right now, but could pop up in 2014, again, those are the things I'm talking about. Obviously, the regulatory side is kind of an unknown, I guess, for everyone.

And then also, obviously, on the security side we need to make sure that we are buttoned up here, and that our systems are -- have the best of breed out there in the marketplace. So, again, nothing major here. I think I will leave everyone to walk through the slide we put together for 2014. Overall, we are setting the bar high. We are setting the bar high for -- in terms of expectations, and I think the $12 a share number we've established is a very firm number, and I think it's a number that's a great place to start.

Okay. I would rather spend just a few minutes on the big picture, so to speak, in terms of, as we move into a new year -- and it is fast approaching, and I know everyone is running around because every company seems to be releasing today and a few other days. We don't really spend a lot of time on strategic viewpoint of the marketplace, and so I just thought I would take this quarter, and maybe 5 minutes just to talk about what we see going on from the big picture perspective. And then we can move on to Q&A.

We start with one big data point, which is $400 billion. That is the amount that's currently being spent on all forms of what's called marketing, and the decision makers behind this spend are the CMOs, or the Chief Marketing Officers. The first trend that we are seeing is that CMOs today are under increasing pressure to justify their spend. More and more they are being asked such things as -- How do you know this stuff is working? Or -- Hey, show me the return on the dollars being spent. That pressure is increasing -- if I were to compare it to 3, 4, 5 years ago -- to the point where most of the conversations begin with -- Hey, I better be able to measure this stuff.

And, to address the first trend, we're seeing more and more interest in the use of data, analytics, targeted marketing, and omni-channel distribution networks to optimize marketing budgets. To address the second trend, many CMOs are looking for a solution that integrates across all of these disciplines. I think the point here is, the markets for these services that I just mentioned -- it's huge, and it's growing. It is likely that multiple business models will be successful.

For example, some clients may only need to access a portion of this value chain, while others may desire one-stop shopping like we offer. Perhaps software as a service works for some, while fully integrated, heavily services-focused offerings such as ours are required by others. Perhaps a pure online solution is what is needed for some, while others require a more omni-channel approach like our offerings. It doesn't really matter.

Regardless, we believe that the market opportunities are significant, that multiple business models can and will be successful, and that the winners will capitalize on the largest trend dominating today, which is the confluence or the flowing together of data, marketing, and distribution. I say this because there's so much smoke and noise out there that it is sometimes hard to distinguish between fact and fiction. And I thought it might be helpful to offer up our view of how we see the pieces fitting together and to do so in plain English. You can call it Ed's crayon version, or my Fisher-Price special. But, the bottom line is, there are three pieces to the puzzle.

The first is data. This includes transactional as well as demographic and psychographic. It includes offline and online. It includes structured and unstructured. All of this must be brought together, cleansed, sorted, and constantly refreshed. Hundreds of data elements end up populating a single record. People today refer to this as big data. It seems like a cool buzzword. But, for us, it's just the first piece. Big data is of little use unless one gains insights from it.

Thus, the second piece of the chain is broadly defined as marketing. The most critical part of marketing comes well before any campaign is ever run. Marketing today first takes the massive data assets I just talked about and applies models and algorithms to infer and develop additional data elements, which are the key data elements that provide the insights into past and, hopefully, future behavior of hundreds of thousands of small clusters of consumers. With these insights, highly targeted campaigns are created which are relevant, customized, and appealing to these clusters.

And now, the last piece. No matter how good the data are or how good the insights in campaigns are, it's not worth anything if the message never reaches the desired audience. So it is critical to apply additional insights when determining how the audience should be accessed. Thus, the term omni-channel. Again, simply stated, some people are more likely to open a direct-mail piece, while others prefer communication at the point of sale or through permission-based e-mail, or via mobile or social or targeted display.

Okay, that's it. Everything should be clear as mud by now. I guess the take-aways are this -- the size of the prize is huge; the areas getting the dollars are in data, targeting marketing, and omni-channel distributions. At Alliance, obviously, we play in all three and offer them via a service model. Over the past decade, we have seen these pieces begin to flow together and believe the future holds even more promise. So that's the sum total of our whole strategic thinking, and we will get back to the numbers for the quarter and open it up for questions. Thank you.

(Operator Instructions)

Sanjay Sakhrani, KBW.

This one is for Ed or Charles. Great quarter -- very solid guidance. Could you just talk about how you intend to manage capital in 2014? What the uses of excess cash will be?

And then I got a second one for Melisa. Historically, ADS has shied away from co-brand loans, but recently it seems that that's changed a bit. Could you just talk about the opportunity there? And what the puts and takes are? And how big you expect that portfolio to get to? Thank you.

Sure. I will take the first one, in terms of use of capital. I think, obviously, with our leverage ratio being quite low, there is no real strong desire to go out and pay off additional debt. So you are really left with two uses. One being on adding incremental growth to the business through M&A or additional share buybacks.

I think I would prefer that we put our shoulder into the former, first, if there is anything that hits our -- catches our fancy. I think right now there are a number of properties out there, again, less so in the US, more so in Europe, that I think would provide a very exciting footprint that we are looking at. If those don't pan out, then we would probably put more of an effort into our share buyback.

It's Melisa. With respect to co-brand, our previous strategy was less about shying away, and our current strategy is really more about acknowledging that the marketplace has changed a bit. You will see us continue to selectively enter into co-brand. We don't chase after every opportunity. Our driving principle is helping our brand partners know more about their customers, to sell more, and that's really the brilliance of this co-brand model.

When we the right brand partner, and we find the right consumer, we drive outside, everyday spend -- gas and groceries -- so he or she can accrue points that puts them back into the hands of the retailer or the client we are serving. If you take Caesars, as an example, that outside spend for everyday activities drives them back into Caesars' property for more gaming and hotels.

In terms of penetration, so, again, as I said, you will see us selectively growing our portfolio somewhere in the neighborhood of 10% to 15% in total over the next several years.

Yes, so I think co-brand is important as you go into certain verticals that we haven't been in before, Sanjay, like T&E. And as Melisa said, this will still be a small piece of our overall business, as she mentioned, somewhere between 10% and 15% of the file would be co-brand. The vast bulk will still be private label.

And I'm sorry, just one follow-up. What is the difference in economics versus the core private-label business?

Yes, I think, overall, what you'll find is, for a given client, we will make roughly the same amount of dollars of profit. However, the balances are quite a bit higher on co-brand and, hence, a lower yield. So, what you will have is a balance that is probably 3 or 4 times what a private-label card balance is, but it is yielding less. The net result would be gross profit dollars being the same between the two clients.

Okay. Great.

Darrin Peller, Barclays.

Nice job on the quarter. I want to start off with Epsilon. It obviously showed material strength across the board, with around -- I think it was 16% organic growth being about 5 points above our estimate -- probably just about the highest level we've seen in terms of growth rate year over year. I think all three segments showed sequential growth as well. Can you touch further on the drivers there? And with permission-based email set to accelerate with Harmony, is this growth rate sustainable?

I think that what you are seeing this year is -- you're seeing extreme overperformance in the agency space, primarily in auto and telecom. I don't know if that is sustainable. It is just -- they are shooting the lights out.

So, what we have done for 2014, as we have said -- let's moderate the expectations for the agency piece. But you are right; the big database builds are back. Data is looking stronger.

Harmony won't really show the big financial results till the back half of next year. But what we are basically saying right now is -- we are assuming that the agency piece will begin to return to more normal levels, which would be 8% to 10%-type organic growth. And then that will be helped along with database and data between 5% and 10% growth. That's where we come up with the high single-digit organic growth for 2014.

Right.

But we could be surprised, if agency keeps ripping it right into 2014. But right now, that's the assumption.

Okay. Is there any big items that will anniversary in -- I'm talking organic items that will anniversary in the next couple of quarters that would drive that 16% growth down materially, or even in the agency business?

Darrin, I wouldn't say it's the case of anything anniversarying, but obviously clients can flex up and down their marketing spend. We had a little softness in 2012 with telecom, and strong in 2013. So, that's helping drive some of the overperformance in the agency business.

All right. That's helpful.

Just quickly on the EBITDA side of that business though, that was obviously a lot slower this quarter, in the sense of versus revenue growth. And I think you mentioned expenses around helping some clients on-board. So, when should that normalize? And when would you -- when can we expect to see more of the margin flow through?

I think that is purely a timing one between Q3 and Q4. I think you will see that we on-boarded the expenses in Q3, and you will get the revenue recognition in Q4. You will get some substantial margin expansion in Q4.

Great. Just one quick follow-up for private label now, and then I will turn it back to the queue. But, Charles, your allowance reissue -- or Melisa is on also -- your allowance reissue was flat sequentially, and you actually look like you had a reserve build here. Credit trends still look pretty stable. I know delinquencies have picked up a bit -- and some of it is seasonality, I think. But what do you think is the -- should we expect to model for your allowance level going forward versus a charge-off level that has been relatively flat?

You're right, Darrin. It has been fairly consistent. And if we see in Q4 the same level of performance, then it's very possible that you could see the reserve rate come down some.

Okay. Great. That's helpful. Thanks, guys.

Dan Salmon, BMO Capital Markets.

I had a question that I think goes across all three of your businesses, but I'll use an example from AIR MILES. You added General Motors over the summer, and it strikes me that bringing them into the program to help drive test drives to the lot is more a bit of a customer acquisition strategy more than a customer retention one, which we normally think about with loyalty programs. So, are there any other examples across any of the three segments where you are starting to see more of a shift in how they view these currencies to customer acquisition, in addition to, or as well as, customer retention?

I will take the first stab at it. What you're seeing is -- and I think you're dead on -- it's a combo. If you looked at LoyaltyOne and the AIR MILES, what really drove the Q3 turn was a big push on the promo side. So, if you want to call it customer acquisition or customer activation, we use the terms interchangeably here at times.

But what we're seeing is -- you're seeing the big clients looking for a balance between engendering loyalty with the ongoing loyalty programs, where you are getting rewarded every time you show up. But what we also are seeing are the quick hits, so to speak, which I think you are referring to, of -- how do I get out there and really blast the market to get the results I need for the quarter, or for the back half, or something like that. So, it seems to be a balancing act on the card side.

Dan, this is Melisa, and I hope I'm addressing the question that you're answering. We focus a lot of our effort with our brand partners, first on finding new potential prospects to the brand. We do that often in concert with Epsilon. Certainly we analyze our clients' customers to see if we can help them find more that look alike their best customers. And then we get them into the brand.

Then over time, either work with our brand partners to either help inspire spend at the brand, even if it's not on the card, or welcome them into the card program. And then, so they get inserted into the circle of life. But most of our brand partners right now would tell you their number-one priority is to get new incremental customers to their brand.

As a quick follow-up -- when you think of a category like auto, where it's an infrequent purchase, a major purchase but an infrequent one, and General Motors -- are there maybe specific categories like that where you're seeing more adoption of programs like yours?

I wouldn't use the auto analogy for private label, but maybe something analogous (multiple speakers) to that would be --

Yes, sorry -- across the Company.

-- would be furniture, for example. And so, then our number-one priority, once we get someone in to buy that $3,000 leather couch, is to get them back in for add-ons -- the pillows, the other things that we can use to decorate it. So, that is really the whole premise, Dan, behind our program is how we take everyday life events, and try to turn them into a shopping event.

For auto, to answer your question directly, we have not only the focus on the OEMs, but the focus on the dealers. Specifically, again, this would begin to move into Epsilon's area, but the whole work with the dealerships, the goal is -- if I can get Dan to realize that it's about time for his oil change, then I need to get in front of that and get a targeted communication to him ASAP that will allow him to say -- hey, you know what, I think it's time to get my oil changed, and I'm getting this coupon to go in to my local GM dealership.

And if you can swing only a fraction of people into that dealership, as opposed to going a mile down the road to the local oil-and-lube shop, then what you've done is you have shifted hundreds of millions of dollars of profit, because that's where the profits are, over to the car dealerships. And that's exactly what we're seeing in our marketplace.

That's really helpful, thank you.

Ashish Sabadra, Deutsche Bank.

Solid quarter. Melisa, thanks for the insights into the receivables growth. I was just wondering, when you look into fiscal-year 2014, and that sustainability of 15% growth, how do you think about what percentage of the growth comes from core clients versus the new wins? And as we look at the new wins, are there any call-outs in terms of any big jumps during the year, or it will be relatively smooth 15% throughout the year?

Several questions there, so I hope I get them in the right order. We would tell you that we would expect to see core growth next year similar to what we are seeing this year -- 9% to 10%. You will see us as sometime around midyear, you will see us on-boarding the Coldwater Creek file, so you will see a significant spike there.

The other announcements that you have not yet heard about are primarily start-ups. And what we love about start-ups is they grow over time. So, virtually every one of our open slots next year will insert a new brand partner, and we will be ramping them up.

Does that answer your question?

Yes, it does. That was great.

And just a quick one for Ed. Just when looking into the fiscal-year 2014 guidance, considering that you're ending the year almost with 9% organic growth, and you have guided to 8% for fiscal-year 2014, I was wondering -- is it just conservatism built in, considering all the segments are on a pretty solid footings here? So, I was just wondering if you could let us know if there is some conservatism built in? And similar to what we've seen in fiscal-year 2013 and prior years, you would see the guidance move up as you get more comfortable with the economy and the businesses ramping up?

Sure. It's a fair question. We try to serve up guidance early, and it's all of October. And what we try to do is we try to serve up guidance where the investor community can feel comfortable that this is our base case. And I think that coming out at 8% organic in a 2% GDP climate, 20%-plus EPS, to us, is a very achievable base case. And if history is any guide, as 2014 plays out, hopefully our businesses will do incrementally better than that.

But it is a bit too early to say right now. It is really just establishing the base from which to grow.

Good. Thanks. Congratulations on the solid quarter.

Andrew Jeffrey, SunTrust.

Ed, you referred to some of the mobile offerings that you have, especially in private label, and certainly the holy grail of payments these days, especially as we move into a digital-wallet-type world is -- are data and SKU-level data. And it seems like Alliance is uniquely positioned, given both the architecture of your platform, as well as your marketing DNA, to really take advantage of SKU-level data, particularly in a more digital and mobile environment.

Can you elaborate a little bit on when you might quantify for us, in a more specific way, the kind of lift you're getting from mobile? I think you alluded to it a little bit, whether that's on the yield side or on portfolio growth -- how can we start to think about that? And maybe put some value around it?

It's a great question. There is so much -- obviously, as you know, there is so much smoke out there about mobile and what's working and what's not working. I will let Melisa take the first half, which is a very concrete example of where mobile is working for us, and that would be on the new account side. So, go ahead.

You bet. A couple of interesting statistics on mobile. We are seeing our application volume on mobile relatively small in comparison to our overall business. It represents currently about 7% of our application volume, but it continues to be up double digit year over year. And what is interesting about applications that come to us through a mobile device -- when we are able to welcome someone to the brand, their first purchase is consistently 20% to 30% higher than it is in a brick-and-mortar environment.

Said differently, the volume is still relatively low; it's under 10%. We would expect to see it grow to about 10% next year. But the first purchase transactions are significantly higher. And it gives us an opportunity, then, to welcome that card mender into the brand with a telephone number that they have said expressly is how they want us to communicate to them.

So, if you think of it, a lot of this is away from the store, but for those who are in the store, especially as it skews towards a younger demographic, normally you would be getting your app -- you would apply for the card at the point-of-sale as you are checking out. Now you're wandering around the store. As you're shopping, you slap the phone against the QR code, and you pop in a few pieces of information, and you will get scored and you will get a virtual card as you are shopping. So, by the time you get up to checkout, that is where we are getting the big lift in terms of the first purchase that Melisa was talking about. So, that's a real-world example.

On the data side, obviously -- you appropriately called it the holy grail. It's having the SKU-level information combined with Epsilon's demographic, psychographic data. It's something that the CMOs today just can't seem to get enough of.

Melisa, do you have any specific programs or --?

Certainly we do. We have a number of programs where we communicate not only through the mobile device, but that is one of the ways that we get the card member alerted to a unique offering specifically for them. They can either click on a link on their mobile device and actually purchase that merchandise immediately, or we sometimes find that it drives them to the website or back into the store. So, it is a very inexpensive catalog, if you will, for many of our brands.

Okay. So, thinking about 2014, that might be the year where we start to really see meaningful traction, as you get north of 10% of new accounts originated by mobile?

You bet. Virtually every client that has the mobile capability is building a strategy now for 2014 and beyond.

Okay. And Charles, a question for you. I understand that there are some timing expenses within the Epsilon data ramp, and how it pertains to margins. Can you just opine a little bit on what you think the long-term sustainable profitability of Epsilon should look like?

It's a situation where, if you go back several years, the EBITDA margin for Epsilon was about 24.5%, 25%. Over the last several years, we have reduced it by doing the acquisitions, and within the agency space; first with Aspen verse, and then second with HMI. I think long term, it is still a business that will do about 25% EBITDA margins. It's going to be achieved primarily through revenue cross-sell/upsell, because agency is not going to be that high. But if you get the foot in the door with the CMO, and then you cross-sell the data and the database offerings, that's how you're going to get that lift.

If we look at this year, and we just factor out HMI, we're going to get over 100 basis points of organic EBITDA margin lift, just based upon that opportunity. So, down the road, I still think two, three years down the road, this will return back to 25% EBITDA margin, if we don't keep laddering in the new offerings, which can somewhat reduce it on a short-term basis.

Great.

Your last question comes from the line of Tim Willi, Wells Fargo.

Two questions. First was on dotz in Brazil. Was curious if you could give a bit of an update on how you are thinking about the crossover into profitability?

And then, you made a comment about some upside there, if you get into -- I think it was Sao Paolo and one other market. Or if you could maybe handicap how you feel about those markets being opened up next year? Or what are the big mile markers to make that happen? And then I had a follow-up.

Sure. I think, overall, the key metric at this point in the program is the ability to enroll as many people as possible. I've called it before a land grab. This is a people grab in terms of -- can we get as high as 10 million people enrolled by the end of the year? It looks like we're running ahead of that.

And to put that in perspective, in 2010, when we started it, we had 400,000. Then we did 1.6 million, then 6 million in 2012, 10 million this year. If we can get to at least 20% growth next year to 12 million, that would be where we would set the bar. To the extent we have big rollouts in Rio and Sao Paulo, then that would be cause for upside to that as well.

So, right now, all of the effort is going -- are going into expanding this program as quickly as possible. That means we are incurring, obviously, a lot of marketing expenses. We've made the decision to -- let's really put our shoulder into getting this thing up to 20, 25 million folks over the next few years, where it could be the size of the Canadian business.

In terms of profitability, that's going to be way down as a function of how fast we're expanding it, but, Charles --?

Yes, Ed's exactly right, Tim. So if you look, we talked about this before in 2013. It's really not a drag on us. In 2014, it won't be a drag on us. Likely, with the growth profile we are looking for -- the new markets, the number of collectors coming through, the front running of expense as compared to that deferred revenue model -- we are probably looking at accretion in 2015 or 2016, based upon how we roll out the markets.

Yes. What we are trying to do right now is -- we are very fortunate in the sense of the core businesses are all doing extremely well, and our outlook for the next year or two is very, very positive. So, we can afford the luxury of really going after building up a huge base in Brazil. And frankly, when the time is right and the other core businesses, perhaps, take a pause in a couple of years, then we will be ready to step in with Brazil. So, that's the strategy right now.

Okay, great. And my follow-up was on private label -- just two quick ones. First, is there a way to think about the marketing dollars that issuers are devoting to private-label cards -- whether that's true hard costs around reaching out to consumers, or the cost of maybe discounts, rebates, offers, to get them in and keep them coming? Just thinking about how that cost of ownership of a program -- is it growing pretty rapidly with retailers, if you can think about it that way?

And then my second question was just around the data. Any updates or thoughts as to your ability to get data and use it that's not coming from the retailer-branded card that's being used at the point-of-sale -- whether that's check or Visa, MasterCard, AMEX, that's incremental to the program?

Let me answer the first question by -- with one word, which is huge. The marketing budgets continue to be large, and they are growing year over year. Our clients are no longer seeing it as that drag and that margin compression that they once complained about. They are really seeing it as an investment in this really, really competitive environment. And that's, in large part -- that realization has, in large part, driven some of the continued improvement and investments that we see on our program.

So, said differently, we put in a great deal of money toward the programs, and our brand partners often match and exceed the investments that we make. We see it continuing to grow. They want to know as much about their customer as they possibly can from us, from Epsilon, and from their own data acquisition resources.

And then in terms of just data acquisition in general, what we are finding is that our clients find that the information that they have about their internal experience, matched up with what we know about that customer and what Epsilon knows about that customer, really is that triumphrant of great things coming together, right? So, we take their purchase behavior with the brand, everything we know about their purchasing cycles, and then often partner with Epsilon to augment that data.

We don't find that they often are going to other areas such as MasterCard or Visa, except to know where else they may be shopping. And that is simply to provide a bit of competitive insight.

So, what we're looking to do is think of -- in addition to the core private-label information, we are looking to expand in two areas. The first would be developing a multi-tender loyalty platform where private label would serve as the anchor and the key piece, but we would also, through Epsilon, be able to provide a loyalty program for any tender type. And that would cut across all the different payment vehicles that are out there. But again, if you use your private-label card, you would get a bit of a kiss on top of that. So, that is one trend we're seeing.

The other trend is, as Melisa talked about, at Epsilon, you've got 235 million adults that we have information about. And that information is everything from demographic to psychographic. And that allows us to overlay what the SKU information or category information that Melisa has, and can be very, very effective in micro-targeting the consumer to help drive her into the store or over the web to make one more purchase on any given year. And if we can get that done, that is where the return is on the bucks.

Great.

That's right, Tim, (multiple speakers) we have an opportunity -- I'm sorry. We have an opportunity to influence when she shops, and what it is that we inspire her to look at when she's either on the website or in the store. And that's really how we help our brand partners.

Yes. No, I appreciate the insights very much.

One more?

You last question comes from Bob Napoli, William Blair.

Melisa, just a question on the card business and the potential growth of that business. How do you view the market size, and has that changed over the past few years? Are we doing a lot more start-ups? It seems like your pipeline is more vibrant than ever. You have a $7-billion portfolio, which has grown a lot, but it's not real large relative to, I think, what might be the potential opportunity. So, I would love to know how you think about market size and market potential, long-term growth?

In terms of market growth, you've heard Ed and Charles say this, coming out of the great recession, the overall market declined by about $200 billion, right? So, it was up to us to really think about how we expand our horizon. We would tell you right now that our active pipeline has about $26 billion to $28 billion worth of opportunity that, for us, still allow us to deliver on that true value selling opportunity for us. They are start-overs, they are start-ups, as we mentioned earlier, and then they are earn-aways.

So, it is a vibrant portfolio. It's in all the sectors that we support, which would be specialty retail. We have some select co-brand prospects in there, some furniture, and certainly some hard goods.

Yes, I think that, as we have cast the net a bit wider these days to include T&E, and you will see other areas that we are dipping our toes in, like with PayPal and stuff. If we have a -- let's call it an $8 billion or so file by the end of the year, normally we would say that's about a third of the marketplace, and so we would put the total market at, as Melisa said, around $25 billion. We would probably extend that now to more like 30 --

$30 billion.

About $30 billion at this point.

Okay, and then just on PayPal, which was my follow-up, I would like to understand a little bit better, if I could, what you are doing exactly for PayPal and Bill Me Later. Are you controlling the underwriting? And when do you start actually taking on some of the Bill Me Later loans?

We would tell you, Bob, that our PayPal relationship is one that we are really excited about. For us, we think this is an example of one plus one equaling three, maybe four over time. So, what we are doing with PayPal today is, what we would tell you, just the beginning of working with this payment powerhouse.

To answer your question directly, currently we are accountable for the credit policy in connection with the Bill Me Later activity.

Okay. Great. And then, let me give you one more -- just one last one on a smaller item. The Coldwater Creek -- you have a lot of new customers with that -- just that one I just find a little bit interesting, where you've had Zales, Bon-Ton, Pier 1, companies that are growing. This one looks a little bit more like a turnaround. And I just wondered how you manage your risk in that type of situation, if Coldwater doesn't -- if they don't do as well as you hope?

That's a great question, and certainly the risk and the financial health of any organization does factor into the overall structure of the deals that we have, Bob. What we are enthusiastic about as it relates to Coldwater Creek is that is a cardholder that is very mature, high income, high FICO score, and all of our contracts are assignable. So, if there would be some sort of activity in connection with Coldwater Creek, either prior to or after we receive that file, we are still the ongoing issuer. Frankly, we are a large part of their turnaround efforts, and we have seen these circumstances before, and believe that we can get this card penetration into the high 20%s, high 30%s, and ultimately into the 40%s, like we have some of their peer group in the marketplace.

And, Bob, if you think about the risk to ADS, it's very small. Basically, through upfront premium, which is the payback period is just a few months. So, in terms of high credit quality, very short payback on the upfront premium, the risk to ADS is very small.

Great.

All right. Thank you, everyone, and we will let everyone get back to work.

Ladies and gentlemen, this concludes today's Alliance Data third-quarter 2013 earnings conference call. You may now disconnect.