Bread Financial Holdings Inc (BFH) 2015 Q2 法說會逐字稿

Good morning and welcome to the Alliance Data second-quarter FY15 earnings conference call.

(Operator Instructions)

In order to view the Company's presentation on their website, please remember to turn off the pop-up blocker on your computer. It is now my pleasure to introduce your host, Mr. Steve Calk of FTI Consulting. Sir, the floor is yours.

Thank you operator. By now you should have received a copy of the Company's second-quarter 2015 earnings release. If you have not, please call FTI Consulting at 212-850-5703. On the call today we have Ed Heffernan, President and Chief Executive Officer of Alliance Data; Charles Horn, Chief Financial Officer of Alliance Data; and Bryan Pearson, Executive Vice President and President of LoyaltyOne.

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 update the information presented on the call.

Also in 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 Investor Relations website at www.AllianceData.com. With that, I would like to turn the call over to Ed Heffernan. Ed?

Thank you, Steve. Joining me today is Bryan Pearson, President of LoyaltyOne, which houses both the Canadian AIR MILES program as well as our European platform BrandLoyalty, as well as Charles Horn, our always eloquent CFO.

Bryan's going to give you an update about LoyaltyOne, and Charles will walk you through the quarter, and I will discuss the year-to-date performance, critical goals, where I think we are in the year and updated 2015 guidance. That being said, Charles?

Thank you Edward. It was a solid second quarter with revenue up 19%, importantly 11% organic, and adjusted EBITDA net up 18%, a good flow-through of the revenue growth. On a constant currency basis, the growth rate for revenue adjusted EBITDA net were an impressive 23% and 21% respectively. Core EPS increased 14% to $3.32 for the second quarter, exceeding our guidance of $3.20. Accordingly, for the year, we are passing that through and raising our annual guidance from $14.90 to $15, a 19% increase compared to full-year 2014. EPS was down slightly to $2.11 due to non-cash expenses related to the Conversant acquisition completed in December of last year. Generally we expect acquisitions to be accretive to core EPS in year one but GAAP EPS in year two.

A quick update on the share repurchase program. During the second quarter, we bought 451,000 shares for total consideration of $134 million. Year to date, we have bought 2.5 million shares for total consideration of $699 million. Currently we've reacquired over half of the shares issued as part of the Conversant acquisition late in 2014. With that, I will turn it over to Bryan to talk about LoyaltyOne.

Thank you, Charles. LoyaltyOne's revenue declined by 15% or $54 million to $302 million, and adjusted EBITDA declined 24% or $21 million to $66 million for the second quarter. Of course, the strong US dollar continues to be a significant headwind for LoyaltyOne, reducing our revenue and adjusted EBITDA by $49 million and $10 million respectively. On a constant currency basis, however, revenue was flat and adjusted EBITDA declined by 13% versus last year as the AIR MILES low single-digit revenue and adjusted EBITDA growth was more than offset by the program timing at BrandLoyalty. However, when reviewing the AIR MILES and BrandLoyalty businesses separately, the results to date and the outlook for the balance of the year are predominantly positive.

So let's start with the AIR MILES. The AIR MILES business enjoyed a strong second quarter as issuance increased an exceptional 235 million miles or 19% over the same period last year. This is the highest mile increase in any quarter of our history, and it is a critical driver of our profitability over time. Leading the charge was the robust performance of our grocery vertical, which is really attributable to two key reasons. The first, the launch of Sobeys in Western Canada which continues to perform well with increased promotional activity happening at both Safeway and the Sobeys banners in that market. Second, the launch of Sobeys Ontario late in the first quarter of this year and the conversion of its legacy [sow club] Sobeys points to AIR MILES coupled with incremental activity from the existing grocer Metro as they share the category in the Ontario region. The Ontario grocery segment really highlights the role that co-exclusive agreements are playing with sponsors as they look to fend off some of the industry's largest competitors.

Finally, issuance growth in the second quarter was also fueled by other sponsors that participated in a very successful promotion in the market and from our relationship with BMO, who launched a new AIR MILES World Elite MasterCard product into the market. To date, the results are very positive, as it has a compelling consumer offer in the very competitive premium card market. For the balance of 2015, we anticipate that base issuance and spend in the program will continue to be strong. However, we believe the extensive bonus activity from the fourth quarter of 2014 will not repeat itself. As we've said many times in the past, we look at the full-year issuance as the key metric in the business since the timing of promotional activity can significantly skew results in any given quarter. We still expect full-year issuance for growth for 2015 to be in the mid single-digit range.

AIR MILES redeemed also increased 10% compared to last year. This is primarily due to AIR MILES Cash, our instant reward option. The cash program continues to be a very popular reward offering, and it enjoyed a 60% increase in redemptions over the same period last year. We should note the cash redemptions are prevalent in our grocery partners, and so it is following the same growth trend we are experiencing for issuance in this segment. For the full year, we anticipate redemptions to increase by mid to high single digits primarily based on the strength of AIR MILES Cash.

Now let's turn to BrandLoyalty. On a constant currency basis, both revenue and adjusted EBITDA were down compared to the second quarter last year. But they were in line with management's expectations. As we mentioned on the first-quarter earnings call, some clients pulled forward programs that were executed in the second quarter of last year and -- pulled forward in the first quarter of this year, creating some bad year-over-year comps. Again, timing.

Keep in mind that BrandLoyalty's revenue is actually up 41%, and adjusted EBITDA is up 29% for the first half of 2015 versus the first half of last year on a constant currency basis. Based on the results to date and the book of business we see planned for the balance of the year, BrandLoyalty is still very much on track to achieve the full-year projections of double-digit top and bottom line growth, again on a constant currency basis.

Now, a couple of updates on our North American expansion efforts with BrandLoyalty. We are in the final stages of establishing the US pilot program later this year, and this represents an important milestone in our US strategy as we build on both our Canadian and US experience through this year. Additionally, the Canadian programs that we first announced in the fourth quarter of last year are progressing well with proven results. We plan to roll out additional programs in 2015 in that market, and maintain 100% customer retention.

Last, let me update you quickly on dotz. We continue to see steady growth in our collector base and are tracking to reach approximately 18 million collectors by year end. That would be up 30% from the end of 2014. In addition to the continued member growth, the level of sponsor interest is also building, and it could be a catalyst for expansion into one of Brazil's largest markets over the next 6 to 12 months.

In closing LoyaltyOne, while the second quarter was a bit choppy due to timing, we've achieved solid year-to-date results with 17% and 7% growth in revenue and adjusted EBITDA net respectively on a constant currency basis. While the strong US dollar continues to be a headwind for both units, we have great visibility on how our clients will engage with our loyalty platforms over the remainder of the year and into 2016.

I would like to personally thank the leadership teams of both organizations for their continued commitment to both our clients and to the success of LoyaltyOne. Great job everyone. I will pass it back to you now, Charles.

Thank you Bryan. Let's flip to the next page and talk about Epsilon. Epsilon's revenue and adjusted EBITDA increased 39% and 66% respectively compared to the second quarter 2014. Big increases, but not yet where we want them to be. Looking at the legacy Epsilon business, results were close to our expectations with mid single-digit growth in both revenue and adjusted EBITDA. A little short on top line growth, but with solid flow-through to EBITDA.

Turning to Conversant, revenue was down about down 9% while adjusted EBITDA was flat compared to the second quarter of 2014 on a pro forma basis. We are running a couple quarters behind on revenue growth but did see some positive developments during the second quarter. First, we gained traction with our cross sell initiatives, signing over 10 contracts, including names like Hormel, Cornerstone, Nine West, Ann Taylor, Sally Beauty and Hillsburgh to name a few. We estimate that the annualized run rate for all of these new programs will be in the $[50] million range which will drive the terms for revenue growth in the back half of 2015. While we work to return the top line to positive growth after pruning some lower-margin offerings, this shift to more profitable business has led to a 300 basis point expansion in EBITDA margins at Conversant.

Looking forward to the remainder of 2015, we expect organic revenue and adjusted EBITDA growth in the mid single-digit range, down from our beginning of the year expectation of 7% to 8%. Unexpected softness in our agency offering, where we have a couple of very large clients that can move the needle quickly, is the primary reason. For Conversant, we are expecting to return to revenue growth by the fourth quarter, led by strength in the CRM offering and solid adjusted EBITDA growth beginning in the third quarter. Page 9 lays out our expectations for the turn, which Ed will talk about later.

Let's flip over and talk about card services now. For card services, we continue to see very strong results with revenue increasing 27%, which translates to a 20% increase in adjusted EBITDA net. This now represents the 14th consecutive quarter of double-digit revenue growth. Just as importantly, revenue outpaced expenses by 6% as card services continues to drive operational efficiencies while delivering on commitments to clients. As a percentage of average card receivables, operating expenses have decreased a full point to 9.8% compared to last year. The provision for loan losses increased 61%, primarily due to the substantial growth in card receivables as we held the reserve rate essentially consistent with last year.

Fueling these impressive results, we saw credit sales increase 34%, which translated into equally strong average receivables growth of 33%. The fundamentals remain very strong despite a relatively early Easter that pulled some sales into the first quarter. We are measurable and we continue to see tender share gains of more than 175 points. Tender share is the key business metric we track closely as it demonstrates our ability to not only grow with our clients, but also help them grow their overall business and program. Importantly the growth in credit sales was balanced. Our core sales, those are the clients that joined us in 2011 and prior, grew 9% in the second quarter, driven equally by stronger traffic and increased spend from existing card members. This is a continuation of our 3X client growth strategy credit sales.

Growth in the core added about 7 points to the total growth. Intermediate sales, meaning clients that joined us 2012 to 2014, grew about [37]% during the second quarter, adding about 10 points to overall growth. The balance came from the acquired programs added in the later part of 2014. These programs have already seen stronger card acquisition providing momentum for continued upside.

From a credit quality perspective, we continue to see low delinquency rates, and principal charge off rate trends remains stable and in line with seasonal expectations. Funding costs continue to be very stable and should remain so for the remainder of 2015. In summary for card services, the results continue to be strong. The pipeline of new partnerships remains robust with sales gains expected to run close to 30% for the remainder of 2015 and 20% or greater for the next several years. With that, I will turn it over to Ed.

Great, thanks Charles. If everyone can turn to the slide that says First Half Summary, I think this is frankly a pretty helpful slide in the sense that it begins to even out some of the choppiness you will see in the quarters and it gives you the first-half report card on how the overall Company is doing. If you were to go through the individual pieces again, I know everyone is getting tired of hearing about the dollar, but at the health of the business if we look at Bryan's group, LoyaltyOne, again there were a number of timing issues where Q1 was through the roof, Q2 was down. But the end result is through the first six months, you're looking at plus 40%, plus 30% in terms of top and bottom. We certainly expect this business to continue to deliver double-digit top, double-digit bottom on a full year basis. So they are scooting along pretty nicely.

Then we move to Canada, and again we are beginning to see the positive growth develop in both revenue and EBITDA. Again, the critical thing there is the 13% increase in miles issued over the first half, compare and contrast that to minus 2% during the first half of last year. And for those of you who don't live in this business, miles issued is the key metric that will drive future revenue and earnings as we get paid when miles are issued, and that payment is brought into the P&L over a period of time. So overall on a constant currency basis through the first half of this year, we are looking at plus 17% top, plus 7% for the LoyaltyOne business which I think is certainly healthy.

We then move next to Epsilon, again the big issue with Epsilon that we were focused on this year was last year's inability to flow revenue growth through to cash flow growth or earnings growth. And that is where we have really been focused. Epsilon delivery plus 5% top, plus 5% EBITDA in the first half of the year. I would say the plus here is that the flow-through to earnings is in fact happening pretty nicely, and we are seeing that generation of cash flow growth that we did not see last year. Where I think we are short, is I think Epsilon is still a couple of points off of its potential in terms of topline. As Charles mentioned, the database, the loyalty, the data, the digital, all of those areas are doing quite well. We did have some softness on the agency side, so we want to be focused on that as well, but the flow-through looks good.

Conversant I'm going to spend some time on in terms of what we are looking at through the full year. It's going to be an interesting ride. I think we have in terms of visibility, we are feeling more comfortable now than we did three months or six months ago, and we are waiting for that to flow through. What we are seeing right now is that we have completed the pruning, really the low-margin or no-margin revenue, which seems to plague ad tech in general. We are focused on making sure the real sticky stuff with the high margin stays with us. And that seems to be happening, as well as signing a very significant book of new business.

Finally card services, again it is the same old thing of just they are performing better than anyone had anticipated with top line and EBITDA again very, very strong. And really the only thing holding back additional EBITDA growth over and above the 17% is the fact that they are growing so fast that we have to place reserves, which in effect defers the recognition of that flow-through of profit. So even these numbers on the bottom line are a bit muted against what is actually in the book. So overall, the first half, you've got plus 24% top, you've got plus 23% EBITDA, I would say it is a pretty solid first half of the year. What I would call out, especially in today's environment where growth is so hard to come by, we are looking at a 12% organic growth. On a constant currency basis, we are looking at 16% constant currency organic growth. And against our goal of 3 times GDP, we are currently running at 6 times GDP which I think is fairly exceptional.

Let's turn now to Conversant and let's see what's going on here. We put together a couple of charts here, and you will see when we brought Conversant into the family at the end of 2014, the trends we were seeing prior to that and then the trends we are seeing since they became part of ADS. Essentially as a six-month update, we made the bet that the majority of the Conversant offerings would be very, very attractive to Alliance's client base. And specifically Conversant itself was in the middle of transitioning to a model that relied on a client's online and offline transactional level or SKU level data, which should sound familiar to everyone, to provide extremely targeted display ads that were linked across desktop tablets and mobile devices.

When we first looked at Conversant, the biggest challenge they were beginning to have was its size. It was beginning to be dwarfed by some very, very large players in the space, and it was having more and more difficulty getting into the door of the C suite which is where the spending decisions were being made. So we thought as part of Alliance, that challenge should go today. And that's where we are today. We look at first revenue. It is a pretty ugly chart until you start looking at where we see things are heading. Again, as Charles mentioned, we have much more comfort with visibility now going forward than we did three months ago.

Growth rates on revenue have been slowing or outright declining for almost a year and a half or five straight quarters. And the bulk of the recent decline was what we would call self-inflicted as we moved quickly to prune some more commodity-like products which offer lots and lots of revenue, but very little margin if any. And as I mentioned for those of you in the ad tech space, that's a pretty common thing. That is something we are not interested in. That process is now complete, Q2 should be the bottom, and we had to go a little bit deeper than we previously anticipated. But we think we can call the bottom at this point.

Now while we pruned, we also introduce Conversant to some of Alliance's clients, and the response rate has been very, very encouraging. To be specific, I know everyone wants numbers. We inked deals with about 10 existing clients that will drive an annual run rate of $50 million. I would consider that a very successful start to the year. That being said, our goal by the end of this year is to have inked deals that would have an annual run rate of between $75 million and $80 million. We think we are well on pace to hit that goal by the end of this year. And that to me would suggest that the original thesis we put forward is in good shape.

So the overall low-margin commodity stuff is gone, and the GC or cross sell is signed, and I think it is a question of timing at this point. The big question when we signed the original deal was can Conversant be transformed into Alliance's key digital cross sell product and return itself to a high-growth business? I think at this point we all internally feel that the answer to that is yes. And now the question is, how fast can we start to load the new wins onto the platform and start seeing the flow-through to revenues? I think that is the question now. So in our opinion, again I think with some folks it's going to take until we actually print the numbers. But based on what we have signed so far, based on the pipeline, the question has moved away from, is this going to be a nice long-term organic growth business for Alliance? I believe the answer is certainly yes.

The question now is how quickly can we get these folks boarded and start recognizing the revenue and showing the turn? And that is the race now. We need these wins fully up and running by the end of Q3. We have half of them boarded by now, and we need everything boarded by the end of Q3 to exit the year in a strong growth mode. Right now we should get there, but that is the thing we are focused on right now.

Now we turn to EBITDA which I think tells a different story, which also declined for five straight quarters. But as we had mentioned, it has already turned the corner. Again, the pruning of the top actually helps the bottom. And in Q2, EBITDA margins jumped 300 basis points from the year before, and we have turned from five negative quarters into flat, and we should be back into growth mode Q3, Q4 as the acceleration begins. So from that perspective I would say we are in good shape there. If I were to sum up maybe five points here, I would say first, the pruning is done. Painful but necessary, remembering why we purchase Conversant. Number two, I think the pruning hurt the top but helped the bottom and EBITDA has turned and margins jumped 300 basis points. Number three, the cross sell into ADS has already produced deals of $50 million in annual run rate, and we want $75 million to $80 million by year end. We talked about getting everything boarded by the end of Q3.

And then, really if you were to turn to the plus - minus of it that we've been going through, that's why it says Conversant at the top plus and minus. If we were to sit back and say, okay, what did we get right? What did we get wrong? I think at the end of the day, what you are looking at is I think we were too optimistic, we certainly were too optimistic on the timing. We thought Q2 would be relatively flat, Q2 came in about $13 million short on revenue. EBITDA did come in on track which is good, but we do believe the original thesis is playing out nicely. If we can get the value of the signed contracts from $50 million run rates to $75 million to $80 million by the end of the year and get things boarded, we should have a very strong jump off for next year and we expect double-double top and bottom organic growth from Conversant in 2016.

So that is where we stand. It's going to be a little bit of a waiting game in terms of seeing that curve turn on the res, but it is headed in the right direction. The cross sells look good, the pipeline looks good, the EBITDA is heading in the right direction. And I think outside of being overly optimistic in terms of pruning versus putting on the new cross sells, I think we are in pretty good shape on Conversant.

If you were to go now to the 2015 guidance and critical goals for the overall company, again, BrandLoyalty as we talked about for the full year, we certainly expect on a constant currency basis to see double-digit top, double-digit bottom on BrandLoyalty. I would say the potential for the North American expansion is enormous, as Bryan mentioned we have a number of programs already up and running in Canada that are going well. And we expect those to be repeatable next year. The question is, as we begin to dip our toe in the water in the US, how successful that will be. But given the size of North America, that could be a huge new market for BrandLoyalty in 2016 and 2017. And with them running at double top and double bottom, we think this could be a very nice growth engine not only today but really accelerate in the future.

In Canada, as we said the big driver there and the big pleasant surprise is the fact that miles being issued, our key growth driver, is in fact running double digits through the first half, we expect mid-singles for the full year. But again, it's always nice to be ahead on the first half, especially given we were down 2% this time last year. And that will eventually flow into revenue and profit. So I think LoyaltyOne is in very, very good shape. Again, you are fighting against a $250 million hit in terms of top line and $50 million on EBITDA in terms of the dollar. But inherent in this is the fact that the businesses themselves offer great long-term potential.

Then we move to Epsilon. The big goal for this year was to make sure the top line flows through to EBITDA, and we talked about a number of businesses and a number of things that we have done there. Right now we expect the various loyalty platforms, the database, the digital, the data, all of those assets are doing quite well. We are seeing some softness on the agency side. And I think the numbers for Epsilon right now on terms of top line are not up to what the potential should be, which I believe is 7% or 8%. And that is something we will have to continue to work on as we move through this year into next year. So potential there for I think faster growth going forward, same deal at BrandLoyalty, same deal in Canada.

And then on Conversant I think we have completed the internal transformation toward product offerings that really rely on what Alliance does best which is using off-line and online SKU level formation to help drive the targeting across any and all devices mobile, tablet, desktop. Those are the things that would make us different in the marketplace. It seems to be playing extremely well with our client set. Again, we have only talked about 10 or 12 folks that we signed out of probably a population of about 300 clients. So it is a huge potential, I do think the thesis is holding nicely. We do have obviously some timing issues that we are trying to get behind us over the next quarter.

As it relates to our card group, there's not much more to say. It's exceptional portfolio growth, solid strong double-digit revenue and EBITDA growth. I keep going back to the question of, well, it has been such a huge run the last three years or so. Is this -- are we getting near the end here? The answer keeps coming back a very strong no. This thing has got legs to it. We think that based on just the signings we are looking at this year -- we have released some, we have a bunch more to release -- that signing another vintage, meaning that this year's signings would eventually spool up to about $2 billion in portfolio, we are about 85% to 90% done with that already. I would say that the pipeline of deals today looks as encouraging as it did three years ago. I do believe a lot of this is secular in the sense of budgets continue to move away from non-measurable traditional channels, and into the very focused one-to-one marketing that can come with having SKU level information.

So long story short, the card services I think has a long way to go, which is very good news. We did not know when we signed our first $1 billion, vintage whether it was one and done, but it was $1 billion, then $2 billion, then $2 billion, then another $2 billion. So it looks like this thing is going to be around for a while from a credit quality and funding perspective, again as Charles talked about, in good shape.

Overall, organic revenue growth we target at 3 times GDP which would be high single digits, maybe 10%. This year we are currently running at 6 times on GDP on a constant currency basis, about 15%, 16% with overall revenue growth of 20%. And then mid 20%s on a constant currency basis and lots of free cash flow. We're using that this year to buy back a number of shares as Charles mentioned, I think we've already taken in half the shares we've issued on the Conversant deal. That tends to be still a very good use of our capital both today and going forward. And we started the year pretty deep in the hole with the FX issue, and we managed through over performance primarily in the card group as well as share buyback to mitigate what we believe is the entire FX headwind and print the numbers that you are seeing today.

Let's finish up with raising 2015 guidance, our last sheet here. I think we are looking at 20/20, a little over 20% top at $6.5 billion and about 20% on EPS, back to that golden number of $15, which is what we wanted before the dollar tanked. So I think we are all the way back, which is good. And I think that overall the businesses are in good shape.

If you step back, and let me just spend two minutes on this, from a strategic perspective and say -- all right, how is the model doing? How does the Company look? Are you guys at the peak of earnings? Are you somewhere in the middle? And the answer is, what you are looking at is a business where you're going to have usually the majority of the businesses doing extremely well. Some of the businesses under construction, and they tend to swap out in terms of leadership. And right now you have the card services group and the BrandLoyalty group are continuing to produce very big growth rates.

The good news is I don't see that changing anytime soon. But what perhaps is more interesting is the potential for other parts of ADS. I don't believe Epsilon has hit its potential in terms of topline growth, which I think is in the high single digits. We are beginning to see that EBITDA flow-through to Epsilon, so we're basically doing profitable growth, which is good.

What we are not seeing yet either is the potential for BrandLoyalty in North America -- that market is huge. That can be an accelerator to the growth rate of BrandLoyalty. We spent a lot of time doing the six-month checkup on Conversant. We are just beginning to get going here. Are we comfortable that this thing is a double-double top and bottom growth for 2016? The answer is yes. A lot of it depends on making sure we continue that book of signings from $50 million to $75 million to $80 million by year end. Get them boarded, get them up and running, and we should be in good shape.

In AIR MILES, we talked about how the key driver of the financials is miles issued. It was flat last year, we are already running double digits this year. You will begin to see the flow-through next year on the deferred.

Brian talked very briefly about Brazil, but again, from the potential perspective, it's growing 30% top and 30% on its customer base and constant currency. Again, it's at the early stages.

So I think wrapping up, there is a lot of good news. There is work in progress. There are a couple of things under construction. I do not think we are at the peak of what we can do long-term, and that's the way Alliance is basically run. We've cycled through different businesses for the last 15 years, I would expect that we will continue to cycle as we go forward. But right now the outlook looks pretty good. With that being said, I will open it up to questions.

(Operator Instructions)

Your first question comes from the line of Sanjay Sakhrani with KBW.

Questions on the agency side of the legacy Epsilon business or the core Epsilon business. Can you talk about what opportunities there are to accelerate the growth there and maybe diversify away from some of your core customers?

If you look at agency, what is unique about it is agency is more project based versus contracts based. That makes it a little more difficult for us to forecast them, and with several large clients in agency, they can increase their projects and they can pull back so they can full influence the growth rates very quickly.

We talked last year about Ford onboarding, it is ramping nicely. Conversely we had another large client pull back a little bit. So that's a situation where it's always going to be a little bit bumpy being projects based.

The upside for ADS is we continue to grow the technology side double digit within Epsilon plus your ladder in Conversant. You get that back to double-digit growth, that will further diversify the product offering within Epi and allow it to mitigate some of these swings on project-based offerings.

Okay. And maybe one on Conversant, obviously good traction in terms of the cross sell opportunities. When we think about the sizes of the revenue opportunity that you are currently signing versus what might be out there prospectively, is it safe to assume some of the opportunities are larger than what you're signing right now?

No. I think that if you use somewhere between $3 million to $5 million per signing, we are probably at the higher end of that right now. So call it $5 million per over 10 clients.

In that 10, you're going to have a swing between $1 million and $10 million, and it depends on how big a set of services they sign up for whether it is just an affiliate transaction, or whether it is the big CRM type data work. So I focus more on if we have traction with 10, and let's say we add another half a dozen or so by year end, there is probably about 300 clients between our card services group and core Epsilon that I think would be a nice target audience for this.

So you do the math, that is what we are focused on. Obviously were not going to get all 300, but if we could add 15, 20 a year, this could be a nice story.

And the signings that you have, have -- thus far, are those from those segments or are they from elsewhere?

Yes. There have been a couple that have been from -- already in the pipe of Conversant pre-Alliance. But everyone else has been an existing client of either Epsilon or card services. And that was the big bet that we made going into this thing was the ability to get these folks into the C suite.

Okay, great, I have one last one. I guess one of your competitors in the private label space talked about how there's opportunities sub-$1 billion, and obviously there's all sorts of deals out there, $1 billion, in all types of companies.

It doesn't really seem to be impacting you guys in terms of your growth. Is that a safe assumption to make that you're really not seeing a lot of competition as it relates to your niche part of the market?

It's always hard to comment on what other people are saying, but look, we are focused on getting a $2 billion vintage every year and growing tender share in the core. The vast bulk of our stuff as always will be finding retailers that have had never had a program before or had one and had a very bad experience.

We start them up from scratch, and it takes three or four years to turn them up.

And those are things that quite frankly the large card players in the industry -- that is a lot of time, patience, effort for a file that may reach $100 million or something like that which is our average file if not smaller. I don't think -- to move the needle at the big guys, you have to go after these huge ones.

So to answer your question, no, we haven't seen it. That doesn't mean that going forward there could be some irrational bids thrown in for some of our existing clients. And if that happens, we will make money on this business, we will make 2 or 3 times what other card players do, and we are growing 5 times faster. So it is a model that works, and we are focused on making sure we do it profitably.

Okay, great. Thank you.

Your next question comes from the line of Andrew Jeffrey with SunTrust.

Hi, good morning, thank you for taking the question. Ed, I wonder if you could just dig in a little bit on the puts and takes of the transition that is taking place at Conversant. Can you be a little more specific on the business that you are pruning?

I assume that is their traditional media business and the precise rationale behind that. And then also the nature of the new business you are signing, if you exit with $75 million or $80 million of annual run rate revenue from cross sells, are those multiyear deals and what could that number be like next year if you see continued momentum?

Sure. Without getting too far into the specifics, it is pretty basic to think about what would be pruning for us? What are areas that are not that exciting?

The pruning areas would be, look, there's a chunk of that business that is a commodity. And everyone has seen what has happened in ad tech over the last few years and what used to be real juicy stuff is now turning into more commodity type business, especially on the agency side. That to us is less exciting because it brings in a whole lot of revenue, but it doesn't do anything to your bottom line.

We are not out there looking to trade at 20 times revenue and some of that crazy stuff without earnings. We are known for generating huge cash flow. That stuff we don't feel is sticky, we don't feel it's additive to our clients. And as a result, those types of plays have been deemphasized.

That being said, I think there's a lot of very exciting stuff on the agency side that will involve the use of data down to the individual level that we have not really put into place until just now. And so very quickly that could be something from going from -- hey, a client says here is $3 million, I'm having a sale this weekend, let's get a bunch of eyeballs on it across devices -- to hey, I'm having a sale this weekend, here's $3 million. Let's go out and go after the folks that we know have a very strong interest in the brand, have shown a willingness to shop here before, live close to where the stores are, et cetera.

That is the type of stuff that is very, very additive from a value perspective. So that's both what's being deemphasized and where we see the emphasis coming on the agency side.

From the deal side, what you are finding is the vast bulk of the wins are as you might expect in what was called this CRM or the old [detomy] side, where the client will feed us both off-line and online historical SKU level purchase transactions. We will combine that with some Epsilon data we have, and again, we will go out almost on a one-to-one basis to target individuals across the web with relevant ads and offers and link them through unique ID across the three devices.

With the upsurge in mobile, we want to make sure that desktop, tablet and mobile can all be linked together. And that's pretty much what we are doing.

So think of the big growth, think of everything at Conversant basically as the more data we have, the more unique SKU level purchased online, offline data, the more we are going to put our shoulder into it the more our clients like it. And that's what is going to make a differentiated model.

Okay. And then a follow-up on BrandLoyalty. Just looking at -- obviously a very strong first half. From a profitability perspective, it looks like almost all of the EBITDA was generated in the first quarter.

Is that revenue timing question? Is there a fixed cost component the pulls down second-quarter margin versus where you were in the first? Just trying to get a sense of that and whether or not you can have -- whether or not we should expect the possibility of choppy margin quarters in BrandLoyalty over time?

Andrew, it's something we've talked about before which is BL tends to have a high fixed cost structure which we added to during the second quarter as we look to move further into Canada as well as too in the US. So what happens is when we have good sales volume, it drops to the bottom line.

When you have a decline in revenue like we did in Q2, that was down 7% year over year, the high fixed cost structure will hurt you. So what you really have to do is you have a little choppiness there as we talked about before. But if you're hitting your revenue growth targets of 10%,15%, 20% you're going to see it flow through over the course of the year, but a pullback in any one quarter given a high fixed cost structure is punitive to your earnings.

Okay. Thank you, appreciate it guys.

Your next question comes from the line of Darrin Peller with Barclays.

Thanks, guys. I just wanted to touch on this one organic growth rate in Epsilon for one more minute just briefly. I know there was a client you said pulled back, and obviously Ford's going well, but it's been a few quarters now where you've seen mid single-digit growth there from the legacy organic business.

Should we be looking at Epsilon now as a story where to see that high single digit growth rate again, it has to be really encompassing the fully synergies and cross selling from Conversant? Or is your legacy Epsilon business powerful enough by itself to still be a high single-digit grower? Just if you can help us think about that.

Yes, look, we are pleased with the flow through, we are not pleased with the top line. I do think Epsilon is a 7% or 8% top line organic growth shot by itself.

I think with Conversant now that we are getting on the upswing, that will bring the whole segment up a few points, and that is really what we are looking to do. But I don't think 5% growth top line for Epsilon is what we are shooting for. I don't think that is an acceptable long-term number.

Okay, so it's still 7% to 8% in your mind.

Yes.

Okay, shifting gears. BrandLoyalty, I know this quarter again you had a pull forward in first. That is an area that does seem like with the buildout in Canada, $25 million incremental revenues there and potential in the US, it could be a very large contributor maybe a year from now.

I guess two questions. Number one is how substantial of a ramp do you think we could see for that in the new markets outside of just Europe? How is Europe going, first of all?

More importantly in terms of the opportunity in the US and Canada, is this something we could see in 12 to 18 months be really substantial? And then in terms of ownership stake of BrandLoyalty, I think you were expecting that to increase per year, right? Can you just remind us on the economics around that?

I will answer that one first, Darrin, which is yes. We own 70% now, and we look to take the next 10% in January 2016, and then in 2017 and 2018 is the way it's structured.

Okay, thank you.

On the business side, I would say what is the nice thing about BrandLoyalty as Ed alluded to in his comments toward the end is that the growth is very solidly happening across our European and Asian base right now. That is where the primary growth is coming from. Canada is certainly additive to it.

But what we are seeing is a lot of clients renewing programs. A lot of new clients coming on board, companies like Lidl extending programs into other markets they operate in. So I think we feel really quite confident about what we are seeing in the existing markets that they are operating in today.

To answer your second question, which is what's the horizon on the North American marketplace growing? If Canada is any indication, it would take a couple of years of starting the deal and starting the relationships with the clients.

I think what happens is that you see a pilot program, or you may see an initial program run. Then what we have seen in Europe is that the ultimate goal is to get your clients running a couple of programs a year.

So they dip their toe in the water and figure out how this works for them. They see the results because we see that this definitively has an impact on our partner results.

And then they are looking at doing a program again to fix the growover issues that they have in the following year. Then they look at adding a second program. So it's a stair step thing that happens over time. The big thing for the US would be how many clients we've got.

Yes, it seems like obviously a much bigger opportunity market wise. The only questions just how much competitive there is around loyalty solutions and rewards type programs in general in the US. But it seems like with your pilot and what you're doing in Canada, there's a good start.

So I guess the question is you're not worried about the competitive dynamics in the US? You think that's something that can be big?

Yes. It definitely can be big. And I would say if Canada is an indication, what we are seeing is that they are layering this program in, in addition to the long-term loyalty initiatives.

So they are replacing other promotional activity in running these short-term 16- to 20-week promotional campaigns. And if the results -- there's no reason to believe that the programs would not work equivalently well in the US, I think the markets are similar enough. It's just about the grocers adopting it and thinking about this as a new tool in their arsenal.

That's great, Bryan. Charles, very quickly within the private label, and sales coming on in Q3 I think or Q4 maybe, how should we look at the portfolio yield cadence in the back half of the year? And then just for chargeoffs, should we still expect flat to slightly up versus 2014?

So from a yield standpoint, I'm looking for about 1 point down year-over-year. That's pretty much what we thought starting the year.

For a provision standpoint, probably an ending reserve around [5.5] which means a loss rate around [4%, 5% ish] for the year. It may be up 10, 20 basis points year-over-year. We will continue to work with it. Obviously it takes a while, and we are working through that to get it done by the end of the year.

All right, it's all unchanged. I think that's all for me. Thank you, appreciate it.

Your next question comes from the line of Josh Beck with Pacific Crest.

Thank you. I had a question on going back to some of these CMO conversations you were having. You talked about 300 plus targets more or less among your card services in Epsilon client base.

Can you help us maybe bring to life some of those conversations? Help us understand how CMOs are viewing your differentiation relative to competitors. Obviously there are a lot of other people knocking on their doors as well.

So just help us understand where you stay now? Is it your data assets, what you're doing with attribution, transparency? I'm not sure exactly what it is, but if you could just give us some color there, that would be very helpful.

Sure. Not a problem, Josh. I think if you look at what we are trying to create here across -- we talked about card services, we talked about Epsilon, I am bugging Bryan who's sitting across from me to get going on Canada and frankly get going on Europe and elsewhere. He's a little busy right now.

Anyway, there is probably -- if you look at it in terms of all the stuff that is out there swirling around in the marketplace, and there is a lot of good models and everything else, we are focused very closely on five things that differentiate us from the rest of the pack. The first one is as we talked about, because of our size and because of what we do for a living, we only do one thing which is using data to engender loyalty and drive sales. And our ability to reach any CMO across the spectrum is solid.

We can get in the door anywhere, get a meeting whenever we want, and so that is the first step. You need to get an audience with the people who are making the decision. And that is something that was fading at Conversant. So we can offer that.

Point two is that these are existing clients and recall again what we do for a living. We are already the trusted partner when it comes to handling their most sensitive information.

So if you think about their offline and online transactional level information, they don't give that to just anyone. We are building the biggest loyalty platforms in the world. We are building these huge card programs. We are the ones collecting that information.

We have a good trusted relationship, so they are not going to freak out when we say with Conversant to do targeted ad across multiple devices -- hey, we are going to need a couple of years of historical online, offline SKU level information. In a lot of cases, we have it. In other cases, the CMO will be very comfortable giving it to us. That is something that the CMO would have trouble with, especially when you get into a couple of the really big guys. We're viewed as a neutral party.

The third thing again, look, we are never going to use social information to help drive our targeting. Our mousetrap is purchase level actual purchases that are made online/offline, and again, that makes us a little bit different from others.

The fourth would probably be the fact that we have unique identifiers that have been able to link your desktop with your tablet with your mobile device. And this unique ID means basically our targeting can be that much more precise and specific. And we are not wasting a bunch of the client's money hitting the same person across their IDs like there's three different people.

And finally, we are not software as a service. We are a services company. We have 8000 folks in Epsilon Conversant, and we believe there's a huge market out there for CMOs who want all the technology that we have, all the creative that we have but also wrapped together in services so they can pick up the phone with one throat to choke.

That's a very long-winded answer, Josh. But the end result is those five things that we think will make this unique. We will not be all things to all people. But for our 300 clients, we think it is a compelling offer.

Great, that is very helpful. Certainly a lot of moving parts to get there, but I do understand what you're saying.

I also wanted to ask on BrandLoyalty. How do you see the margins for that business at scale? Obviously it's an earlier business and you are building it pretty substantially. So where could I go if you put your longer-term hat on?

And how should we think about seasonality moving forward? Obviously this year we've had some moving parts between Q1 and Q2, and I think we probably also have some moving parts around expanding that business. So maybe help us think a little bit more about the seasonality of that business and how it evolved.

On the margin side, I think to say it's 20% plus would probably be in the right range. Ed talked about -- or Charles talked about the fixed cost nature of the business, but I know there is continuing focus there on how we grow margins over time. But I think that would be safe.

Then on the second question around seasonality, you have to think about when grocers really want to focus on what happens in their business. And that is heading into the holiday seasons. You can imagine in the US, Thanksgiving will be a very large period of time and then the holidays after that, Christmas.

So what you see is that programs tend to skew a little bit toward the latter part of the year, and then sometimes those programs run into the beginning of the following year into the first quarter. So you might get a little bit of flop over of revenue and profit as you clean up the fall programs. And then people tend to run spring programs as well.

It's just depending on -- it really is depending on the clients and what the clients are trying to do in their business. We start from what the grocers are thinking about in terms of where they are looking to ad sales and create excitement for customers. So that creates a little bit of the shift back and forth in terms of how you see --

Q4 is usually our biggest.

Yes, Q4 is usually big.

If you look at the first three quarters, what he's basically telling you Josh is it's not going to be a constant seasonality for the model every year. It's going to be a little bit bumpy with Q4 being the biggest.

Great, thank you.

Your next question comes from the line of Dan Salmon with BMO Capital Markets.

Hi guys, good morning. Ed, when you look at the robust pipeline you've got on the private label side, you mentioned if you look back three years, you feel like it's just as strong now as it was then.

How is it different? Is it maybe more tilted toward co-brand, are there different verticals that are driving it more?

But just as we think about the run rate over the next few years, you've obviously seen some new types of clients coming in there. If you could just give us a little bit of color on how you see that growing and executing against that robust growth numbers that you talked about.

That's a fair question. Some of it again would be self-imposed on our end, which is -- I do think the co-brand side of it we're going to be a bit more cautious on because the co-brand stuff tends to attract some of the other players in the marketplace who are looking to make it the number one card in the wallet, which is not necessarily what we are after from our clients' perspective. They just want to make sure it's number one when you are shopping at their store.

And so I would expect that you would continue to see the vast majority of our announcements to be private label as opposed to co- brand, which is really our basics. The co-brand stuff for the most part, if you looked over the portfolio, has either been in TNE which is unique to the TNE space or more specifically they're co-brands that the clients have said -- okay, I have a private label, maybe I can get even more penetration with the co-brand.

So a lot of our stuff are dual card programs. And that's where I see some of our growth on the co-brand side going forward, which is an existing client who says hey, can I get another 10 points of tender share if I offer a general-purpose card?

So we are pretty attracted to that stuff. But for the most part, private label, probably 75% of our stuff will be private label. And a portfolio we would like to keep at 75/ 25, we think that is a good mix on a long-term basis.

In terms of where the deals are coming from, again whether, depending on how you cut it. In our little sandbox, we've talked about 350 or so type clients that we think would be a good fit. And of those, there are only still about 150 who have a program, so we still have -- we are not even half penetrated at this point. There are just a lot of folks who are turning off the general spend marketing, and moving over to the measurable data driven targeted marketing.

So it is a reallocation of their budget dollars. And we're just seeing it in waves today that started three years ago. You cover the space, you know what goes on.

Okay, great.

Okay, we will take one more. That's it?

Yes.

Okay. Thank you for all of your time, and we will see you next go around. Bye now.

Ladies and gentlemen, this does conclude today's conference call, you may now disconnect.