Bread Financial Holdings Inc (BFH) 2015 Q3 法說會逐字稿

Good morning and welcome to the Alliance Data third-quarter 2015 earnings conference call.

(Operator Instructions)

In order to view the Company's presentation on their website, please remember to turn off pop-up blockers 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 third-quarter 2015 earnings release. If you have not, please call FTI Consulting at 212-850-5721. 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 Kennedy, Chief Executive of Epsilon/Conversant.

Before we begin, I'd 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 risk 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 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 Investor Relations website at www.alliancedata.com. With that I'd like to turn the call over to Ed Heffernan. Ed?

Thanks, Steve. Welcome everyone. Joining me today, as mentioned, is Bryan Kennedy, the CEO of Epsilon and Conversant, and Charles Horn, our always dynamic CFO. Bryan will update you on both Epsilon, and in particular, the trends that we're seeing at Conversant and (technical difficulty) [for] results and then I'll finish up and discuss our final outlook for this year and then what we're thinking about for 2016. So with that, I'll turn it over to Charles.

Thanks, Ed. It was a strong and balanced third quarter for Alliance Data, as all three operating segments achieved double-digit growth on a constant currency basis. Importantly, organic revenue growth has continued at a double-digit rate. This allowed us to drive 20% growth in revenues to $1.6 billion for the quarter, despite FX headwinds, which dropped the growth rates by about 5%.

Adjusted EBITDA net increased 20% to $453 million for the third quarter of 2015, as we were able to successfully flow through the increase in the top line to the bottom line. Core EPS increased 14% to $3.95, exceeding our guidance of $3.90 for the third quarter. A higher share count, up about 3% compared to the same period last year and FX headwinds of about 4% dampen the growth rate.

EPS decreased 24% to $2.08 for the third quarter, burdened by approximately $0.65 in charges related to consent orders entered into by Comenity Bank and Comenity Capital Bank with the FDIC, pertaining to practices associated with certain credit card add-on products. These practices were principally for the years 2008 to 2013, and we believe the we have substantially addressed the FDIC's concerns.

Turning back to the share count, you may remember the increase in share count is due to 4.6 million shares issued late in 2014 to acquire Conversant. Since the acquisition date, we have bought back 3.3 million shares, or about 73% of the shares issued to acquire Conversant. We have done this for two reasons. First, we remain bullish in our stock, and Ed is always eager to get shares in the door. Second, we're adding financial leverage to the Conversant acquisition, consistent with the manner in which we'd have liked to last year, but weren't quite capable. We have done so while maintaining a prudent leverage ratio of 2.8x.

Let's go to the next slide talk about LoyaltyOne. LoyaltyOne had a solid third quarter, with revenue up 10% or $33 million, and adjusted EBITDA up 11% or $8 million on a constant currency basis. Substantial FX headwinds reduced reported revenue by $59 million to $299 million and adjusted EBITDA by $14 million to $65 million for the third quarter of 2015.

AIR MILES issued increased of 5%, while AIR MILES redeemed grew by 7% from third quarter of 2014. Additional bonuses and promotions related to our Sobeys relationship, as well as a few other grocer sponsors, helped drive issuance growth during the quarter. AM Cash, our instant rewards program, which is popular within the grocery vertical, is primarily driving the growth in both issuances and redemptions.

As we have talked about before, much of the strong promotional activity seen in the first half of 2015 will not likely be replicated in the second half due to the [pull forward] of several programs. Looking ahead to the fourth quarter, we expect issuance growth to decline about 7%, but still remain on track for mid-single-digit issuance growth for the year.

Turn to BrandLoyalty, it was another great quarter, with the revenue up 30% and adjusted EBITDA up 42% on a constant currency basis. Strong program performance, most notably in Germany, and improved margins for a few core programs, contributed to the top-line growth and drove a 200-basis point expansion in EBITDA margins. The expansion into North America continues to be a key growth initiative and is gaining traction as we have already signed contracts in excess of $40 million. The initial pilot for the US market is set for early 2016.

Lastly, an update on dotz. With over 60 million collectors enrolled, the program is the largest of its kind in Brazil, growing its collector base at more than double the rate of the next largest program. Market expansion remains key and we plan to launch into a major market before year end. I'll now turn it over to Bryan to talk about Epsilon/Conversent.

Thanks, Charles. Epsilon's revenue increased 41% to $532 million and adjusted EBITDA increased a strong 60%, both helped by the acquisition of Conversant in December of 2014. If you were to exclude Conversant, revenue and adjusted EBITDA increased 5% and 6%, respectively, for the third quarter of 2015, with margins expanding by 300 basis points, also mostly due to Conversant.

For legacy Epsilon, the third quarter showed steady progress, as we improved by a full point in both top-line and bottom-line growth rates compared to the previous quarter. Much of that lift came from strong performance in our technology services business, along with good strength in the automotive vertical, where existing clients were adding on additional services. That over performance more than offset some of the projects softness we've seen within agency.

Turning to Conversant, the next slide, I'm pleased to report that after three straight quarters of revenue declines, Q3 demonstrated a substantial recovery and came in at flat versus prior-year, reversing a trend which had appeared to be accelerating over the first half, but was in fact all part of the transformation process we have been undergoing the entire year.

Specifically, we spent the first half of the year purposefully pruning some portions of the business that relied on more commodity-like offerings, as we shifted our focus toward an intensive, data-driven, people-based approach to digital marketing. As we demonstrated over the first half, these offerings are more profitable, evidenced by the growing improvement in EBITDA performance over the first two quarters, and then punctuated by adjusted EBITDA growth of 9% in Q3 on a pro-forma basis, with margins improving about 300 basis points over prior year.

But we also believe that this approach, the data and sensitive people-based marketing and personalization approach offers the best opportunity for top-line growth. The turn from decline to flat also demonstrates the success of our second major focus during the first three quarters, which was to introduce the power of the Conversant offering to our enterprise Epsilon client relationships.

The backlog of $50 million of annual potential has continued to gain traction, swelling to over $70 million as we continue to add wins, with newly signed clients including brands such as Patagonia, Toys"R"Us, Norwegian Cruise Lines, Nature's Way, and a leading American automotive manufacturer. Importantly, these wins demonstrate a few key reasons why we brought Epsilon and Conversant together in December of last year, and I want to take a second to walk through those.

First, Conversant's assets are unique and differentiated in the marketplace, but they needed the benefit of access in a space that is crowded and noisy and filled with a lot of large and small companies calling on clients with a lot of bold claims. Epsilon's trusted client relationships have provided fertile ground to introduce the unique assets that Conversant brings to the table.

Second, Conversant's offering, built around power of first-party transactional data, so commerce data, is not only differentiated, but it just provides better results. Each of the wins with Epsilon clients involves a rigorous process of testing in which the accuracy and persistency of Conversant's offering has been proven with side-to-side comparisons, with the ultimate determinant being measured not by clicks or views or impressions, but really looking at online and offline sales, which at the end of the day, is all that really matters to our clients.

Third, it was critical for us to continue the transformation of the business through investment in the common platform, which brings together the CRM, mobile, video display, and affiliate platforms to create the most precise and reliable cross-device, anonymized identity database, powered by over 2 billion transactions that we see every month. This platform allows us to understand the unique device profiles of each consumer with 95% verified accuracy, using deterministic, not probabilistic methods to identify those individuals.

Those investments now are really beginning to pay off for us. Earlier this quarter, at Advertising Week, we were awarded a Mobile Mafia Award for innovation in advertising, with the best technology publishing platform for mobile. All that is due to our rich cross-device capability, something that clients are really striving after. Our platform accurately reaches over 90% of iOS and Android users enabling our client brands to connect to consumers where they live, on mobile, without dependence on device IDs or cookies.

We also launched this quarter our personalized video offering, which extends Conversant's powerful contextual video offering by incorporating 150 million individualized profiles from Epsilon data, enabling our clients to dynamically personalize pre-roll video advertising on both mobile and desktop, tailoring offers to individuals to drive relevance and response, while preserving viewability and brand safety, which are super important in the video world. As consumers continue to shift toward online content consumption and away from traditional television, we are intent on leveraging the power of our Epsilon data and the Conversant Common ID platform to continue to create effective advertising opportunities for clients.

Summing it up, together Epsilon and Conversant have a rich offering, spanning data, technology, analytics, strategy, creative, and digital distribution at massive scale to allow the Global 1000 CMO to maximize the trend of data-driven omnichannel marketing. We have an online and offline data asset that together allows us to understand consumers better than any company, and a delivery engine to reach those consumers, again both online and offline, with persistency, accuracy, and relevance. Our emphasis on a services-driven model that leverages the power of all that data and the deep technology IP that we have, but powered by a brilliant team of marketing professionals equipped with the expertise to really drive real measurable results for our clients is a core differentiator for our business.

Looking ahead, we still have lots of work to do, but we are very encouraged by the trend we are on. The backlog of wins, while making a modest contribution to 2015, should give us a strong running start for 2016. In the US, we're on good footing with this growing backlog, and now our focus will turn to expanding our cross-sell program to new verticals, to clients within other parts of Alliance Data, to our affiliate marketing business and to international. While it has taken longer than we thought to work through the turn, we are bullish and excited about the next several quarters, as we move from riding the ship to now focusing on innovation and on growth. Okay, that's it on Epsilon/Conversant. I'll turn it back over to you, Charles.

Thanks, Bryan. Terrific job for the quarter. Let's go to the next slide and talk about Card Services. It was another in a long string of quarters with double-digit growth in both revenue and adjusted EBITDA net. It all starts with credit sales, with which were up 34% for the third quarter. Organic credit sales grew an impressive 19% complemented by a solid back-to-school season, representing just over one-half of our credit sales increase for the third quarter.

The rest is fueled by significant new partnerships. [Our core clients], those that have been with us since 2011, saw credit sales increase by 9%, as card members shopped more frequently and spent more. This combination drove an estimated 175-basis point increase in our tender share for the third quarter. The value of our offering to our clients is simple: customers with one of our cards shop more often, spend more, and are more loyal than their non-cardholder peer group.

An area of focus for us is digital sales, or those sales which have occurred outside of a physical store. Notably, digital sales have increased to 27% of all credit sales in the third quarter of 2015. Additionally, mobile channels now represent nearly 10% of all new credit applications. These trends, driven by established GenXers and Millennials confirm the evolution of today's shopping journey, as customers leverage their smartphones as a primary tool to shop and purchase.

As such, our mobile strategy is deliberate and focused on our clients' future growth in this area. We recently announced the launch of our full mobile loyalty suite, aptly called My Loyalty app. This proprietary suite provides a branded wallet solution that allows retailers to collect, connect, and leverage key shopping data, while using their existing technology. We're seeing that early adopters deliver nearly 30% increases in transaction sizes when using their mobile card versus their physical plastic. These impressive results were achieved by leveraging our understanding of the consumer, how they are changing, what they are telling us, and how we turn the data they provide into valuable actionable insights.

Turning back to our strong financial performance, average card receivables increased 30%, driving an impressive 23% increase in revenue for the third quarter of 2015, marking the 15th consecutive quarter at double-digit growth. Operating expenses grew at a slower rate, 20%, reflecting our focus on gaining expense leveraging.

The provision for loan losses increased 50% due to strong receivables growth and our expectations for about a 30-basis point increase in principal loss rates this year, primarily due to the seasoning of the large 2013 and 2014 vintages. The bottom line of adjusted EBITDA net increased 14%. From a credit perspective, we continue to see low stable delinquency rates and our principal loss rates that are trending towards our guidance of mid-4%s for 2015, or up about 20 to 30 basis points compared to 2014.

Looking forward, our outlook remains bullish for a number of reasons. First, we have signed a number of new currently unannounced clients; second, a robust pipeline that will enable us to continue to signing $2 billion annual vintages; third, our ability to leverage joint opportunities across our lines of businesses, such as [with Toyota] and Epsilon clients becoming a Card Services client; and lastly, our ability to use data insights to drive further tender share within our existing partnerships. With that, I will turn over to Ed.

Great. Thanks, guys. I'm on the slide 2015 Guidance and Critical Goals, an update on the full year, and as we head towards the finish of the year, where do we stand. Again, let's break it down by platform.

If you start with the group under LoyaltyOne, you start with our BrandLoyalty business, which you can think of as our European platform. That's the platform that essentially extracts data about the purchases of shoppers, primarily at grocery stores, and uses that information to then target and drive shorter-term loyalty programs from that platform on behalf of the grocer. They obviously have done exceptionally well, not only last year but this year, as well. You will also notice that there is a certain amount of choppiness in the results, so it was -- it's very hard to predict on a quarter-to-quarter basis how they will do. But it's pretty straightforward when it comes to the full year, so we do caution folks to look at the full year and that's really how we look at the business. You'd notice in Q1, revenues were up about 100%, Q2 they were down 7%, Q3 they were up 30%, so it really is determined by when the programs are run.

The bottom line of all of it is they are having another heck of a good year. Again, if you normalize for a constant currency, that is assume that the foreign exchange rate this year was the same as the foreign exchange rate last year, we call that constant currency, you'll see that they are up strongly double-digit, both top and bottom. Probably the biggest development there is the expansion into North America. That is pretty exciting for us. We started up in Canada, which made a lot of sense because we have some very strong, long-standing Canadian grocer relationships from our AIR MILES program. Sure enough, we were very successful in selling into those sponsors this shorter-term loyalty approach, along with maintaining the longer-term approach with AIR MILES. As a result, we are looking at somewhere to $40 million run rate in terms of revs, just out of Canada alone.

We're obviously looking south of the border, as well, south of the Canadian border, that is. You'll hear more and more about some of the pilots we are beginning to look at as we move into the latter part of this year and into 2016. But obviously, if we can get the US ripping, it should be in pretty large market to be additive to BrandLoyalty. So double-digit top and bottom there, all organic.

We then turn to Canada, and again Canada, that platform, same concept except the fact that it's a coalition of a number of folks having a common loyalty program that is shared. But again the thesis is the same, which is utilizing the information from the members to then develop incremental marketing programs to drive higher sales and engender loyalty across the sponsor base.

The critical thing we looked at there is how has the weakness in the Canadian economy impacted our ability to issue these miles, which are based exclusively on the dollars spent. What we found was it didn't have a big impact, and in fact, our issuance growth, which again is the key driver of eventual financial performance, has been quite strong. We target mid-single-digits because that will eventually flow to mid-single-digital top- and bottom-line growth and we've been successful at doing that this year.

A large part of the growth has come from the grocer segment, so perhaps it had something to do with the fact that if things are a little bit tougher, some of the more non-discretionary spend categories, such as grocer and pharma and petroleum, actually do a little bit better. Regardless, we think the issuance growth is a good predictor of future financial performance, and as a result, Canada seems to be hanging in there quite nicely. So two for two on that one.

We then turn to Epsilon and Conversant, and Bryan did a good job of walking through. I just wanted to reiterate on core Epsilon itself, the big goal for this year, frankly, was let's see if in addition to growing revenues, we can actually benefit by flowing it all the way through to the bottom line or EBITDA growth. If you recall in 2014, we had revenue growth of around 7%. But due to the very high labor costs associated with a lot of these hot skill jobs, where we're competing with the usual folks for talent, the actual bottom line growth was essentially nothing. So we wanted to change that and to refocus on those areas where we had a competitive advantage. I am pleased to report that this year, it looks like we are in pretty good shape there, mid-single-digit top line is in fact flowing to mid-single-digit EBITDA growth and that's our job. So I feel good about that.

Conversant, a big sigh of relief, you're hearing from this end of the phone, in the sense of it's always challenging when you're a public Company and you have an asset that you bring on board that you know needs to go through some level of transformation. In this case, it was transforming the Conversant model, really the old value click model, from a more of a commodity-like product in today's world to really a unique product that focuses on pulling in customer SKU-level information online, offline, using it with Epsilon. That will help drive very targeted, focused marketing across the display, mobile, tablet and that has been extremely successful.

As we talked about, it caused a fair amount of angst out there for the first half of the year. It look like the trend was not our friend and heading in worse shape than we had thought, but in fact, that turn has been reversed completely. A lot of it has to do with the huge book of business that has been signed. Our backlog of signings is now up to $70 million on an annualized basis, and still growing, and the year isn't out yet, which suggests this thing works. We think that the ability to marry the unique SKU-level platform with the access that Epsilon can provide to the CMOs out there has in fact worked. Therefore, we are feeling very good about where Conversant is heading as we close out this year and a great running start for next year.

Again, as a public Company, we don't want to do this too many times. It wasn't the most fun that we've had over the years. It's basically trying to change a tire on a moving car while under scrutiny. The tire has been changed, the car is in good shape, we've turned the corner, and also we've actually expanded margins on top of it, which in ad tech, it's tough to find folks who actually make money, let alone make the type of margins that we have, so we can finally this put this one to the bed.

This should be a good contributor, not only to the Epsilon client base, but as Bryan said, we are equally excited as we roll it into our Card Services group, our Canadian AIR MILES business, those clients, as well as our European platform partners. We got a long, long runway to sell the Conversant offering into the massive client base we have here.

So that's that and we certainly don't want to be light on the Card Services group. People are beginning to just take it as a given that they have a tremendous quarter, but we do want to call out the fact that they had a tremendous quarter. Once again, you have a marketplace where probably traditional Card Services is growing maybe 3%, something like that, and in our portfolio, it was actually up 25%.

The reasons behind that start primarily with the core clients that we've had for many, many years. We continued to see very strong growth in tender share, meaning the percentage of dollars that are spent at that retailer that are placed on our card continues to grow. So if a retailer is doing 3% or 4% sales growth, we are actually doing closer to 9% to 10% at that retailer. The first 10% of growth comes from these folks who traditionally you would think have maxed out and they haven't. And a lot of that has to do with, once again, to beat the drum, the ability to take SKU-level, purchase level information and flip that around into very focused marketing information, targeted marketing across multiple channels. So the tender share gains are driving probably 10 points of growth.

Then Charles talks a lot about the $2 billion vintages and what are those. What that essentially means is, each year we want to sign about $2 billion worth of business, which really means that we can sign a bunch of clients, primarily clients where we are starting from scratch, and over the course of, let's say, three years, at the end of three years, the combined portfolio size for all of those clients for a given year will be roughly $2 billion. So when we say $2 billion vintage has been signed, that essentially means that three years from now, we will have added $2 billion to the portfolio itself. Again, this is $2 billion this year, $2 billion last year, $2 billion the year before. We expect another $2 billion next year.

Again, there are number of non-disclose clients that we've signed, but just a sample of some of the others included Toyota, Cornerstone, Wayfair, Hot Topic, Farmers Insurance, Red Roof, Univision. It gives you a sense of the breadth of this offering across multiple verticals. We do see a very strong demand based upon our pipeline for this to continue strong double digit revenue and EBITDA growth for this year for sure. Very strong demand out there in the marketplace, as -- and Bryan alluded to this in Epsilon/ Conversant as ad dollar shift from traditional channels into the data-driven targeted marketing channels, which is what we do in the private label card business.

Then finally, obviously delivering the full digital suite, all these different mobile apps and all that we continue to roll out. It should be noted that a typical client for us actually has almost 30% of their sales are online at this point, which is quite high. It's, overall in the US retail space, it's more like 10%, so being at 30% means that we need to be on our game when it comes to offering the latest on the digital side. Whether it's an online purchase or someone is applying for the card while they are shopping in the store, being able to do it as they are shopping over the phone, having a virtual card pop up, having their loyalty points and their rewards and coupons and everything else handy in their mobile device, those are all critical items we see going forward. Again, we're pretty excited about it, and overall, I know that from a macro perspective, there's a lot of noise out there in terms of lack of revenue growth.

We have a long-term model that essentially is -- we expect to grow at 3 times the rate of growth of GDP, and this year we are running north of that, probably around 10% or 11% and then constant currency actually around 14%, so we're in the right markets for sure. And then with the Conversant deal, we'll do 20%-plus. We've got $1.3 billion of free cash flow and I'd say overall, we had two big challenges this year, one being the Conversant one that we talked about. We would like to think that is in the rearview mirror at this point. Then the second is the foreign exchange headwinds that have dinged us for about $250 million top and probably $50 million on -- $0.50 on the bottom line. Those were both a bit unexpected and hopefully we don't have that level of excitement next year. That's where we are for this year.

If we turn to the actual dollar guidance, as we talked about, we're going to stick to our guidance of roughly $6.5 billion top, up about 23% and core EPS, where it looks like we're going to make that $15 number, which also looks pretty comfortable at this point. That includes a drag of $250 million on the top due to FX and another $0.50 drag on the bottom, but again, the organic revenue growth for the overall Company is 14%, which is well above our model.

Before we move on to 2016, talking just briefly about our use of capital, probably three areas, the first being our European platform, BrandLoyalty, taking our ownership stake up another 10%. We are at 70% today and we will move that up to 80% as we move into next year, so a nice steady progression for that great business in Europe. The second is, of course, we need to set aside capital as the portfolio grows in our card business, and so if we're looking at this year, almost [$3 billion] of portfolio growth, obviously that needs to be backstopped with capital down in the business itself.

And then third, it was a two-fold play this year on the buyback, and that was the fact that when we did the Conversant deal, we did it for roughly $1 billion in cash and $1.3 billion in equity. Obviously, we would've preferred to do it all in cash at these cheap rates, but we didn't. We did what we thought was prudent at the time. The weak or soft stock price this year has really given us an opportunity to take advantage, and we have taken out over two-thirds of the equity that was issued in the Conversant deal with low-priced debt. So in terms of our cost of capital for that deal, it has dropped significantly, which should make the return in the accretion quite a bit higher. Despite being somewhat disappointed at where the stock is traded this year, we have taken advantage of it nonetheless and that should pay dividends going forward. That's really the game plan for where we stand on 2015.

Let's turn to 2016. As a general statement about 2016, you've got a lot of the noise that's out there and a lot of headlines about some of the slowing global macro environment and what does that mean and are people going to still be able to grow their businesses? We've looked across all of our businesses and, frankly, we think we are going to have another very strong year and look no further than probably revenue on a purely organic basis.

We are thinking our goal of 3 times the GDP growth rate, we think we're going to be north of that, again, somewhere around 4x GDP, or maybe around 11% growth, so we're not really seeing the impact of a slowing global environment in our businesses. A lot of that, of course, has to do with the continuation in the shift of the massive dollars being spent in marketing, shifting away from general and into data-driven targeted marketing. So clearly, the trend is moving in our direction again and we stand to benefit from that.

From initial 2016 guidance, I know it's very early, and we will clean it up a little bit when we release Q4, but we like to set some base expectations. At BrandLoyalty again, our European business, we look for another year of double-double top and bottom, when it comes to constant currency growth rate there. In Canada, we actually are looking now for mid-single top and bottom growth there, as we begin to see the benefits of the positive issuance start flowing through the financials. So when you factor out any fluctuations in foreign exchange and look at the businesses themselves, we should have very strong year out of both BrandLoyalty, and a very solid year out of the Canadian business.

We then turn to Epsilon, and again, we've been running somewhere around 5% or 6% top and bottom, at core Epsilon. We would like to continue that trend and then this time let's actually have contribution from Conversant in terms of, at this point we're just going to say high single top and bottom, throughout 2016, which will be a very nice add. It will also -- really, if you were to look on a pro-forma basis of where the combined Epsilon/Conversant will come in this year, you're talking 3%-ish probably top and bottom combined. We expect that to double next year to 6% to 7% top and 6% to 7% bottom. So we want to double their performance, which essentially means that Conversant's turn has to be real and we think it is as we look at Q4 and going into next year, so hopefully off to the races there.

Cards, we don't really see any major headwinds out there. We expect, once again, to sign a $2 billion vintage. We expect the portfolio to once again grow at about 8 times faster than the overall market and another 25% growth on the card receivables. As Charles mentioned, from a loss rate perspective, you've got these massive vintages are beginning to mature and that means that their losses are beginning to creep up to a normalized run rate. That will continued to push up the overall losses 20, 30 bps, so call it a 5% for the overall file as a placeholder, which is fine. We think long-term, the run rate is probably around 5.5%, if we were to look out into 2018, but in the interim, it will creep up as the vintages normalize. But all overall, again, very, very strong growth in the Card Services space, double-double, top and bottom.

Overall, double top, organic, double bottom, or low teens bottom, all in terms of earnings per share. Organic revenue, as we talked about, probably 4x GDP. Lots of free cash flow. And the FX side, we will talk about in the second. I don't know where the currencies are going, so we're not even going to pretend to try to make sense of it.

So if you go to our actual 2016 guidance page with the [nums], what you'll see is we're going to put a placeholder in at about $7.2 billion in terms of revenue, which is again, all organic. It's 11% revenue growth. Earnings per share, we will put a placeholder in at $17, and that's up about 13%, again, all organic. That is a good place to start.

When we talk constant currency, it's just it gets so muddled up out there, that we try to make it real simple. The guidance is based on where the Canadian dollar has traded on average for this year and where the euro has traded on average for this year, so we're trying to do apples-to-apples. The Canadian dollar has been trading around $0.79 for the full year and the euro around $1.09.

So you look into next year and you'll say where is everything going? Who knows? I can look at the spot rates right now and say the Canadian dollar is a little bit weaker at this point, but the euro is a little bit stronger at this point. So the initial gut would say that you are certainly not going to see anything too dramatic next year on the FX, nothing like this year, but it's going to chop around. If everything just were to hold to where spot is today, you will essentially have -- we will be right on target.

That's where we are. That's probably a good metric, and in terms of, as we said, from a macro perspective, we're not seeing it. The businesses that we're in tend to be less impacted by the overall macro and more impacted by the secular trends, which in our case, are all the movements of dollars into areas of marketing that use data, and that's what we're benefiting from, and in that [far away] is the macro out there.

We really didn't address use of capital. At a high level, probably you're going to have some that will go towards acquiring the next 10% of BrandLoyalty to get us to 80%. If we continue to see 25% growth in the portfolio, we will need capital to support that, and then our guess is, some combo platter of a buyback and maybe a small tuck-in if we find something out there. I'd certainly like to take out those final shares that we issued on the Conversant deal and we're always hunting for something on the M&A side. Essentially, we don't have anything lined up right now, but that's where we would look to do it. That would keep our leverage around 2.5 times and we would like to keep it somewhere around 3 times or less.

End of the day, finishing up, the elevator speech for folks it simply this, that all of Alliance Data consists of a number or series of platforms whether it's specialized for the grocery segment or coalition or one off or something with a liquidity function attached to it. All of these platforms extract purchase level information, both online, offline, which is then brought into the pipe where it is analyzed to look for certain trends and what makes people tick. We then have creative folks that then come up with the various marketing programs. Now, with the Conversant platform, that will spread across all of the divisions of Alliance. We have a means to then reach out to all our consumers, whether it's the more traditional channels, like point-of-sale, in-store, direct mail, permission-based email, and now across all the digital channels as well.

So that's pretty much it, and especially as it relates to Conversant our expertise, look, we're not going to dominate using social information, we're not going to dominate using search information, but when it comes to specific merchant SKU-level information, that's our bag. That's what we're good at. That's our sandbox. That's where we're going to stay and play.

That's it. Why don't we go to Q&A?

(Operator Instructions)

Dan Perlin, RBC Capital Markets.

Thanks. Good morning. I just had a couple of follow-ups on Conversant. As we're mapping out the growth rate and expectations around next year, I want to make sure I understand this roll in of new business versus the pruning and exit of the legacy business. It looks like you're calling for around $70 million or so, but the indication is that it could be as much as $85 million or better for the year of new business, cross sales.

But it looks like the pruning was going to cost you guys about $40 million this year. Is that the right amount and is there continued pruning expected? I thought there was some indications that it might be continue to be down on the display side, some $10 million to $20 million next year?

Dan, your estimate for 2015 is pretty close. That's about what were looking for. If you look into 2016, we wouldn't expect it to be near to that level on the display side of it. We'd expect to see good double-digit growth on the CRM side, we'd expect to see low-single digit, mid-single digit on affiliate. And then any pressure coming through on agency, we'd expect to mitigate it with growth in mobile and in video. So that's really what we're looking for in 2016. You roll it up and you get high single-digit growth in revenue.

Got it. And you announced, I guess it's 16 deals that you guys have won. How many of those are Epsilon? Inter-quarter, you had talked about 12, and 10 were from Epsilon. How does that stack up when we look at the total 16?

On the wins that we have had, first of all, a good number of Epsilon clients are shared clients with ADS retail, so sometimes when we talk about them, they're actually both. But our penetration at this point is something like 70% Epsilon, 30% Private Label, and obviously there's a lot of headroom in both of those businesses as we continue to move forward. About 80%, I would say, of the cross-sell wins that we've had are retail and 20% in other verticals, so those are expansionary for us as we look at next year, both deeper penetration into retail and then penetration into new verticals.

Okay. And then, Ed, I just wanted to check something you said. This conversion of buying back two-thirds of the stock and then converting it into low-cost debt, it sounded like you were talking up the accretion that you maybe had originally given in year two, which I want to say was $0.75 for Conversant? It sounded like you were lifting that a bit. Is that correct?

It depends how you look at it, Dan. If you look at on a stand-alone basis, the answer would be, no. If you look at the buyback being directly to change the capital structure of Conversant, then the answer would be, yes.

Said differently, don't start creeping up our guidance before we even finish this year.

(Laughter.) Okay. Just one last one on Conversant. We get a lot of questions around the ability for Conversant, with Epsilon combined, to actually compete with Google and Facebook in terms of capturing the intent -- the intent at the time of purchase. What's your response to that? Then I'll hop off. Thanks.

Dan, from my perspective, Google is all about search, search is all about intent. We're really focused -- and it will sound like we're beating the dead horse here, but we're really focused on commerce data and what people buy. And, from our perspective, that is always going to be the best predictor of future behavior.

So, certainly all of those other channels, whether it be search or social, are meaningful to our CMOs when they think about marketing. But the landscape that we play in is really around, what am I buying, who am I, and increasingly, where am I from a location perspective, which we can get at with our mobile footprint. So that's the piece we focus on.

Thank you.

Chris Brendler, Stifel.

Good morning. I'd like to focus on the card business for a second, just your comments around credit reserve provisioning expense this quarter and the expectation for slightly higher losses next year. The delinquency trends, though, look really good to me in this quarter and I'm just wondering if you could comment on what you're seeing in the early-stage delinquency buckets and how you feel about credit because, from my perspective, it looks like things are actually improving, not declining.

We would agree with you, Chris. We're really not seeing it come through the delinquency buckets. Really what you're seeing is just that natural maturation of a portfolio that you start up in 2013. Its loss rates could be 1% in 2013, 3% in 2014, and then 6% in 2015, and then dropping into a more normalized level the following year.

So you don't really see that creep through your delinquency trends. It's basically just that aging with that trailing charge-off rate, you charge off after six months. Purely, for the first couple years, you outrun it, catches up with you in year three, and then by year four, you see it decline a little bit into its more natural state.

Okay. Great, thanks. And then, on the pay and protection products and the charge you took this quarter, can you just give us a sense of what the run rate of revenue is from those products today and how quickly it will decline?

It's a small piece of what we do. Really, what we agreed to with the FDIC doesn't affect 2015, it really didn't affect 2014, so the overall revenue stream we have from it, if you look in our other revenue bucket, it's very small. So, it's really not a big number to us. But really what happened there is we were -- it was a retroactive look at practices that we thought were legit at the time, not necessarily believed so by the FDIC, so we trued it up and we believe we have addressed all the issues going forward.

Okay, so it won't be a material drag in 2016 then?

No.

Okay. And then, one final quick one. I may have missed this. Did you mention at all the performance of BrandLoyalty from a revenue perspective this quarter? I know it was really big in the first quarter, flattish in the second. Where was it this quarter?

We did. If you look at BrandLoyalty for the quarter, very strong. Again, if we look at it on a constant currency basis, its revenue is up 30% and its EBITDA was up over 40%.

Fantastic. Thanks, Charles.

Thanks, Chris.

Bob Napoli, William Blair.

Thank you. Good morning. Just on Conversant, Bryan, just to be clear, what do you feel like is the biggest differentiator that, bringing Conversant on, adding it to Epsilon and the other products, what really differentiates your capabilities versus the market?

Sure, Bob. It goes back to what we were attracted to when we started talking to Conversant initially, which is, a business that really is based on first-party transactional data. If you think about Epsilon and our business, we are, for the vast majority of our clients, managing a lot of their consumer data and using that to drive marketing programs.

What we did not have is significant scale in the channels. As everyone is fully aware, so much of the spend is shifting out of traditional channels into those digital channels that we were missing out on the opportunity to capture some of the potential value for our clients by leveraging the data that we were already managing to make that work in terms of driving return in the digital channel, specifically display, mobile, and video.

So, when you put Conversant and Epsilon together, you have a very natural match there. A Conversant platform that's already built on first-party transactional data, an Epsilon relationship that's managing client data, so those are the critical ingredients for us to then begin turning on those marketing programs for clients in digital channels. What that effectively means is, we're able to demonstrate to our clients a better return than they were using -- than they were getting from buying from other vendors. So it's a consolidation play, where we attract more of that spend and, frankly, get better results for the clients.

Was Conversant important in signing Wayfarer or the Toyota deals?

Not for those two specifically, but there were a number of shared clients that we have signed with Conversant that were shared between Epsilon and the Card Services group, so now you've got Card Services, you've got Epsilon, and you've got Conversant, all engaged with a single client. And that, again, drives the relationship deeper and stickier.

Great. Then you'd mentioned, Ed or Charles, that BrandLoyalty had $40 million of signed contracts for North America. Does that mean -- that's revenue? I know these are short-term marketing programs, so is that $40 million of revenue that you have signed up in the US for BrandLoyalty and you're just getting started, or is that --? How should I think about that?

It's $40 million revenue annualized in Canada.

In Canada. Okay. Nothing in the US yet?

Right. These are the big grocers in Canada. That's our first step into North America, and then we pivot south and we've got a couple of pilots lined up, which will hopefully turn into programs as we progress through 2016.

Okay. And then, do you still expect to bring on Zale and do you have a shot at the [Signet] portfolio?

Yes. Zale is set to go. That should come on in Q1. That's all set, wrapped up, ready to go. I can't comment on the Signet thing. Obviously, best thing we can do is knock it out of the park with performance on the Zale file and then we'll go from there.

Great. Thank you very much. Appreciate it.

Ashish Sabadra, Deutsche Bank.

Congrats on the solid results. It's good to see the turnaround with Conversant, as well as good momentum coming back into Epsilon. My question was more around Epsilon. Bryan, you talked about improvement -- or solid growth in technology, as well as the auto vertical. I also believe you had one large client which had pulled back. Can you just talk about how that is trending and then how should we think about Epsilon growth -- the core Epsilon growth, going forward?

Sure. We've seen good growth in technology, as we mentioned earlier this year, and that's been a major driver, has always been a legacy strength for Epsilon. Data has also been strong for us over the course of this year. And the softness that we had to play through is in the agency vertical where we did have one significant client pull back. We've slowly been clawing our way back to growth with that client and that's our plan as we roll into 2016, which should drive continued mid-single-digit performance for Epsilon.

That's great. A quick question for you, Charles, just around the reserve rate. The reserve rate in this quarter was 5.7% versus 5.6% last quarter. The spreads there between the reserve and charge-off have gone up to 130 basis point compared to your normal 110 basis point. Is that just conservatism building up a reserve as the receivables [growth accelerate]?

It's more of a situation, we're getting ahead of the 30 basis points increase in loss rates we talked about. And then what you'll see in Q4, Ashish, it'll probably come down a little bit as a reserve rate, as you add more transactors in Q4 versus revolvers. So you always narrow the spread, the differential in Q4 a little bit over Q3. So all you're really seeing in Q3 is we got ahead of that additional increase in the loss rates we talked about.

That's great. And, Ed, just maybe a quick comment on the 2016 guidance. Usually, when you first come out with the first guidance for the next year, there is a conservatism baked in. And I just wanted to confirm there is no change this time around -- there is still conservatism baked into the guidance.

Well, we feel that this is a very good base case and we will tweak it as things go, but we feel very comfortable putting these numbers out this early and that means we feel pretty confident about it.

That's great.

How's that for a non-answer?

(Laughter.) I think it answered my question. But, thanks, and congrats once again.

Take one more?

George Mihalos, Cowen.

Thanks for squeezing me in, guys. Bryan, just wanted to go back to Epsilon and approach it more from a margin perspective. You've been growing EBITDA about a point ahead of revenue growth the last two quarters. How should we think about that relationship going into 2016, for the overall business, and then specifically for legacy Epsilon?

Sure. Ed covered it earlier and it's been a major focus for us this year and that's our goal going forward, is to maintain that relationship. We have a significant offshoring initiative that we've talked about several times over the course of this year that provides us opportunity in future years to continue that trend. Obviously, as we look at Conversant, which has a nice margin profile, there's leverage in that business, so we're planning to continue the same trend that we are on.

I would say that, if we're successful, you're going to see core Epsilon, whatever the revenue growth is, flow to EBITDA growth. I wouldn't expect a real expansion there because what we're getting from some of the labor plays that we're talking about is being offset by the very expensive hot skills set that we're bringing in.

But we certainly don't want to go back to grow top line 7%, grow nothing on bottom line. So, think of core as whatever we grow top, we should grow bottom. Won't be much leverage after that. But the Conversant piece, as that starts getting bigger, because it is growing faster than overall core Epsilon, has much larger margins, and so the combined Epsilon/Conversant business should show margin expansion as we move forward.

Okay. Thanks for that. Just a quick follow-up for Charles. How should we be thinking about the gross yield, modeling that going into 2016? And maybe talk a little bit about the opportunities you see or maybe don't see on the co-branded side going forward. Thank you.

You'll see a little bit of gross yield compression next year, obviously, as we do a few renewals, and now, obviously, as we do a little bit of a change in mix in the co-brand versus Private Label. I wouldn't expect it to be as much as what it is this year, and I would expect that we'd find a way from an operating expense to mitigate a large portion of it. So I'm not looking for a big compression in EBITDA net margins in 2016 compared 2015.

Great. Thank you.

All right. Thank you, everyone. I appreciate your time and we'll talk to you next time. Bye-bye.

Thank you, ladies and gentlemen. That does conclude today's call. You may now disconnect.