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#Let's flip over to page four
If we look at the results, it was a little bit of a noisy fourth quarter for LoyaltyOne and Alliance Data due to expiry
Not only do we have more AIR MILES redeemed and expected due to heavy media attention to the issue, but also had a new law and act in Ontario of Canada which forced a one-time charge
Removed the noise though and it was a terrific 2016. Let's start with pro forma revenue of $7.4 billion, up 15% from 2015. We estimate that elevated redemption activity in Q4 added about $175 million or 3% growth to 2016. Essentially, AIR MILES that would have redeemed in 2017 were instead redeemed in 2016 ahead of the expiry, creating a pull forward of revenue recognition to 2016. Adjusted for that, revenue was approximately $7.2 billion, up 12% and consistent with the guidance
Core EPS was $16.92, up 12% from 2015 and $0.02 better than guidance
In calculating core EPS, we added back the $242 million related to elimination expiry, but not the full breakage reset
Let's turn over and talk about LoyaltyOne
Adjusting the breakage reset and revenue pull forward added the number, we estimate that revenue and adjusted EBITDA for LoyaltyOne both increased about 4% for 2016. Let's begin with BrandLoyalty which had a terrific year with high single-digit growth in both revenue and adjusted EBITDA
Expansion efforts in Canada continued to exceed expectations and U.S
market could be a growth driver in 2017 based upon early successes
For AIR MILES it was tumultuous year with all the publicity surrounding the upcoming miles expiration date, AIR MILES issued increased 1% for 2016, below our expectations for about 3% as sponsor promotions dropped in Q4 as there was simply too much noise in Canada to be effective
We believe issuance growth will return to 3% range in 2017. In addition, we reduced the breakage rate for the AIR MILES Dream [ph] program for 26% to 20% at the end of 2016. The first 1.5 point reset resulted from higher than expected Q4 redemption activity
This is a normal change in accounted estimate and is reflected in our operating results
However, the second 4.5 point reset is different and that it was driven by the enactment of a new law and one-time event, thus we headed it back for adjusted EBITDA and core EPS purposes
Flipping over to Epsilon
It was a disappointing year for Epsilon as revenue increased 1% while adjusted EBITDA decreased 6%, both substantially less than our 5% growth expectations for '16. Breaking down revenue by key offering, let's start with the good – collectively auto, CRM, affiliates and data grew revenue, double digits compares to 2015. In addition, after a slow start to 2016, due to the pull back of a large client, agencies growth rate turn positive in the back after the year
Let's now shift to the problem childs; technology platform growth turn negative mid-year due to some flying attrition
In addition to non-core offering, essentially the old-value click business was a consistent issue all year as we endeavor to pivot it towards a more of a data-driven solution
This offering alone was a 3-point drag to Epsilon's revenue growth
Turning to adjusted EBITDA, we start off the year in a big hole, down 22% in Q1. By significantly lowering our expense base, we cut that to a modest 9% in Q2, turn to flat in Q3 and then up 30% in Q4. We believe that our lower expense base will enable us to be more price-competitive on certain product offerings going forward
Let's now flip over to card services on page seven
It was another stellar year for card services with 24% growth in revenue and 14% growth in adjusted EBITDA net despite over $200 million built and allowance for loan losses
Credit sales increase 16% for the fourth quarter and 18% for the year
Growth in core credit sales which are pre-2013 programs were slight for Q4 and up 4% for the year, driven by tender share gains of about 150 basis points
Growth in the core weekends as the year progressed is comparable sales growth turn negative at several of our large apparel-focused clients
Gross yields after being down in Q1 through Q3 due to cardholder changes made to the program in 2015 stabilized and increased slightly in the fourth quarter of 2016. We believe that these changes have fully burned in at this point
We continue to receive operating leverage, operate expenses up 21%, compared to revenue growth at 24% for 2016. As a percentage of average card receivables, operating expenses decreased 50 basis points compared to 2015. Average receivables growth remained robust at 24% for 2016. Growth slowed over the course of 2016, due to softness in core spending as discussed before, resulting at ending card receivables growth of about 20%
The principal loss rate was 5.1% for 2016, just slightly higher than original guidance, primarily due to this low and receivables growth rate
This creates what we call the denominator effect
Importantly, losses continue to track in line with our delinquency expectations for 2017 as we show on the wedge
With that, I will it over to <UNK>
I'm right there with you
I do
I think yields should be stable
There could be a little bit of positivity to it based upon the trends we're seeing, but I basically think what has happened, <UNK>, some of the changes we made in '15, where we could start a cardholder friendly had burned in and I would expect them to be stable, to maybe slightly increasing going forward
M&A is something we always consider
I'll tell you right now, we don't really see anything that's pressing for us in '17. What that means is we have $500 million authorized share repurchase plan
That will be our top priority
As <UNK> talked about before, it could be best used early in 2017, which we think will happen
As the year progresses, if we don't see any further M&A opportunity, we could increase the buy back and be even more active
What I would say, <UNK>, from a free cash flow standpoint, expect it to be up 7% to 10% in '17 over '16. Again, we'll have money we're keeping back at the banks, but it's a little bit of slow in growth than they are
That will diminish a little bit
What that means is free cash flow at the [indiscernible] will be up a little bit year-over-year
That enables us to be more active with the buy back
We consider the $500 million in terms of guidance
I think having been in it for 25 years, we were pretty good at looking at vintages and seeing what flows there
So what we do every year or throughout the year is we will go client by client, which is 155 different portfolios and within those clients, vintage by vintage and we will look at every single vintage and see how they are performing
Again, what has happened is you have a certain band of credit that you cater to and coming out of the great recession, we had people who were signing up for the card, who are at the very high end as the recovery continued and the people repaired their credit
We had more and more people come into the allowable band and that's sort of what causes that normalization
Again as I tell a lot of folks, we are returning to a level that is comfortable for us
It's not like things are getting worse
The consumers are fine, it's just we're normalizing out at a level that will help us optimize our earnings in tender share going forward
It's a bottom's up, vintage-by-vintage, portfolio-by-portfolio, client-by-client look
A year ago we had a strong conviction that this would be sort of a year and-a-half, two-year cycle to normalize
We're past the first 12 months
Now we can see it in terms of what the delinquency flows
We can see it, the stuff normalizing as we look out six months
Now, the guest work is out of it and now it's just a question of 'let's get the next six months out of the way' and we're fully normalized
I think that's very possible, <UNK>
