ADS
#Thanks, Ed
Let’s start with Slide number 3, and if you look at our start to 2017, it was better than expected with revenue of 12% to a $1.88 billion and core EPS of 2% to $3.91. Both exceeded guidance for the first quarter, which is a very good start
Adjusted EBITDA net was flat at $440 million compared to the first quarter of 2016. A $72 million reserve billed at Card Services and a $17 million decrease in adjusted EBITDA at AIR MILES due to the breakage reset at the end of 2016 dampen the growth rate for the quarter
As delinquency trends moderate over the course of 2017 consistent with a wedge the quarterly reserve billed will moderate while the year-over-year hole in AIR MILES adjusted EBITDA should close this program changes or implemented over the course of 2017. Starting the year, we knew we need to deliver on three major assertions
First, that Epsilon could return to positive revenue in adjusted EBITDA growth and that we could stabilize the technology platform offering
We would say we’re on track; especially I view it as very strong Q1. Second, the credit normalization will conclude by the end of 2017 with a check as we’re definitely tracking to the wedge on Slide 11. Third, that we can retool the AIR MILES model to replace loss to EBITDA from the breakage reset
We’d say that still in the process, but we do expect EBITDA margins to increase appreciably especially in the back half of 2017. Turning to capital allocation, we were active with our repurchase program during the first quarter, spending $415 million of the $500 million board authorization to acquire 1.7 million shares
Let’s go to the next slide and talk about LoyaltyOne
We’ll start with AIR MILES, and AIR MILES revenue decreased 6% to $181 million for the first quarter of 2017. The decrease is largely due to a 4% decline in AIR MILES redeemed which was expected given the elevated redemption activity in 2016. The burn rate which were miles redeemed divided by miles issued was still elevated during the first quarter of 2017 due to a backlog that carried over from 2016. But we expect it to normalize at about a 78% burn rates for full year 2017. AIR MILES adjusted EBITDA decreased 32% to $35 million or a 20% EBITDA margin
The decrease was primarily due to the lower breakage rate entering 2017, as you recall it’s now 20% versus historically it was 26% and that knocks about one cent or one penny off profitability per mile redeemed
This is the whole we’ve talked about before
We are focused primarily on lowering the cost per mile redeemed by negotiating better vendor pricing and we started to see results in March
From a collector standpoint, our active collector statistics overall are down from last year but on par with 2015 levels
Our promotions in market such as a recently completed cruise promotion where every mile earned during the qualifying period was an entry into one of 1,300 cruise packages are stimulating issuance per transaction which is positive news
BrandLoyalty revenue and adjusted EBITDA decreased 6% to $152 million and 14% to $24 million respectively compared to the first quarter of 2016. The declines are largely due to program timing between years as well as unfavorable FX rates been a 3-point drag on both
There’s really nothing new to report on the North American expansion effort at this time, but there were several high potentials for 2017. Let’s flip to the next slide and discuss Epsilon
It’s the first quarter in some time that I actually enjoy talking about the Epsilon results, as we started the year very strongly with revenue up 7%, adjusted EBITDA up 5% a very nice flow through the top line growth to adjusted EBITDA
And there was a better balance of revenue growth in the key product categories than we’ve seen in some time
Epsilon agency, auto and CRM were all at double digits with the CRM/Direct at a robust 47%
Data and affiliate product offerings increased in low single-digit range, to acknowledge in your platform which is about 25% of Epsilon’s revenue decreased 7% which was a sequential improvement to the minus 13% in Q1 of 2016 – Q4 of 2016, sorry
This offering turn quickly in 2016 as growth rates went from plus 5% growth in Q1 to flat in Q2 to minus 4% in Q3 and then minus 13% in Q4. The change in 2016 was due to the loss of a few key clients midyear, importantly the client base has since been very stable
Lastly Conversant Agency was down 28% compared to the first quarter of 2016. This offering has been a consistent drag now for about nine quarters, but it’s now reaching a level where at less than 5% of Epsilon’s revenue, it appears to be stabilizing
Let’s turn to Slide 6 and talk about Card Services
Revenue increased 22%, just slightly over $1 billion for the first quarter of 2017 driven by strong gross yields which increased 80 bps compared to first quarter 2016. Operating expenses increased only 3% to $360 million for the first quarter and expressed as a percentage of average card receivables decline to 120 basis points compared to the first quarter of 2016 that is a very strong start to the year in terms of expense leveraging
Adjusted EBITDA net increased 8% to $331 million for the first quarter of 2017, despite a $72 million billed allowance for the loan losses and as we talked about before that number should drop in Q2 and Q3. Credit sales increased 6% to $6.6 billion for the first quarter aided by tender share gains to about 100 basis points
Over one-third of credit sales for the quarter were through digital channels reflecting the change in retail landscape
Web mobile applications increased 13% while traditional channel applications such as in-store increased 6% during the quarter
Web mobile applications now count for over 30% of all applications
Recognizing the shift to digital sales, we recently introduced a Frictionless mobile acquisition capability which reduces the application process to only a few keystrokes reducing the abandonment rate of over 95%
These capabilities will allow us to continue to add etailers such as Wayfair and its clients
Lastly to clarify the topic of raise in interest rates, yes the benefits Card Services made interest margin
The APR we charged is variable rate tied to primary, an increase in prime rate will reset the APR to the card holder within 2 billion cycles
Conversely funding costs which are about 70% fixed rate will reset over a two-year period
Now with that, I’ll turn it over to Ed
It’s a great question <UNK>
Again, that’s primarily focused around the Epsilon division
We are not doing any off-shoring with Card Services
You’re right, we ended last year with about 1,000 associates in India
We’re now up to about 1,300, I believe
The target will be to continue to grow that within the Epsilon division
I would not expect to see any EBITDA margin expansion
Right at the moment from it, what it does allow us to do, <UNK>, is be more price competitive on that core Tech Platform offering that we have, where, as Ed talked about, we’ve seen some pressure coming through from some SaaS products and cloud based
So what I’m looking for is to allow us to really grow the top line, sustain EBITDA margins but not necessarily be incremental to EBITDA margins until at a future day
On the reserve side, <UNK>, the reserve was 6.6% in reservable AR at 12 – sorry, at March 31. What I would expect is the provision build, that reserve build, which was $72 million in Q1, should drop probably below $50 million Q2 – below $50 million Q3. Q4 is really going to come down to growth and whether we see any type of bulk acquisition coming through
So I think that your question’s right
Based on the trends we’re seeing, should it be lower than 6.6% at year-end? I’d say based on trends now, that would be an accurate assumption
And <UNK>, the only thing I’d add on the cost-to-mile, the reason we’re attacking the cost-to-mile is it does not reduce the value proposition to the collector
So if we can go through and negotiate better pricing for the same product, we basically fill the hole and the lost EBITDA without affecting the experience of the consumer, which is really the reason why we’re attacking it in that approach
I’ll tell you what I look at most, George, is what did payroll do
What did the fully burdened cost of payroll do? And it was up less than 6% in Q1 versus 7%
You always have some other operating expenses if you onboard a new program, such as the rollout of some new auto programs we have in place where you get some other expenses behind the scene ahead of it
But what you’re really trying to do with the Epsilon model is always make sure the revenue growth rate is better than the payroll growth rate, and we definitely did that in the first quarter
And I think that’s really the trend we’ll look to continue at the back half of the year
Like we said, we had a couple of new programs within the auto we’re rolling out
We incur quite a bit of costs up front before they come functional, and that’s part of the pressure why you didn’t see a one-for-one flow-through
But really, it’s the comparison of revenue to payroll that’s relevant to us
Yes, the only thing I would add, and I think this is a very important piece, historically, when we’ve had a retailer just basically go out of business, going through liquidation, the loss rates in that portfolio are no different than the overall portfolio experience
So to Ed’s point, you lose the opportunity
They can’t go on to the store and spend
But the good cardholder does not and of itself they’re going to walk away from this account
I’m going to charge it off and run the risk of basically cross-defaulting a different credit card
So our experience in the loss rate is basically similar to what the overall portfolio experience is
I’d say there’s none in particular
We had two small retailers go into liquidation, but they’re very small portfolios, really aren’t affecting us
In terms of any material client, there’s none that have given us any pause at this point
I’d say, <UNK>, I think that the three clients we lost last year midyear definitely affected us
They did shift to a little bit different model than what we’re providing for them
As part of what Ed talked about, how we had to shift to a little bit more of a packaged product to lower the costs, lower pricing, what you have seen us do is as we’ve had renewals since then, we had come down a little bit on the pricing
We had to offset it by lower operating costs primarily in parallel with our off-shoring to India
So we’d say that base is stable
As Ed talked about before, we’re expecting it to basically return to flat growth year-over-year probably as early as Q3. So we think that we’ve addressed the salient issues with the technology platforms
We’ve not seen any further client attrition
And we think the changes we’ve made have really put this back in place frankly to return it to a growth offering versus where it declined over the last three quarters
I’d say, <UNK>, it’s a little bit early
We’re just now introducing the packaged offering to the market
I would expect that – the EBITDA margins to be fairly consistent with the full service, maybe down a little bit
But it’s too early for us to really know what the answer is going to be there
Q3, Q4.
Both would be strong
Obviously, Q1, it was extremely good
I don’t expect it to be quite that good for the full year
As Ed talked about, probably 20, 30 basis points versus a very strong start to the year
I’d say it’s coming from pretty much all angles
So it’s the growth in the portfolio
Obviously, it’s the influence of co-brand that we put in there over the last few years, which has a little bit lower OpEx
But it gets into the way we do collection activities, whether we source within our own operations or we allow people to work from home
I would say there’s really no one silver bullet
It’s a combination of different factors that really allowing us to drive that operating leverage
Sure
You’re going down the right area, which is the way that CRM signings work is almost like a vintage, where in the first year you’ll sign a group that maybe they do $50 million of revenue first year, $75 million second year, $100 million third year, and we are definitely benefiting at the same time that we are definitely benefiting from new clients
Last year, we added about 33 new clients with CRM
This year, it could be an estimate as high as 50. So it’s the combination of both the ability to leverage a new client for three to four years, get revenue growth, plus we’re continuing to onboard new clients as people see – companies see the value of the proposition we bring
The way we look at it, <UNK>, we knew that we had a little pressure early in 2016 that will play through starting this year at 25.5% gross yield is consistent with the average we had last year
So we would tell you there could be a little positivity to it based upon, obviously, any changes with the Fed raising rates and so forth
It could pass a little bit through to gross yield
The thing that always creates noise within your gross yields is if you do find a bulk file and you acquire it, it puts temporary pressure
So there’s a lot of moving parts
But we would say steady state
25.5% feels good for the year
It could up maybe 10, 20 basis points given further interest rate increases coming through
But really, it goes back to mid-2015. If you remember, we’ve put some changes in place that were cardholder friendly
We had to burn through those issues in the temporary pressure we put
And we would tell you at this point, we’re past that
No, nothing to add to that
