Julie Prozeller - Investor Relations, FTI Consulting Ed Heffernan - President and Chief Executive Officer Charles Horn - Chief Financial Officer Bryan Pearson - Executive Vice President and President, LoyaltyOne.

Sanjay Sakhrani - KBW Darrin Peller - Barclays Brett Huff - Stephens Inc David Togut - Evercore David Scharf - JMP Securities Andrew Jeffrey - SunTrust.

Good morning, and welcome to the Alliance Data First Quarter 2014 Earnings Conference Call. At this time, all parties have been placed on a listen-only mode. Following today’s presentation, the floor will be opened for your questions.

(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, Ms. Julie Prozeller of FTI Consulting. Ma’am, the floor is yours..

Thank you, operator. By now, you should have received a copy of the company’s first quarter 2014 earnings release. If you haven’t, please call FTI Consulting at 212-850-5721.

On the call today, we have Ed Heffernan, President and Chief Executive Officer; 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 the 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 non-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?.

Great. Thanks, Julie. Joining me today is Charles Horn, our always exuberant CFO and Bryan Pearson visiting us from Canada and leader of LoyaltyOne. Charles will discuss the operating results for the first quarter and then Bryan will walk you through LoyaltyOne and in particular to new business, BrandLoyalty.

I will wrap it up with a discussion about our guidance and outlook for ‘14.

Charles?.

Thanks, Ed. The year started off pretty much as we expected with strong revenue growth, up 17% from last year and dampened core EPS growth of 9% from last year due to incremental personnel cost needed to support growth expected in the back half of 2014.

Even so, we dropped there some additional earnings meeting core EPS guidance of $2.70 for the quarter. Organic revenue growth was strong at 8% driven by high single-digit organic growth at Epsilon and low double-digit organic growth at Private Label.

For LoyaltyOne, organic revenue growth was essentially flat on a constant currency basis as their amounts redeemed dropped 4% compared to the first quarter of 2013. BrandLoyalty, which closed on January 2, 2014, added approximately $112 million in revenue to the first quarter.

Adjusted EBITDA, net reduced for funding cost and a portion attributable to the minority shareholders of BrandLoyalty increased 3% compared to the first quarter of 2013 burdened by higher payroll expense.

We estimate that approximately $20 million was development payroll signifying it did not drive current period revenue, but is needed to support future revenue. BrandLoyalty added about $14 million of EBITDA, $9 million net of non-controlling interest to the first quarter, which we believe will be seasonally lowest quarter.

Diluted share count was $66.1 million consistent with our guidance. With the maturity of the next and final tranche convertible debt in May, we expect our diluted share count to drop to approximately $63.1 million for the second quarter of 2014. Let’s turn to next slide and Bryan Pearson will talk about LoyaltyOne..

Thanks, Charles. LoyaltyOne’s revenue increased 37% to $329 million due to the acquisition of BrandLoyalty, which as Charles said added $112 million. During the first quarter, we fought through a couple of headwinds in our core AIR MILES business as revenue declined 10% from the first quarter of 2013.

The first and primary driver was the Canadian dollar being down by about 8% from a year ago. This lower translation rate dropped AIR MILES revenue by about $19 million. And then the second factor was that AIR MILES redeemed declined 4% from a year ago creating a revenue drag of about $6 million.

We will likely face these kinds of headwinds throughout 2014. Adjusted EBITDA increased 4% to $65 million for the first quarter. Again due to BrandLoyalty which added $14 million gross or $9 million net to LoyaltyOne. Adjusted EBITDA for the AIR MILES business was down 10% from the first quarter but was essentially flat on a constant currency basis.

Adjusted EBITDA margin for AIR MILES remained consistent between quarters at 26%. Adjusted EBITDA margin for BrandLoyalty was 13%, but we believe that we will definitely expand as the year progresses.

AIR MILES reward miles issued actually decreased 4% compared to the first quarter of 2013 due to the weakness in consumer spending, some of which relates to the timing of the Easter holiday which landed in Q1 in 2013 and doesn’t actually land until Q2 in 2014.

And some of this relates also to regulatory changes which are eliminating reward mile issuance from prescription purchases in some regions. We still expect full year issuance growth to be in the low single-digit rate for 2014, mostly due to increased promotional spend and the addition of new sponsors in the back half of the year.

For the first quarter, AIR MILES redeemed decreased 4% due to reduced demand primarily for our travel related rewards. AIR MILES cash on the other hand our instant reward program continues to gain momentum with the rollout of 300 plus IGA stores in Quebec during the quarter.

We expect the expansion of the AIR MILES cash offering to increase overall miles redeemed by approximately 3% compared to 2013. Now, before turning to a discussion on BrandLoyalty let me just give you a brief update on Dotz. Our priority for Dotz in 2014 is really pretty simple. It is all about growth.

We had an excellent start to the year as Dotz added 1.2 million collectors during the first quarter, bringing its total collector count to 12 million. In addition, we plan to continue our market expansion strategy in 2014 with a target of four new markets by the end of the year, which would bring the total market count to 13.

Why don’t we turn to the next slide, during the quarter LoyaltyOne acquired a 60% stake in BrandLoyalty, which is a leader in transactional and emotional loyalty programs. BrandLoyalty is based in Netherlands and employs over 400 associates in 14 offices around the globe.

The primary product offering they have is our short-term loyalty campaigns that are run for grocery retailers in Europe, Asia and Latin America. In the programs shoppers earn points using either digital or paper stamps for achieving spend thresholds during each shopping trip.

The points are then redeemed in the store for high quality merchandise at BrandLoyalty sources and distributes to the retailer. Through its subsidiary Ice Mobile shoppers can also download custom mobile apps that add digital capability for earning and redeeming points as well as increasing customer engagement by a targeted mobile messaging.

BrandLoyalty’s programs are short-term in nature, but they offer a full service no risk approach for the retailers to grow their sales.

Starting with the program design and the actual selection of the products they use their unique data and analytical approach to support the procurement distribution and in-store merchandising of products that create the kind of aspirational short-term program that changes consumer behavior.

These turnkey programs are proven to drive increased visits to the store and increased basket size which results in measurable sales results and a positive return on investments for their clients. LoyaltyOne is excited about this acquisition as this offers the following strategic benefits.

First BrandLoyalty is really one of two leading players in these type of short-term grocery promotions and they have an excellent track record of double digit organic growth, which clearly is an excellent fit with Alliance Data’s growth model.

Second, grocery retail is a key vertical for both LoyaltyOne and BrandLoyalty and we believe that we can leverage existing relationships to grow the BrandLoyalty platform in North America.

And third, LoyaltyOne’s advanced analytics capability and advisory services presents a new product offering for BrandLoyalty customers which will lead to future revenue synergies between our organizations. We are pleased with the results that we have had to-date and we are working diligently as a team towards new opportunities.

Now let me turn it back to Charles to discuss Epsilon..

Thanks Bryan. If we turn to the next page Epsilon’s revenue increased a healthy 9%, all organic to $348 million for the first quarter 2014. Technology led the way with 11% growth supported by 15% increase in database revenues fueled by expansion both in new and existing client base.

E-mail which is part of technology continues to be soft, but we believe the next release of Harmony scheduled for the second quarter of 2014 will remedy that.

Harmony which is our new digital messaging platform was recently ranked number one Red Pill Email for its features and functions and received a perfect score of five in the categories have been the security, queries and segmentation ease-of-use.

The preview of this next release which had segmenting and multichannel capabilities has resulted in several new customer wins. Moving on, agency also delivered a solid performance increasing 9% compared to the first quarter of 2013 driven by continued strength in the auto vertical.

We are currently in the process of on-boarding two new agency clients, which should contribute revenue as 2014 progresses. Our outlook for 2014 remains high single-digit organic revenue growth supported by a backlog, which is up double-digits compared to the same time last year.

Adjusted EBITDA net increased 1% to $55 million compared to the first quarter of 2013 as higher healthcare cost attributable to a higher associate participation rate, severance expense associated with the integration of HMI and upfront expenses incurred to ramp up two potentially large new clients dampened the revenue flow through to adjusted EBITDA.

In summary, it was a good start to the year for Epsilon. We remain positive about the product cross-selling opportunities generated from agency as well as the continued rollout of the Harmony platform.

We could have done a little bit better with expense control in the first quarter, more labor inefficiencies than we would like to have seen, but some of the expense could not be avoided given our strong backlog and the need to staff in advance. Overall, strong start to the year with expected continued momentum.

Let’s turn to the next slide and talk about Private Label. This quarter represents the ninth consecutive quarter of double-digit revenue growth for Private Label as revenue increased 13% to $562 million driven by 15% increase in average card receivables. Organic revenue growth was a robust 12%.

Adjusted EBITDA net increased 7% to $244 million as the revenue flow through was dampened by 26% increase in operating expenses compared to the first quarter of 2013.

As we talked about in the last earnings call, this increase was expected as we added about 1,000 new associates mailing our call centers in order to increase support capacity and prepare for future growth. We expect leveraging of operating expenses as the year progresses and we ramp up new clients.

Moving on in the P&L, the provision for loan losses increased 6% from the first quarter of 2013 primarily due to growth in credit card receivables, while funding cost remains stable between years despite the growth in receivables as we continue to replace maturing debt with cheaper new debt.

Now, let’s turn to the next page and talk about some of the key metrics for Private Label. The total gross yields decreased 60 basis points when compared to the first quarter 2013 due to the impact of new programs. Moved into the second quarter, we expect to see a slight uptick in gross yields as this influence moderates.

Importantly, we continue to pickup share during the quarter as our credit sales of core clients meaning pre-2012 (vintages) increased 7%, while overall client sales were about flat compared to the first quarter of 2013.

Normalized principal loss rates increased 20 basis points to 4.9%, while delinquency rates increased 10 basis points both compared to the first quarter of 2013. Based upon the trends we are seeing, we expect stable to slightly improving principal loss rates for the remainder of 2014.

From a loan loss reserve standpoint, we ended the first quarter with a 6% reserve rate, which represents approximately 16 months of forward coverage. The last thing I will discuss is new metric added this quarter return on average assets. As you can see from the chart, we generated very strong return 6.4% this quarter compared to 6.5% last year.

It is just another metric that reflects the difference in Private Label’s business model compared to just a card issuer. Let’s move on and talk about liquidity.

Liquidity at the corporate level remained strong at $1.1 billion at March 31, 2014 after deploying over $300 million on the BrandLoyalty acquisition and the share buyback program in the first quarter. Their levels remain modest with excellent debt service coverage ratios.

As noted on the slides, we have $345 million of convertible notes coming due in the second quarter, which we planned to cash settle. This has created a little confusion in the market given at the current settlement value of the convertible notes would be about $1.9 billion.

The way it works is we pay $345 million, the face value of the convertible notes, our hedge counterparties pay $1.55 billion and the noteholders receive a total of $1.9 billion in cash. Several months after the debt maturity, we had to settle the other side of the hedge arrangement with our counterparties meaning the warrants.

At ADS’ current price, we would issue approximately 5.1 million shares to settle our obligation under the warrants. Importantly, these shares are already included in our diluted share count and are separating apart from the phantom shares you have heard us talk about so much in the past.

In our nutshell, we paid $345 million in cash and issued 5.1 million shares to settle the convertible notes. Our guidance reflects all of this. Lastly, Ed and I have always talked about our capital allocation priorities for 2014. And as we have indicated in the past, they will flip around based upon which gives us the best accretion.

M&A will continue to be our first priority, but as you can see, the buyback program is still important to us. Year-to-date, we have spent $115 million of our $400 million board authorized program. With that, I will turn it over to Ed..

Alright, thanks guys. Now, I am going to step back a little bit and look at sort of the bigger picture and the overall view of how the years trending and other things that we are seeing out there and how they might impact the company.

I would say overall obviously Q1 has got a lot of puts and takes in lot of moving pieces, but in general, I think we could probably sum it up by saying that we are very, very pleased with the organic growth rate of our top line.

I know that’s a big item out there in the marketplace these days and what we are finding is that once again, we are feeling very comfortable that this year we are going to run organically at 9%, maybe 10%. And that would be at least 3x GDP, which is our goal.

So I think from a revenue perspective, you are talking 9%, 10% organic, you are talking 20% plus when you layer in BrandLoyalty, the top line looks very strong this year and we are bumping up guidance accordingly on our top line.

And from an expense perspective, obviously getting banged with the Canadian dollar is going to cost us 50 or 60 on top and probably about $0.15 to $0.17 on EPS. But again, I think we can play through that without a problem. So very strong organic top, overall top, 20% plus.

And what we are looking at is we are seeing stronger revenue growth coming out of BrandLoyalty. We initially thought we are looking at about $0.5 billion of top line. It looks like it will already be more like 550. Epsilon is running a little bit stronger than we have thought as is private label.

You take those three offset a little bit of it with the Canadian dollar and that’s where we get an upward bias in our guidance for top line. So very pleased there on I guess the balancing act that we are trying to accomplish this year, which is bringing on a huge book of new business at both Epsilon and our Private Label.

We have alluded to last quarter fact that we are going to have to ramp up a significant amount of folks. And Charles mentioned, we added another 1,000 people just in the Private Label group to handle the book of business that we signed last year and we are signing now.

That will obviously bodes extremely well for the back half of this year and going into ‘15 as well. Unfortunately, we need to absorb it now without the top line against it. So, that’s a little bit of the drag that you are seeing in the first part of the year.

We do feel very comfortable however that it’s the right bet to make and that the back half and in 2015 we are going to be glad we did so. So based on where the revenue is going, we think that we are right on track with where we want to be. Actually, I think we are actually trending a little bit better as we sit on top line.

And as a result, we are going to go ahead and bump up guidance from 12.20 to 12.25 which would give us earnings growth of 22% for this year. I do think that’s probably a conservative raise at this point. And as the year plays out, I certainly would hope that we can continue to drift that number upwards as the year progresses.

Turning to the page on the specific businesses, 2014 outlook, Bryan walk through what’s going on in his businesses, I just wanted to sort of hit the highpoints again with the AIR MILES program. We expect on a constant currency basis revenue to be up in the low single-digits and adjusted EBITDA to be up somewhere in the mid single-digits.

I think overall, those are good numbers for the year. I will call your attention to as we have seen over the past 18 years. The key metrics there, AIR MILES issued, we cautioned people from trying to look at it on a quarterly basis.

If you look that at last year, our issuance by quarter was minus 3%, minus 5% and plus 11%, plus 12% and we ended the year plus 4%. That’s pretty much which you’re going to be seeing. This year you’re going to see this thing jump all over the place because the lot of it is driven by promotional spend.

We don’t have visibility on a quarterly basis as much we do on an annual basis. So, whether it’s growing double-digits or down single-digits, I would caution anyone into reading too much into either movement and focus more on the full year basis.

Bryan also alluded to the fact that well we have our full year goal of around plus 4%, plus 5% as we usually do.

There is probably a point or so of risk due to some legislation up in coupled with provinces regarding our ability to issue for when someone buys prescription drugs, so that could damp in growth in that metric little bit, so more to come on that. But, overall LoyaltyOne should have a solid year once again.

BrandLoyalty, right of the gate, they are trending quite a bit stronger than we had anticipated which is always a great thing to see as the first quarter out of the new business. And their revenues are running stronger and we’re pumping them up 10%. We would expect their organic revenue growth to grow over 20% this year.

And when we are talking about our 9% to 10% organic growth, that excludes the organic growth at BrandLoyalty, because it was an acquisition. So, overall organic growth for the company would be even higher than that. Brazil, as Bryan mentioned also it’s all about scale and if you look back at 2011, we were under 2 million collectors, 2012, 6 million.

Last year we ended just under 11 million and already we’re up to 12 million this year. And so, I expect to have a very, very strong year this year. In Brazil, we’re looking to expand into four new regions as well and we’ll keep you posted on that.

I always get the question of how do I – how can I value the Brazilian piece of the business and goodwill of some is that we would need about 2.5 dotz collectors – excuse me to be equivalent to about 1 AIR MILES collector. So, essentially in Canada, we’ve got about 10 million folks and that generates the 1.25 billion or so of EBITDA.

So, someone can do the math and come up to about 25 million is what we’ll need down in Brazil. So, I hopefully we’ll be – we’re about half way there at this point and it’s looking right along. In Epsilon, again very strong story from a great organic perspective and it was nicely balanced to which is what we like.

The database part or the technology part was quite strong double-digit during the quarter and should continue that, that’s based on the large number of builds that are going on now, we brought on a lot of folks for the record number of databases that were assigned last year.

A lot of this is again a continuing trend with folks wanting their own loyalty program, their own loyalty platform, their ability to collect that data on the consumer, they can lend to use for a data driven marketing. So, we’re seeing very strong demand for that.

It looks like if we typically sign about 15 of these type platform builds a year, last year we did 23 plus, this year we’re currently running at that rate as well. So, again I’d say we’re scrambling pretty hard right now to make sure we’ve got the folks on board to make that happen.

Charles mentioned the new Harmony platform which is getting very good reviews out there and I think it’s so far so good, we will know probably by the end of second quarter.

We’ll be hopefully comfortable saying that this thing is after the races, right now we’re just in the process of converting some clients over as we speak and we want to make sure everything is smooth there as well, so that’s the scoop.

Epsilon, in Private Label, once again gets the gold star that I think they will share with BrandLoyalty for the quarter. Again new client growth continues to surprise. Historically we tend to sign about five new clients per year which is a bit under $400 million of new portfolio growth for vintage.

And again when we talk about vintage and we talk about signing clients most of clients start from scratch and so it take three years for them to fully mature and that’s why when we talk about $400 million vintage that means three years after signing that essentially gives us tremendous visibility into the next couple of years.

Well, as we talked about over the past couple of years in 2012 there just seem to be a massive shift of interest from number of retailers as well as new verticals in retail for our particular product offering which again allows a close loop network to pull out not just who the person is, but also the information down to the category or SKU level, which is really the gold standard in data these days.

In ’13 the shift continued to accelerate and we signed our first $2 billion vintage and in ’14 we are absolutely tracking to another $2 billion vintage we have announced Virgin, Venus DSW and IDD. And just those four should be about the first $0.5 billion when they fully spool up.

So we have a number of signings that we will be releasing over the next six months and it looks like it’s going to be another huge year. And the importance of that is that it allows us to look into ’15, ’16 and ’17 as these vintages spool up and be very comfortable with the type of growth rates that we want.

Probably the – I would say the most important item to note here is the continuation in tender share growth. So for example if on a typical clients 30% of their sales flow through our card that’s probably a pretty decent level for us.

And then you look at well once the client matures, once the program matures, at the client we tend to grow or should grow at the growth rate of the client.

Well, what we found during the holiday season in Q4 and what we are continuing to see in Q1 is that this private label product is really beginning to take off in terms of probably the best type of loyalty tool that the retailer has and so we saw that in terms of comparing the growth rate in card sales against the growth rate in our client sales overall.

And as many people know from the weather or whatever is being said out there, the first three months of this year you probably saw relatively flat sales growth in the retail space. Against that our core sales growth is more like 7%, so something is working out there and I think that’s part of what’s attracting more and more clients.

Overall the results, the credit card portfolio I think you saw we did about 15% in Q1 that is going to accelerate and we will be running around 20% as the year rolls out. Principal loss rate and funding rates are pretty stable and we are not seeing any blips here or there in terms of anything on the credit quality side it looks good.

Obviously we have brought on a ton of new folks which is great thousand plus people onshore, which will of course hit the expenses pretty hard until we have those programs ramped up and the revenue flowing through. But I think it’s certainly the right thing to do.

So the overall outlook mid to high teens growth in revenue, double digit growth in adjusted EBITDA for ’14, so another good year overall. Finishing up on the last item, and we will open up to questions.

There is no question that the ongoing shift of spend in marketing dollars from sort of general brand spending into data driven marketing and loyalty programs continues. I don’t think its news to anyone. Fortunately, we are on that side of the bet.

And all three of our businesses were continuing to see a very high level of interest in every vertical out there trying to get a better beat on who their customer is, and how he or she behaves and how we can entice them to be a more loyal customer into frequent the retailer more often.

For us, we essentially have four objectives for the year and they are pretty straightforward. We are primarily an organic growth shop. Our goal is to grow our top line at 3x GDP. So, we would say roughly 9% for the year.

We expect overall revenue growth rate of 22% as we are seeing a bit stronger results on top line from BrandLoyalty, Epsilon and Private Label. And then we have got a little bit of offset with the Canadian dollar. That will flow through the core EPS growth of 22%.

And in the middle there, of course, our expenses and there is a lot of frontloading right now going on both in Private Label and at Epsilon and it’s just the nature of those businesses that you got to pay for it now.

And it starts flowing in a little bit later, but I think that means that it bodes extremely well for the future and we are building the foundation for the future and while we are on-boarding a record amount of new businesses.

So, if I were to finally sum it up I would say the year is tracking a little bit better out of the gate than we had anticipated. It’s a little bit choppy in the first half, but it’s because we are building for the second half and into ‘15, ‘16, and ‘17 which is for me where a lot of my attention is being spent these days.

And then finally, I will sort of sum up obviously in the market, there has been a fair amount of volatility to start out the year and there is not much we can do about that, but we can say that with volatility comes opportunity. And from our perspective, things are looking a bit more intriguing now if this volatility continues.

So that being said, I think we will cut it off here and we will move to Q&A.

Operator?.

(Operator Instructions) Your first question comes from the line of Sanjay Sakhrani with KBW..

And so starting with Epsilon, the two new agency deals that you guys spoke about, could you maybe just talk about when you onboard the revenues, are there going to be significant incremental costs that you incur? Are most of those costs kind of being incurred now and then the revenues come after? And maybe if you could give us a little bit more qualitative color on kind of the nature of these two relationships, because they seem pretty sizable? And then maybe just one on Private Label, could you just also talk about the M&A pipeline, you have a player that’s going public, obviously Wells came into the market a little bit? So maybe you can just talk about how that M&A pipeline is materializing? Thank you..

Sure. Let me start with the second and finish with the first. The M&A pipeline per se in Private Label, it’s really if you look at the clients that we have signed probably 90% plus of the clients that were signing, they are starting a program from scratch. So, we are not really in the takeaway game from an M&A perspective.

They will be one or two files probably per year that we will onboard and I would expect that to be the case this year as well. But for the most part, Sanjay, this stuff is coming from clients who either have had a program in the past and dead now and they are going to start cranking it up again or folks who have never had one.

So, I think in terms of running into the other folks, for the most part, unless it’s a really large file. I think we are comfortable in our sandbox. It’s usually trying – our biggest challenge is trying to convince the prospect that the Private Label platform is the better loyalty option than other options.

Of course one of the other options is Epsilon. So it’s sort of a delicate balance there.

On speaking of Epsilon itself on the agency deals, yes, we are beginning to see some traction in terms of selling through the stacks so to speak, which would be not only the creative and agency side of it, but also allowing Epsilon to be the provider of things such as the demographic and psychographic data the database build as well as the analytics and distribution side of the business as well.

So I am not going to get into the specific clients themselves, but we are seeing some traction on that side. On the expense side yes, I mean whenever you are in strong – when you are signing a strong book of business you are always going to have expenses that are running in front of the revenue and that should even out of your progresses..

Okay.

And just one more on the Epsilon question, just is the opportunity to move some of those new relationships into the other lines as well but maybe materialize as revenue and in database and technology as well?.

Yes, that’s the game plan or it could be a big tech client today and we would try to sell in the agency side..

Okay, alright, great perfect. And then I just had one last one for Bryan, maybe you can just give us a little bit of a refined window into Brazil, I guess Ed you mentioned that 25 million collector target to get to roughly the size of Canada.

How do you guys get there from where you are right now because it seems like a lot of the collectors you got thus far came from Banco do Brasil?.

Yes, I think there is – they did come from Banco do Brasil but they also came very much from the retail partners that we have in each of the regions that we have launched, so I would suggest the following is that we have been doing market by market rollout.

We have been trying to get and look for a national sized grocery player which would help us penetrate the two largest markets which are basically Rio and Sao Paulo. So remember that we are now at 12 million customers in that marketplace and we are now in the two largest cities in Brazil.

There are still a number of markets there are last, so you can think about it three ways. One is we continue growing into new markets as we have been doing and that would take us on the pace and cadence that we are on today.

The second piece would be by adding additional partners to the mix so when that big grocer or a new fuel player or a bigger electronics players or whatever it maybe those will make the program more attractive and add even more customers from the existing markets we are in but also lend us the opportunity to do the third thing which is really grow that national presence which would bring Rio and Sao Paulo into the mix.

That’s sort of the (indiscernible).

I think we are quite comfortable that we can continue with kind of the pace of growth that we have been on in the last for the while and the focus for us right now is to build a very viable program in all the markets that we are in which today collective activation which would be the measure of how many points are they redeeming, how many partners are they using those metrics are tracking quite nicely with what the early days were in Canada and so we feel quite confident that we are on the right track in terms of the value proposition we have for the marketplace..

Okay, great. Thank you very much..

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

Yes, you can help us understand what may have surprised you with regard to your top line growth during the quarter versus your initial I think $1.25 billion guidance maybe beyond currency.

And then maybe you could just rank the key drivers enabling you to raise revenue guidance for the year despite this quarter and maybe just conservatism in the private label business that was going into the year or are they better than expected results in BrandLoyalty and what are key variables should we focus on? Thanks..

Yes, Darrin in terms of the revenue I would say really came from two areas one FX was a little bit worse than what we anticipated to see here a little bit more pressure coming on LoyaltyOne.

The second was we just acquired BrandLoyalty and initially probably we are a little optimistic on terms of the revenue but really it’s a sequencing issue which is they are stilling to hit there as we had talked about we are actually going to have a very good year for BrandLoyalty revenue.

Probably initially we thought the revenue would be a little bit stronger in the first quarter than what it ended up checking out. So I think it’s just more of a timing issue for us nothing more, the currency was a little more pronounced BrandLoyalty timing issue on the revenue but still very strong for the year.

And then if you go through and look at why we feel better about the revenue stream. Obviously, Ed's already talked about BrandLoyalty going from $500 million to $550 million. Ed also talked about private label. We started the year with 15% growth on average receivables. Now we are talking about 20%. So that’s the upside we are seeing.

The third of it is we did start off a little bit stronger with Epsilon, good, high-single digit organic growth, looking for some new clients to come through on Harmony, which could give a little upside to the back half of the year.

And then going back to Sanjay’s point as we do have these two big clients ramping, if we get to the point of revenue growth where we can recognize in Q3, Q4 that gives upside to the year as well..

Alright that’s helpful.

So, if we were to rank I mean it sounds like it is basically the BrandLoyalty upside, although it sounds like the first quarter was a little bit weaker, but you are still expecting that to ramp up enough and see the evidence that it will ramp up enough to actually do better than you initially planned, latter part of the year?.

Yes..

Okay and then private label obviously you are looking at 20% versus 15% and then those two big deals for ramping in. Alright that’s helpful, just on the credit quality side, one question.

It seems like provisions were about $20 million or $25 million below your charge off level in the quarter, which typically we see you guys more in line or a little higher although you also seem like at least by our calculation you are still over 100 basis points higher in terms of your allowance level than your charge-offs, which is still a really conservative question, are we thinking about this correctly in the sense of how you want to keep that level going forward or – I mean can you give us a little guidance in terms of how we should think by your allowance levels for the rest of the year?.

I think you are right Darrin, in terms of the spread between the reserve rates and the trailing charge-off rate 100 bps to 110 bps is reasonable. Like we talked about we are still looking about 16 months forward of coverage in terms of the reserve we currently carry.

So that’s obviously very robust when most card companies would carry more like 9 to 12 months worth of coverage. So I think it will be – continue to be very conservative or and I will say appropriate in that regard. Good forward coverage, good spread, think of it being in 100 basis points and 110 basis points range..

Okay, very helpful. Alright, thanks guys..

Your next question comes from the line of Brett Huff with Stephens Inc. Your line is open..

Hello, can you guys hear me, okay?.

Yes..

Okay, sorry about that. One quick – just to put a little finer point on the guidance Charles I want to make sure I understood this.

What was your expectation for the Canadian headwind in the prior guided range versus the – I think its $55 million and I am just trying to balance that with it seems like the benefit of an extra $50 million or so we are going to get from BrandLoyalty?.

So, when we came out with our guidance last quarter, we were assuming the Canadian dollar would be about 0.94. Now we think the Canadian dollar will be more like 0.91 for the year. Now, the headwinds we face will be throughout the full year, but worse in the first quarter and lightest in the fourth quarter.

So what we saw was a little bit more than negative impact in Q1 than we anticipated. We have taken it down little bit for the year, which is obviously included in our 12/25 core EPS guidance. But again as the year goes on it abates in terms of the amount of the headwinds..

Okay, that’s helpful.

And can you talk about a little bit more on that Epsilon frontend loading – I think you called out in the press release a couple of million dollars, but it sounds like it might be a bigger project than that or it’s been – somebody already asked that question, but I just wanted to know a little bit more on – is it $2 million or is there more ancillary stuff in there, that’s harder to quantify, we thought the profitability will be better in Epsilon, I am trying to understand what’s going on in there?.

I guess I consider more direct costs we are incurring to rollout the platform with these clients. Again, if it’s a large client and technology platform in this case software we are rolling out, it takes a number of months to get rolled out.

During that timeframe we’re incurring the expense the direct expense due to rollouts but we are deferring the revenue stream until it really gets up and ramped. So what you are seeing now is just the deferment expense. The expense we have to incur to get technology platform rolled out.

But then when we get to the point of recognizing the revenue stream in Q3, Q4 then you can see the leveraging coming through a little bit obviously the EBITDA margin contribution..

Yes, I think one of the things that we are beginning to see now given the size of Epsilon with north of 5000 people is that when you are signing 23 new deals a year on platforms and stuff you have got to bring in a lot of folks.

And these are folks who are what we call folks who have the hot skills where we are competing with the other folks out there, the Googles or Facebooks and stuff like that for the same talent.

And so getting those folks, getting them in the door, getting in the size of the labor force that we need, it’s becoming something that is now more of a challenge than it was when we are a lot smaller, I will tell you that.

And so we will probably hear on the side of getting a little bit more in the door sooner rather than later to make sure we have the pool available..

Okay. And then one last question, I think Ed, you talked a little bit about Private Label going forward and it sounds like you are spending time there. And I think the last call you have said that 2015 Private Label sort of spots to start implementing, where we are starting to look a little scarce.

First of all, I want to make sure that I am remembering that right.

And if so, can you give us your sense of that same view of today?.

Yes. In terms of ‘14 obviously we are all booked up. And it’s training the resources a little bit at this point. And so we probably – we are drifting into slots for ‘15 already. To your point, I would say, we could probably launch as up to at most 20 clients in a given year given that we used to do five.

I would say, folks have done a spectacular job giving us that capacity, but I would say 20 is about it and it sort of goes back to the overall theme that we have been talking about, which is organic top line is very strong, revenue is very strong. We are going to flow through enough of it to give us the 20% plus earnings growth.

Our real issue this year is not going to be bringing in top line and organic growth. Our biggest issue this year is on execution and making sure that with these record books of businesses, especially at Epsilon in the Private Label that the machine does a breakdown frankly. And that’s where we are putting all of our efforts.

In terms of the year, I think the financials are in very good shape for the year as there maybe a couple of minor tweaks as the year unfolds hopefully to the upside, but we are 100% focused right now on just handling the two books of businesses that we have signed and getting those on with how things preying at the themes..

Great, thanks for your time..

Your next question comes from the line of David Togut with Evercore..

Thank you and good morning.

Could you comment on the unit pricing outlook for Private Label, Epsilon and LoyaltyOne for this year and next year?.

I am not sure exactly what you mean, David. I will probably answer a little bit differently. If you were looking at EBITDA margins, we are looking probably for stable to maybe slightly up in LoyaltyOne and AIR MILES. Obviously, we will see some improvements coming through on BrandLoyalty as the year progresses.

For Epsilon, EBITDA margins probably flat to maybe up slightly. For Private Label, just because a little bit reserve build associated with the growth, you will probably see a little bit of EBITDA margin compression in the Private Label space.

Is that what you are going, David?.

That’s helpful.

And to follow that up in the Private Label space, I am curious if you are seeing any change in unit pricing as you compete for some of these new awards or have most of these awards that you highlighted in the quarter really been so sourced?.

I wouldn’t say we are seeing really any pricing pressure in that regard. If you look for the year, we are saying that gross yields maybe down as much as 40 basis points.

If I take out the ramp of the new programs, required programs, basically flat to maybe slightly up, so that would tell me really what you are seeing is the influence of the growth, not the influence of pricing pressure coming through on resounding to deals are basically some of the programs we have, really it’s just the ramp you are seeing..

That’s helpful.

And just a quick final question on the co-branding side, could you update us on your strategy in co-branding?.

Sure. I think that one of the things we are trying to do in our Private Label business is to diversify a little bit away from our traditional verticals which would be soft goods, jewelry, home furnishings. And so co-brand, the choice of whether to use private label or co-brand is really up to the client.

And what we found is there are certain verticals where co-brand works best and specifically (indiscernible), hospitality, those are the areas where there is a huge amount of interest in just having co-brands.

So, if you see an announcement in those areas, so for example, with Caesars or with Virgin America something like that, those are going to be the co-brand space. The majority of our business will always continue to be Private Label, but there is a slot that’s opening up for co-brand..

And then on that point, to what extent, can you extract skew level data from a co-brand card?.

Sure. It’s the same gig. It’s actually what you do is because we are the merchant acquirer and the issuer for co-brand if the transaction takes place at that retailer, clearly, we can extract the same type of information as long as the merchant, once again in Greece to give us that information.

For purchases outside of the retailer, we can’t get that level of information we could probably only get where you went and what you thought and how much you spend at the whole location. So it’s sort of for stuff that takes place at the retailer, we can get the same level of information. That’s the deal with the merchant.

And outside of that, it’s we are sort of stuck up with just sort of total dollars being spent..

What percentage of purchases on co-brand typically occur as the retailer on the card versus outside of that?.

I don’t know, David. I don’t have the stat..

It’s all over the place..

Yes..

Okay, thank you very much..

Thank you..

Your next question comes from the line of David Scharf with JMP Securities..

Good morning. Thank you. Two areas.

First on Epsilon, I wanted to follow up on earlier questioning about kind of cross-selling, has there been a history thus far of moving any agency clients to become data and technology clients or is there a track record over the last couple of years since you have entered the agency business?.

It hasn’t been nearly as strong as it should be. A lot of that has to do with we really just finished, I think we talked about last year the organizational changes at Epsilon, whereas before we sold by product.

So you would have someone responsible for the agency P&L, someone else responsible for technology, someone else for distribution, etcetera, etcetera. We rearranged everything so that now the P&L is by vertical. So if you are in the auto vertical, your P&L responsibilities are now cut across all the products.

And as a result, your comp is cut across all the products. And we have found that when you tie your comp to that type of goal that tends to move the needle. So I would say that you had a smattering of deals last year. This year we are beginning to see much more sell-through. And it goes both ways.

It goes agency clients which are now going into the technology side and technology going upstream into agency. So it’s I would say this year and next year should be significant years for the sell-through..

Got it, got it. That’s helpful.

And then secondly turning to Private Label, there is helpful commentary on the yield outlook, maybe there is more a tougher question to answer, it’s more qualitative or macro driven, but setting aside the near-term headwinds on gross yields just because you are boarding on more new clients, you have to build bigger reserves.

Is there – can you give us a sense for whether gross yields are still running below ignoring the new client aspect, whether gross yields are running below kind of historical peaks just based on the percentage of your yield that’s coming from late fees? I am just trying to understand whether or not as we think about ultimately where that portfolio can trend, whether it’s still let’s say more of a prime portfolio or a higher credit score portfolio than you actually like? Just trying to understand kind of what key profitability can be and whether late fees are still representing about a third of gross yield or if their payment rates are still too high?.

I think if you take out the influence of the new programs right around to where it is, is about where we would want it to be. Said in other way, we are not really trying to push it up or push it down. You will have some influences coming through there, David. Obviously, we have an APR tied to primary.

So if you see short-term rates go up, then you are going to see the APRs go up. So you can see little bit of float there naturally that the increase in APR offsetting the increase in funding cost. Flipside of it is they have talked about we are doing a little bit more co-brand than what we did in the past.

Co-brands going to carry a little bit lower gross yield than what a typical PLCC would. So I would say expecting for those will be somewhat static, but those will have an influence on a go-forward basis that it’s hard for me to really answer your question exactly. We do have a prime portfolio. We will endeavor to keep it that way.

Going back to even 2007, we have kept our underwriting standards very consistent. Approval rates now are still pretty low for us, which would exceed them over time as people repair the credit. But aside from the two structures I talked about, I don’t really see the impetus to make it to go up or down..

Okay, very helpful. Thank you..

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

Guys, good morning. Thank you for taking the questions. Ed, I appreciate the color on the pipeline and it sounds like demand is strong sort of across your businesses. I have been following Alliance for a while and I certainly have less than perfect memory, but I can’t remember a time when you called out a 1,000 new employees in a call center.

For example, can you just frame up for us how you balance visibility and I think you mentioned a couple of potential large customers at Epsilon suggesting that they are not signing.

Can you just frame up the balance between the frontend loaded investment and perhaps the risk on either timing of new deals coming on this year or the risk that you don’t win the contracts, you think you are going to win and how you frame that up in the context of your real confident second half outlook?.

Yes. It’s I mean you hit the nail on the head. It’s a balancing act. What we are finding is that really especially at Epsilon and at Private Label, you are just seeing more demand, more demand and more demand, which is as we say a great problem to have. I think hiring 1,000 people at Private Label. We need those folks up and running.

We need the call centers built. We need the space provided well in front of these clients moving up. I think the messaging here is that none of this is hiring on spec. We are hiring folks based on deals that have been signed. So in the case of Private Label as we said, we have got 20 new folks, 20 new clients going up this year.

The backlog looks very strong. And at Epsilon, we have got 23 big platform builds going on this year and getting those people in the door. That’s the big challenge. And we are going to try to match delivering 20% earnings growth this year at the same time not letting business fall through the cracks. So we can have strong growth outlook for ‘15 and ‘16.

It’s a longwinded way of saying it’s a balancing act. It’s a good problem to have, but it doesn’t take much either way to get your expenses to shoot out of control for a quarter or two. And we want to make sure that doesn’t happen..

Okay. And you guys have a good track record of forecasting your business.

One last one if I might just with regard to the loyalty business generally, when you step back and look at the traditional AIR MILES business versus some of them, it’s BrandLoyalty or the cash rewards business in Canada or certainly the growth in Brazil, would you frame that up at all as kind of a changing of the guard or a maturation of your loyalty business generally or is that too sort of dramatic comment I guess?.

I think it’s – let’s put it this way. The program is 22 years old.

When you have got a business that’s been running for that long and you have got 17% of Canadians participating in the program, you could look at it and say is it in a maturing phase as a business overall? And I think that you could put that color on? And the reality is that we still see a lot of opportunity in that business for growth.

Is it going to be a strong double-digit growth in the future? No, it doesn’t have the potential to be mid to high single-digit as you go forward, yes. We have some things that we put in place, which will help us get there. And the answer to that is yes. We probably have the best year of signing new partners that we have had in years last year.

If you look at that 10 million households, there is a portion of them that are very engaged in the program and there is a portion of them that are using some sponsors, but they are not holistically engaged in the program and using it as their primary reward vehicle.

And so we see opportunity to continue to add sponsors in categories to continue to basically add to continue add more cross sponsor activations, we would say in other words a measure of engagement.

And as a result of that, we think that there is opportunities with things like the cash program to change the nature of what our growth pattern has been over the last years. I think as much as anything, Canada has had an anemic spending environment for probably the better part of 18 months now.

And I think the consumer is cautious in terms of how they are spending. And so a little bit of economic recovery and a little bit of these other strategies will get us back to a healthier outlook going forward..

Okay, that’s great. Thank you..

Okay. I think that wraps it up and we will talk to you next quarter. Thank you..

Thank you. Ladies and gentlemen, this concludes the Alliance Data first quarter 2014 earnings conference call. You may now disconnect..