Steve Calk – IR, FTI Consulting Ed Heffernan - President & CEO Charles Horn – EVP and CFO Melisa Miller – EVP and President, Retail Credit Services.

Tulu Yunus - Nomura Tim Willi - Wells Fargo Sanjay Sakhrani - KBW Darrin Peller - Barclays Brett Huff - Stephens.

Good morning and welcome to the Alliance Data Systems Q1 2015 Earnings Conference Call. [Operator Instructions]. In order to view the Company's presentation on their website, please remember to turn off the pop-up blocker on your computer. It is 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 first-quarter 2015 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 and Charles Horn, Chief Financial Officer of Alliance Data.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the Company's earnings release and other filings with the SEC.

Alliance Data has no obligation to update the information presented on this call. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide more useful information for investors. Reconciliation of those measures to GAAP will be posted on the investor relations website at www.AllianceData.com.

With that I would like to turn the call over to Ed Heffernan.

Ed?.

Thanks, Steve. Joining me today is Melisa Miller, our President of our Card Services Group, and Charles Horn, our erudite CFO. Melisa will update you on what's going on in Cards. Charles will give you the financial update on the quarter.

Then I'll talk a little bit about some of the business trends we're seeing and then guidance for the remainder of the year. That being said, let me turn it over to Charles..

Thanks, Ed. I've got to say I've never been called that before. I am glad to say we're off to a fast start to 2015, as revenue increased 30% while core EPS and adjusted EBITDA net increased at comparable rates of 31% and 29%, respectively. Overall, a very good flow through of the revenue growth to the bottom line.

Importantly, strong performance across all three segments led to 19% organic revenue growth. As we expected, unfavorable exchange rates were a significant headwind, reducing our revenue and core EPS by about 5% for the quarter.

We were able to play through these headwinds and beat guidance and expectations for Q1 through a combination of over-performance, about $0.10 which we've added to our core EPS guidance for 2015 and share repurchases. As we have talked about for the last several months, our top capital allocation priority for 2015 is the share repurchase program.

We started the year with a $600 million authorization which we have pretty much used, buying 2 million shares during the first quarter. Our ambition is to use the repurchase program to mitigate most, if not all, of the FX headwinds in 2015.

Accordingly in order to keep some dry powder to support this goal, we're increasing our authorized program for 2015 from $600 million to $1 billion. Let's move to the next slide and talk a little bit about LoyaltyOne.

LoyaltyOne had a better-than-expected first quarter, similar to our fourth quarter of last year, with the revenue up 37% and adjusted EBITDA up 26%, both on a constant currency basis. A strong U.S. dollar was substantial headwind for this segment, reducing revenue and adjusted EBITDA by $64 million and $12 million, respectively.

Despite these headwinds we were able to increase revenue by 18% and adjusted EBITDA by 9%. Adjusted EBITDA margins contracted about 200 basis points due to mix as BrandLoyalty which carries a lower EBITDA margin than AIR MILES, increased to about 50% of segment revenue from 34% last year.

AIR MILES issued increased a solid 7% during the first quarter due to strength in the gas and grocer verticals. This was the strongest Q1 growth rate since 2012 and the expansion of the Sobeys relationship late in 2014 was the key driver.

AIR MILES redeemed increased 15% compared to last year, primarily due to AIR MILES Cash, our instant reward option which drove over 50% of the increase in miles redeemed. A reminder we assume a 0% breakage rate for instant rewards. BrandLoyalty had a terrific Q1, with both revenue and adjusted EBITDA up over 100% on a constant currency basis.

The business continues to have solid momentum, but a portion of the Q1 performance is due to timing of promotions by our clients. As we have talked about before, these promotions tend to be 12 to 20 weeks in duration and can move between quarters on an annual basis. The number of active programs in Q1 2015 jumped over 60% compared to last year.

Conversely, the number of active programs in Q2 2015 is expected to be slightly lower than last year, meaning clients pull forward some of their programs for 2015. Lastly, an update on our North American expansion. BrandLoyalty entered Canada late in 2014. We're now actively approaching potential clients in the U.S.

and hope to run a pilot program by the fall. The revenue in North America, the opportunity in North America, could be of size $50 million in 2015. Let's flip over and talk about Epsilon.

Epsilon's revenue increased 45% to $505 million and adjusted EBITDA increased to a stronger 88% to $104 million, both aided by the acquisition of Conversant in December 2014. Excluding Conversant's revenue, adjusted EBITDA increased 6% and 5%, respectively, getting close to our full-year organic growth targets of 7% and 7%.

For legacy Epsilon, meaning excluding Conversant, Q1 reflected the initial benefits from our offshore initiative, specifically we increased our offshore presence by about 200 jobs. While small, compared to Epsilon's overall head count of over 6,000 associates, it's an important first step in ensuring revenue growth translates into EBITDA growth.

We still expect our U.S. workforce to grow, albeit at a modest pace than in previous years. With legacy Epsilon heading in the right direction, let's turn and talk about Conversant.

As we said before, our top priorities for Conversant in 2015 are to complete the transformation to a more transactional base, data-driven digital display platform and away from the businesses which have become more commoditized and to streamline its tech stack to allow customers a smoother experience and greater access to all areas of the digital display space.

We're making progress. This quarter, we launched the Conversant private exchange which opens up our unique digital reach in inventory to programmatic buying flexibility and efficiency. In other words, agency trading desk which operate realtime bidding platforms known as RTB, can now more efficiently leverage our rich data, add quality and audiences.

In addition, as we consolidate Conversant technologies into one common platform, we're driving significant benefit for our clients, such as increasing the available mobile inventory for our advertisers by about 4X.

This is critical in continuing to push our mission of cross-device marketing, allowing our clients to reach their consumers at any time on any device with messages that matter.

From a financial performance standpoint, do not expect much revenue growth for Conversant until the back half of 2015 when new product launches and cross-selling initiatives gain traction.

To that end we have made significant progress, as the Conversant offering has been introduced at the C-suite level to several large ADS clients, both at our Card Services and Epsilon businesses. With that, I will turn it over to Melisa to talk about Card Services..

Thank you, Charles and good morning, everyone. As Ed mentioned, today I'll cover our updated financial metrics. They're really a stellar continuation of the results you've come to expect from us. And then I'd really like to transition a bit into some of the key differentiators that really contribute to these results.

Turning now to slide 5, I'm very pleased to report that Card Services delivered strong revenue growth of 27% which translates to 16% of adjusted EBITDA, net of funding, compared to the first quarter of 2014. This represents the 13th consecutive quarter of impressive double-digit growth.

Importantly, we drove solid expense leveraging during the first quarter while remaining focused on delivering high-value outcomes for our brand partners. The provision expense, of course, is directly related to the large increase in card receivables.

Let's now move on to slide 6 and cover just a bit about some of the fundamentals that are really driving these results. We continue to focus on those fundamentals. They drive very strong revenue and adjusted EBITDA, net of funding. Credit sales grew an impressive 37% which in turn fueled receivables growth of 33%.

So what is really driving this increase? Our focus is solely on delivering loyalty-driving credit programs that appeal to customers and drive top line sales for our brand partners. Now to do this, we fully need to leverage our often discussed, always cherished first-party data.

We take the best of what our partners know about a customer and really combine that with the best of what we know and deliver very rich deep data insights. Then through our innovative capabilities, we deliver a true omni-channel customer experience in the moments that matter the most. So in our environment, one size does not fit all.

We're differentiated because of our highly customized white glove approach and our brand partners and their card members benefit from this approach. We do this simply because it works program after program.

And while certainly we benefit from the positive macroeconomic trends that create a bit more discretionary spending, our partners really look to us for the strategies to direct and influence those discretionary dollars back toward our card programs.

Virtually all of the metrics we use to measure our joint success are up significantly, both quarter over quarter and year-over-year. Where measurable, our tender share has improved more than 170 basis points year-over year and you'll continue to hear us highlight tender share.

As for us and our partners, it is one of the most important success metrics when delivering growth in our programs. We have a healthy balance of strong organic growth within our core programs and so to remind a group those would be our pre-2012 partners, as well as growth within our new brand partners in our acquired programs.

Beginning with organic growth, our first-quarter continued the trend of credit sales growth at three times that of our brand partners' total sales. On a comparable basis new card member acquisition is up 9%. Number of trips and spend per trip and spend per click are also up. And once we welcome a new card member, we work really hard to retain them.

Ultimately strong retention means that our base of active purchasers continues to grow by an impressive 8% year-over-year. So our strong card member base is growing, they're buying more, they're shopping more often across more and more channels.

Turning now to our newer partnerships, those who joined us in 2013 and beyond are also seeing very strong growth. Early indications around our key program conversions from 2014 are very positive, with strong acquisition of new card members.

For example, we doubled the number of applications and new card members year-over-year this past quarter for one of our converted programs. For another newly converted partner, we've welcomed more new card members in five months than the first two full years of their legacy program.

We're also seeing healthy activation and repurchase from converted card members. And all of this productivity is really made possible through our highly targeted data-driven differentiated approach. Additionally you'll see us continue to invest, innovate and expand our value in all channels where our partners and card members interact.

You might remember that last fall we announced the development of our next generation mobile loyalty suite. And by holiday this year you can expect to see several enhancements to our offering.

In the first quarter digital sales, so those sales not transacted in a traditional brick and mortar environment, represented more than 25% of credit sales and continued to be an important growth channel for our partners and for us.

10% of new credit applications now come through web-enabled mobile channels and are up 60% from the same quarter last year. While we remain committed to integrating into relevant wallet technologies and are planning our investment strategy accordingly, nearly half of our top 20 partners have adopted our mobile virtual card solution.

Our mobile virtual card enrollments are up more than 245% and mobile spend is up more than 450% from last year. Now, while on the subject of mobile and digital, Charles and I often receive questions regarding encryption and tokenization. I wanted to take just a moment and hopefully in one sentence, perhaps demystify these solutions.

They are really designed to enhance the security of transactions and will not compromise our access or ability to leverage first-party data. Additionally, unlike some digital solutions, our mobile platform will provide us opportunities for deeper insight into the card members' path to purchase and their behaviors.

So in summary, we expect our first-quarter success to continue, despite moderate to slow growth in certain retail segments. Card services will continue to deliver strong consistent file growth of roughly 20% or more. We're crystal clear on where that long-term growth will come from.

Tender share adds roughly 5% or more of growth and when combined with average brand growth of 3% to 4%, our more mature programs will achieve nearly half of our 20% long-term growth. Newer programs, so those primarily starting from scratch, with a few selective acquisitions, will add the remaining 10% of growth.

Hence our comfort with long-term 20% file growth, all while maintaining a very stable portfolio mix. We’ve a very purposeful pipeline of prospects and will onboard a number of new partnerships, some not yet announced. With acquisitions, we can increase long term growth further and run it closer to a 30% file growth which is this year's run rate.

When we add in a stable credit environment, low funding costs and expense leverage, we expect very strong results throughout 2015 and beyond. Ed, I'll turn it over to you..

Great, thanks, Melisa. So if everyone can turn to the slide that says First Quarter Summary. This is where we break it down by the individual units and hopefully it's a lot easier to understand what we're seeing in the trends that we're seeing.

If I were to characterize last quarter's results as mixed at best, I would say first-quarter results across the board were quite a bit better than we had anticipated. And a couple of the key initiatives are already paying off.

So I think Q4 was a bit of a mixed report card, but Q1 across the board is hitting on all cylinders and the result being you're seeing a very, very strong print compared to, I think, anyone's expectations. So it's good to see the meet and beat coming back and we like that trend and expect that trend going forward.

That being said, let's talk about the individual pieces. If you look at our European-based business, BrandLoyalty, as Charles mentioned, continues to really hit it and it was up 100% top and bottom line, compared to the same period a year ago.

Our folks at BrandLoyalty are doing a heck of a job both expanding in existing markets, as well as we talked about the initial entree into North America through some of our Canadian partners. So we expect another very nice year from BrandLoyalty, up double digits both top and bottom.

I should also point out, however, that the 100%, we should not be expecting that every quarter. In fact Q2 will actually be down a bit versus prior year. These are just timing issues, but if you put the two together you'll see some very strong growth there. So BrandLoyalty is in very good shape.

Probably the highlight of the quarter for LoyaltyOne was the return of the Canadian business and its key metric, miles issued, to very solid growth. We've talked a lot about we needed to get the revenue-generating metric which is miles issued, back into positive territory for more than one quarter.

And it's starting out last year with three negative quarters before we finally started to see the ship turn in Q4. A continuation of that in Q1 is a very good signal, because we expect similar results in Q2 as well in terms of miles issued.

So for those of you who don't live and breathe the AIR MILES program in Canada, what that essentially means is, that is our key driver of revenue and earnings over the long term because we get paid when a mile gets issued, so if that's positive eventually it turns into positive revenue and earnings as well.

Obviously from an accounting perspective, there's a bit of a delay between the miles being issued and when we actually get to recognize it. But net-net, we feel comfortable that this year Canada is back. We're seeing that strong mid single-digit growth and we expect that to continue to flow throughout the year.

So again, a lot of good news coming from a lot of the work that the team did in the grocer segment last year is driving the bulk of that. You put the two together you get LoyaltyOne. Incredibly strong first quarter of, plus almost 40% top and almost 30% on EBITDA.

Again, you'll have the dip down from BrandLoyalty in Q2 from a timing issue that pulled some earnings into Q1. But nonetheless, we think LoyaltyOne is in very good shape for this year. Obviously, I'm sure everyone on the phone has about had it with hearing about the strong dollar and what that means and earnings revisions and everything else.

We're just showing it here as illustrative of what we're facing going forward. I think on a full-year basis, it's probably about $0.25 billion top line and about $0.50 of earnings are going to hit us from the strong dollar. As Charles mentioned, our goal is to play through that and then over achieve from there.

So in the first quarter it hit us for about $65 million top line and about $0.10 in terms of earnings per share. That being said, the core businesses at LoyaltyOne, BrandLoyalty in Canada, look very good for 2015. We turn now to Epsilon and the two big, big items that I was focused on and everyone was focused on here.

We talked about turning the Canadian ship around and getting those miles issued back to a consistent positive growth metric. I believe we're there at this point. The other big one is of course Epsilon.

And while Epsilon has consistently posted solid organic growth rates north of two times GDP, we were having some challenges getting that to flow through to earnings, primarily because of a spike in labor costs. So we announced at the end of last year that certain non-core, or non-client-facing businesses, would be off-shored.

We're moving very slowly on that, but with purpose. We're already seeing the results as top line and EBITDA are now growing close to being in tandem at plus six, plus five. We expect that flow-through to continue throughout the year and perhaps get a little bit stronger as some of these non-client-facing positions are in fact kept offshore.

Again, we expect headcount in the U.S. to continue to grow, albeit at a bit more of a modest pace than in the past. So it gives us some flexibility at Epsilon for folks to move around into different positions, while also giving us the benefit of a little bit of a break on the labor costs.

So far so good there, those were the two areas that were the big focus. And then we talked about Conversant. The numbers here, obviously this is the first quarter that Conversant is part of the overall Company. Again, as we've talked to folks, don't expect from a financial perspective much excitement in the first half of the year.

Our goal is, as we announced when we did the transaction, to get their platforms consolidated, the tech stack consolidated and making sure that the growth in the data-driven targeted display space is job number one.

That also means that we're taking a very focused approach to de-emphasizing some of the more commodity-like businesses, where we don't see a lot of future opportunities. So if you were to go back and actually look at Conversant year-over-year, you would see that they were probably down both top and bottom versus a year ago.

We would expect Q2 to be flattish and then you'll see the growth rate spool up in Q3. We expect to hit a very nice run rate by Q4. The cross-sell initiatives, I'm very encouraged with where we're in that, with both Card Services and core Epsilon clients. As a result, those will begin to flow in as the summer months hit.

Again, it's hard to see what's going on underneath the water, but we're very pleased with the initial jump off for Conversant. As we've told people from a financial perspective, the real bennies are going to come in the back half. So that's where we're there. Card Services, I think Melisa and her team once again, has done everything above expectations.

There's not a whole heck of a lot to say there that she hasn't covered, other than it was just a tremendous quarter. I would emphasize again what Melisa was talking about, in terms of what really makes this different from many years ago is our ability to grow tender share. That is core organic growth.

And that essentially means when our client's growing 3% or 4% and we're growing more like double or triple that amount at that client, that means something's working, that's how we're going to get almost 10% of that 20% growth Melisa was talking about long term.

Obviously the data-driven really precise targeted and trigger marketing campaigns that we do are working today much better than they ever worked before. So very encouraging there. Overall, earnings up 31%. It's kind of hard to argue with that for Q1, but we know that folks are immediately moving on to Q2 and beyond.

So we will turn to the next page where it says Guidance and Critical Goals, just to make sure you've got a report card or checklist to keep us honest as the year flows out. LoyaltyOne, again BrandLoyalty, we want that double-digit growth in top line and EBITDA.

Obviously when you start off at plus 100, plus 100, you feel pretty comfortable about how the year is going to turn out. The key initiative there is the North American expansion. We've moved. We have two very large programs going in Canada that were brought to fruition through our relationships with existing sponsors up there in the AIR MILES program.

So we're seeing a very nice, if you want to call it a cross-sell ability, between the Canadian business and European business. And I think that bodes well for our North American expansion.

In Canada we talked about job number one by far is to keep this issuance growth in positive territory and not dip back down for a bunch of quarters, because that will just hurt the model and the financials that eventually flow out. We do feel that the Canadian business is on a much more solid footing this year than last year.

Specifically, there was a tremendous amount of activity in the grocer segment last year and that has played to our advantage and will play to our advantage throughout this year. At Epsilon, the core Epsilon business, that is the business excluding Conversant.

Again by far, job number one is to make sure that the solid revenue growth that we're seeing flows through to earnings growth and doesn't get chewed up with the increasing costs of these hot skill jobs that we have there. Again, the messaging here is we still expect to have modest headcount growth in the U.S.

But some of the growth overall in labor needs will be taken care of overseas. That's job number one there. And then with Conversant, the goal being in the first half to complete the internal transformation that they had started probably a couple quarters before they were joined with Alliance. It's a couple quarters to go.

It's a very deliberate transformation. And as I said, we're going to be focused on those businesses where that real rich first-party data will be driving the offerings and the more commodity-like businesses we will be de-emphasizing.

So again, I think that based on what we're seeing, based on the run rates, we expect this thing to really move along nicely. In second half we should see some nice growth on a year-over-year basis. In Card Services, it's going to be their biggest year ever.

While our long-term target is more of about a 20% portfolio growth, this year we'll be north of 25%, if not 30%. So very, very strong there, double-digit top and bottom. That being said, we're also looking towards the future. Once again, we want to sign those clients that would eventually ramp up from scratch to about a $2 billion add to the files.

So we're looking at the pipeline, looks very, very strong, as it has over the past few years as more and more retailers are moving their dollars out of general brand spend and into the data-driven marketing and loyalty platforms. Finally, it's critical that we deliver the full digital suite.

It may be quite some time before it actually moves the needle across our 35 million or 37 million card holders. But we want to provide the opportunity for them to have their virtual cards, so they just take out their phone and tap and go. That's a critical thing to get out to our 130 or so brand partners this year.

Overall, regardless of the macro environment that's out there which looks increasingly like it's going to be another year of sluggish global growth and not too exciting growth in either Canada or the U.S., we're sticking to our 3X GDP which may be 7% or 8% organic. Typically, this year we're certainly looking at something north of that.

We'll be in the double digits in terms of organic growth. Let's call it certainly north of 10%, maybe around 12% organic, 20% overall when you layer in Conversant, we'll generate about $1.3 billion of free cash flow.

And then one of the key things we want to do is, people who rely on Alliance to be a consistent performer year after year, the issue of the fact that we need to play through FX is not lost on us. As a result, we think that the buyback program is a nice mitigant to the FX.

So simply put, our job is to play through this non-business-related issue and get back to where folks expect us to be. And that's what we're going to do. So, guidance, it gives me great pleasure to once again get back on the train of beat and raise, so we're looking at bumping up our guidance from the $14.80 to $14.90.

Some of you may view that as a bit conservative, but I don't feel at all uncomfortable raising guidance by $0.10 with the notion that as things move throughout the year, we would like to keep a little bit of a hedge in there in case the dollar does something quirky against us, even more so than today.

I think overall it's going to be a very strong year for us across the board. I think we found a solution to the FX issue which we can take care of the businesses themselves. Again, Cards is in great shape, BrandLoyalty's in great shape. And then LoyaltyOne, the move towards positive miles issued for two quarters in a row is a very good sign.

And Epsilon, seeing flow-through from revenue to EBITDA is a good sign. And then finally to complete the report card, we need to deliver in the back half of this year, the return to growth and momentum at Conversant which I think we'll be able to do. So that's where we're.

If we move to understanding a little bit more about the Q1, if you walked through this, you would see that we had initially guided to about plus 22% growth, we came in at plus 31%. I would say certainly $0.25 of over-performance always nice to report.

But we'll also mention that $0.10 of that was probably a pull forward, or was a pull forward, from BrandLoyalty spooling up a little faster than we had thought. We're going to lose that in Q2, that's where we had it layered.

So if you were to really look at how we think Q2 is going to roll out, maybe a place to start would be a normalized growth rate of just under 20%, or about $3.40-ish, $3.45. Then you back out the $0.10 or so of BrandLoyalty performance that was moved into Q1 out of Q2 that gets you down of a $3.32-ish type number which is about a 15% growth rate.

And then we're going to get hit on FX for about $0.12 and that's why we get our guidance at $3.20. So if you were to look at a normalized run rate, we'd probably be in the $3.40s where guidance is $3.20, to reflect both the FX hit and the BrandLoyalty pull forward.

All that being said, for those of you who know us, we think that we've had a very strong start out of the gate. We expect the rest of the year to be equally strong. And outside of some timing and FX issues, we expect to over-perform as the rest of the year plays out. So that's all we had for the first quarter.

Needless to say, we're very excited about it. We know that there's been a lot of chit chat out there about general earnings being fairly dismal in the first quarter. We do not share that.

And in fact, what we're seeing is an acceleration coming from dollars being shifted from, again, general brand spend to the data-driven targeted marketing area in which we play. So that being said, I'm going to open it up to questions.

Operator?.

[Operator Instructions] Your first question comes from Tulu Yunus with Nomura..

So it does seem clear that BrandLoyalty is performing very well here, even despite the pull-forward that you did describe.

Can you remind us what the strategic rationale is to take this into North America? As in, what sort of value add does it bring in Canada where you already have AIR MILES fairly broadly penetrated there? And then why do you think that this can work in the U.S.

as well?.

Sure..

That's my first question..

If you were to look at the programs that we traditionally run, whether it's a Card program or an Epsilon program or an AIR MILES program, those are very large long term loyalty plays across the customer base. What BrandLoyalty provides is it provides more of a quick 12 to 20 week type hit that you layer on top of these longer-term loyalty programs.

While someone would still have their cards when they're going into the grocer, this additional program would allow the grocer to really drive incremental sales for a given quarter, let's call it. So these are not long-lasting programs. These are more shorter term type loyalty plays to drive market share in a given quarter.

What we have found is that it's a very nice fit if you think of a birthday cake, you have the first layer being the long-term loyalty play and then you have these quarterly type programs that layer on top of it. It just attracts additional spend from the consumer that wasn't there before and drives market share.

So it's a perfect complement to the longer-term type programs. What we found in Canada is it doesn't cannibalize the existing loyalty spend from the retailer. And in fact, what it does is it's taking more dollars out of that general brand spend and into the more specific targeted marketing spend.

We think, we'll see how the Canadian results look very good so far. As we begin to look south into the U.S., we would expect this to play nicely as well. So that's pretty much the fit..

And then secondly, two-part question on the cost side of the P&L, so first on private label. It looks like revenues are growing quite meaningfully faster than OpEx. Is that just normal scale benefits coming? Going back to 1Q last year, you did have that big headcount increase.

Are we starting to see the efficiency there or is there some other driver behind that?.

Tulu, you're exactly right. We're starting to see some of the expense leveraging. You might remember this time last year, we talked about the need to get ready to onboard a number of new clients. So now you're beginning to see the revenue productivity from the work that we did last year..

Okay, got it. And then on the Epsilon side, sounds like the outsourcing initiative is, not to put words in your mouth, but probably a multi-year initiative.

If you could put a finer point on that? And then secondly, as far as the low hanging fruit with regards to any cost synergies from the Conversant acquisition, have those already been enjoyed? And are they flowing through the numbers right now?.

As we mentioned, in terms of the off-shoring of some non-client-facing positions, we're going to take a very moderate deliberate approach towards this process. We want to continue to grow the U.S. workforce. It won't be at that 6%, 7% that you've seen before. We'll probably grow U.S. workforce around 2%, maybe 3%.

And then the delta will be some of those positions that we can do offshore. As a result, you're exactly right, this should be one of those benefits that continues to accrue as long as Epsilon grows. We've really just started the thing and as the year progresses you'll continue to see more and more bennies as that continues to grow.

We've made a decision that we think we can grow profitably, as opposed to just growing. But at the same time, let's keep the U.S. workforce growing at a more modest pace..

And the Conversant synergies are running through the P&L now? Or is there further upside from any G&A?.

The target for the cost synergies is about $20 million. We'll fully extract slightly less than half of that in 2015. And it's going to be more toward the end of the year, as we had the ability to displace some vendors we previously used and move it inside..

At the run rate..

Your next question comes from the line of Tim Willi with Wells Fargo..

Two questions around the Card Services. Melisa, there has been discussions and announcements by the credit bureaus about reconfiguring how they score. And some stop that had been punitive to consumers in a static sense around medical bills, etcetera, being reevaluated.

I'm just curious if you have any thoughts around does this open up, to any degree, applicants for private label that may have been denied for obvious reasons and logical reasons under the old reporting and data collection formats, that may reverse itself and open up a pool of new applicants worthy of approval? Any thoughts there?.

Yes, you bet, Tim. What I would tell you is that's a great question. We're always looking at models just beyond that come from the credit bureaus. So we have some of our own models, our proprietary models that we use in addition to any models that could come from the credit bureaus. We may see some opportunities there.

Obviously we don't want to compromise any of our standards, but our traditional practice has always been to use our proprietary models which help us understand how a card member will perform with us very specifically..

The other one I have and then a quick one on the balance sheet, was just around -- I want to make sure I understand the dynamic around tender share and then your commentary around the growth of the private label versus the retailer's revenue stream.

On an absolute basis, the lift in revenue to your retailers is, I think you put it at a number of 9% which was 3X. Or maybe you just said 3X the retailer's growth rate.

Is that representative of the new foot traffic and average spend coming into the retailer? Or is that the portfolio itself is growing at that rate in excess of the retailer? I'm trying to understand how much the retailer is seeing an actual lift to their sales that would be attributed to the card program versus just the growth of the card file.

Does that make sense?.

Yes, it sure does. I'm glad you asked that question, actually. About two-thirds of the growth that we'll see in tender share actually comes from us working in close partnership with the brand. We're going to get about three quarters of that growth from traffic.

So they're coming into the store or going into more channels more frequently and then about a quarter of that is coming from more spend which is particularly impressive. This is still a very, very highly promotional environment. What we see is that card members are actually purchasing more things.

And they're purchasing them for more dollars, even though the actual cost of a particular item may be less this year than last.

Does that answer the question?.

It does. And then the last one, Charles, quickly, if you mentioned it, I apologize, but on funding, right? So we've still got very low rate environments, more rhetoric about maybe that changing to some degree. Remind us how much funding you have that could be rolled over in the near term.

Are there any big tranches here you have a chance to refinance into lower rates and lock down a little bit more on that? Or is there nothing really to comment on there?.

There is not a lot there, Tim. If you think about the funding, about $1 billion of the funding would be a true variable rate that's basically churned somewhat during the course of the year. Over the course of the year then you'll have about $600 million to $700 million that will be more your term financing coming up for renewal.

I would say in that situation, there is some opportunity maybe lock it in at a little bit lower rates, because some of it would have been placed back in 2010. But the opportunity is not that big. So if you look at the funding rate for this year, it will likely be slightly better than what it was in 2014, but I'm not looking for a big benefit there..

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

I had a question on Conversant. Ed, you mentioned the goal is to move Conversant's model over the course of the rest of the year and that should produce results in the second half.

Could you talk about what exactly is happening into the second half and how much of that you've contemplated into your expectations?.

Yes, I think the goal all along has been let's let Conversant complete its transformation from, I guess what you would call it, is the older value click-type model which has a number of components that have been shed before we even stepped in. As well as some businesses that lend itself to more of a commodity play which isn't our bag quite frankly.

So what our focus is on is the continued movement of Conversant's businesses, even if some of the legacy businesses didn't have it before, but are moving much more towards the utilization of first-party transactional data to help differentiate the offering in the marketplace itself.

And in the area of targeted display, whether it's desktop, mobile, tablet, whatever it may had be, the ability to deliver this precision ad business across devices, driven by the insights gleaned from offline and online first-party data. That is the model that is Alliance's model.

That's the model that's going to be Conversant's model more and more going forward. To make that happen, what we're basically doing is Conversant should be in a good position sometime in the spring, where the organizational changes have been made and the businesses are aligned the way we want them, the emphasis is where we want it.

And at the same time, the cross-sell that we're seeing and Melisa can talk to this, the initial response has been exceptionally strong from a number of her clients, as well as a number of the Epsilon clients. These things don't happen overnight, but after a couple of quarters you're going to start seeing that flow through.

So Conversant should be on a pretty decent trend line to go from comps that are somewhat negative, that's been the case over the past year or so, to flattish by springtime.

And then you're moving into positive growth in Q3 and then real solid growth in Q4 as these cross-sells are coming through and we've completed the deemphasizing of the non-core businesses. That's the game plan..

Okay. And then, Charles, you mentioned for BrandLoyalty, the North American opportunity could be $50 million this year.

How much of that is in your guidance already?.

Obviously we know the Canadian opportunity is built in there. Really not much built in for the U.S. potential. What will happen is you'll start running pilots late in 2015. You really don't make a lot of money off the pilots until you go to full programs which will likely be more 2016.

So I would say of the $50 million, a portion of it is built in, maybe half of it. The rest of it is opportunity that we could get later in the year..

And I got one final one for Melisa. Thanks for the color on tokenization in mobile. But I wanted to make sure I understood your comments on tokenization.

So to the extent that your cards would work within the existing mobile wallets, do you still get the information that you have been getting? Like for example, if it worked off of Apple Pay?.

We would, Sanjay. It would come to us differently than we see in today's environment. But take comfort in the fact that our clients for 20 years have built their business in this tender share growth we've been discussing, all solely based on this deep rich data.

So they are first in line to make sure that there is no compromise in terms of our ability to gain access to it and continue to use it. So we're building all of those--.

How much progress have you made in trying to get into those wallets like Apple Pay? And you've got at least one more that came out since Apple Pay which is Samsung Pay..

Yes, there is a lot of activity in the marketplace. We're progressing. As you might imagine, there are a host of requirements that have been put forth to all of the issuers. So it is certainly in our work plan and we're making progress.

Interestingly, although partners ask about it, there's not been the type of demand that perhaps the play in the media would have suggested six months ago..

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

So BrandLoyalty has obviously been a very strong positive surprise in terms of how much upside, how much growth there's been since you've acquired it.

I want to understand, number one, before we even get into the opportunity in North America, what kind of innings would you say we're in terms of the opportunity in Europe? I mean, the growth has been outstanding. I think, correct me if I'm wrong, you said it would be negative in the second quarter, given the timing on promotions.

Still, obviously that just is going to average out to a very strong year again..

Yes, I think that from a BrandLoyalty perspective, even that model is continuing to evolve. So if you were to look in prior years, the programs they used to run at the big grocers, a lot of it had to do with market share data and stuff like that coming from outside sources.

What we've done is, we've now moved it to, we're extracting right from the get-go from the grocer's own loyalty platform, all the customer information and SKU level information, so that we can be much more targeted in our approach. That's something that's new to the model over there and it's getting the existing client base pretty jazzed up.

Look, I think we're early on in terms of where we're with the BrandLoyalty opportunity. It's going to be continuing to see good growth in Europe itself. You're going to continue to see strong movements into some of the more traditional, what we would call, Eastern European type countries as well as Asia.

So I would say, if you were to look at innings, you're probably in about the third inning, I would say, over there. The whole concept of SKU level data-driven targeted marketing is really just starting over there. I think that's going to be pretty cool going forward.

And then in North America, we're seeing, obviously with the help of the Canadian business, real strong results coming out of BrandLoyalty, so inning three..

Okay. So in putting that into context, you had over $500 million of revenue from BrandLoyalty last year.

You're saying early innings suggests, I guess, double-digit growth should be sustainable for a while, well over just a year?.

Yes..

Melisa, I want to ask on private label or Charles, if you can answer also. The private label growth, obviously it's been well above expectations, the combination of organic and acquired. Number one, what are you seeing out there in terms of additional portfolio acquisition opportunities? I know that we have, I think Zales coming on later.

But incremental to that, is there a good pipeline of deal out there? And then, I want to touch on the reserve level as a follow-up for a moment, but maybe first if you could answer that quick question..

Sure, Darrin. I would tell you the pipeline is rich with, really, three categories. First of all, portfolios that may be available in the marketplace because they feel their current program is under-leveraged or [indiscernible]. You'd think about that as an acquisition. There are some start-overs and then there are some start-ups.

So you'll see us really delicately balancing all three of those. We're really circumspect when we pursue a brand who currently has a program. We want to be sure that the brand is fully committed to the program being a loyalty tool. And so you won't see us get in bidding wars.

We're not going to welcome brand partners who see this solely as an arbitrage of MDFs. So there are some portfolios, or brand partners, where we're earning our way into discussions. But we're also enthusiastic about some of the programs that could be starting from scratch. They build over time. We learn a lot together..

Okay.

Would you say there is enough expectation for additional portfolio acquisition this year beyond Zales?.

I wouldn't say this year. If you would see something this year, Darrin it would be relatively small..

And then last question for me is on the reserve side. I think you said it came in at 5.6%. I just want to be clear. We're still looking at a 4.5%, or let's say a mid-4% charge-off ratio for the year as expected, following typically seasonally high first quarter.

But it should drop off, right? And then if that's right, should we expect a reserve level for the year that's -- right now you're trending at 5.6%.

I think we have about 5.6%, 5.7% in our model, but it seems like it could be lower than that?.

I would say that's accurate, Darrin. I would say by the end of the year it could be a little bit down, maybe 10 bps down, not appreciable change, but maybe 10 bps of improvement..

I think from a credit quality perspective, just so everyone is on the same page, what we're basically seeing is flat to last year, maybe up plus or minus 20 bps either way. So I don't see much of a change in terms of credit quality. It looks pretty stable.

In terms of how you would sequence the credit quality as the year plays out, it will be a little bit different this year in the sense of your Q2 loss profile will be a little bit higher, because the portfolios we brought on at the end of last year, we didn't buy the charged-off accounts.

So recoveries are going to be a little bit down in Q2 and then as this recovery stream builds back up in Q3 and Q4, you'll see the net loss rate again trend back down. From a sequencing perspective, expect Q2 loss rate to be a little bit higher and then have it trend back down. We're going to wind up relatively flat for the rest of the year..

And is that higher year-over-year or sequentially higher from first quarter levels?.

If you're talking about Q2, that would be year-over-year..

Ladies and gentlemen, we have time for one more question. Your final question will come from the line of Brett Huff with Stephens Inc..

Last question for me is on Epsilon, the organic business. I think that there was a pretty large contract that you guys didn't quite get to recognize revenue for 4Q and I wanted to make sure that came in, started to come in on 1Q.

If that's so, I thought that the margins might be a little bit better in the organic Epsilon business, because I think we took a lot of the cost in the back half of last year and wanted see how that played out in 1Q?.

You're correct, Brett, that client is now starting to produce some revenue in Q1. I wouldn't say its run rate yet. So you're not getting the full benefit of it flowing through which is the reason you saw 6% organic growth versus 7%.

But at least we're at a position now where we're getting some revenue coming through and that revenue should ramp a little bit to Q2 through Q4, compared to what it was in Q1. From a cost standpoint I would say we're on track. Again, we're very early stages of the offshore initiative.

We only have about a couple hundred, what I would say associates involved with this so far. So what you'll see is as that client ramps and as we get the offshore initiative going, that's when you'll look for a little bit of EBITDA margin expansion.

What Ed and I have talked about is, don't expect a lot of expansion in the margin to flow through in 2015. It will be somewhat flattish compared to 2014. You'll see it, though, the benefit, really as you jump off into 2016, when you get the full run rate benefit of the offshoring initiative..

Okay and then last question for me, just another question on Conversant. You mentioned that you thought we would get maybe $10 million of the cost saves mostly in the back half of the year.

How do you feel about the initial costs and revenue synergy projections that you made? I think it was $200 million of revenue synergies over many years and $20 million of costs if I'm remembering right.

Now that you're knee deep in it and have seen the business a little bit more, how do you feel about those projections?.

Yes, I think we feel pretty good. Things are playing out the way we had hoped. My guess is, as always from an investor perspective, people are impatient and that's nothing new. People need to be a little bit more patient and let us play with it. I think second half you're going to see a very nice ramp beginning to build.

The visibility that we have with Conversant is actually pretty good, so it is tracking according to what we thought. So far so good, let us do our thing.

And again, first half has been focused in terms of things to fix, was focused on getting that flow-through at Epsilon and getting the miles issued turned in Canada, as well as strong results at BrandLoyalty and Card Services. As we move to the second half, hopefully all of that stuff continues.

And then second half you add to it the addition of the Conversant benefits. That's sort of the game plan for the year..

Okay, so that's it. Sorry we're out of time here. So I know everyone's got a bunch of other stuff to do. We will get back to you next quarter. Thank you..

Thank you, ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect..