Steve Calk - Managing Director, FTI Consulting Edward J. Heffernan - President, Chief Executive Officer & Director Charles L. Horn - Chief Financial Officer & Executive Vice President Bryan A. Pearson - Executive VP & President, LoyaltyOne.

Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc. Andrew Jeffrey - SunTrust Robinson Humphrey, Inc. Darrin D. Peller - Barclays Capital, Inc. Josh Beck - Pacific Crest Securities Dan Salmon - BMO Capital Markets (United States).

Good morning and welcome to the Alliance Data Second Quarter Fiscal 2015 Earnings Conference Call. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. It is now my pleasure to introduce your host, Mr. Steve Calk of FTI Consulting. Sir, the floor is yours..

Thank you, operator. By now, you should have received a copy of the company's second quarter 2015 earnings release. If you haven't, please call FTI Consulting at 212-850-5703.

On the call today, we have Ed Heffernan, President and Chief Executive Officer of Alliance Data; Charles Horn, Chief Financial Officer of Alliance Data; and Bryan Pearson, Executive Vice President and President of LoyaltyOne.

Before we begin, I'd like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the 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 the call. Also, on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com.

With that, I'd like to turn the call over to Ed Heffernan.

Ed?.

Thanks, Steve. Joining me today is Bryan Pearson, President of LoyaltyOne, which houses both the Canadian AIR MILES program as well as our European platform, BrandLoyalty; as well as Charles Horn, our always eloquent CFO.

Bryan is going to give an update about LoyaltyOne, and Charles will walk you through the quarter, and I will discuss the year-to-date performance, critical goals, where I think we are in the year, and updated 2015 guidance.

That being said, Charles?.

Thanks, Edward. It was a solid second quarter with revenue up 19%, importantly 11% organic, and adjusted EBITDA, net up 18%, a good flow-through of the revenue growth. On a constant currency basis, the growth rate for revenue adjusted EBITDA net were an impressive 23% and 21% respectively.

Core EPS increased 14% to $3.32 for the second quarter, exceeding our guidance of $3.20. Accordingly for the year, we are passing that through and raising our annual guidance from $14.90 to $15, a 19% increase compared to full-year 2014.

EPS was down slightly to $2.11 due to non-cash expenses related to the Conversant acquisition completed in December of last year. Generally, we expect acquisitions to be accretive to core EPS in year one, the GAAP EPS in year two. A quick update on the share repurchase program.

During the second quarter, we bought 451,000 shares for total consideration of $134 million. Year-to-date, we bought 2.5 million shares for total consideration of $699 million. Currently, we have reacquired over half of the shares issued as part of the Conversant acquisition late in 2014.

With that, I will turn it over to Bryan to talk about LoyaltyOne..

Thanks, Charles. LoyaltyOne's revenue declined by 15% or $54 million to $302 million, and adjusted EBITDA declined 24% or $21 million to $66 million for the second quarter. Of course, the strong U.S. dollar continues to be a significant headwind for LoyaltyOne, reducing our revenue and adjusted EBITDA by $49 million and $10 million respectively.

On a constant currency basis, our revenue was flat and adjusted EBITDA declined by 13% versus last year as the AIR MILES low-single digit revenue and adjusted EBITDA growth was more than offset by the program timing of BrandLoyalty.

However, when reviewing the AIR MILES and BrandLoyalty businesses separately, the results to date and the outlook for the balance of the year are predominantly positive. So let's start with AIR MILES. The AIR MILES business enjoyed a strong second quarter as issuance increased an exceptional 235 million miles or 19% over the same period last year.

This is the highest mile increase in any quarter of our history and it's a critical driver of our profitability over time. Leading the charge was the robust performance of our grocery vertical, which is really attributable to two key reasons.

First, the launch of Sobeys in Western Canada which continues to perform well with increased promotional activity happening at both Safeway and the Sobeys banners in that market.

Second, the launch of Sobeys Ontario late in the first quarter of this year and the conversion of its legacy called Sobeys points to AIR MILES coupled with incremental activity from the existing grocer, Metro, as they share the category in the Ontario region.

The Ontario grocery segment really highlights the role that co-exclusive agreements are planned with sponsors as they look to fend off some of the industry's largest competitors.

Finally, issuance growth in the second quarter was also fueled by other sponsors that participated in a very successful promotion in the market and from our relationship with BMO, who launched a new AIR MILES World Elite MasterCard product into the market.

To date, the results are very positive as it has a compelling consumer offer in the very competitive premium card market. For the balance of 2015, we anticipate that base issuance and spend in the program will continue to be strong. However, we believe the extensive bonus activity from the fourth quarter of 2014 will not repeat itself.

As we've said many times in the past, we look at the full year issuance as the key metric in the business since the timing of promotional activity can significantly skew results in any given quarter. We still expect full year issuance for growth for 2015 to be in the mid-single digit range.

AIR MILES redeemed also increased 10% compared to last year and this was primarily due to AIR MILES Cash, our instant reward option. The cash program continues to be a very popular reward offering, and it enjoyed a 60% increase in redemptions over the same period last year.

We should note the cash redemptions are prevalent in our grocery partners and so it's following the same growth trend that we are experiencing for issuance in the segment. For the full year, we anticipate redemptions to increase by mid to high-single digits primarily based on the strength of AIR MILES Cash. So now, let's turn to BrandLoyalty.

On a constant currency basis, both revenue and adjusted EBITDA were down compared to the second quarter of last year, but they were in line with management's expectations.

As we mentioned in the – on the first quarter earnings call, some clients pulled forward programs that were executed in the second quarter of last year and this – and they were pulled forward in the first quarter this year, creating some bad year-over-year comps, again timing.

Keep in mind that BrandLoyalty's revenue is actually up 41% and adjusted EBITDA is net – is up 29% for the first half of 2015 versus the first half of last year on a constant currency basis.

Based on the results to-date and the book of business, we see plan for the balance of the year BrandLoyalty is still very much on track to achieve the full year projections of double-digit top and bottom-line growth, again on a constant currency basis. And now, a couple of updates on our North American expansion efforts with BrandLoyalty.

We're in the final stages of establishing the U.S. pilot program later this year and this represents an important milestone in our U.S. strategy as we build on both our Canadian and U.S. experience through this year.

Additionally, the Canadian programs that we first announced in the fourth quarter of last year are progressing well with proven results, and we plan to roll out additional programs in 2015 in that market and maintain a 100% customer retention. Last, let me update to you quickly on dotz.

We continue to see steady growth in our collector base and are tracking to reach approximately 18 million collectors by year-end that would be up 30% from the end of 2014.

In addition to the continued member growth, the level of sponsor interest is also building and it could be a catalyst for expansion into one of Brazil's largest markets over the next 6 months to 12 months.

In closing LoyaltyOne, while the second quarter was a bit choppy due to timing, we've achieved solid year-to-date results with 17% and 7% growth in revenue and adjusted EBITDA net respectively on a constant currency basis. While the strong U.S.

dollar continues to be a headwind for both units, we have great visibility on how our clients will engage with our loyalty platforms over the remainder of the year and into 2016. I would like to personally thank the leadership teams of both organizations for their continued commitment to both our clients and to the success of LoyaltyOne.

Great job, everyone. And I'll just pass it back to you now, Charles..

Thanks, Bryan. Let's flip to the next page and talk about Epsilon. Epsilon's revenue and adjusted EBITDA increased 39% and 66% respectively compared to the second quarter of 2014. Big increases but not yet where we want them to be.

Looking at the legacy Epsilon business, results were close to our expectations with mid-single digits growth in both the revenue and adjusted EBITDA, a little short on top-line growth but with solid flow-through to EBITDA.

Turning to Conversant, revenue was down about 9%, while adjusted EBITDA was flat compared to the second quarter of 2014 on a pro forma basis. We are running a couple quarters behind on revenue growth, but did see some positive developments during the second quarter.

First, we gained traction with our cross-sell initiatives signing over 10 contracts including names like Hormel, Cornerstone, Nine West, Ann Taylor, Sally Beauty, and Helzberg, to name a few.

We estimate that the annualized run rate for all these new programs will be in the $50 million range which will drive return to revenue growth in the back half of 2015.

While we work to return the top-line's positive growth, after pruning some lower margin offerings, the shift to more profitable business led to a 300 basis point expansion in the EBITDA margins at Conversant.

Looking forward to the remainder of 2015, we expect organic revenue and adjusted EBITDA growth in the mid-single digit range, down from our beginning of the year expectation of 7% to 8%. Unexpected softness in our agency offering where we have a couple of very large clients that can move the needle quickly is the primary reason.

For Conversant, we are expecting return to revenue growth by the fourth quarter, led by strength in the CRM offering, and solid adjusted EBITDA growth beginning in the third quarter. Page 9 lays out our expectations for the turn, which Ed will talk about later. Let's flip over and talk about Card Services now.

For Card Services, we continue to see very strong results, with the revenue increasing 27%, which translates to a 20% increase in adjusted EBITDA net. This now represents the 14th consecutive quarter of double-digit revenue growth.

Just as importantly, revenue outpaced expenses by 6%, as Card Services continues to drive operational efficiencies, while delivering on commitments to clients. As a percentage of average card receivables, operating expenses have decreased a full point to 9.8% compared to last year.

The provision for loan losses increased 61%, primarily due to the substantial growth in card receivables as we held the reserve rate essentially consistent with last year. Fueling these impressive results, we saw credit sales increase 34%, which translated into equally strong average receivables growth of 33%.

The fundamentals remain very strong, despite a relatively early Easter that pulled some sales into the first quarter. Where measurable, we continue to see tender share gains of more than 175 basis points.

Tender share is the key business metric we track closely as it demonstrates our ability to not only grow with our clients, but also help them grow through overall business and program. Importantly, the growth in credit sales was balanced.

Our core sales, those are the clients who joined us in 2011 and prior, grew 9% in the second quarter, driven equally by stronger traffic and increased spend from existing card members. This is a continuation of our 3x client growth strategy for credit sales. Growth in the core added about seven points to the total growth.

Intermediate sales, meaning clients who joined us 2012 to 2014, grew about 36% (13:02) during the second quarter, adding about 10 points to overall growth. The balance came from the acquired programs added in the latter part of 2014. These programs already seen stronger card acquisition providing momentum for continued upside.

From a credit quality perspective, we continue to see low delinquency rates and principal charge-off rate trends remained stable, and in line with seasonal expectations. Funding costs continue to be very stable and should remain so for the remainder of 2015. In summary, for Card Services, the results continued to be strong.

The pipeline of new partnerships remains robust with sales gains expected to run close to 30% for the remainder of 2015 and 20% or greater for the next several years. With that, I will turn it over to Ed..

Great. Thanks, Charles. If everyone can turn to the slide that says first half summary, I think this is, frankly, a pretty helpful slide in the sense of it begins to even out some of the choppiness you'll see in the quarters, and it gives you sort of the first half report card on how the overall company is doing.

If you were to go through the individual pieces, again, I know everyone's getting tired of hearing about the dollar, but at the health of the business if we look at Bryan's group, LoyaltyOne, again, there were a number of timing issues where Q1 was (14:30) Q2 was a little bit – was down, but the end result is through the first six months, you're looking at plus 40%, plus 30% in terms of top and bottom.

We certainly expect this business to continue to deliver double-digit top, double-digit bottom on a full-year basis. So, they're scooting along pretty nicely. Then, we move to Canada, and again we're seeing – beginning to see the positive growth develop in both revenue and EBITDA.

And again, the critical thing there is the 13% increase in miles issued over the first half.

Compare and contrast that to minus 2% during the first half of last year, and for those of you who don't live in this business, miles issued is the key metric that will drive future revenue and earnings as we get paid when miles are issued, and that payment is brought into the P&L over a period of time.

So, overall, on a constant currency basis through the first half of this year, we're looking at plus 17% top, plus 7% for the LoyaltyOne business, which I think is certainly healthy.

We then move next to Epsilon, again, the big issue with Epsilon that we were focused on this year was last year's inability to flow revenue growth through to cash flow growth or earnings growth and that's where we've really been focused. Epsilon delivering plus 5% top, plus 5% EBITDA in the first half of the year.

I would say the plus here is that the flow-through to earnings is in fact happening pretty nicely, and we're seeing that generation of cash flow growth that we didn't last year. Where I think we're short is I think Epsilon is still a couple of points off of its potential in terms of top-line.

As Charles mentioned, the database, the loyalty, the data, the digital, all those areas are doing quite well. We did have some softness on the agency side. So we want to be focused on that as well, but the flow-through looks good. Conversant, I'm going to spend some time on.

In terms of what we're looking at through the full year, it's going to be an interesting ride. I think we've got in terms of visibility we're feeling more comfortable now than we did three months or six months ago, and we're waiting for that to flow through.

What we're seeing right now is that we have completed the pruning of really the low margin or no margin revenue, which seems to plague ad tech in general, and we're focused on making sure that the real sticky stuff with the high margin stays with us and that seems to be happening as well as signing a very significant book of new business.

And finally, in Card Services, again, it's the same old thing of just – they're performing better than anyone had anticipated with top-line and EBITDA.

Again, very, very strong and really the only thing holding back additional EBITDA growth over and above the 17% is the fact that they're growing so fast that we have to place reserves, which in effect defers the recognition of that flow-through of profit. So even these numbers on the bottom line are a bit muted against what's actually in the book.

So overall, the first half you've got plus 24% top, you've got plus 23% on EBITDA, I would say it's a pretty solid first half of the year. What I would call out, especially in today's environment where growth is so hard to come by, we're looking at 12% organic growth. On a constant currency basis, we're looking at 16% constant currency organic growth.

And against our goal of 3x GDP, we're currently running at 6x GDP, which I think is fairly exceptional. Okay. Let's turn now to Conversant. Let's see what's going on here.

We put together a couple of charts here, and you'll see when we brought Conversant into the family at the end of 2014, the trends we were seeing prior to that and then the trends we are seeing since they became part of ADS.

Essentially, as a six-month update, we made the bet that the majority of the Conversant offerings would be very, very attractive to Alliance's client base, and specifically Conversant itself was in the middle of transitioning to a model that relied on a client's online and offline transactional level or SKU level data, which should sound familiar to everyone, to provide extremely targeted display ads that were linked across desktop, tablet and mobile devices.

When we first looked at Conversant, the biggest challenge they were beginning to have was its size. It was beginning to be dwarfed by some very, very large players in the space. And it was having more and more difficulty getting into the door of the C-suite, which is where the spending decisions are being made.

And so, we thought as part of Alliance that challenge should go away and that's where we are today and we look at first revenue. It's a pretty ugly chart until you start looking at where we see things are heading. And again, as Charles mentioned, we have a much more comfort with visibility now going forward than we did three months ago.

Growth rates and revenue have been slowing or outright declining for almost a year-and-a-half or five straight quarters, and the bulk of the recent decline was what we'll call self-inflicted as we move quickly to prune the more quantity like products which offer lots and lots of revenue, but very, very little margin, if any.

And as I mentioned, for those of you in the ad tech space, that's a pretty common thing, that's something that we're not interested in. That process is now complete. Q2 should be the bottom and we had to go a little bit deeper than we previously anticipated, but we think we can call the bottom at this point.

Now, while we pruned, we also introduced Conversant to some of Alliance's clients. Initial response rate has been very, very encouraging. To be specific, I know everyone wants numbers, we inked deals with about 10 existing clients that will drive an annual run rate of $50 million. I will consider that a very successful start to the year.

That being said, our goal by the end of this year is to have inked deals that would have an annual run rate of between $75 million and $80 million. We think we were well on pace to hit that goal by the end of this year and that to me would suggest that the original thesis we put forward is in good shape.

So, the overall low margin commodity stuff has gone and the GC or sort of cross-sell is signed and I think it's a question of timing at this point. The big question when we signed the original deal was can Conversant be transformed into Alliance's key digital cross-sell product and returned itself to a high growth business.

I think at this point, we all internally feel that the answer to that is yes. And now the question is how fast can we start to load the new wins on to the platform and start seeing the flow-through to revenues. I think that's the question now.

So in our opinion, and again, I think with some folks, it's going to take until we actually print the numbers, but based on what we signed so far, based on the pipeline, the question has moved away from, is this going to be a nice long-term organic growth business for Alliance. I believe the answer is certainly yes.

The question now is how quickly can we get these folks boarded and start recognizing the revenue and showing the turn. And that's the race now. We need these wins fully up and running by the end of Q3. We've got half of them boarded by now, and we need everything boarded by the end of Q3 to exit the year in a strong growth mode.

Right now, we should get there, but that's the thing that we're focused on right now. Now, we turn to EBITDA, which I think tells a different story, which also declined for five straight quarters, but as we had mentioned, it's already turned the corner.

Again, the pruning of the top actually helps the bottom and in Q2, EBITDA margins jumped 300 basis points from the year before, and we've turned from five negative quarters into flat, and then we should be back into growth mode Q3, Q4 as the acceleration begins. So from that perspective, I would say, that we're in good shape there.

If I were to sum up, maybe five points here, I would say, first, the pruning is done, painful but necessary, remembering why we purchased Conversant. Number two, I think the pruning hurt the top but helped the bottom, and EBITDA has turned, and margins jumped 300 basis points.

Number three, the cross-sell into ADS has already produced deals of $50 million in annual run rate, and we want $75 million to $80 million by year-end. We talked about getting everything boarded by the end of Q3.

And then, really if you were to turn to sort of the plus/minus of it that we've been going through that slide that says Conversant at the top plus and minus. If we were to sit back now and say, all right, what did we get right, what did we get wrong.

I think at the end of the day, what you're looking at is, I think, we were too optimistic, we certainly were too optimistic on the timing. We thought Q2 would be relatively flat, Q2 came in about $13 million short on revenue, EBITDA did come in on track, which is good, but we do believe that the original thesis is playing out nicely.

If we can get the value of the signed contracts from $50 million run rate to $75 million to $80 million by the end of the year and get things boarded, we should have a very strong jump up for next year and we expect double, double top and bottom organic growth from Conversant in 2016. So that's where we stand.

It's going to be a little bit of a waiting game in terms of seeing that curve turn on the revs, but it's headed in the right direction, the cross-sell looks good, the pipeline looks good, the EBITDA is heading in the right direction and I think outside of probably being overly optimistic in terms of pruning versus putting on the new cross-sells, I think we're in pretty good shape on Conversant.

If you were to go now to the 2015 guidance and critical goals for the overall company, again, BrandLoyalty, as we talked about for the full year, we certainly expect on a constant currency basis to see double-digit top, double-digit bottom. On BrandLoyalty, I'd say the potential for the North American expansion is enormous.

As Bryan mentioned, we had a number of programs already up and running in Canada that are going well and we expect those to be repeatable next year and the question is as we begin to dip our toe in the water in the U.S., how successful that would be, but given the size of North America that could be huge new market for BrandLoyalty in 2016 and 2017 and with them running at double top and double bottom, we think this could be a really nice growth engine not only today, but really accelerate in the future.

In Canada, as we said, the big driver there and the big pleasant surprise is the fact that miles being issued, our key growth driver is in fact running double digits through the first half, we expect mid singles for the full year.

But again, it's always nice to be ahead, on the first half, especially given we were down 2% this time last year and that will eventually flow into revenue and profit. So I think LoyaltyOne is in very, very good shape. Again, you are fighting against the $0.25 billion hit in terms of top-line and $50 million on EBITDA in terms of the dollar.

But inherent in this is the fact that the businesses themselves offer great, long-term potential. Then we move to Epsilon, the big goal for this year was to make sure the top-line flows through to EBITDA, and we've talked about a number of businesses and a number of things that we've done there right now.

We expect the various loyalty platforms, the database, the digital, the data, all those assets are doing quite well. We are seeing some softness on the agency side, and I think the numbers for Epsilon right now, on terms of top-line are not up to what the potential should be which I believe is 7% or 8%.

And that's something we're going to have to continue to work on as we move through this year and into next year. So, potential there for, I think, faster growth going forward, same deal at BrandLoyalty, same deal in Canada.

And then on Conversant, I think we've completed the internal transformation towards product offerings that really rely on what Alliance does best, which is using offline and online SKU level information to help drive the targeting across any and all devices, mobile, tablet, desktop.

Those are the things that would make us different in the marketplace. It seems to be playing extremely well with our client set. Again, we've only talked about 10 folks or 12 folks that we signed out of probably population of about 300 clients. So, it's a huge potential. I do think the thesis is holding nicely.

We do have obviously some timing issues that we're trying to get behind us over the next quarter or two.

As it relates to our card group, there's not much more to say as I – the – its exceptional portfolio growth, solid strong double-digit revenue and EBITDA growth, and I keep going back to the question of, well, it's been such a huge run in the last three years or so, is this – are we getting near the end here and the answer keeps coming back a very strong no, this thing has got legs to it.

We think that based on just the signings we're looking at this year, we've released some, we've got a bunch more to release that signing another vintage meaning that this year's signings would eventually spool up to about $2 billion in portfolio. We're about 85% to 90% done with that already.

I would say that the pipeline of deals today looks as encouraging as it did three years ago. I do believe a lot of this is secular in the sense of budgets continue to move away from sort of non-measurable traditional channels and into the very focused one-to-one marketing that can come with having SKU level information.

So, long story short, the Card Services, I think, has a long way to go which is very good news. We didn't know when we signed our first $1 billion vintage whether it was one and done, but it was a $1 billion, then $2 billion, then $2 billion, then another $2 billion, so it looks like this thing is going to be around for a while.

From a credit quality and funding perspective, again, as Charles talked about, in good shape. Overall, organic revenue growth, we target at 3x GDP, which would be high-single digits, maybe 10%. This year, we're currently running at 6x GDP on a constant currency basis or about 15%, 16%, with overall revenue growth of 20%.

And then, mid-20%s on a constant currency basis, lots of free cash flow, we're using that this year to buy back a number of shares. As Charles mentioned, I think we've already taken in half the shares we issued on the Conversant deal that tends to be still a very good use of our capital both today and going forward.

And we started the year pretty deep in the hole with the FX issue, and we managed through over performance primarily in the card group, as well as share buybacks to mitigate what we believe is the entire FX headwind and print the numbers that you're seeing today. All right. Let's finish up with raising 2015 guidance – our last sheet here.

I think that we're looking at 20% – 20%, a little over 20% top at $6.5 billion and about 20% on EPS, back to that sort of golden number of $15, which is what we wanted before the dollar tanked. So I think we're all the way back which is good, and I think that overall the businesses are in good shape.

If you step back – and let me just spend two minutes on this from a strategic perspective – and say, all right, how's the model doing? How's the company look? Are you guys at the peak of earnings? Are you somewhere in the middle? And the answer is that what you're looking at is a business where you're going to have usually the majority of the businesses doing extremely well, some of the businesses sort of under construction and they tend to swap out in terms of leadership.

And right now, you have the Card Services group and the BrandLoyalty group are continuing to produce very big growth rates. The good news is I don't see that changing any time soon, but what perhaps is more interesting is the potential for other parts of ADS.

I don't believe Epsilon has hit its potential in terms of top-line growth, which I think is in the high-single digits. We are beginning to see the EBITDA flow-through to Epsilon. So, we're basically doing profitable growth, which is good. What we're not seeing yet either is the potential for BrandLoyalty in North America. That market is huge.

That could be an accelerator to the growth rate of BrandLoyalty. We spent a lot of time doing the six-month checkup on Conversant. We are just beginning to get going here. Are we comfortable that this thing is a double-double top and bottom growth for 2016? The answer is yes.

A lot of it depends on making sure we continue that book of signings from $50 million to $75 million to $80 million by year-end, get them boarded, get them up and running and we should be in good shape. On AIR MILES, we talked about how the key driver of the financials is miles issued. It was flat last year.

We're already running double digits this year. You'll begin to see the flow-through next year on the deferred. Bryan talked very briefly about Brazil, but again, from a potential perspective, it is growing 30% top and 30% on its customer base in constant currency. Again, it's sort of at the early stages.

So I think wrapping up, there's a lot of good news. There's work in progress. There's a couple of things under construction. I do not think we're at the peak of what we can do long term and that's the way Alliance is basically run. So, we've cycled through different businesses for the last 15 years.

I would expect that we will continue to cycle as we go forward, but right now, the outlook looks pretty good. With that being said, I'll open it up to questions..

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

Questions on the agency side of kind of legacy Epsilon business or the core Epsilon business.

Could you just talk about what kind of opportunities there are to accelerate the growth there and maybe diversify away from some of your core customers?.

Yeah. If you look at agency, what's unique about it is agency is more project-based versus contract-based. That makes it a little bit more difficult for us to forecast; and with several large clients in the agency, they can increase their projects, they can pull back, so they can influence the growth rates very quickly.

We talked last year about Ford onboarding, it's ramping nicely. Conversely, we had another large client pull back a little bit. So that's a situation where it's always going to be a little bit bumpy being project-based.

The upside for ADS is we continue to grow the technology side double-digit within Epsilon plus you ladder in Conversant, you get that back to double-digit growth. That will further diversify the product offering within Epi and allow it to mitigate some of these swings on project-based offerings..

Okay. And then maybe one on Conversant, obviously, good traction in terms of the cross-sell opportunities.

When we think about the sizes of the revenue opportunities that you're currently signing versus what might be out there prospectively, I mean, is it safe to assume that some of the opportunities are larger than what you're signing right now?.

No. I think that if you used somewhere between $3 million to $5 million per signing, we're probably at the higher end of that right now. So say, call it $5 million per over 10 clients. Sanjay, in that 10, you're going to have a swing between $1 million and $10 million.

So, it depends on how big a set of services they sign up for whether it's just an affiliate transaction or whether it's the big CRM type data work.

So, I focus more on if we got traction with 10 clients and let's say we add another half a dozen or so by year-end, there's probably about 300 clients between our Card Services group and core Epsilon that I think would be a nice target audience for this. So, you do the math, that's what we're focused on.

Obviously, we're not going to get all 300 clients, but if we can add 15 clients, 20 clients a year, this could be a nice story..

And the signings that you have had thus far, are those from those segments or are they from elsewhere?.

Yes, yes. There's been a couple that have been from sort of already in the pipe of Conversant pre-Alliance, but everyone else has been an existing client of either Epsilon or Card Services and that was the big bet that we made going into this thing is the ability to get these folks into the C-suite..

All right. Great. I have one last one. So, I guess one of your competitors in the private label space talked about how there's opportunities sub $1 billion and obviously there's all sorts of deals out there sub $1 billion and types of companies. It doesn't seem to be really impacting you guys in terms of your growth.

I mean, is that a safe assumption to make that you're really not seeing a lot of competition as it relates to your niche part of the market?.

Yeah. It's always hard to comment on what other people are saying, but from – look, we're focused on getting a $2 billion vintage every year and growing tender share in the core. The vast bulk of our stuff, Sanjay, as always will be finding retailers that have never had a program before or had one and had a very bad experience.

And we start them up from scratch and it takes three years or four years to churn them up. And those are things that quite frankly, the large card players in the industry. That's a lot of time, patience, effort for a file that may reach a $100 million or something like that, which is sort of our average file, if not smaller.

So, it's just, I don't think, moved the needle at the big guys, you've got to go after these huge ones. So to answer your questions, no, we haven't seen it.

That doesn't mean that going forward, there could be some irrational bids thrown in for some of our existing clients and if that happens, we're going to make money on this business, we'll make two times or three times what other card players do and we're growing five times faster.

So it's a model that works and we're focused on making sure we do it profitably..

Okay, great. Thank you..

Your next question comes from Andrew Jeffrey with SunTrust..

Hi. Good morning. Thanks for taking the question..

Hey..

Ed, I wonder if we could just dig in a little bit on sort of the puts and takes of the transition that's taking place at Conversant. Can you be a little more specific on the business that you're pruning? I assume that's the – their traditional media business and the precise rationale behind that.

And then also the nature of new the business you're signing if you exit with $75 million or $80 million of annual run rate revenue from cross-sells, there's multi-year deals and what could that number be like next year if you see continued momentum?.

Sure. Without getting too far into the specifics, it's pretty basic to think about our – what would be pruning for us, what are areas that aren't that exciting.

The pruning areas for us would be, look, there's a chunk of that business that is a commodity and everyone has seen what has happened in ad tech over the last few years and what used to be real juicy stuff is now turning into more commodity type business especially on the agency side.

That, to us is less exciting, because it brings in a whole lot of revenue, but it doesn't do anything for your bottom-line. And we're not out there looking to trade it 20 times revenue and some of that crazy stuff without earnings, we are known for generating huge cash flow.

So that stuff we don't feel is sticky, we don't feel it's additive to our clients and as a result, those types of plays have been deemphasized. That being said, I think there's a lot of very exciting stuff on the agency side that will involve the use of data down to the individual level that we haven't really put into place until just now.

And so, very quickly that could be something from – going from, hey, a client says, here's $3 million, I'm having a sale this week, and let's get a bunch of eyeballs on it across devices to, hey, I'm having a sale this week and here's $3 million, let's go out and go after the folks that we know have a very strong interest in the brand, have shown a willingness to shop here before, live close to where the stores are, et cetera, et cetera.

That's the type of stuff that is very, very additive from a value perspective. So that sort of both, what's being deemphasized and then where we see the emphasis coming on the agency side.

From the deal side, what you're finding is the vast, vast bulk of the wins are as you might expect and what was the – called the CRM or the old Dotomi side where the client will feed us both offline and online historical SKU level, purchase transactions, we will combine that with some Epsilon data that we have.

And again, we'll go out almost on a one-to-one basis to target individuals across the web with relevant ads and offers and link them through unique ID across the three devices. With the upsurge in mobile, we want to make sure that desktop, tablet, and mobile can all be linked together. And that's pretty much what we're doing.

So, think of the big growth. Think of everything at Conversant basically as the more data that we have, the more unique SKU level purchased online, offline data, the more we're going to put our shoulder into it, the more our clients like it and that's what's going to make it a differentiated model..

Okay. And then a follow-up on BrandLoyalty, just looking at obviously, very strong first half from a profitability perspective, it looks like almost all of the EBITDA was generated in the first quarter.

Is that revenue timing? Is there a fixed cost component that pulls down the second quarter margin versus where you were in the first quarter, just trying to get a sense of that and whether or not you can have – whether or not we should expect the possibility of choppy margin quarters in BrandLoyalty over time?.

Andrew, it's something we've kind of talked about before, which is BL tends to have a high fixed cost structure, which we added to during the second quarter as we look to move further into Canada as well as to in the U.S.

So, what happens is when we have good sales volume and drops to the bottom line, when you have a decline in revenue like what we did in Q2, it was down 7% year-over-year, a high fixed cost structure is going to hurt you.

So, what you really have to do is you'll have a little choppiness there as we talked about before, but if you're hitting your revenue growth targets of 10%, 15%, 20%, you're going to see it flow through over the course of the year. But a pullback in any one quarter given a high fixed cost structure is punitive to your share earnings..

Okay. Thanks. Appreciate it, guys..

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

Thanks, guys. I just want to touch on this one, organic growth rate in Epsilon for one more minute just briefly. I mean I know there was a client you said pulled back. And obviously, Ford's going well. But I guess it's been a few quarters now where we've seen sort of mid-single digit growth there from the legacy organic business.

Should we be looking at Epsilon now as a story where really to see that high single-digit growth rate, again it has to be really encompassing the full synergies and cross-selling from Conversant? Or is your legacy Epsilon business powerful enough by itself to still be a high single-digit grower? Just if you can help us think about that..

Yeah. I mean, look, it's – we're pleased with the flow-through. We're not pleased with the top line. I do think Epsilon is a 7% to 8% top-line organic growth shop by itself. I think with Conversant now that we're getting on the upswing that will bring the whole segment up a few points. And that's really what we're looking to do.

But I don't think 5% growth top-line for Epsilon is what we're shooting for. I don't think that's an acceptable long-term number..

Okay, all right.

So it's still a 7% to 8% in your mind?.

Yep..

Okay. Just – all right. Shifting gears, BrandLoyalty, I know this quarter again you had a pull forward in first. I mean that's an area that does seem like with the build-out in Canada $25 million incremental revenues there and then potentially U.S., it could be a very large contributor maybe a year from now. I guess two questions.

Number one is how substantial of a ramp do you think we could see for that in the new markets outside of just Europe? How's Europe going for, I guess – how's Europe going first of all, but more importantly, I mean in terms of the opportunity in the U.S.

and Canada, is there something we can see in 12 months to 18 months to be really substantial? And then in terms of ownership stake of BrandLoyalty, I mean I think you were expecting that to increase per year, right? Could you just remind us on the economics around that?.

I'll answer that one first, Darrin, which is, yes, we own 70% now. We'll look to take the next 10% in January of 2016 and then in 2017 and 2018, that's the way it's structured..

Okay. Thanks..

And on the business side, I would say that what's the nice thing about BrandLoyalty, as Ed alluded to in his comments towards the end, is that the growth is very solidly happening across the European and Asian base right now. I mean that's where the primary growth is coming from.

Canada is certainly additive to it, but it's – what we're seeing is a lot of client renewing programs, a lot of new clients coming on board, companies like Lidl extending programs into other markets that they operate in. And so, I think we feel really quite confident about what we're seeing in the existing markets that they are operating in today.

And to answer the second question which is what's the horizon on the North American marketplace growing, if Canada is any indication, it will take two – a couple of years sort of starting the deal and starting the relationships with the clients.

I think what happens is that, you see a pilot program or you may see an initial program run, and then what we've seen in Europe is that, the ultimate goal is to get your clients running a couple of programs a year. And so, they kind of dip their toe in the water, figure out how this works for them.

They see the results, because we see that this definitively has an impact on our partner results, and then they are looking at – we're doing a program again to fix the go over issues that they'd have in the following year. And then they look at adding the second program. So it's sort of a stair step thing that happens over time. The big thing -.

All right..

...for the U.S. would be how many clients we get. So (51:08) -.

Yeah. It seems like a – yeah, obviously, a much bigger opportunity in market wise, the only question is just how much competitive there is around loyalty solutions and rewards type programs in general in the U.S., but it seems like just with your pilot and what you're doing in Canada, it is a good start.

So, you're not worried – just I guess the question is you're not worried about the competitive dynamics in the U.S., you still think that's something that can really be big?.

Yeah. It definitely can be big and I would say that if Canada's indication what we're seeing is that they're layering this program in, in addition to the long-term loyalty initiatives.

So they're replacing other promotional activity and running the short-term 16-week to 20-week promotional campaigns and if the results – so there's no reason to believe that the programs would not work equivalently well in the U.S., I think the markets....

Okay..

...are similar enough. It's just about the grocers adopting it and thinking about this as a new tool in their arsenal, that's all..

All right. That's great, Bryan. Just – Charles, very quickly within private label, sales coming on in Q3, I think or Q4 maybe, how should we look at the portfolio yield cadence in the back half of the year. And then just for charge-offs, should we still expect flat to slightly up versus 2014 and I'll leave it at that, guys. Thanks..

So from a yield standpoint, I'm looking for about a point down year-over-year, that's pretty much what we thought starting the year..

Yep..

From a provision standpoint, probably an ending reserve around 5.5, which should mean a loss rate of around four or five-ish for the year. It may be up 10 basis points, 20 basis points year-over-year..

Okay..

They'll continue to work with it. Obviously, it takes a while and we're working through that to get it done by the end of the year..

All right. All right, that's all unchanged. Thanks, guys. I appreciate it..

And your next question comes from the line Josh Beck with Pacific Crest..

Thank you. I had a question really on going back to some of these CMO conversations that you're having, you've talked about 300 plus targets more or less among your Card Services in Epsilon client base.

Could you just help us maybe bring to life some of those conversations, help us understand how CMOs are viewing your differentiation relative to competitors? Obviously, there's a lot of other people knocking on the doors as well.

So just help us understand kind of where you're staying now, is it your data assets? What you're doing with attribution, transparency? I'm not sure exactly what it is, but if you could just give us some color there, I think, would be very helpful..

Sure. Not a problem, Josh. I think that if you look at what we're trying to create here across – we talked about Card Services. We talked about Epsilon. I'm bugging Bryan to – who's sitting across from me – to get going on Canada and then, frankly, get going on Europe and elsewhere. But he's a little busy right now.

Anyhow, there's probably – if you look at it in terms of all the stuff that's out there swirling around in the marketplace and there's a lot of good models and everything else, we are focused very closely on sort of five things to differentiate us from the rest of the pack.

The first one is as we've talked about because of our size and because of what we do for a living, we only do one thing, which is using data to engender loyalty and drive sales. And our ability to reach any CMO across the spectrum is solid. We can get in the door anywhere, get a meeting whenever we want.

And so that's sort of the first step is you need to get an audience with the people who are making the decision. And that's something that was fading at Conversant and so we can offer that.

Point two is that these are existing clients, and recall again, what we do for a living, we are already sort of the trusted partner when it comes to handling their most sensitive information.

And so, if you think about, they're offline and online transactional level information, they don't give that to just anyone and we're building the biggest loyalty platforms in the world. We're building these huge card programs. We're the ones collecting that information. We have a good trusted relationship.

So they're not going to freak out when we say with Conversant to do targeted ad across multiple devices, hey, we're going to need a couple of years of historical online/offline SKU level information. In a lot of cases, we have it. And in other cases, the CMO is going to be very comfortable giving it to us.

That's something that the CMO would have trouble with especially when you get into some of the – a couple of the really big guys. We're viewed as sort of a neutral party. The third thing, again, is we're not – look, we're never going to use social information to help drive our targeting.

Our mousetrap is purchase level – actual purchases that are made online, offline and again that makes us a little bit different from others. The fourth would probably be the fact that we have unique identifiers that have been able to link your desktop with your tablet with your mobile device.

In this unique ID, means basically our targeting can be that much more precise and specific and we're not wasting a bunch of the client's money hitting the same person across their IDs like there's three different people. And then finally, again, we're not software-as-a-service; we are a services company. We've got 8,000 folks in Epsilon, Conversant.

And we believe that there's a huge market out there for CMOs who want all the technology that we have, all the creative that we have, but also wrap together and services so they can pick up the phone with one throat to choke. And that's a very longwinded answer, Josh.

But the end of the result is there's sort of those five things that we think will make this unique. We're not going to be all things to all people, but for our 300 clients, we think it's a compelling offer..

Great. Yeah. That's very helpful. Certainly, a lot of moving parts to get there, but I do understand what you're saying there. I also wanted to ask on BrandLoyalty, how do you see the margins through that business at scale? Obviously, it's an earlier business and you're building it pretty substantially.

So where could that go if you put your longer-term hat on? And then how should we think about seasonality kind of moving forward? Obviously, this year, we've had some moving parts between Q1 and Q2. And then I think we probably also have some moving parts around expanding that business.

So maybe just help us think a little bit more about the seasonality of that business and how it evolves?.

From the margin side, I think, to say it's 20% plus would probably be in the right range. I mean, we're – Ed talked about – or sorry, Charles talked about the fixed cost nature of the business. But I know that there's continuing focus there on how we grow margins over time, but I think that would be safe.

And then on the second question around seasonality, I mean, you've got to think about when grocers really want to focus on, on what happens in their business. And that's heading into the holiday seasons. And you can imagine, in the U.S., Thanksgiving will be a very large period of time and then the holidays after that with Christmas.

And so, what you see is that the programs tend to skew a little bit towards the latter part of the year and then sometimes those programs run into the beginning of the following year into the first quarter. So you might get a little flop over of revenue and profits as you clean up the fall programs. And then people tend to run spring programs as well.

So, it really is dependent on the clients and what the clients are trying to do in their business. We start from what the grocers are thinking about in terms of where they're looking to add sales and sort of create excitement for customers, and so that creates a little bit of the shift back and forth in terms of how you see the (59:45)..

Q4 is usually the biggest, right?.

Yeah. Q4 is usually big..

But -.

If you look at the first three quarters, what he's basically telling you, Josh, is it's not going to be a constant seasonality you can model every year..

Yeah..

It's just going to be a little bit bumpy with Q4 being the biggest..

Great. Thank you..

Your next question comes from the line of Dan Salmon with BMO Capital Markets..

Hey, guys. Good morning. Ed, when you look at the robust pipeline that you've got on the private label side, you mentioned sort of if we look – if you look back three years, you feel like it's just as strong now as it was then.

How is it different? Is it maybe more tilted towards co-brand? Are there different verticals that are driving it more? But just as we think about the run rate over the next few years, we've obviously seen some new types of clients coming in there.

If you could just give us a little bit color on sort of how you see that growing and executing against that sort of robust sort of growth numbers that you've talked about?.

Yeah. It's a fair question.

Some of it again will be self-imposed on our end, which is I do think that, you know, our – the co-brand side of it, we're going to be a bit more cautious on because the co-brand stuff tends to attract some of the other players in the marketplace who are looking to make it sort of the number one card in the wallet, which is not necessarily what we're after from our clients' perspective.

They just want to make sure it's number one when you're shopping at their store. And so I would expect that you would continue to see the vast, vast majority of our announcements to be private label as opposed to co-brand, which is really our basics.

The co-brand stuff for the most part, if you looked over the portfolio, has either been in T&E, which is sort of unique to the T&E space or more specifically, they're co-brands that have been – that the clients have said, all right, I have a private label, maybe I can get even more penetration with the co-brand.

So a lot of our stuff are dual card programs. And that's where I see some of our growth on the co-brand side going forward, which is an existing client, he says, hey, can I get another 10 points of tender share if I offer a general purpose card. So we're looking – we're pretty attracted to that stuff.

But for the most part, private label, probably 75% of our stuff will be private label. The portfolio we'd like to keep it 75%-25%. We think that's a good mix on a long-term basis.

In terms of where the deals are coming from, again, whether depending on how you cut it in our sort of little sandbox, we've talked about 350 or so type clients that we think would be a good fit. And of those, there's only still about 150 who have a program, so we still got – we're not even half penetrated at this point.

It's just a lot of folks who are turning off the general spend marketing and moving over to the measurable data driven targeted marketing. So, it's a reallocation of their budget dollars, and we're just seeing it in waves today that started three years ago. You cover the space which goes on..

Okay, great. Thanks, guys..

Okay. We'll take one more..

We'd already cut it off..

That's it?.

Yeah..

Okay. Thank you for all your time. And we'll see next go around. Bye now..

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect..