Steve Calk - Managing Director, FTI Consulting, Inc. Edward J. Heffernan - President, Chief Executive Officer & Director Charles L. Horn - Chief Financial Officer & Executive Vice President Bryan J. Kennedy - Chief Executive Officer.

Daniel R. Perlin - RBC Capital Markets LLC Christopher Brendler - Stifel, Nicolaus & Co., Inc. Bob P. Napoli - William Blair & Co. LLC Ashish Sabadra - Deutsche Bank Securities, Inc. George Mihalos - Cowen and Company.

Good morning, and welcome to the Alliance Data Third Quarter 2015 Earnings Conference Call. At this time, all parties have been placed on 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 third quarter 2015 earnings release. If you have not, please call FTI Consulting at 212-850-5721.

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 Kennedy, Chief Executive of Epsilon/Conversant.

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. Welcome, everyone. Joining me today, as mentioned, is Bryan Kennedy, the CEO of Epsilon and Conversant (sic) [Epsilon/Conversant] (1:38); and Charles Horn, our always dynamic CFO.

Bryan will update you on both Epsilon and, in particular, the trends that we're seeing at Conversant, and Charles [audio gap] (1:52) the results, and then I'll finish up and discuss our final outlook for this year and then what we're thinking about for 2016. So, with that, I'll turn it over to Charles..

Thanks, Ed. It was a strong and balanced third quarter for Alliance Data as all three operating segments achieved double-digit growth on a constant currency basis. Importantly, organic revenue growth continued at a double-digit rate.

This allowed us to drive 20% growth in revenues to $1.6 billion for the quarter, despite FX headwinds which dropped the growth rate by about 5%. Adjusted EBITDA net increased 20% to $453 million for the third quarter of 2015, as we were able to successfully flow through the increase in the top line to the bottom line.

Core EPS increased 14% to $3.95, exceeding our guidance of $3.90 for the third quarter. A higher share count, up about 3% compared to the same period last year, and FX headwinds of about 4% dampened the growth rate.

EPS decreased 24% to $2.08 for the third quarter, burdened by approximately $0.65 in charges related to consent orders entered into by Comenity Bank and Comenity Capital Bank with the FDIC pertaining to practices associated with certain credit card add-on products.

These practices were principally for the years 2008 to 2013, and we believe that we have substantially addressed the FDIC's concerns. Turning back to the share counts, you may remember the increase in share count is due to 4.6 million shares issued late in 2014 to acquire Conversant.

Since the acquisition date, we have bought back 3.3 million shares or about 73% of the shares issued to acquire Conversant. We've done this for two reasons. First, we remain bullish on our stock, and Ed's always eager figure to get shares in the door.

And second, we are adding financial leverage to the Conversant acquisition consistent with the manner in which we'd have liked to last year, but weren't quite capable. We have done so while maintaining a prudent leverage ratio of 2.8x. Let's go to the next slide and talk about LoyaltyOne.

LoyaltyOne had a solid third quarter with revenue up 10% or $33 million and adjusted EBITDA of 11% or $8 million on a constant currency basis. Substantial FX headwinds reduced reported revenue by $59 million to $299 million and adjusted EBITDA by $14 million to $65 million for the third quarter of 2015.

AIR MILES issued increased 5%, while AIR MILES redeemed grew by 7% from the third quarter of 2014. Additional bonuses and promotions related to our Sobeys relationship, as well as a few other grocer sponsors, helped drive issuance growth during the quarter.

AM Cash, our instant reward program which is popular within the grocer vertical, is primarily driving the growth in both issuances and redemptions. As we have talked about before, much of the strong promotional activities seen in the first half of 2015 will not likely be replicated in the second half due to the pull-forward of several programs.

Looking ahead to the fourth quarter, we expect issuance growth to decline about 7% but still remain on track for mid-single-digit issuance growth for the year. Turning to BrandLoyalty, it was another great quarter with the revenue up 30% and adjusted EBITDA of 42% on a constant currency basis.

Strong program performance, most notably in Germany, and improved margins from a few core programs contributed to the top line growth and drove a 200-basis-points-expansion in EBITDA margins. The expansion into North America continues to be a key growth initiative and is gaining traction as we have already signed contracts in excess of $40 million.

The initial pilot for the U.S. market is set for early 2016. Lastly, an update on dotz, with over 60 million collectors enrolled, the program is the largest of its kind in Brazil, growing its collector base at more than double the rates of the next largest program. Market expansion remains key, and we plan to launch into a major market before year-end.

I will now turn it over to Bryan to talk about Epsilon/Conversant..

All right. Thanks, Charles. Epsilon's revenue increased 41% to $532 million, and adjusted EBITDA increased a strong 60%, both helped by the acquisition of Conversant in December of 2014.

If you were to exclude Conversant, revenue and adjusted EBITDA increased 5% and 6%, respectively, for the third quarter of 2015, with margins expanding by 300 basis points, also mostly due to Conversant.

For legacy Epsilon, third quarter showed steady progress as we improved by a full point in both top-line and bottom-line growth rates compared to the previous quarter.

Much of that lift came from strong performance in our Technology Services business, along with good strength in the automotive vertical where existing clients were adding on additional services. And that over-performance more than offset some of the project softness we've seen within agency. Okay. Turning to Conversant in the next slide.

I'm pleased to report that after three straight quarters of revenue declines, Q3 demonstrated a substantial recovery and came at flat versus prior year, reversing a trend which had appeared to be accelerating over the first half, but was in fact all part of the transformation process we have been undergoing the entire year.

Specifically, we spent the first half of the year purposefully pruning some portions of the business that relied on more commodity-like offerings as we shifted our focus toward an intensive data-driven, people-based approach to digital marketing.

As we demonstrated over the first half, these offerings are more profitable, evidenced by the growing improvement in EBITDA performance over the first two quarters, and then punctuated by adjusted EBITDA growth of 9% in Q3 on a pro-forma basis, with margins improving about 300 basis points over prior year.

But we also believe that this approach, the data-intensive, people-based marketing, and personalization approach, offers the best opportunity for top-line growth.

The turn from decline to flat also demonstrates the success of our second major focus during the first three quarters, which was to introduce the power of the Conversant offering to our enterprise Epsilon client relationships.

The backlog of $50 million of annual potential has continued to gain traction, swelling to over $70 million as we continue to add wins with newly signed clients including brands such as Patagonia, Toys "R" Us, Norwegian Cruise Lines, Nature's Way and a leading American automotive manufacturer.

Importantly, these wins demonstrate a few key reasons why we brought Epsilon and Conversant together in December of last year, and I want to take a second to walk through those. First, Conversant's assets are unique and differentiated in the marketplace.

But they needed the benefit of access in a space that's crowded and noisy and filled with a lot of large and small companies calling on clients with a lot of bold claims. Epsilon's trusted client relationships have provided fertile ground to introduce the unique assets that Conversant brings to the table.

Second, Conversant's offering built around the power of first-party transactional data, so commerce data, is not only differentiated, but it just provides better results.

Each of the wins with Epsilon clients involves a rigorous process of testing in which the accuracy and persistency of Conversant's offering has been proven with side-to-side comparisons, with the ultimate determinant being measured not by clicks or views or impressions but really looking at online and offline sales which, at the end of the day, is all that really matters to our clients.

And third, it was critical for us to continue the transformation of the business through investment in the common platform, which brings together the CRM, mobile, video display and affiliate platforms to create the most precise and reliable cross-device, anonymize identity database powered by over 2 billion transactions that we see every month.

This platform allows us to understand the unique device profiles of each consumer with 95% verified accuracy, using deterministic, not probabilistic, methods to identify those individuals. And those investments now are really beginning to pay off for us.

Earlier this quarter, at Advertising Week we were awarded a Mobile Mafia Award for innovation in advertising with the best technology publishing platform for mobile. And all that is due to our rich cross-device capability, something that clients are really striving after.

Our platform accurately reaches over 90% of iOS and Android users, enabling our client brands to connect to consumers where they live on mobile without dependence on device IDs or cookies.

We also launched this quarter our personalized video offering, which extends Conversant's powerful contextual video offering by incorporating 150 million individualized profiles from Epsilon data, enabling our clients to dynamically personalize pre-roll video advertising on both mobile and desktop, tailoring offers to individuals to drive relevance in response while preserving viewability and brand safety, which are super important in the video world.

As consumers continue to shift toward online content consumption and away from traditional television, we're intent on leveraging the power of our Epsilon data and the Conversant common ID platform to continue to create effective advertising opportunities for clients.

So, summing it up together, Epsilon and Conversant have a rich offering spanning data, technology, analytics, strategy, creative, and digital distribution at massive scale to allow the global 1,000 CMO to maximize the trend of data-driven omni-channel marketing.

We have an online and offline data asset that together allows us to understand consumers better than any company and a delivery engine to reach those consumers, again both online and offline, with persistency, accuracy and relevance.

And our emphasis on a services-driven model that leverages the power of all that data and the deep technology IP that we have, but powered by a brilliant team of marketing professionals equipped with the expertise to really drive real measurable results for our clients, is a core differentiator for our business.

Looking ahead, we still have lots of work to do, but we are very encouraged by the trend we're on. The backlog of wins, while making a modest contribution to 2015, should give us a strong running start for 2016. In the U.S., we're on good footing with this growing backlog.

And now, our focus will turn to expanding across our cross-sell program to new verticals, the clients within other parts of Alliance Data to our affiliate marketing business and to international.

While it has taken longer than we thought to work through the turn, we are bullish and excited about the next several quarters as we move from riding the ship to now focusing on innovation and on growth. Okay. That's it on Epsilon and Conversant. I'll turn it back over to you, Charles..

Thanks, Bryan. Terrific job for the quarter. Let's go to the next slide and talk about Card Services. It was another in a long string of quarters with double-digit growth in both revenue and adjusted EBITDA net. It all starts with credit sales which were up 34% for the third quarter.

Organic credit sales grew an impressive 19%, complemented by solid back-to-school season, representing just over half of our credit sales increase for the third quarter. The rest is fueled by significant new partnerships.

Our core clients, those who have been with us since 2011, saw credit sales increased 9% as card members shopped more frequently and spent more. This combination drove an estimated 175 basis point increase in our tender share for the third quarter. The value of our offering to our clients is simple.

Customers with one of our cards shop more often, spend more and are more loyal than their non-cardholder peer group. An area of focus for us is digital sales are those sales which have occurred outside of a physical store. Notably, digital sales have increased to 27% of all credit sales from the third quarter in 2015.

Additionally, mobile channels now represent nearly 10% of all new credit application. These trends, driven by established Gen Xers and millennials confirm the evolution of today's shopping journey as customers leverage their smartphones as a primary tool to shop and purchase.

As such, our mobile strategy is deliberate and focused on our clients' future growth in this area. We recently announced the launch of our full mobile loyalty suite aptly called My Loyalty app.

This proprietary suite provides a branded wallet solution that allows retailers to collect, connect and leverage key shopping data while using their existing technology. We are seeing that early adopters deliver nearly 30% increases in transaction sizes when using their mobile card versus their physical plastic.

These impressive results were achieved by leveraging our understanding of the consumer, how they are changing, what they are telling us, and how we turn the data they provide into valuable, actionable insights. Turning back to our strong financial performance.

Average card receivables increased 30% driving an impressive 23% increase in revenue for the third quarter of 2015, marking the 15th consecutive quarter of double-digit growth. Operating expenses grew at a slower rate, 20% reflecting our focus on gaining expense leveraging.

The provision for loan losses increased 50% due to strong receivables growth and our expectations for about a 30 basis point increase in principal loss rates this year primarily due to the seasoning of a large 2013 and 2014 vintages. The bottom line suggested EBITDA net increased 14%.

From a credit perspective, we continue to see low, stable delinquency rates. And our principal loss rates that are trending toward our guidance of mid-4s for 2015 are up about 20 to 30 basis points compared to 2014. Looking forward, our outlook remains bullish for a number of reasons. First, we have signed a number of new currently unannounced clients.

Second, a robust pipeline that will enable us to continue signing $2 billion annual vintages. Third, our ability to leverage joint opportunities across our lines of business such as with Toyota (16:17), an Epsilon client, becoming a Card Services client.

And lastly, our ability to use data insights to drive further tender share within our existing partnerships. With that, I will turn it over to Ed..

Great. Thanks, guys. I'm on the slide 2015 guidance and critical goals, sort of an update on the full year, and as we head towards the finish of the year, where do we stand. Again, let's break it down by platform.

And if you start with sort of the group under LoyaltyOne, you start with our BrandLoyalty business which you can think of as our European platform.

That's the platform that essentially extracts data above the purchases of shoppers primarily at grocery stores and uses that information to then target and drive shorter-term loyalty programs from that platform on behalf of the grocer. They, obviously, have done exceptionally well not only last year but this year as well.

You'll also notice that there is a certain amount of choppiness in the results. So, it's very hard to predict on a quarter-to-quarter basis how they'll do. But it's pretty straightforward when it comes to the full year. So, we do caution folks to look at the full year, and that's really how we look at the business.

So, you noticed in Q1, I think revenues were up about 100%. In Q2, they were down 7%. In Q3, they're up 30%. So, it's determined by when the programs are run. The bottom line of all of it is they're having another heck of a good year.

And again, if you normalize for a constant currency, that is assume that the foreign exchange rate this year was the same as the foreign exchange rate last year, we call that constant currency, you'll see that they're up strongly double-digit both top and bottom.

I think probably the biggest development there is the expansion into North America, that is pretty exciting for us. We started up in Canada, which made a lot of sense because we have some very strong longstanding Canadian grocer relationships from our AIR MILES program.

And sure enough, we were very successful in selling into those sponsors this shorter-term loyalty approach along with maintaining the longer-term approach with AIR MILES. And as a result, I think we are looking at somewhere up to $40 million run rate in terms of revs just out of Canada alone.

We're, obviously, looking south of the border as well, and, I guess, south of the Canadian border that is. And you'll hear more and more about some of the pilots we're beginning to get as we move into the latter part of this year and into 2016. But, obviously, if we can get the U.S.

ripping, it should be a pretty large market to be additive to BrandLoyalty. So, double-digit top and bottom there, all organic. We then turn to Canada. And again, Canada, that platform, same concept, except the fact that it's a coalition, the number of folks having a common loyalty program that is shared.

But, again, the thesis is the same, which is utilizing the information from the members to then develop incremental marketing programs to drive higher sales and engender loyalty across the sponsor base.

The critical thing to look at there is how has the weakness in the Canadian economy impacted our ability to issue these miles which are based exclusively on the dollar spent. And what we found was it didn't have a big impact. And, in fact, our issuance growth, which again is the key driver of eventual financial performance, has been quite strong.

And we target mid-single digits because that will eventually flow to mid-single-digit top and bottom-line growth, and we've been successful at doing that this year. A large part of the growth has come from the grocer segment.

So, perhaps, it had something to do with the fact that if things are a little bit tougher, some of the more non-discretionary spend category such as grocer and pharma and petroleum actually do a little bit better. So, regardless, we think the issuance growth is a good predictor of future financial performance.

And as a result, Canada seems to be hanging in there quite nicely. So, two for two on that one. We then turn to Epsilon and Conversant, and Bryan did a good job walking through. I just wanted to reiterate on core Epsilon itself.

The big goal for this year, frankly, was let's see if, in addition to growing revenues, we can actually benefit by flowing it all the way through to the bottom line or EBITDA growth. If you recall in 2014, we had revenue growth of around 7%.

But due to the very high labor cost associated with a lot of these hot skill jobs, where we're competing with the usual folks for talent, the actual bottom line growth was essentially nothing. So, we wanted to change that and to refocus on those areas where we had a competitive advantage.

And I'm pleased to report that this year it looks like we're in pretty good shape there. Mid-single-digit top line is, in fact, flowing to mid-single-digit EBITDA growth, and that's our job. So, I feel good about that.

Conversant, a big sigh of relief you're hearing from this end of the phone in the sense of it's always challenging when you're a public company and you have an asset that you bring on board that you know needs to go through some level of transformation. And in this case it was transforming sort of the Conversant model.

Really, the old ValueClick model from a sort of more of a commodity-like product in today's world to really a unique product that focuses on pulling in customer SKU level information online/offline, using it with Epsilon, and that will help drive very targeted and focused marketing across the display, mobile, tablet.

And that has been extremely successful, as we talked about, it caused a fair amount of angst I know out there for the first half of the year. It looked like the trend was not our friend in hitting, in worse shape than we have thought.

But in fact, that turn has been reversed completely, and a lot of it has to do with the huge book of business that has been signed, I think, our backlog of signings is now up to 70 million on an annualized basis and still growing, and the year isn't out yet, which suggests this thing works.

We think that the ability to marry the sort of unique SKU level platform with the access that Epsilon can provide to the CMOs out there has in fact worked. So, therefore, we're feeling very good about where Epsilon is, where Conversant is heading as we close out this year, and a great running start for next year.

But again, as a public company, we don't want to do this too many times. It wasn't the most fun that we've had over the years. It's, basically, trying to change a tire on a moving car while under scrutiny. So the tire has been changed. The car's in good shape. We've turned the corner.

And also, we've actually expanded margins on top of it, which in ad tech, it's tough to find folks who actually make money, let alone make the type of margins that we have. So, I think we can finally put this one to bed.

This should be a good contributor, not only to the Epsilon client base, but as Bryan said, we're equally excited as we roll it into our Card Services group, our Canadian AIR MILES business, those clients, as well as our European platform partners.

So, we get a long, long runway to sell the Conversant offering into the massive client base we have here. Okay. So, that's that. And we certainly don't want to be light on the Card Services group. People are beginning to just sort of take it as a given that they have a tremendous quarter.

But we do want to call out the fact that they had a tremendous quarter. Once again, you have a marketplace where probably traditional card services is growing maybe 3%, something like that. And our portfolio was actually up 25%. The reasons behind that start primarily with the core clients that we've had for many, many years.

We continue to see very strong growth in tender share, meaning the percentage of dollars that are spent at that retailer that are placed on our card continues to grow. And so, if a retailer is doing 3% or 4% sales growth, we're actually doing closer to 9% to 10% at that retailer.

So the first 10% of growth comes from these folks who traditionally you would think have maxed out, and they haven't. And a lot of that has to do with, once again, to beat the drum, the ability to take SKU-level, purchase-level information and flip that around into very focused marketing information, targeted marketing across multiple channels.

So, the tender share gains are driving probably 10 points of growth. And then Charles talks a lot about the $2 billion vintages. And what are those? What that essentially means is each year we want to sign about $2 billion worth of business which really means that we can sign a bunch of clients, primarily clients where we're starting from scratch.

And over the course of, let's say, three years, at the end of three years, the combined portfolio size for all of those clients for a given year will be roughly $2 billon. So when we say $2 billion vintage has been signed, that essentially means that three years from now, we'll have added $2 billion to the portfolio itself.

And again, this is $2 billion this year, $2 billion last year, $2 billion the year before, we expect another $2 billion next year. Again, there are a number of non-disclosed clients that we've signed, but just a sample of some of the others included Toyota, Cornerstone, Wayfair, Hot Topic, Farmers Insurance, Red Roof, Univision.

It gives you a sense of the breadth of this offering across multiple verticals, and we do see a very strong demand based upon our pipeline for this to continue, strong double-digit revenue and EBITDA growth for this year for sure.

Very strong demand out there in the marketplace as, and Bryan alluded to this in Epsilon and Conversant, as ad dollar shift from traditional channels into the data-driven targeted marketing channels, which is what we do on the private label card business.

And then finally, obviously, delivering the full digital suite, all these different mobile apps and all that we continue to roll out. It should be noted that a typical client for us actually has – almost 30% of their sales are online at this point, which is quite high. So, it's, I think, overall, in the U.S. retail space it's more like 10%.

So, being at 30% means that we need to be on our game when it comes to offering the latest on the digital side, whether it's an online purchase or someone is applying for the card while they're shopping in the store, being able to do it as they're shopping over the phone, having a virtual card pop up, having their loyalty points and their rewards and coupons and everything else handy in their mobile device.

Those are all critical items we see going forward. So, again, we're pretty excited about it. And overall I know that, from a macro perspective, there's a lot of noise out there in terms of lack of revenue growth. We have a long-term model that essentially is -- we expect to grow three times the rate of growth of GDP.

And I think this year we're running north of that, probably around 10% or 11%, and then in constant currency actually around 14%. So, we're in the right markets for sure. And then with the Conversant deal, we'll do 20% plus. We got a $1.3 billion of free cash flow.

And I'd say, overall, we had two big challenges this year, one being the Conversant one that we talked about. We'd like to think that is in the rearview mirror at this point. And then the second is the foreign exchange headwinds that have dinged us for about $250 million top and probably $0.50 on the bottom line. So, those were both a bit unexpected.

And hopefully, we don't have that level of excitement next year. So, that's where we are for this year. If we turn to the actual dollar guidance. As we talked about, we're going to stick to our guidance of roughly $6.5 billion top, up about 23% in core EPS. Looks like we're going to make that 15 number which also looks pretty comfortable at this point.

That includes a drag of $250 million on the top due to FX, and another $0.50 drag on the bottom. But again, the organic revenue growth for the overall company is 14%, which is well above our model. Before we move on to 2016, talking just briefly about our use of capital, probably three areas.

The first being our European platform, BrandLoyalty, taking our ownership stake up another 10%. We're at 70% today, and we'll move that up to 80% as we move into next year. So nice, sort of steady progression for that great business in Europe. The second is, of course, we need to set aside capital as the portfolio grows in our card business.

And so, if we're looking at this year, almost $3 billion of portfolio growth, obviously, that needs to be backstopped with capital down in the business itself.

And then, third, it sort of was a twofold play this year on the buyback, and that was the fact that, when we did the Conversant deal, we did it for roughly $1 billion in cash and $1.3 billion in equity. Obviously, we would have preferred to do it all in cash at these cheap rates, but we didn't. We did what we thought was prudent at the time.

The weaker, soft stock price this year has really given us an opportunity to take advantage. And we have taken out over two-thirds of the equity that was issued in the Conversant deal with low-priced debt. So, in terms of our cost of capital for that deal, it has dropped significantly, which should make the return in the accretion quite a bit higher.

So, despite being somewhat disappointed at where the stock has traded this year, we have taken advantage of it, nonetheless, and that should pay dividends going forward. So, that's really the game plan for where we stand on 2015. Let's turn to 2016.

I guess, as a general statement about 2016, you've got a lot of the noise that's out there and a lot of headlines about sort of the slowing global macro environment and what does that mean and are people going to still be able to grow their businesses.

We've looked across all of our businesses, and frankly, we think we are going to have another very strong year and look no further than probably revenue. On a purely organic basis, we're thinking our goal of three times the GDP growth rate. We think we're going to be north of that, again, somewhere around to 4x GDP or maybe around 11% growth.

So we're not really seeing the impact of a slowing global environment in our businesses. And a lot of that, of course, has to do with the continuation in the shift of the massive dollars being spent in marketing shifting away from general and into data-driven targeted marketing.

So, clearly, the trend is moving in our direction again, and we stand to benefit from that. From initial 2016 guidance, I know it's very early. And we'll clean it up a little bit when we release Q4. But we'd like to set some base expectations.

At BrandLoyalty again, our European business, we look for another year of double-double top and bottom when it comes to constant currency growth rate there. In Canada, we actually are looking now for mid-single top and bottom growth there as we begin to see the benefits of the positive issuance start flowing to the financial.

So, on a – when you factor out any fluctuations in foreign exchange and look at the businesses themselves, we should have a very strong year out of both BrandLoyalty, very solid year out of the Canadian business. We then turn to Epsilon, and again, we've been running somewhere around 5%, 6% top and bottom.

At core Epsilon we'd like to continue that trend, and then this time, let's actually have contribution from Conversant in terms of, at this point, we're just going to say high-single top and bottom throughout 2016, which will be a very nice add.

It will also really, if you were to look on a pro forma basis of where the combined Epsilon and Conversant will come in this year, you're talking three-ish, probably top and bottom combined, we expect that to double next year to 6% to 7% top and 6% to 7% bottom.

So, we want to double the performance which essentially means that Conversant's turn has to be real, and we think it is as we look at Q4 and going into next year. So, hopefully off to the races there, cards, we don't really see any major headwinds out there. We expect, once again, to sign a $2 billion vintage.

We expect the portfolio to, once again, grow at about eight times faster than sort of the overall market, and another 25% growth on the card receivables.

As Charles mentioned, from a loss rate perspective, you've got these massive vintages are beginning to sort of mature, and that means that, their losses are beginning to creep up to a normalized run rate. That will continue to push up the overall losses, 20, 30 bps, so call it a 5% for the overall file as just sort of a placeholder which is fine.

We think, long term, the run rate is probably around 5.5% if we were to look out into 2018. But in the interim, it'll creep up as the vintages normalize. But, overall, again, very, very strong growth in the Card Services space, double-double, top and bottom.

Overall, double-top organic, double bottom or low teens bottom, all in terms of earnings per share. Organic revenue, we talked about probably forex, GDP, lots (39:58) free cash flow. And the FX, I will talk about in a second. I don't know where the currencies are going. So, we're not even going to pretend to try to make sense of it.

So, if you go to our actual 2016 guidance page with the nums, what you'll see is we're going to put a placeholder in at about a $7.2 billion in terms of revenue, which is, again, all organic. It's 11% revenue growth. Earnings per share, we'll put a placeholder in it at $17.00, and that's up about 13%, again, all organic.

And that I think it's a good place to start. When we talk constant currency, it gets so muddled up out there. We try to make it real simple. The guidance is based on where the Canadian dollar has traded on average for this year and where the euro has traded on average for this year. So, we're trying to do apples to apples.

The Canadian dollar has been trading around $0.79 for the full year, and the euro, around $1.09. So, you look into next year, and you say, where's everything going. Who knows? I can look at the spot rates right now and say the Canadian dollar is a little bit weaker at this point, but the euro is a little bit stronger at this point.

So, the initial gut would say that you're certainly not going to see anything too dramatic next year on the FX, nothing like this year. But it's going to chop around. And so, if everything just were to hold to where spot is today, you'll essentially have, we'll be right on target. So, that's where we are. I think that's probably a good metric.

And in terms of – as we said from a macro perspective, we're not seeing it. I think our – the businesses that we're in tend to be less impacted by the overall macro and more impacted by the secular trends, which, in our case, are all the movements of dollars into areas of marketing that use data.

And that's what we're benefiting from and then that (42:23) far away is the macro that's out there. We didn't really address use of capital. At a high level, probably you're going to have some that will go towards acquiring the next 10% of BrandLoyalty to get us to 80%.

If we continue to see 25% growth in the portfolio, we'll need capital to support that. And then our guess is some combo platter of buyback and maybe a small tuck-in if we find something out there. I'd certainly like to take out those final shares that we issued on the Conversant deal. And we're always hunting for something on the M&A side.

Essentially, we don't have anything lined up right now, but that's where we would look to do it, that we keep our leverage around 2.5 times, and we'd like to keep it somewhere around 3 times or less.

So end of the day, finishing up the elevator speech for folks is simply this, that all of the lines data consists of a number or a series of platforms, whether it's specialized for the grocery segment or coalition or one-off or something with a liquidity function attached to it.

All of these platforms extract purchase-level information, both online and offline, which is then brought into the pipe where it is analyzed to look for certain trends and what makes people tick. We then have creative folks that then come up with the various marketing programs.

And now with the Conversant platform that will spread across all of the divisions of Alliance, we have a means to then reach out to all our consumers, whether it's the more traditional channels like point-of-sale, in-store, direct mail, permission-based e-mail, and now across all the digital channels as well. So, that's pretty much it.

And especially as it relates to Conversant, our expertise – look, we're not going to dominate using social information. We're not going to dominate using search information. But when it comes to specific merchant SKU-level information, that's our bag, and that's where we're good at. That's our sandbox. That's where we're going to stay and play.

So, that's it.

Why don't we go to Q&A?.

Your first question comes from the line of Dan Perlin with RBC Capital Markets..

Thanks. Good morning. I just have a couple follow-ups on Conversant. As we're mapping out, kind of the growth rate on expectations around next year, I want to make sure I understand this kind of roll in of new business versus the pruning and exit of the legacy business.

So, it looks like you're calling for around $70 million or so, but I think the indication is that it could be as much as $85 million or better for the year of new business cross-sells. But it looks like the pruning was going to cost you guys about $40 million this year.

Is that the right amount, and is there continued pruning expected? I thought there was kind of some indications that they might continue to be down on the display side some $10 million to $20 million next year..

So, Dan, your estimate for 2015 is pretty close. It's about what we're looking for. If you look into 2016, we wouldn't expect it to be near to that level on the display side of it. We'd expect to see good double-digit growth on the CRM side.

We'd expect to see low-single digit, mid-single digit on affiliate, and then any pressure coming through on agency, we'd expect to mitigate it with growth in mobile and video. So, that's really what we're looking for in 2016. You roll it up, and you get high-single-digit growth in revenue..

Got it. And you now – I think you said 16 deals that you guys have won. How many of those are Epsilon? I think, inter-quarter, you had talked about 12 and 10 were, I think, from Epsilon.

How does that stack up when we look at the total 2016?.

Yeah. I think on the wins that we've had, first of all, a good number of Epsilon clients are shared clients with ADS Retail. So, sometimes, when we talk about them, they are actually both. But I think our penetration at this point is something like 70% Epsilon, 30% private label.

And obviously, there's a lot of headroom in both of those businesses as we continue to move forward. About 80%, I would say, of the cross-sell wins that we've had are retail, and 20% in other verticals. So, those are expansionary for us as we look at next year, both deeper penetration into retail and then penetration into new verticals.

Okay. And then, Ed, I just wanted to check something you said, this conversion of buying back two-thirds of the stock and then converting it into debt, low cost debt. It sounded like you were talking up the accretion that you maybe had originally given in year two, which I think, I want to say was $0.75 for Conversant.

It sounded like you were kind of lifting that a bit.

Is that correct?.

It depends on how you look at it, Dan. If you look at the buybacks on a standalone basis, the answer would be no. If you look at the buybacks being directly to change the capital structure of Conversant, then the answer would be yes..

Said differently, don't start creeping up our guidance before we even finish this year..

Okay. And then just one last one on Conversant. The – we get a lot of questions around the ability for Conversant with Epsilon combined actually to compete with Google and Facebook in terms of capturing the intent at the time of purchase. What's your response to that, I guess? And I'll hop off. Thanks..

I mean, Dan, from my perspective, Google is all about search. Search is all about intent. We're really focused, and it will sound like we're beating the dead horse here. But we're really focused on commerce data and what people buy. And from our perspective, that is always going to be the best predictor of future behavior.

So, certainly, all of those other channels, whether it be search or social, are meaningful to our CMOs when they think about marketing. But the landscape that we play in is really around what am I buying, who am I, and increasingly, where am I from a location perspective, which we can get at with our mobile footprint. So that's the piece we focus on..

Thank you..

Your next question comes from the line of Chris Brendler with Stifel..

Thanks. Good morning. Kind of focus on the Card business for a second. Just your comments around credit reserve, provisioning expense this quarter, and the expectation for probably higher losses next year. The delinquency trends, though, look really good to me in this quarter.

I just wonder if you could comment on what you're seeing in the early-stage delinquency buckets and how you feel about credit. Because from my perspective, it looks like things are actually improving, not declining..

We would agree with you, Chris. We're really not seeing it come through the delinquency buckets. Really, what you're seeing is just that natural maturation of a portfolio that you start up in 2013. These loss rates could be 1% in 2013, 3% in 2014, and then 6% in 2015, and then dropping into a more normalized level the following year.

So you don't really see that creep through your delinquency trends. It's basically just that aging with that trailing charge-off rate you charge off after six months. Surely, for the first couple of years, you outrun it. Catches up with you in year three. And then by year four, you see it decline a little bit into its more natural state..

Okay. Great. Thanks. And then on the Payment Protection product and the charge you took this quarter.

Can you just give us a sense of what the run rate of revenue is in those products today and how quickly it will decline?.

It's a small piece of what we do. Really, what we agreed to with the FDIC doesn't affect 2015; it really didn't affect 2014. So the overall revenue stream we have from it, if you look in our revenue bucket, it's very small. So it's really not a big number to us.

But, really, what happened there is we were – it was a retroactive look at practices that we thought were legit at the time, not necessarily believed so by the FDIC, so we trued it up, and we believe we've addressed all the issues going forward..

Okay. So, it won't be a material drag in 2016 then..

No..

Okay. And then, one final quick one, I may have missed it. Did you mention at all the performance of BrandLoyalty from a revenue perspective this quarter? I know it was really big in the first quarter, flattish in the second.

Where was it this quarter?.

We did. So, if you look at BrandLoyalty for the quarter, very strong. Again, if we look at it on a constant currency basis, its revenue was up 30%, and its EBITDA was up over 40%..

Fantastic. Thanks, Charles..

Thanks, Chris..

Your next question comes from the line of Bob Napoli with William Blair..

Thank you. Good morning. Just on Conversant, Bryan.

Just to be clear, what do you feel like is the biggest differentiator that bringing Conversant on, adding it to Epsilon and the other products, what really differentiates your capabilities versus the market?.

a Conversant platform, that's already built on first-party transactional data, an Epsilon relationship that's managing client data. So, those are sort of the critical ingredients for us to then begin turning on those marketing programs for clients in digital channels.

What that effectively means is we're able to demonstrate to our clients a better return than they were using – than they were getting from buying from other vendors. So, it's a consolidation play where we attract more of that spend, and frankly, get better results for the clients..

Was Conversant important in signing Wayfair or to the Toyota deals?.

Not for those two specifically, but there were number of shared clients that we have signed with Conversant that were shared between Epsilon and the Card Services group. So, now you've got Card Services, you've got Epsilon and you've got Conversant all engaged with a single client. And that again drives a relationship deeper and stickier..

Great. And then you've mentioned, Ed or Charles, I think that BrandLoyalty had $40 million of signed contracts for North America. Does that mean – that's revenue, I mean I know these are short-term marketing programs. So, is that like $40 million of revenue that you have signed up in the U.S.

for BrandLoyalty and you're just getting started or is that – how should I think about that?.

It's $40 million revenue annualized in Canada..

In Canada. Okay. And nothing in the U.S. yet..

Right. These are the big grocers in Canada. That's our first step into North America. And then we pivot South, and we've got a couple of pilots lined up which will hopefully turn into programs as we progress to 2016..

Okay.

And then do you still expect to bring on Zale, and do you have a shot at the Signet portfolio?.

Yeah. Zale is set to go, that should come on in Q1. So, that's all set, wrapped up, ready to go. I can't comment on the Signet thing. Obviously, best thing we can do is knock it out of the park with performance on the Zale file, and then we'll go from there..

Great. Thank you very much. I appreciate it..

Yep..

Your next question comes from the line of Ashish Sabadra with Deutsche Bank..

Congrats on the solid results. It's good to see the turnaround with Conversant, as well as good momentum coming back into Epsilon. My question was more around Epsilon. Bryan, you talked about improvement or solid growth in technology, as well as the auto vertical. I also believe you had one large client which had pulled back.

Can you just talk about how that's trending, and then how should we think about Epsilon growth – the core Epsilon growth going forward?.

Sure. Yeah. I mean, we have seen good growth in technologies, as we mentioned earlier this year, and that's been a major driver. I think, it has always been kind of a legacy strength for Epsilon.

Data has also been strong for us over the course of this year and the softness that we had to play through is in the agency vertical where we did have one significant client pullback. We've slowly been clawing our way back to growth with that client, and that's our plans.

We roll into 2016 which should drive continued the mid-single performance for Epsilon..

That's great. A quick question for you, Charles, was around the reserve rate. The reserve rate in this quarter was 5.7% versus 5.6% last quarter. The spreads there between the reserve and charge-off has gone up 230 basis points compared to your normal 110 basis points.

Is that just conservatism, building up a reserve as the receivables growth accelerate?.

I think it's more of a situation we are getting ahead of the 30 basis points increase in loss rates we talked about. And then what you'll see in Q4, Ashish, you'll probably come down a little bit as the reserve rate as you have more transactors in Q4 versus revolvers. So, you always narrow the spread, the differential in Q4 a little bit over Q3.

So, I think all you're really seeing in Q3 is we got ahead of that additional increase in the loss rates we talked about..

Yeah. That's great. And, Ed, just maybe a quick comment on the 2016 guidance. Usually, when you first come out with the first guidance for the next year, there is some conservatism baked in, and I just wanted to confirm, there is no change this time around.

There is still conservatism baked into the guidance?.

Well, we feel that this is a very good base case, and we'll tweak it as things go, but we feel very comfortable putting these numbers out this early, and that means we feel pretty confident about it..

That's great..

How's that for a non-answer?.

No, no, I think it answered my question, but thanks, and congrats once again..

Thanks.

Take one more?.

The final question comes from the line of George Mihalos with Cowen..

Great. Thanks for squeezing me in, guys. Bryan, just wanted to go back to Epsilon and sort of approach it more from a margin perspective. You've been growing EBITDA about a point ahead of revenue growth for the last two quarters.

How should we think about that relationship going into 2016 for the overall business and then specifically for sort of legacy Epsilon?.

Sure. I mean, this – Ed covered it earlier, has been a major focus for us this year, and that's our goal going forward is to kind of maintain that relationship. We have a significant offshoring initiative that we've talked about, I think, several times over the course this year that provides us opportunity in future years to continue that trend.

And obviously, as we look at Conversant which has a nice margin profile, there's leverage in that business. So, we're planning to continue the same trend that we're on..

Yeah. I would say that if we're successful, you're going to see core Epsilon, whatever the revenue growth is flow to EBITDA growth, I wouldn't expect a real expansion there because what we're getting from some of the labor plays that we're talking about is being offset by a very expensive hot skills set that we're bringing in.

But we certainly don't want to go back to grow top line seven (1:00:13), grow nothing on bottom line. So, think of core as whatever we grow top, we should grow bottom, won't be much leverage after that.

But the Conversant piece, as that starts getting bigger because it is growing faster than overall core Epsilon has much larger margins, and so the combined Epsilon/Conversant business should show margin expansion as we move forward..

Okay. Thanks for that. And just a quick follow-up for Charles. How should we be thinking about the gross yield modeling that going into 2016? And maybe talk a little bit about the opportunities you see or maybe don't see on the cobranded side going forward? Thank you..

I think you'll see a little bit of gross yield compression next year, obviously as we do a few renewals and obviously as we do a little bit of a change in mix in the co-brand versus private label. I wouldn't expect it to be as much as what it is this year.

And I would expect that we'd find a way from an operating expense to mitigate a large portion of it. So, I'm not looking for big compression in EBITDA net margins in 2016 compared to 2015..

Great. Thank you..

All right. Thank you, everyone. Appreciate your time. And we'll talk to you next time. Bye-bye..

Thank you, ladies and gentlemen. That concludes today's call. You may now disconnect..