Edward Sebor – FTI Consulting Edward Heffernan – Chief Executive Officer Charles Horn – Chief Financial Officer.

Jason Deli – Piper Jaffray Andrew Jeffrey – Sun Trust Bob Napoli – William Blair Sanjay Sakhrani – KBW.

Good morning, and welcome to the Alliance Data Fourth Quarter and Full Year 2016 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. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Edward Sebor of FTI Consulting.

Sir, the floor is yours..

Thank you, operator. By now you should have received a copy of the company's fourth quarter and full year 2016 earnings release. If you haven't, please call FTI Consulting at 212-850-5721. On the call today, we have Ed Heffernan, President and Chief Executive Officer of Alliance Data; Charles Horn, Chief Financial Officer of Alliance Data.

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

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

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

Ed?.

Great. Thanks, Eddie. As we continue to evolve over the years, the commentary we receive back is to have management commentary shorter so that we'll have more time for questions, so we're going to try to keep management commentary to no more than 20 minutes.

That being said, I'll turn it over to Charles who is Charles Horn, CFO who's going to talk about our fourth quarter and full year result and then I'll wrap up with '16 and then shift to '17 outlook.

Charles?.

Thanks, Ed. Let's flip over to page four. If we look at the results, it was a little bit of a noisy fourth quarter for LoyaltyOne and Alliance Data due to expiry. Not only do we have more AIR MILES redeemed and expected due to heavy media attention to the issue, but also had a new law and act in Ontario of Canada which forced a one-time charge.

Removed the noise though and it was a terrific 2016. Let's start with pro forma revenue of $7.4 billion, up 15% from 2015. We estimate that elevated redemption activity in Q4 added about $175 million or 3% growth to 2016.

Essentially, AIR MILES that would have redeemed in 2017 were instead redeemed in 2016 ahead of the expiry, creating a pull forward of revenue recognition to 2016. Adjusted for that, revenue was approximately $7.2 billion, up 12% and consistent with the guidance. Core EPS was $16.92, up 12% from 2015 and $0.02 better than guidance.

In calculating core EPS, we added back the $242 million related to elimination expiry, but not the full breakage reset. Let's turn over and talk about LoyaltyOne. Adjusting the breakage reset and revenue pull forward added the number, we estimate that revenue and adjusted EBITDA for LoyaltyOne both increased about 4% for 2016.

Let's begin with BrandLoyalty which had a terrific year with high single-digit growth in both revenue and adjusted EBITDA. Expansion efforts in Canada continued to exceed expectations and U.S. market could be a growth driver in 2017 based upon early successes.

For AIR MILES it was tumultuous year with all the publicity surrounding the upcoming miles expiration date, AIR MILES issued increased 1% for 2016, below our expectations for about 3% as sponsor promotions dropped in Q4 as there was simply too much noise in Canada to be effective. We believe issuance growth will return to 3% range in 2017.

In addition, we reduced the breakage rate for the AIR MILES Dream [ph] program for 26% to 20% at the end of 2016. The first 1.5 point reset resulted from higher than expected Q4 redemption activity. This is a normal change in accounted estimate and is reflected in our operating results.

However, the second 4.5 point reset is different and that it was driven by the enactment of a new law and one-time event, thus we headed it back for adjusted EBITDA and core EPS purposes. Flipping over to Epsilon.

It was a disappointing year for Epsilon as revenue increased 1% while adjusted EBITDA decreased 6%, both substantially less than our 5% growth expectations for '16. Breaking down revenue by key offering, let's start with the good – collectively auto, CRM, affiliates and data grew revenue, double digits compares to 2015.

In addition, after a slow start to 2016, due to the pull back of a large client, agencies growth rate turn positive in the back after the year. Let's now shift to the problem childs; technology platform growth turn negative mid-year due to some flying attrition.

In addition to non-core offering, essentially the old-value click business was a consistent issue all year as we endeavor to pivot it towards a more of a data-driven solution. This offering alone was a 3-point drag to Epsilon's revenue growth. Turning to adjusted EBITDA, we start off the year in a big hole, down 22% in Q1.

By significantly lowering our expense base, we cut that to a modest 9% in Q2, turn to flat in Q3 and then up 30% in Q4. We believe that our lower expense base will enable us to be more price-competitive on certain product offerings going forward. Let's now flip over to card services on page seven.

It was another stellar year for card services with 24% growth in revenue and 14% growth in adjusted EBITDA net despite over $200 million built and allowance for loan losses. Credit sales increase 16% for the fourth quarter and 18% for the year.

Growth in core credit sales which are pre-2013 programs were slight for Q4 and up 4% for the year, driven by tender share gains of about 150 basis points. Growth in the core weekends as the year progressed is comparable sales growth turn negative at several of our large apparel-focused clients.

Gross yields after being down in Q1 through Q3 due to cardholder changes made to the program in 2015 stabilized and increased slightly in the fourth quarter of 2016. We believe that these changes have fully burned in at this point. We continue to receive operating leverage, operate expenses up 21%, compared to revenue growth at 24% for 2016.

As a percentage of average card receivables, operating expenses decreased 50 basis points compared to 2015. Average receivables growth remained robust at 24% for 2016. Growth slowed over the course of 2016, due to softness in core spending as discussed before, resulting at ending card receivables growth of about 20%.

The principal loss rate was 5.1% for 2016, just slightly higher than original guidance, primarily due to this low and receivables growth rate. This creates what we call the denominator effect. Importantly, losses continue to track in line with our delinquency expectations for 2017 as we show on the wedge. With that, I will it over to Ed..

Great. Thanks, Charles. If you will turn to Slide 9 where it says '2016 Wrap Up', a couple of things we want to walk you through. There's a couple of moving pieces here with the noise from the Canadian business. If you look at revenue, revenue was up to $7.38 billion or up 15% when you excluded the charge.

So that was a couple of hundred million higher than our guidance of $7.2 billion. When you put in the charge, then your revenue is decreased to the $7.14 billion, up 11%. So you start at $7.4 billion, the charge takes it down to about $7.2 billion. What we should also say is you can't really look at just the $7.4 billion.

That does include a pull forward of about $175 million that Charles talked about with, what we call the 'run on the bank' in the Q4. We had expected to come in the year about $7.2 billion, it looks like it came in about $7.4 billion, so the real run rate is really about $7.2 billion once you factor out the run on the bank.

The net result is I think if you were to look at what is the right number, I look at the $7.2 billion, up about 12% core EPS, 16.92, up about 12%. That factors in the effective vote of charge as well as the pull forward. That should give you a good starting point.

Double-digit revenue and core EPS growth despite absorbing a 12-point drag in earnings per share from the increase in the card services loss rate. Turning to the use of cash, we were fairly busy.

We did about $800 million in repurchases, $350 million to take out final 30% of our European based brand loyalty business, another $500 million to support growth in our card business of roughly $2.7 billion. We did establish a 1% dividend. You wrap it all together and we still have leverage below 3x.

So again, it attest to the strong free cash flow of the company. Let's go to the businesses, Slide 10. LoyaltyOne. We printed revenue up 17% before the reduction due to the expiry charge and adjusted EBITDA was about 4%.

Again, the revenue included about $175 million in revenues pulled forward from 2017 into 2016 as people are trying to cash in their points before expiry and obviously this was in front of the law that was changed up in Canada.

So if you were to look at adjusted numbers again and take the $175 million pull forward out, you're probably talking about plus four, plus four for top and for EBITDA. Brand loyalty continues to be a bright spot with strong growth from existing and new markets and in North America, Canada.

They are firmly established in Canada and in the U.S., we've won our first client and we expect to have some announcements that are pretty exciting as we go through '17.

For AIR MILES itself as Charles mentioned, Ontario's parliament enacted a new law after we head into the five-year expiry and after four years and 11 months, it was determined that that was unacceptable and as a result, the parliament passed a law prohibiting us from completing the expiry process and as result, resulted in the one-time charge to reflect loss breakage revenue.

So overall, if you were to do the math, LoyaltyOne combined, did above $1.580 billion in top line and that's up 17%. If you want to take out the pull forward from '17, your starting point would be like $1.4 billion and that would have been 4% versus the '17 that was recorded.

All right, Epsilon as Charles mentioned, revenue of 1%, adjusted EBITDA down 6% and again, we have plenty of bright spots and we've got a couple of spots that need some hard work. The core as we've defined it is 92% of total revenue and effectively all of the profit.

If you looked at the core, the revenue was up 4%, which did include absorbing a 5% drag from the technology platform business. The India office ended the year at a full-scale run rate of about 1,000 associates.

We have now hit the point where our office in India is at critical mass, which means we're beginning to see the flow through in terms of the leverage on the labor side. So we have completed part one of two for the turnaround in the technology platform business, which is the expense side.

We think the expense side is in good shape as we head through '17 and now we got to work on making sure that our products and our time to market are consistent with the competitive landscape.

So what's left over? You have the non-core revenue, which used to be 10% to 11% is now only about 8% revenue and did cause a 3% drag on total revenue growth, but obviously it's becoming a smaller and smaller piece of the business. If we turn to card services on Slide 12, obviously a very, very strong year.

Revenue was up 24%, receivables up 24%, adjusted EBITDA up 14%. I think that the key thing here is you had those types of growth while absorbing a 60 basis-point increase in loss rates. And to put it in perspective, that's about $165 million hit to EBITDA or $1.85 a share.

The net result is if we grew earnings this year at 12%, that included absorbing another 12% from the normalizing loss rate. So we would have been somewhere in the mid-20s this year without the lost drag. Again, this gets down to our thesis that once credit normalizes, this thing is going to be a slingshot in terms of the acceleration in growth.

We are nicely on track to have this normalization take place during 2017 with the key driver there being the delinquency shrinkage year-over-year and as soon as that thing anniversaries, you know that you've hit the normalized part. That's the thesis and I know we're tracking nicely to it.

We mentioned before it was going to take two years to get this thing normalized. We're through certainly the first full year and I would say over the next six months, that should pretty much clean it up. We had a huge year in terms of new signings, $2 billion all on vintage.

The vast majority are startups, which again will cost – you won't have the immediate benefit to the portfolio growth rate, but what you have is it comes in over a two to three-year period as they all pull up, but you've got some names here that are going to really add some juice to the files. So very good names as a huge-year signings.

And then finally, 150 basis point increase in tender share which essentially means if our retailers – their sales do X, then we're going to do better than that in terms of sales on our card. All right, let's turn to '17 outlook.

If you look at revenue, on our last call we said, 'Look, we wanted to do 10-10 on both top and bottom and that would have come out to be your 7-8, 7-9 in terms of growth rate' and then what we tried to do here is we're saying, 'Look, we came in hotter than that for this year, hotter than the $7.2 billion.

We actually came in about $7.4 billion,' but that did include really pulling from '17 about $200 million of redemption revenue which carries virtually no margin, but it is revenue and that's why from a guidance perspective, our $7.2 billion for 2016 came in like a $7.4 billion.

For '17, if we were guiding to about $7.9 billion, obviously we had that surprise run on the bank in Q4 which increased 2016. It has taken it out of '17, so that brings your run rate for '17 to about $7.7 billion.

I know it's a lot of noise, but at the end of the day, you have this sort of pull forward, which is pulling out of '17 into '16 and we want to make sure that everyone adjust their models to reflect that.

On core EPS, it didn't really affect that, so we're sticking with 'we should go from 1692 to about 1850, which is about 10% growth rate' and that's pretty much the guidance that we're going to have for the year. We feel good about it.

In terms of growth rates, if you were to sequence these things, you would see that the whole slingshot thesis behind the model is really driven by the fact that as we exit the final normalization part of the credit cycle and we start rebuilding the model that we need in Canada, you start moving out of the mid-singles flattish-type first half and you start ramping up in Q3, you hit full run rate really in Q4 and then you should have a huge jump as we go into 2018.

Again, if you're looking at our history over the last 10 years, revenue has grown consistently at 13%, EBITDA is up 12% a year for about 10 years and earnings were up 17% of about 10 years. So we've been a little bit shy of that 17% in '16 and in 2017, you would therefore expect in 2018 year and be well above that.

That's again the thesis that we have here at the company. If you could turn to the next slide, on the consolidated side, we expect all segments to contribute, we expect solid growth across the businesses while absorbing the final credit normalization and revamping the AIR MILES model to be more consistent with the new laws in Canada.

In 2018, what you're going to have to just map is the slingshot where you're going to have stable loss rates which turns into an accelerated growth rate on your metrics. If you look at the different businesses, LoyaltyOne, we expect BrandLoyalty to continue to have strong performance for actually 10% top and bottom line.

We think all areas of Europe, Asia, in the U.S. will be driving that growth, so expect a strong year from BrandLoyalty. In Canada, again, I think we sort of beaten this thing to death, but we'll keep going. The pro forma, Canada was up about 24% in '16 that did include a $175 million pull forward.

So maybe the run rate that you use is more like at $7.60 billion. We expect that to be relatively flat in '17 and we expect the margins which will go from 27 to 24.

Essentially, we're recapturing a little over half of the margin lost from the new law, but the way it will work is as we implement the new model in Canada, that will drift in as the year progresses and as a result, by Q3-Q4, you're essentially going to be well above the margin rate in Q1-Q2.

So again, feeding into, we're looking for that momentum pick up in slingshot effect as we go into '18. AIR MILES issue looks about 3% and then we expect on a full year basis the margin to be fully recovered in '18. On Epsilon, it's time for Epsilon to step up and complete what needs to be completed and return to a consistent revenue growth model.

We expect the core to run about 5% growth, overall about 4%. So there's about less than 10% of the business that's viewed as non-core. EBITDA, we also expect that to grow 4% or 5% as we go through '17.

What gives us comfort as we look at it? Well, the big piece we need to make sure gets turned is the technology platform which is about a quarter of our total revenue. The step one which is what we've been doing the last 12 to 15 months has been significantly to lower the expense base – that's done now. You can check the box on that.

We finally get that done, we've got the duplicative cost out of the system, so we should have nice leverage there and we're right now in the middle of step two which is we need to standardize the product and we've got to have a much faster time to the marketplace.

That's just the way the market has changed and that's the goal as we move in to and through 2017. What's left over in the non-core piece, again was 11% of the business and 15.8% of '16 and 6% in '17. Again, less and less, it should really be not material in terms of the drag on revenue, no more than a point in '17.

Card services, 2017 outlook, again, we expect nice growth. Card receivables growth just about $2.5 billion, which is about 15%. Now you will note that it is less than the 20% growth that we did in '16. So you do have a deceleration in the growth rate from 20% to 15%.

Primarily, it comes back to the fact that are vintage, that we signed our primarily startups which means the growth will reaccelerate as we move out of '17 and into '18. We have fewer portfolios that we brought on – in fact we have none – and we have really all startups that should have nice yielding receivables as they grow.

Pipeline is robust, it's a good market to be in. We expect another $2 billion vintage year. We expect gross yields to be stable, we're not seeing pressure on the competitive side, we like where we are staying in our sandbox and it seems to be working.

We're going to get a little bit of operating leverage as we continue to grow and then of course the all-important question of what's going on with credit. And the credit normalization as we've talked about is right on track and we talk over and over again about the wedge.

Again, delinquencies being the best predictor of future losses, so as delinquencies begin to anniversary with delinquency rates of last year, that means losses will do the same within three months to four months out. So in Q1, we expect delinquency rates to be about 50 basis points over the last year.

Q2, that's going to go down and then as we move into Q4, it's going to be flat to prior year. What does that all mean? It basically means you've completed the normalization process and your loss rate is going to follow shortly. Principal loss rates for this year, we expect in the mid 5% range.

We're going to drift to about 6%, 6-ish in the first half as again, we talked about the denominator effect of the step down in growth in the portfolio. However, we expect our loss rate to be below 5.5% by Q3.

So again, it looks like we are tracking nicely, so we expect the first half to be negatively impacted by the slowing growth in the card receivables which is the denominator effect and overall even with the higher loss rates, we still expect 8% to 10% earnings growth from this business.

If you were to look at guidance and looked at our set of our history at the beginning of 2015, we had guidance of mid 4% as we came in at 4.5% beginning '16.

We gave guidance of approximately 5%, came in at 5.1% and today we give guidance and we're in the mid 5%s, so overall we're pretty good on the guidance side, but to relay any other concerns, our guidance today for our overall revenue in earnings also include some 'squish room' if you want to call it, or 'buffer' should the rate drift up a little bit above where we thought, just to give us the comfort that we need on the guidance side.

If it doesn't, then that's great news and we'll flow that through the year goes. In '18, again the whole thesis wraps on flat losses, compared to 2017, which should show your slingshot and accelerate your growth. All right, finishing up, if you look at the outlook, closing the wedge, so to speak, essentially again, this is what we track to.

This is how we run our business. We know that losses will have fully normalized and will therefore be flat to prior year shortly after delinquencies are flat to prior year. So we expect the wedge to close as the year progresses.

Everything we're seeing suggest that's the case and again, if that happens as we expect, then you're going to have a very nice acceleration of earnings as we go into '18. Final commentary for LoyaltyOne. The past year was a very difficult year and we went through a very disruptive event. We're past that.

We've got a plan in place for the model, issuance has returned to normalize levels and redemptions have come way back down to the more normal levels as well. So the game plan is to comply with the new law while we retool our model.

We have good visibility on how we're going to get that margin back and we expect really the last half of 2017 to reflect the benefits of that retooling. On Epsilon, also a tough 2016. We have a good plan to return to mid-single top and bottom in '17 which is sustainable. That's the key. The expense issue is now fixed.

We're working on faster time to market in a more competitive tech offering. We talked about the non-core, 3-points off growth in '16. That will decline to a point in '17 and then be not meaningful really for '17 onwards.

For cards, credit quality visibility, grows each month and remains consistent with the key predictor delinquencies flattening out in the latter part of '17, meaning losses will be flat in '18 and we'll have that slingshot.

We appreciate all of those who have hung in there as the credit normalization turned to 20% plus EPS model into half of that in '16 and '17. Fortunately we were still able to deliver double digit in '16 and will do as well in '17 with the slingshot hitting in '18.

With our 10-year history of 13% annual revenue growth, 17% earnings growth, we drifted below that in '16 and '17. Again, we expect to start making that up as we move into the latter part of '17 and then for all of '18, so you should really begin to see the beginnings of the slingshot in Q3 of this year and certainly in Q4.

So we think we have all our ducks in a row for this, and we will continue to aggressively take advantage of any opportunities in the market to pick up additional shares, in front of the slingshot. That it, let’s turn over to Q&A. .

Thank you. Our first question will come from the line of Jason Deli of Piper Jaffray..

Thanks and good morning, so first question is on the receivables growth outlook for 2017, the 15%. Understand there is portfolios -- new portfolios ramping there but could you also just kind of help us understand the components from the same store sales it looks like that slowed.

And then just the tender share and then I'm just going to give us a sense for that so we can have a little bit visibility with a potential re acceleration in to -- into next year. .

Yes, sure the -- the core those have been with us for three years or more, if you look at those retailers across the board their -- their growth was actually negative so you saw very strong consumer spend out there, but it seems to have been on auto and home improvement and health care not so much.

At our traditional retail clients, their growth is negative. We picked up about 150 basis points of tender share, which is called about 4.0 growth from the core. So whatever the core does you out about 4.0 and that will be what we get in terms of the growth on our cards.

That traditionally has been more like the retailer would do plus 3 and we would do plus 7 or 8. So clearly we did well from a tender share perspective, but it's off retail results that we’re quite soft. That means that the -- a bigger chunk needs to come from the newer signings which is why the $2 billion type vintages are so important.

Therefore, we would expect your next set of 10 points to come from the start-ups that we talk about.

And that's where you get to about 15% overall growth if there are a couple of portfolios out there, that we decide to bring on the year, that will certainly be additive to that growth, but you don't think of the core as providing for 5 points of growth and think about the new vantages the startups pulling up, as adding about 10 points.

And then if we have portfolios we can do about that. .

Alright, thanks for that.

And then just thinking about the provisioning level, when charge offs historically have normalized or peaked, versus the charge offs annualized or net charge offs or -- I mean not necessarily looking for exact numbers, but can -- I mean there should be less of a -- of a reserve billed as we get into peaking or normalizing charge offs, is there any kind of sense that you can help us with historically where at what level has that been in the provisioning side.

.

Sure, it's a great question Jason, when we knew the loss rates were picking up we would we have a spread over the LTM [ph] loss rate up about a point a little over a point. Once you get to normalize loss rate you could probably see that dropped to 70 basis points.

So that there is some flexibility in the reserve and we basically we got ahead of the increase in loss rate, so we stabilize, as you could see the spread the LTM [ph] loss rate, narrow to some degree. .

Thank you very much. .

Our next question comes from the line of Dan [ph] of RBC..

Thanks guys, so looking back to the that beating the dead cores a bit, so we think about 2017 guiding I get a couple things, for loyalty when their multi particular; one is I just want to make sure I can understand what fully being baked in terms of your break through assumption for the year. I want to know.

Maybe not exactly if you played fully telegraphed some of the possible remedies to the program that you're really thinking about. And then a third Lee, when you talking -- when you're talking to your sponsors it's clear that they held back and it would seem that the programs cut the question right now.

So I want to know what -- what are they I guess worried about and then what are you up actively telling them in one of those early conversation like. Thanks..

Okay, okay. I'll take that and then Charles can jump in here, what we've essentially done is we have taken out and canceled the five year expiry policy per the law that was made, at the end of the year, and as a result all you have left are really inactive accounts that they can be -- they can they can be expired.

So that's consistent with all the other loyalty programs up there in terms of what our assumptions are, again you're looking at a program that historically we did not make margin or much of a margin when people redeemed for various rewards, we put all our margins into the assumption that ex number of people would essentially lose interest in the program it would not redeem.

We need to -- we need to change that in the more traditional loyalty programs would have to have some margin coming from reports.

And that's essentially what we're going to be doing is we are going to be trying to create a portfolio of rewards that the collectors, will be excited about and have various events, and specialties and a lot of marketing and promotion, that could in fact get them excited but drive them also into those rewards, that are not only of value to them but that we get it good expense leverage from.

And therefore we can realize margin on those rewards, which we never did before. That's essentially what we're doing is a very traditional loyalty program keep it right in the lane of what considered quote unquote normal in this business.

Again, we had a fairly unique model turned out at the very, very end, it wasn't appreciated and so we're retooling it to make it for all right squarely in the middle of a traditional model, in terms of how you generate revenue and how you generate earning.

Our goal right now is to really make sure that the collectors and the sponsors are excited about it again, I think that the fact that we did go out there we did take the hit, we are promoting the program fairly aggressively right now, we do see already some nice pick up on the issue inside redemptions is no more fear of people losing their point.

So those levels have dropped off dramatically there have been obviously a couple of stories in the media that were off base and things are taking out of contact, right now we believe our relationship with our sponsors are solid obviously they would have preferred not to have gone through this with us, so it's our job to make sure that they're comfortable with that going forward..

Okay, so just to be clear, are you saying break into the 20%. .

That's right..

And then the air model issue number plus 3 for the year it declined in the quarter historically, we have a couple quarters of year-to-year declined and maybe it sounds like you're alluding to the fact that are going to happen, but you need called out things like air pockets in the past right.

Because it’s how radically recognized, so it dips for a couple of quarters and it makes it harder in terms of bit to rebuild it. So I am just trying to understand how you get back to a plus [indiscernible] of all this noise, it is still pre differed, clue back in loaded, are we expecting it to be negative potentially at all in the first half..

Think of it this way, we still issue growth of 1% 2016 Q4 usually our heaviest promotional period with the sponsors. With all the noise in the market we had promotional activities going to drop live in Q4, which is what pressure in 2016. We believe in what is it we're going to support additional promotional activities in 2017.

So we think getting back to that 3% range is not going to be an issue for us. .

Let me just ask one other question unrelated to more about cart service. In -- it maybe a bigger picture strategic question given kind of a shareholder that then your stock, but remind me why you feel compelled to keep the company in its consolidated holding company structure versus spending [ph] and fantastic business for you guy.

Although it got a little bit of a slowdown here bill looks to be enormously appealing asset. It even more so in a -- in a different regulatory environment. So Ed, can you just briefly explain why you feel compelled to keep this under this one umbrella structure, thanks..

Yes, sure I mean it's it gets back to what the thesis of the company, the thesis of the company is all -- essentially we all do the same thing which is we have a number of platforms. Some have a credit component to them, some don't, you just flat out single loyalty program summer coalition loyalty programs like in Canada.

At the end of the day this company is essentially a based entirely on we've got some type of platform that is used to collect very valuable information called skill level information.

Which is then we used to derive insight about the consumer use that information and then intelligence from the data to then go out into the market place and drive additional sales.

Those could be additional sale that the grocer [ph] up in Canada as part of the coalition, additional sales at a retailer in the mall, in our current services or additional sales add of a financial institution, their credit cards or hotel in Epsilon So it -- it essentially all the same model, we just make money different ways.

If you look at the current services business, their core of loyalty engine that's an Epsilon platform, if you look within the current services business we get 500 people that are hard core heavy duty data analytical types, think of it as the mini Epsilon.

So they also share the same messaging platforms for email, will be using the conversant asset to reach out with our clients and reach them over the various digital channels across the company.

So there's a lot of commonality the net result is; we built this company to find ways to extract sort of the -- the gold nugget the skew level data that we can get from these platforms, which we think is -- is really the gold standard for understanding the consumer driving incremental sales. That -- that's why we think it fits together nicely.

However, yes obviously that if there are other arguments that suggests maybe they don't fit together, and look we look at everything every year and will continue to do so. .

That’s helpful, thanks Ed. .

Our next question comes from line of Ramsey [ph] of Jefferies..

Hey guys, thanks for taking my question. On Epsilon you mention now that you have your cost structure settled at this point and now it's sort of phase two, is pushing to drive to reiterate growth and some of the problem areas.

Can you speak your confidence level of the headwinds there are sure mountable with extra effort meaning not just related to changes in the demand environment for the products or -- or sort of environmental things that are sort of more difficult to get at with just incremental investment. .

Yes, it's a great question.

I mean it's -- it's if you look at the -- the business that Epsilon you've got sort of three quarters of the business is chugging along pretty nicely mid-single digit or higher and you get that final quarter which is what we call our technology platform business which for years and years did anywhere from 78% growth to just jumped out.

These are the massive loyalty platforms that we would build in first city bank thank your [ph] Walgreens or something like that.

And what is happened over the last set of 24 months is that the marketplace is changed, the biggest question we needed to answer was; is there still is a huge amount of demand for the big loyalty platforms out there; the answer that came back is for sure now more so than ever, because it's the best way to collect that skew level data that we talked about.

So the next question is who -- who are we losing share to and why are we losing share and it quickly came back that people while they loved having these massive platforms with all the bells and whistles and everything else, it was no longer practical -- practical and so they wanted something that was more cost effective with bringing in an in house ASP [ph] solution in hiring 100 analyst to analyze the data.

So we needed to get our cost structure back in line, that's been done. So that was the whole in the initiative now we need to go back and get a product that we can get the market not in 12 months but more like four or five months.

And that's really what the big hang up has been, is the fact that we have a lot of chief marketing officers, who say look I don't want to take this thing and how they don't want to hire 100 analysts.

But at the same time you guys were too expensive and it took forever to get the thing delivered, so we taking care of the expense, we've got to basically strip off the bells and whistles, have a more modular approach to the technology platforms, sort of a plug and play, and that's you working on right now.

We -- we believe with those two things solved, you're going to have a very nice turn in the technology platform, there will always be a huge market for CMOs who want a in house solution and there will always be a huge market for CMO those who want to be focused on what their company sells and they don't want to worry about the actual technology platform for their -- their loyalty and CRM needs.

So we're going to peel that market but we need to fix two things we got one fixed working on the other right now, I think we're going to be in good shape as the year goes on. .

Okay. I switch over to the card business. The tender share ends in the quarter were a little lower than last quarter which I guess the question is; can you talk about the kind of trajectory of that rate, in this certain point you would think that those gains would become a little harder and harder to come by and sure there's still room left.

But you can keep a lot of other sort of runway left in terms of tender share gains. .

Yes, question it -- it's interesting because when you have a business like ours which is different from sort of what people would view as a traditional card business.

Are all our -- our growth comes from signing new clients, and as a result when you have 90% plus of your new business coming from clients have never had a program, before you're spilling them up year after year after year, you're always going to have this huge pool of new clients, who are literally starting with zero tender share and we'll have that whole rich ramp up to about 30% tender share after about three years.

So you're always going to have that opportunity to grow tender share on the stuff that you've brought on the in the prior three years, in terms of the corps were probably at what do you think Charles about a third or so in terms of tender share, we have clients that are over 50%.

So from that perspective, we think that with -- if you look at the retailer results over holiday and everything else there's never been a more important time for them to put their shoulder into this data driven targeted marketing space, which is what we do.

So what we're seeing is a lot of interest in a lot of dollars coming into, enhancing these programs, enhancing the platform, getting at the data which to me would suggest that the tender share gross rating is going to continue for many years to come. .

Great, thank you very much..

Our next question comes from the line of Andrew Jeffrey of Sun Trust..

Good morning guys, thanks for taking the question. I wonder if I could just ask you two part question expanding on your grand these query on the strategic but also more specifically that plot [ph]. Is there any reason that Alliance data should be more of a pure play, the card services business is consistently outperform.

You don't seem to be getting a lot of credit in the market were perhaps a minor or for air miles maybe brand loyalty notwithstanding, maybe you can just talk about whether or not you've ever thought about card services being your -- your central business and maybe that the primary driver of the economic value, and as a corollary to the extent you believe epsilon is core, are you happy with low single digit organic revenue growth driven value of that is I would think that you can grow faster you really -- it's really central to the long term value proposition.

.

Yes I mean. Look those are all reasonable questions I think -- I can tell you from you if you go up to the -- the board level that we -- we are every year we go through the various discussions in the various iterations of what's next for Alliance, what should it look like.

Is it better the way it is today, would it be better differently going forward and that is that is an ongoing -- an ongoing debate? I think that what I would like to see frankly is we had all this noise in a very tough challenge in Canada this past year, you've been around the company for ever, Canada used to just constantly just rip it year after year after year, I'd like to see how it does once we retool the modeling get this thing back in a growth mode, I think you're -- I think you're going to see some nice growth their combined with brand loyalty.

Epsilon say same deal, I mean Epsilon use to rip it pretty nicely for years, and the last couple years frankly it hasn't performed. And it seems like it's a little bit a whack a mole of which businesses isn’t performing, we think the last piece is this technology piece.

If we can get that going in a very consistent level, then you're going to have almost half the company from a revenue perspective back consistently producing that 5%, 6%, 7% type growth that we've come to know and love.

What was nice about it is the fact that when cards would go through some normalization and the cycles would hit and you would change the growth profile of the business, you would have the other half of the business that doesn't grow as fast through certain parts of the cycle, but it usually grows very consistently.

You put the two together and you have a very nice model with strong visibility through good times and bad. That has been the thesis all along, Andrew.

Let us get Canada and let us get Epsilon producing again and then we'll sit back and say, “Okay, are we getting credit for it or are we not getting credit for it? Obviously if it's the latter, then that's a different discussion..

That's helpful. Thanks for making me feel all that. One quick follow-up with Charles....

I'm right there with you..

Yes. Charles, it looks like the yield has started to make a recovery.

Is that something we should anticipate into [indiscernible] '17?.

I do. I think yields should be stable. There could be a little bit of positivity to it based upon the trends we're seeing, but I basically think what has happened, Andrew, some of the changes we made in '15, where we could start a cardholder friendly had burned in and I would expect them to be stable, to maybe slightly increasing going forward..

Okay. Thank you very much, guys..

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

Thank you. Good morning. Cash flow utilization in 2017, now you've fought 100% of BrandLoyalty.

First of all, what do you have in your guidance for buy backs and what are your thoughts on the utilization and the cash flow? What do you expect for cash flow in '17 and how do you plan to use it?.

M&A is something we always consider. I'll tell you right now, we don't really see anything that's pressing for us in '17. What that means is we have $500 million authorized share repurchase plan. That will be our top priority. As Ed talked about before, it could be best used early in 2017, which we think will happen.

As the year progresses, if we don't see any further M&A opportunity, we could increase the buy back and be even more active. What I would say, Bob, from a free cash flow standpoint, expect it to be up 7% to 10% in '17 over '16. Again, we'll have money we're keeping back at the banks, but it's a little bit of slow in growth than they are.

That will diminish a little bit. What that means is free cash flow at the [indiscernible] will be up a little bit year-over-year. That enables us to be more active with the buy back..

Okay.

And how much of the buyback do you have built into the 1850?.

We consider the $500 million in terms of guidance..

Okay. Looking at your customer base in the card business. I think last year was probably the most impressive as far as quality of customers that you've added in a single year. But looking at your base, there are a lot of retailers there that are struggling.

I know you're concerned about the liability of more companies today than you have been in the past and how is that built into your longer term thoughts on the card business?.

I know your question, I think. Look, it's no secret that a lot of the traditional bricks and mortar type clients had a tough go of it over the past year. Both as consumers shifted their spend outside of those verticals as I said, to auto and home improvement, as well as more pure online players as well.

From that perspective, you will have a handful of clients that will not make it and we've had usually a couple of year. The key thing here is we don't lose money if a client files because our relationship is with the cardholder, collect. But it does produce a grow-over issue in the subsequent years.

So that being said, what our game plan is, we will probably look to board a couple extra clients over and above what we normally do each year in order to make up for what we think will be softer growth rates in the court and that's our hedge against that.

Probably the biggest initiative that we are working on right now, which is going to be critical for the next several years is we have always positioned our technology and our platforms to deal with, 'Hey, 90% plus, 95% of the activity takes place in the stores' and now what we're finding is its rapidly shifting to online.

And as a result, what we're doing is we're stepping up our investments in that business to create what we believe will be the best suite of services for the digital channels for our retailers.

Said differently, whether it's a retail or app where you would have your favorite retailer on your phone and that would be integrated very nicely with both payments and loyalty all together and have it as a seamless one-stop transition and transaction, that's what we're after. We also are after helping our retailers find new potential customers.

So if you think about what conversing can do with the skew level information that we can get, they can actually go out to the digital channels and find the most likely future customer for that retailer.

So we want to move the model from really focused primarily on the bricks and mortar and more towards – we want to be the one-stop solution for all the digital needs of the retailer to not only drive online sales for existing customers, but then also find the best new potential customers for the retail and therefore help them grow.

That's going to be where all the money is going..

Great. And just last question on your confidence in credits. What is driving the confidence in credit? What are you looking at? Is it by program? What is caused to rise in credit loss? I think you said you have tightened credits back in somewhat 2015.

Are you looking at static pull, or is the increase been driven by one or two retailers, have driven an outsized portion of that credit and now you see that stabilizing? What is driving the stabilization in the credit in your confidence?.

Sure. I think having been in it for 25 years, we were pretty good at looking at vintages and seeing what flows there. So what we do every year or throughout the year is we will go client by client, which is 155 different portfolios and within those clients, vintage by vintage and we will look at every single vintage and see how they are performing.

Again, what has happened is you have a certain band of credit that you cater to and coming out of the great recession, we had people who were signing up for the card, who are at the very high end as the recovery continued and the people repaired their credit.

We had more and more people come into the allowable band and that's sort of what causes that normalization. Again as I tell a lot of folks, we are returning to a level that is comfortable for us. It's not like things are getting worse.

The consumers are fine, it's just we're normalizing out at a level that will help us optimize our earnings in tender share going forward. It's a bottom's up, vintage-by-vintage, portfolio-by-portfolio, client-by-client look. A year ago we had a strong conviction that this would be sort of a year and-a-half, two-year cycle to normalize.

We're past the first 12 months. Now we can see it in terms of what the delinquency flows. We can see it, the stuff normalizing as we look out six months. Now, the guest work is out of it and now it's just a question of 'let's get the next six months out of the way' and we're fully normalized..

Thank you very much. I appreciate it..

We'll take one more..

We have time for one more question. Our final question will come from the line of Sanjay Sakhrani of KBW..

Thanks. Most of my questions have been answered, but just a follow-up on that last question that Bob asked. I guess I hate the fast-forward path 2017, given me a whole year to go through. But it seems like when you look at that wedge chart, your delinquency start to inflect and come down year-over-year.

So when we look out to 2018, should we expect in the absence of any changes, exogenous changes in the economy that the charge operate has a downward bias because of the lack of seasoning from the vintage cars?.

I think that's very possible, Sanjay..

Okay.

And then when we think also about Epsilon and this competitive tech offering that you guys are working on, could you talk about the timing of when you expect that to gain momentum and how we would see it manifest itself through the results over the course of the next year, to a year and-a-half?.

Yes. I would expect the core of Epsilon excluding technology will probably do mid-singles all year.

I would expect technology will still drift probably for the first four or five months as we begin to sign – which is what we're doing now, sign the new client – but unlike last year, we're not going to have that big expense drag that we had to start out the year.

So we're going to avoid that falling off a cliff at the beginning of the year that happened last year because revenue was light, but expenses were heavy. So as I said, we're not going to have the same expense issue and the question now is just getting the momentum going back on the revenue side..

Final question on Loyalty. I know a lot of questions were asked about this before, but when I look at the revenue guidance on an adjusted basis, it's obviously flat.

Is that just the continued residual impact of higher redemption scene in 2016? Or is there something else factored into that such that it's a flat number?.

It's two things, Sanjay. One is breakage is revenue. It took beyond breakage by 6% so that hurts your revenue. The second is you're basically normalizing the number of miles redeemed. You're going to see basically flattish miles redeemed compared to '15, not '16.

So because you're going to have fewer miles redeemed, plus the fact that you have less breakage revenue, that's what creates the flattish..

Okay, great. Thank you very much..

All right. I want to thank everyone for hanging in there. Again, apologies in terms of the noisiness of the quarter, but as you can tell, we know we've got little more wood to chop in the first part of this year, but we are getting pretty jazzed up about back half and no question in terms of '18, it's going to be a nice one.

That's what we're building for....

Thank you, ladies and gentlemen, this does conclude Alliance Data System's Full Year 2016 Earnings Conference Call..