Bread Financial Holdings, Inc.
Q1 2007 Earnings Call Transcript

Published: 19 Apr 2007

[Operator:]

Good afternoon and welcome to the Alliance Data first quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Julie Prozeller of Financial Dynamics.

[Julie Prozeller:]

Thank you, Operator. By now you should have received a copy of the company’s first quarter 2007 earnings release. If you have not, please call Financial Dynamics at 212-850-5608. On the call today we have Mike Parks, Chairman and Chief Executive Officer, and Ed Heffernan, Chief Financial Officer of Alliance Data. Before we begin, I would like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company’s earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on 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 Mike Parks. Mike.

[Michael Parks:]

Thanks, Julie. Good afternoon everyone and thanks for joining us today. As usual, we will start with the agenda. I will go through the highlights of the quarter. We will talk about the full year outlook and then I will ask Ed to dive into the financials in some more detail. Let’s turn over and start with the first quarter on the next slide. I am very pleased to announce that we posted our best quarter ever, turning in record revenue, EBITDA and cash EPS. This marks our 24th quarter as a public company and our 24th consecutive quarter of delivering or exceeding our plan. In the first quarter, our revenue reached $549 million, an increase of 15% and EBITDA increased by 19% to $160 million. Cash earnings was $0.95 per share, up 12%. This 12% growth was in addition to growing through a very difficult comp from the first quarter of last year. You will recall with our abnormally low credit losses, which was a result from bankruptcy reform legislation enacted in 2005, created a $0.10 grow over issue. If you were to normalize this, cash EPS growth would be 27%. Now let’s take a look at a few highlights and we will start with the AIR MILES program. Turning to the next slide, our marketing services division in Canada, which manages our AIR MILES reward program, had another great quarter, delivering strong double digit organic top line and 20% plus EBITDA growth. This quarter, we announced a multi-year agreement with Newfoundland and Labrador Liquor Corporation. In Canada, the sale of alcohol you’ll remember is regulated by provincial government and sold primarily through government-owned stores. Liquor is one of the top five sponsor categories in the program, along with financial services, gas stations, supermarkets and pharmacies. Expansion into this category is a focus for our growth, as we have only four of the ten provinces in the program. The AIR MILES program enjoys market dominance as the largest and most successful and recognizable coalition program in North America and this provides sufficient leverage and margin expansion. When asked about our ability to sustain this pace, we point to our unique business model that consistently demonstrates real value for our sponsors and collectors alike, and as a result, we have our breadth of our sponsor base, the wide variety of rewards and two-thirds of Canadian households as active collectors, which cannot be easily duplicated. Our ability to keep the AIR MILES reward programming dynamic and relevant further ensures this pace of growth. Let’s turn now to the next slide and our U.S. marketing services division. Even excluding Abacus, we had a tremendous quarter with 30%-plus top line and approximately 60% EBITDA growth. We successfully signed a number of new clients for our database services, analytics and permission-based e-mail marketing services. Due to our client’s wishes, they cannot be announced just yet. They are a very well-known national brand and we are pleased to include them in our list of marquee clients. The Abacus acquisition closed in early February. We are very excited about their depth of expertise and experience in delivering data, data management, and analytical services to over 1,500 retailers. This is a significant expansion of our U.S. marketing group into the retail and catalog verticals and expands our geographical footprint in the U.K. and Europe. Additionally, we expect to leverage this acquisition through cross selling of other services within Epsilon and also other Alliance Data businesses. We believe we now hold a formidable leadership position in marketing services and I want to briefly walk you through the five core areas of comprehensive end-to-end marketing services. Let’s turn to the next slide. Epsilon has become one of the most robust and comprehensive providers of multi-channel, data driven marketing technologies and services worldwide. Our core offerings help leading marketers design, build and execute highly profitable marketing programs across all channels and throughout the customer lifecycle. So what makes us unique in this space? First, we provide five critical services. It includes initial consulting and design through our strategic consulting and creating services group. We provide data services using proprietary, client-specific, and third-party data to accelerate the success of marketing programs. We design, build and manage transaction rich databases on their behalf. We provide analytic services that lead to real insight into consumer behavior and the delivery of highly targeted marketing programs through our multi-channel interactive services. Secondly, we have the expertise and scale in all five of these areas, and lastly our core services align with our clients’ strategic initiatives, which creates a stickiness in our relationship and in return creates a more predictable revenue stream for Alliance Data. Let’s now turn to private label services. Our private label group had another stellar performance in signing and operating metrics. Last week, we announced two long-term agreements with Orchard Supply Hardware, a regional home improvement retailer with 85 stores in California. We will provide a comprehensive credit and marketing solution for both their consumer and commercial customers. Additionally, we signed an agreement with Sportsman’s Guide for a new co-brand program. Sportsman’s Guide is a leading catalog and Internet retailer offering quality name brand outdoor gear and merchandise. We also announced the renewal and expansion of our long-term relationship with one of our largest clients, Redcats USA. They are one of the largest multi-channel retailers in North America and a top five client for Alliance. In addition to a 10-year agreement to provided integrated private label and credit marketing, the agreement also includes co-brand credit card services for 12 of their catalog brands. By offering co-brand, we believe Redcats can broaden the reach of its loyalty building programs by attracting a new segment of customers. Our key operating metrics performed very nicely as well, despite a $13 million or $0.10 grow over I mentioned earlier, which came from abnormally low credit losses in ’06. We had very positive results. Portfolio growth came in just under 10%, and combine that with rock solid credit quality and stable funding costs and you have a very strong quarter. Print sales were decent but we believe we will see stronger growth as programs signed in ’06 and beyond will start to ramp up. Once again, very nice quarter. Let’s turn to the utility services page next. Last month, we signed a six-year agreement with Pinellas County Utilities. They are a municipal water utility providing services to over 100,000 homes and businesses in Florida’s mid Gulf Coast. We will implement a new customer information system, provide ongoing application management, hosting, bill prints and mail services. As I mentioned last quarter, our focus has and will be on operations. We had higher-than-expected expenses in this area due to delays in system conversions and some penalties associated with these delays. Along with that, costs were also impacted by the opening of a new call center here in Texas to handle the growth experienced in the last 12 to 18 months, as well as our future growth. We anticipate this to be completed in the second half of ’07 and then see a return to more normalized expenses. The good news is these additional expenses are far outweighed by the expected over-performance in our other three business units. Let’s move ahead to talk about the remainder of 2007 and our outlook. Looking at the full year, we are very excited about the company’s overall performance and based on the overall performance in the first quarter, we are flowing through Q1’s over-performance and thus upgrading our guidance. We expect strong momentum to continue from AIR MILES, Epsilon and our private label group and believe this positions us very nicely for the year. To the extent over-performance continues, we will upgrade guidance as we go. I want to thank our teams for an outstanding quarter. There is still a lot of work to do as we are still early in ’07, but I am confident you will deliver on your promises. Thanks again. Ed, would you take over now?

[Edward J. Heffernan:]

Thanks, Mike. If you could turn to the slide, first quarter consolidated results, as Mike mentioned, Q1 marked our 24th quarter as a public company and further extended our track record of over-delivering on what we have promised. Q1 was also our best quarter in our history with record revenues, operating EBITDA, adjusted EBITDA, and cash EPS. All this despite battling a $0.10 or $13 million grow over from last year’s abnormally low credit losses resulting from a temporary benefit from the enactment of new bankruptcy legislation in late ’05. Revenues were up strongly at 15% to about $550 million, which happens to be approximately what we made for the entire year in 1999. EBITDA was at $160 million, up 19%, and more than we made in all of 2002. Cash EPS up 12% reflected some increased depreciation run-rate but also the funding costs associated with the Abacus transaction, which closed in February. Excluding the temporary grow over issue, cash EPS would have been up 27%. All right, let’s talk about five key takeaways from the quarter. The first one, AIR MILES, Epsilon, and private label all had better-than-anticipated quarters, organic growth rates were double digit in either revenues, EBITDA, or both across all three units, with Epsilon and AIR MILES leading the pack. Second, our traditional non-core merchant bank card business continued to attrite as expected and the utility business quite frankly had a disappointing quarter due to higher costs. Third, the strong over-performance of the “Big Three” -- AIR MILES, Epsilon, and private label -- will more than offset the two lagging units, since the big three represent about 85% of consolidated revenues and well over 90% of cash flow. Fourth, because of this, we are flowing through Q1’s over-performance and thus raising guidance and expect an upward bias to our numbers as the year progresses. As promised, we fully expect to grow through the $0.25 full year grow over issue, as well as put up additional impressive growth numbers on top of that. Finally, note that consolidated EBITDA margins are off to a good start by increasing 100 basis points plus versus prior year. We expect even stronger expansion for the full year. In summary, a solid quarter and a great start to the year. Let’s now hit the segments, if you will move to that slide. All right, the segments, which I’d grade as two As, and as they used to say, a gentlemen’s C, which is where we will start. The transaction services segment houses private label, utility, and our traditional merchant bank card business. Revenues were flat, as our non-core merchant bank card business continued to attrite, which offset growth in private label and a flat performance in utility. Overall revs were up roughly in line with expectations. EBITDA however was below our expectations by around $4 million. The shortfall came from the utility business and consisted of

[Michael Parks:]

Thanks, Ed. We are going to wrap up here and I will make a few closing comments, and it is all around the transformation that really you have seen in terms of the industry. Alliance Data has created a unique leadership position in loyalty and marketing solutions. I don’t care where you look at -- you know, you can look at it from an external coalition perspective or internal coalition or a variety of individual models, our clients and the marketplace clearly recognize the value of transaction rich services, and we are replacing their traditional marketing budgets and spend with measurable ROI-based programs, and they drive long-term sustainable results, thus the loyalty effect that we have been talking about for 10 years. We believe there is no other single provider who can match us for our breadth and depth of these services and as a result, we have staked out truly a unique position and we are very excited about the future. With that said, let’s wrap up and go to Q&A. Operator.

[Operator:]

(Operator Instructions) Your first question comes from Jim Kissane of Bear Stearns.

[Jim F. Kissane:]

Could you provide a little more color in terms of the challenges in the utility business, and in your confidence level that you have a handle on the challenges of the problems in utility, so that it kind of goes away by the end of the second quarter?

[Michael Parks:]

Look, if you look back to the last 12 to 18 months, we had a very strong sales year. Instead of our normal two to three, I think you look back and we had five or six last year. Frankly, as I tell my kids, I think our eyes got a little bit bigger than our stomachs and while we have made through most all of our conversions, some of the unique characteristics and some of the customization that our clients wanted has caused us to be delayed on a couple of them. We have gotten the majority converted but we still have some work to do and I am very confident that we will be through this mid-year.

[Jim F. Kissane:]

You said or used the word decent when you were describing credit sales, and I just got the sense that maybe you weren’t as satisfied with the ramping of some of your newer programs. Could you comment on that or give a little more color?

[Michael Parks:]

I did not mean to --

[Jim F. Kissane:]

I think Ed said it too.

[Michael Parks:]

I would say that the credit growth, if you look at our grow over and look at the opportunities there, we are right on track according to our plan and our guidance. It has not been a blow out quarter or year, as we have had in the past couple and as we have talked about, we are getting back to our more normal steady state kind of long-term growth on 9% or 10% growth. I would say we are in good shape. The signings from the last few years are going as planned.

[Edward J. Heffernan:]

I would say, since apparently you dragged me into this too, Jim, that I think it is more of a timing thing. This stuff is cranking up and we have been through this I don’t know how many times over the past years where it bounces up and down. But we expect certainly as we exit Q2 at the latest, we should be hitting double digit with the way the ramp-ups are heading. The portfolio itself is just chugging right along right around 10% and that is what is throwing off so much of the cash flow.

[Michael Parks:]

I think the key point, and I think we probably beat it to death but you will hear us say it one more time. Maybe we are a little sensitive to it but I think the key story here this year when you have seen the sub-prime blow-ups in mortgage and some of the big bank card issuers, I think hopefully we are finally vindicated as to the quality of the model.

[Edward J. Heffernan:]

Just on the credit sales, to give a little bit of insight into the 12 million consumers that we do see, I would say obviously we cannot talk about one specific retailer but across the 80 or 85 programs that we have, I would say right now I like to use the word decent because what we are seeing is I do not think the retailers feel comfortable it is going to be a blow out year, but they are certainly not saying it is going to be a dismal year. I think they are basically, and what we are seeing is a decent year, which is probably 4% or 5% type sales growth from the established players and then you throw in the new vintages and that is where you get up to sort of the 9% or 10% where we are going to run.

[Jim F. Kissane:]

Just one last question, the early performance of Abacus and the integration of Abacus and kind of your thoughts.

[Michael Parks:]

Could not have gone smoother. Mike [Actarino] has done a great job. Brian [Reine], who leads the Abacus group, is now direct -- as he reorganized his team basically with the head of each of the service offerings if you think about the database business, the interactive business, the data business. We have created a consolidated cross-team sales force. In fact, we just had 150 of the sales and service organization in for a three-day exchange in sharing and a sales strategy. So we are very pleased with our new associates as well as the plan for the future.

[Edward J. Heffernan:]

I think, to finish on Mike’s note, if I got the numbers right only about 10% of Epsilon’s clients are in fact clients of Abacus, and in private label, only 20% of private label clients are currently clients of Abacus, and there’s 1500 retailers in there, so we are getting pretty psyched up to get our meat-hooks in there as well.

[Michael Parks:]

We have already had at least a half-a-dozen new business signings with those relationships, either in the interactive space or the data space, as we begin to consolidate.

[Operator:]

Thank you. Your next question comes from Greg Smith of Merrill Lynch.

[Gregory Smith:]

The marketing services revenue just sequentially fell a little more than we were expecting, especially considering that you had Abacus in there. Could you just remind us of the seasonality in that overall segment and why that fell sequentially?

[Edward J. Heffernan:]

You bet. As we talked about, or I tried to walk you through, right now the way the seasonality is working, Q3 and Q4 will be by far our largest and strongest quarters, primarily to do with a lot of the back to school work that we do and then of course all of the holiday work that we do for our clients as well. It is just an enormous spending period for them, so what you are seeing, 245 last year going down to 230, you are going to see a -- when you compare Q4 of last year to Q4 of this year, you are going to see a spike up I am guessing north of 20%.

[Gregory Smith:]

Okay, that’s perfect. That explains it. So we should really expect a big pick up in Q3 and Q4.

[Edward J. Heffernan:]

Yes, I mean, that gets back to when I droned on about trying to explain the seasonality by quarter this year. Things have really changed over the past two or three years so Q1 obviously is going to be very strong because of private label but Q3, Q4 is going to be very strong, primarily because of marketing services.

[Gregory Smith:]

Okay, that explains it. And then, just the fact that the utility revenue you said was flattish. Given all the signings, I still would have thought the revenue would be higher. Why is that only flat?

[Michael Parks:]

Well, even though we have had a lot of signings, we are just now in the process of getting those converted. We did pick up last year a good portion of the revenue associated with all of the call center customer service and back office support that we were doing even while they were on their previous system. So we actually picked up a good portion of the revenue last year already as well.

[Gregory Smith:]

Okay, and then the credit margins were just unbelievable. Obviously all the credit quality and everything flows in through the revenue line. Are we just seeing very good operating leverage in the core credit business? How do you just explain such a great margin number?

[Edward J. Heffernan:]

We tried to tell folks last quarter when there was some concern that our credit margins were dropping from the low 30s into 28 that that had to do with marketing spend for the holidays and that should immediately translate into Q1 behavior from cardholders that would generate over-performance, and people I think just needed to wait and see. What we are finding is Q1 is not indicative of the full year. Q1 is the quarter where it is post holiday season and we have over 12 million cardholders. That is when you tend to see the highest what we call revolving rate behavior, and that is folks who for whatever reason -- sloppy pay, they didn’t get around to it, just was not high on their list of things to do -- they revolve whereas for most of the rest of the year they don’t. That is where we get a huge amount of our income in Q1. But I would think as we go and look throughout the remainder of the year, it is not going to drop off a cliff for sure. I think it will probably revert back to probably somewhere in the mid-30s, maybe a little bit better than that, and we wind up the year around the mid-30s, with Q1 being the strongest. So it is the programs that we -- you know, for every dollar we spent in Q4 we probably got four bucks back in Q1.

[Gregory Smith:]

Just real quickly, I was thinking about it on a year-over-year basis, so comparing it to the strong Q1 a year ago, it was even the EBITDA up nicely, is that operating leverage plus a little, a heavier marketing spend in Q4 of just this last year --

[Edward J. Heffernan:]

You bet. You bet because -- no, that is a great point. If you went back to ’05, we were not dumping the kind of cash we did last year in Q4 into the programs. It was still more of a test cycle, but this past Q4 we dumped a bunch of cash into these holiday programs and boy did it drive things through the roof in the first quarter.

[Gregory Smith:]

Okay, thanks a lot, guys.

[Operator:]

Thank you. Your next question comes from Mark Bacurin of Robert W. Baird.

[Mark Bacurin:]

Thank you. Good to be on the call. A couple of questions, as you can image mostly on the marketing services side. Given all the acquisitions you have made over the last 12 to 18 months, you definitely have put together the full service solution now. I am just curious; what are the steps that are needed now to be taken, either divine sales channels, et cetera, that will let you really go to market with a full integrated solution and start to tap into some of those cross-selling opportunities?

[Michael Parks:]

Let me address the whole marketing and sales cycle for the U.S. group at Epsilon. Each of the product lines, the major product lines, if you talk about the database management, the interactive services, the data services, Abacus -- each have their own sales force and we will continue to sell those individually. But as I mentioned earlier, the entire group was in here just two weeks ago for this training session. We have also created a standalone cross-selling sales organization and it is amazing how quickly the clients recognize and see the opportunity to streamline their operation, as we were talking about, just sort of sending out catalogs a few times a year. Why not continue to communicate with your consumers via e-mail, et cetera? So we are already seeing the results of just the demand coming from our client side before we even rolled out the cross-selling initiatives. So we have spent a lot of time in the last 60 days putting that plan together, pulling everybody in and training them. So we are hitting the ground running now. All of the consolidation activities around the normal HR and accounting systems and all those kinds of things are behind us and it is full speed ahead.

[Edward J. Heffernan:]

I would say to Mike’s point, there is no real integration that needs to take place at this point. It is pretty much where we have boots on the ground and we are running at this point. As I mentioned earlier, only 20% of our private label installed base are Abacus members and a huge percentage of the targets that we are looking at for private label are in the Abacus camp, so I think that should be a good place where we can get some traction. Also, the fact that only 10% of Epsilon’s clients excluding Abacus are Abacus clients as well. So there are examples out there of some of our private label clients, like Eddie Bauer and J. Crew and Crate and Barrel and Design Within Reach that are both sort of Abacus and private label clients. What we would like to do is boy, wouldn’t it be great if we could get all 85 into the Abacus family? Alternatively, wouldn’t it be great if we could get some of those 1500 folks within Abacus into our private label camp? And then, as Mike said, we are going to bolt on the Bigfoot DoubleClick or the Epsilon interactive engines onto all of our businesses north and south of the border. I think it is a little bit frustrating on our end because we signed half-a-dozen really nice names in the first quarter but the clients were reticent to let us release their names. As such, we cannot talk about them but you are seeing it in the growth rates. I would also suggest that roughly 60% of the growth within Epsilon is coming through expanded relationships with existing clients as well.

[Michael Parks:]

I want to talk a minute about the inability to announce names. That is just a matter of time. That is not unique. We have had that in the past. The clients do not want to release on contract signing, but once the program has been implemented and rolled out and it is public knowledge, then there will be no problem. But the marketing world is a very competitive world and no need to signal to competitors any ideas or strategies they have, so business as usual.

[Mark Bacurin:]

I can attest to that. I have seen that from others as well. I guess it does seem like managing that channel, sales channel issue, you know, where you have a bunch of guys who still price independently versus now going to this cross-sell solution, is probably the biggest challenge of trying to manage the opportunity. Can you address, I mean, you specifically said you have cross sales teams now that are looking at those opportunities. Is it fair to say that the 80-plus retailers in the private label program are probably the most fertile ground for you guys to go after first?

[Michael Parks:]

Absolutely, no question. But we also think there is a lot of opportunity on the database side as well and the interactive.

[Mark Bacurin:]

Great, and just one nit-picky one for you, Ed. Could you tell us what the CapEx was for the quarter?

[Edward J. Heffernan:]

CapEx usually runs about 5% of top line, so I would guess -- let’s see, it would be around $27 million would be 5%. I think we actually ran at $22 million, so a little bit under, a little bit better.

[Operator:]

Thank you. Your next question comes from Wayne Johnson of Raymond James.

[Wayne Johnson:]

Good afternoon. My question is on the private label. If we go back in time, 2001, 2002, 2003, there were certain expectations for penetrating a new customer with private label. My question is has the ramp rate in those prior years, is that any different, better or worse than the ramp rate of the clients that you signed in ’04, ’05, and ’06?

[Edward J. Heffernan:]

No, actually -- that’s a great question. It is interesting that they really have not changed, that the ramp rates where we go from zero to about a 33% wallet share, that is a third or one out of every three dollars spent flows to our card.

[Wayne Johnson:]

In what period of time?

[Edward J. Heffernan:]

It still takes about three years, Wayne, so it really has not changed. Obviously what a lot of it is dependent upon is if the retailer really puts their shoulder into the program, then we can get higher penetration. If the retailer is not that excited about it, then we will have lower penetration. What we are doing is hopefully every year we are showing a little bit more of what we can do when we can link up SKU with the client’s specific name and do some very serious micro targeting of various segments. I think that is beginning to bear some fruit. The fact of the matter is we are offering additional products, such as a co-brand card, which could add another three or four percentage points on to wallet share. A commercial card could offer another two or three points. So could we get penetration up to 40%? It is certainly possible.

[Wayne Johnson:]

Okay, that’s great. That’s helpful. With the now what seems like a full suite of marketing services solutions, is it possible not only could the wallet share increase but the ramp rate also accelerate?

[Michael Parks:]

I’m not so sure I would see wallet share ramping any faster. I think from the -- particularly if you think about the retail side, we have had a pretty strong database analytic team, if you will recall, coming out, our foundation coming out of the limited and having a fairly integrative program. It was a pretty sophisticated operation to begin with. I think the key is really the point Ed made. Look, we would like the retailers to have their number one priority is signing up new private label relationships. Since we get all of our new customers from them walking into the stores and transacting business at the point of sale, unlike bank card where it is mass mailing, we are dependent on them at the point of sale. Sometimes they have two or three other priorities depending on how they are doing with regard to their merchandise pick and other kinds of operational activities going on in their stores. We have created over the past four or five years a very strong training organization that goes out to the field, making it as easy as possible but getting those associates at the point of sale excited about it is the key to success, and on average, it is still growing nicely and I just don’t see how we can improve that ramp speed that much.

[Wayne Johnson:]

That’s very helpful and I appreciate that. My last question is can you give us any update or color on Citibank, on how that is progressing for you guys?

[Edward J. Heffernan:]

Well, we really don’t talk specifically about clients, so I will talk in generalities, which is it is progressing fine. It is certainly running well ahead of what I think anyone thought the program was going to be. They are really apparently putting a great deal of their own resources and efforts into promoting the program and rolling all their big products into the one common coalition currency being the thank you network, of course. Quite frankly, what we hadn’t anticipated was the fact that they are going outside of their own internal coalition and signing up large partners outside of the coalition, such as Expedia, and that is new news. Now certainly we get involved, obviously, because customers of Expedia who get rewarded with thank you points, that flows through our pipes and on to our platform and is a part of our permission-based e-mail type activity, so Citi seems to be really going all out in this program and we think from a client perspective, it is going to be a very, very significant client over the next couple of years.

[Operator:]

Thank you. Your next question comes from David Scharf of JMP Securities.

[David M. Scharf:]

Good afternoon. A question for you on some of the disclosure, Ed. Now that marketing services is such a major component in the primary growth driver, we can appreciate the issues of client confidentiality, but are there any usage metrics that on an ongoing basis you will be able to provide to give us a little more transparency, whether it is number of databases managed, number of e-mails per month? For all the positive shifts in the business away from so much of a reliance on credit, credit at least there was a lot of transparency with monthly filings and so forth. Is there anything on the marketing side that we can look forward to that gives us a sense for traction?

[Edward J. Heffernan:]

Believe we, we are painfully aware of we do not have good drivers for the business. For me to sit there and say the former Bigfoot DoubleClick now Epsilon Interactive is going to do 25 billion permission-based e-mails a year, I do not know how much that is going to really help you gauge what the overall segment is going to be. Where we are heading I think is the fact that this thing is certainly growing so fast and it is going to be half of our consolidated revs this year, that my guess is as we exit this year and go into next year, we will probably split this segment into two, one for Canada and one for the U.S. I would say in the interim, we will attempt the best we can to break down the organic growth rate. We will strip out, we will give you each quarter the numbers excluding Abacus, and then within that remaining organic growth rate, where is it coming from? And really, David, where I’d say 60% of it is coming from is from existing clients. I mean, we are just getting more and more and more commitments from our existing sponsors. And then I think the number of new clients we are signing, we are certainly well ahead of expectations of probably half a dozen a year. I think we did half a dozen in the first quarter. For now, we will try to guide you as to whether that long-term mid-teens organic growth rate is looking real good for ’08 or whether there is something blocking the way. Right now, it looks real good for ’08. So it is a long-winded, basically non-answer, other than we will try to start parsing it a little bit better, but we have looked, believe me, and have not found any single driver or two drivers that can explain the growth rate.

[David M. Scharf:]

I see. Is there any color you can provide on just how discretionary you would call some of these services that are being purchased, and whether the deeper penetration of existing clients tends to be, for lack of a better term, sort of recurring or is it very one-off, project oriented?

[Edward J. Heffernan:]

It is definitely the former. The nice thing about this business, which is why we got into it, it is the same concept as Canada, it is the same concept of private label. We want, at the end of the day as we look down the road a few years, we want -- and Abacus itself is a fairly unique asset, but outside of Abacus, we want people to be signing up for all five legs of the stool; the creative piece, the proprietary data piece, the database piece, the analytics piece, and the distribution through the interactive mechanisms. Then you have a relationship that is so deep that it is kind of like private label and kind of like the Canadian relationships that we have today. In terms of discretionary and non-discretionary, a lot of these programs actually are counter-cyclical, and if you think about why it is because everything we do is the exploitation of the seam between transaction processing and marketing and loyalty. In other words, everything we do is driven from our ability to collect transactional level information, associate it with a specific consumer name, and then utilize that as the best predictor of future behavior and hence drive the marketing and loyalty programs of those clients. That is something you cannot shut off. If I know Scharf is out shopping at J. Crew and I get eight records the first year and another eight the second year, the more records I have the more information I am going to have about you, the more precise I can be about my targeting and the more effective that targeting and hence the ROI can be.

[David M. Scharf:]

Shifting to utility, I should probably know the answer to this, but the conversion cost were running a little over. Are any of your conversion costs capitalized, much like a credit card processor, card issuer processor? Or is it all expensed?

[Michael Parks:]

It is a little bit of both. We have, if you think about the ramping up of the call center that we talked about, we are training a lot of operators on the system in preparation for the conversion. They are actually going to be expensed and stretched out a little bit longer before we get associated revenue, but there is some capitalization of the core conversion too.

[David M. Scharf:]

Based on the experience with ramping up this latest wave of five, six new signings, is there a target operating margin we ought to think about, or rethink about in this segment? You may have been through an initial wave of contract renewals recently. Any sense on where pricing is going?

[Edward J. Heffernan:]

That’s a good question. I don’t think we have gone through that many renewals recently, but you know, it is more on the expense side. It is not on the revenue per side. We are running I think, quite frankly, way too fast on the expenses and until we can muscle through these conversions, which we will do over the next few months, we are just going to have to eat them and unfortunately, the contracts we signed, there were penalties attached to those as well, so we are going to have to eat that as well. And then hopefully, we can get back and get you a better feel for some type of run-rate, but right now it is just a question of muscling through.

[David M. Scharf:]

Is the business more labor intensive than you originally thought with the call center component, or is this really just a phenomenon of how much you are ramping up right now?

[Edward J. Heffernan:]

It’s not call center.

[Michael Parks:]

It’s not -- the model is not any different than we thought in terms of the expectation of the balance between how much is call center, how much is customer service, how much is processing, et cetera, et cetera. Look, as I said earlier, our eyes were bigger than our stomachs. We have learned our lesson and trust me, it is painfully aware to everybody in the organization and that’s not going to happen again, so --

[Edward J. Heffernan:]

I think that as has been the case in the past six years, we are fortunate in the sense that our three big engines are just running so hard right now that we can absorb additional expenses and it won’t cause us to slow down the over-performance we have done in the past.

[David M. Scharf:]

Ultimately signing up more than you thought is a good problem to have. Thanks a lot.

[Operator:]

Thank you. Your next question comes from Colin Gillis of Canaccord.

[Colin W. Gillis:]

Good afternoon, gentlemen. Could you just talk a little bit on the private label side, what should we think of in terms of the number of new potential clients? Would these all be fresh start programs, or are there any existing portfolios out there that interest you?

[Edward J. Heffernan:]

Sure, I’ll take a stab at it. I think right out of the gate, you should think about five to six. Normally we would say four to five but I think the pipe looks a little bit stronger this year, so I think five to six seems to be pretty good. I mean, you just look at where we started. You’ve got Sportsman’s Guide, which is a brand new program that we will be starting from scratch. You’ve got Orchard Supply, which is a brand new program starting from scratch. Then, we have the rights -- which call this our third client that we’ve announced -- we have the rights to I think 11 or 12 of Brylane’s different catalogs names, like Chadwick’s and Brylane Home and a few of those catalogs that are out there that we can add a co-brand to, and they have been private label for a number of years. So we signed the equivalent of three thus far and it is the first quarter, so I am going to go with my gut and tell me that I think that we can probably struggle through another three before the end of the year. There may be some upside to that number as well. In terms of existing portfolios that are floating around out there, again we are not all that big into that business and there are not that many really floating around. We are not counting on any. There’s one or two that we are always sniffing around and looking at, and if it happens, great. If it doesn’t, so be it, but it is really the start-ups that catch our fancy because those are the ones that they add to the growth rates in future years.

[Colin W. Gillis:]

Any timing as to when you might access the debt markets again?

[Edward J. Heffernan:]

Well, I am thinking of doing a private -- I’m sorry, a corporate bond offering some time in the last spring to free up our credit facility. And I believe in November of this year one of our asset-backed bond deals is coming due and we will probably, or we will be accessing the public market for that one as well. We do have a $3 billion shelf that is out there, so November, we will be rolling over that into new five-year money and most likely adding into that mix some of the portfolios that have been ramping up and seasoning over the past 18 to 24 months.

[Colin W. Gillis:]

One last one on the AIR MILES, new sponsor categories that we could be thinking about?

[Edward J. Heffernan:]

Auto, liquor --

[Colin W. Gillis:]

You have liquor out there now, right?

[Michael Parks:]

Only four of the 10 provinces, so it is still a high priority in the pipeline. Insurance, electronics did you say?

[Edward J. Heffernan:]

Internet.

[Colin W. Gillis:]

Consumer electronics?

[Michael Parks:]

Yes.

[Colin W. Gillis:]

Okay, beautiful. Hey, that Abacus acquisition just keeps looking better and better. Congratulations.

[Operator:]

Thank you. Your next question comes from Larry Berlin of First Analysis.

[Larry Berlin:]

Good evening, guys, how you doing today? I just want to go back to Abacus for a second. I am curious; are the EBITDA and the EBITDA margins for about what you have expected?

[Edward J. Heffernan:]

Yes, I mean, I think it is running -- they are running about 40% so I think Abacus is off to a very good start. One of the things we are pretty jazzed about is the ability, as Mike talked about, of taking our interactive capabilities so that an Abacus client who may only mail four catalogs a year, there can be ongoing dialog and communication with its client base throughout the quarter through our Epsilon Interactive businesses, and offering that to the entire 1500 client base I think is going to be a pretty neat service, let alone the fact that only 10% of Epsilon clients are Abacus clients as well. Obviously we talked about private label. Overall I think, quite frankly, it was a good deal.

[Larry Berlin:]

On the guidance for EPS, you raised your low bar by about a nickel and we expect you to jump the bar and limbo under it, but you had a $0.04 beat in the quarter, and that means you have basically a $0.01 raise in guidance. Is that a bit conservative, being conservative or how do you guys look at that?

[Michael Parks:]

Beyond the normal, it is a low bar.

[Edward J. Heffernan:]

I am still working on the fact that the typical low bar thing, but --

[Larry Berlin:]

Well, you normally say “at least” and I look at it as kind of like setting a low bar rather than -- you are not setting a medium.

[Edward J. Heffernan:]

We like to think of it as a very solid base level, Larry. But I think our guidance for Q1 was $0.90. We do not key off the word on the street is, but our guidance was $0.90. We came at $0.95. We closed through the nickel from $3.55 to $3.60. There is nothing out there that would suggest there could be more over-performance as we go throughout the year. I mean, I think that is certainly a distinct possibility, more than a distinct possibility. We expect it and if and when that happens, we will do what we have always done, which is just flow through that over-performance. It gives us the flexibility if we want to do something with the business to use that extra money, but right now, no reason why we cannot have more good news as the year progresses.

[Operator:]

Thank you. Your next question comes from Dan Perlin of Wachovia.

[Daniel R. Perlin:]

Thanks, guys. Just a quick question; I jumped on late and I heard Greg ask it but I want to make sure I understand it, because you probably mentioned it earlier, but credit services was a whopper on the EBITDA line. The incremental margins on that look to be almost 80%. I appreciate the leverage comment but was there something else in there? Was there a gain that you had to take or did you have a step down in the funding costs that really helped spreads, or what?

[Edward J. Heffernan:]

No, it’s -- the leverage comment, I am not really sure where that came from but --

[Daniel R. Perlin:]

I think Greg said something about incremental operating leverage in the credit business as the larger private label portfolio matures and stuff --

[Edward J. Heffernan:]

Basically, we have -- if you recall in Q4 of last year, we got dinged a little bit because people were concerned our operating margin went down 500 basis points --

[Daniel R. Perlin:]

Yes, pre-funding marketing, I got that.

[Edward J. Heffernan:]

Right, so the funding of the marketing basically paid off four-fold in the first quarter. Funding costs were flat, credit losses were flat, but what we had was --

[Daniel R. Perlin:]

Wait a minute -- were funding costs flat year over year?

[Edward J. Heffernan:]

Roughly flat compared to -- a little bit better than Q4 but flat year over year, yes. And credit losses were flat, so the only other place it can come from, right, is yield and that means that the programs that we put in place generated the type of consumer behavior where we have a higher revolving percentage of the population, therefore generating finance income and that is what happened in Q1. That again is something that we had been testing for the last two or three years, and it was a boomer. It worked really well. Unfortunately, it tends to fall off after Q1 and people tend to get their house in order by Q2.

[Daniel R. Perlin:]

Understood. Just one other quick question, it is probably a stupid question, but did the rates on the cards change, given a mix of retailer and as a result, were the average receivables flowing from those higher?

[Edward J. Heffernan:]

No.

[Daniel R. Perlin:]

Okay. Good answer. Thanks.

[Michael Parks:]

Thanks, Dan. Have a good evening. I think we have one more and then we will wrap it up.

[Operator:]

Thank you. Your last question comes from Tien-Tsin Huang of J.P. Morgan.

[Tien-Tsin Huang:]

I guess as a follow-up on that credit side, just to make sure, was there any material change in the IO gain in the quarter, in Q1?

[Edward J. Heffernan:]

I don’t think there was any material change. It might have been up a couple but that was about it.

[Tien-Tsin Huang:]

Then, in terms of the bank card acquiring business, could you give us some numbers there in terms of the revenue decline? And maybe you could also update us on the strategic fit of this business? I am sure that private equity has a lot of interest in that asset.

[Michael Parks:]

Yes, no question that top line continues to be impacted by slow trading at some of the smaller clients in that network business. Probably, I don’t know, $25 million, $30 million on an annual basis is what we expect. We are getting close to the point of -- we have such a broad relationship focused in the convenience store and petroleum area, always trying to create a unique loyalty tool to help them get from the pump to the store. That is where they make their margins. That is where they make their revenue. We have tried a number of different ideas, from prepaid cards and gift cards and different things along the way. Such a large market opportunity, we have been hesitant to be quick to pull the trigger on that kind of business. But at some point in time, I guess we have to maybe begin to see the light. Maybe there is nothing big enough to really make a difference there and we will have to make that call.

[Tien-Tsin Huang:]

Okay, so I’ll stay tuned for that. If I could just sneak in one more on the utility front. Are the delays principally related to IT or technical issues, or is it a matter of trying to get to a common platform? I am just trying to better understand what is driving the delays.

[Michael Parks:]

It is focused on having enough people to do the work, as I mentioned earlier, in terms of absorbing more than we can handle and the job in terms of some scoping of some of the custom interface work to the client, that it was bigger than we expected and so it was more work. So it is really those two and those typically are one-timers that are not recurring kinds of expenses. All right, thanks, Tien-Tsin. Again, wrapping up, thanks for joining us today, folks. We look forward to talking with you again and we are excited about the year, and we will talk to you in 90 days. Bye now.

[Operator:]

Thank you. This concludes today’s Alliance Data first quarter 2007 earnings conference call. You may now disconnect.