Bread Financial Holdings, Inc.
Q2 2015 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

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

[Steve Calk:]

Thank you, operator. By now, you should have received a copy of the company's second quarter 2015 earnings release. If you haven't, please call FTI Consulting at 212-850-5703. On the call today, we have Ed Heffernan, President and Chief Executive Officer of Alliance Data; Charles Horn, Chief Financial Officer of Alliance Data; and Bryan Pearson, Executive Vice President and President of LoyaltyOne. Before we begin, I'd like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also, on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at www.alliancedata.com. With that, I'd like to turn the call over to Ed Heffernan. Ed?

[Edward J. Heffernan:]

Thanks, Steve. Joining me today is Bryan Pearson, President of LoyaltyOne, which houses both the Canadian AIR MILES program as well as our European platform, BrandLoyalty; as well as Charles Horn, our always eloquent CFO. Bryan is going to give an update about LoyaltyOne, and Charles will walk you through the quarter, and I will discuss the year-to-date performance, critical goals, where I think we are in the year, and updated 2015 guidance. That being said, Charles?

[Charles L. Horn:]

Thanks, Edward. It was a solid second quarter with revenue up 19%, importantly 11% organic, and adjusted EBITDA, net up 18%, a good flow-through of the revenue growth. On a constant currency basis, the growth rate for revenue adjusted EBITDA net were an impressive 23% and 21% respectively. Core EPS increased 14% to $3.32 for the second quarter, exceeding our guidance of $3.20. Accordingly for the year, we are passing that through and raising our annual guidance from $14.90 to $15, a 19% increase compared to full-year 2014. EPS was down slightly to $2.11 due to non-cash expenses related to the Conversant acquisition completed in December of last year. Generally, we expect acquisitions to be accretive to core EPS in year one, the GAAP EPS in year two. A quick update on the share repurchase program. During the second quarter, we bought 451,000 shares for total consideration of $134 million. Year-to-date, we bought 2.5 million shares for total consideration of $699 million. Currently, we have reacquired over half of the shares issued as part of the Conversant acquisition late in 2014. With that, I will turn it over to Bryan to talk about LoyaltyOne.

[Bryan A. Pearson:]

Thanks, Charles. LoyaltyOne's revenue declined by 15% or $54 million to $302 million, and adjusted EBITDA declined 24% or $21 million to $66 million for the second quarter. Of course, the strong U.S. dollar continues to be a significant headwind for LoyaltyOne, reducing our revenue and adjusted EBITDA by $49 million and $10 million respectively. On a constant currency basis, our revenue was flat and adjusted EBITDA declined by 13% versus last year as the AIR MILES low-single digit revenue and adjusted EBITDA growth was more than offset by the program timing of BrandLoyalty. However, when reviewing the AIR MILES and BrandLoyalty businesses separately, the results to date and the outlook for the balance of the year are predominantly positive. So let's start with AIR MILES. The AIR MILES business enjoyed a strong second quarter as issuance increased an exceptional 235 million miles or 19% over the same period last year. This is the highest mile increase in any quarter of our history and it's a critical driver of our profitability over time. Leading the charge was the robust performance of our grocery vertical, which is really attributable to two key reasons. First, the launch of Sobeys in Western Canada which continues to perform well with increased promotional activity happening at both Safeway and the Sobeys banners in that market. Second, the launch of Sobeys Ontario late in the first quarter of this year and the conversion of its legacy called Sobeys points to AIR MILES coupled with incremental activity from the existing grocer, Metro, as they share the category in the Ontario region. The Ontario grocery segment really highlights the role that co-exclusive agreements are planned with sponsors as they look to fend off some of the industry's largest competitors. Finally, issuance growth in the second quarter was also fueled by other sponsors that participated in a very successful promotion in the market and from our relationship with BMO, who launched a new AIR MILES World Elite MasterCard product into the market. To date, the results are very positive as it has a compelling consumer offer in the very competitive premium card market. For the balance of 2015, we anticipate that base issuance and spend in the program will continue to be strong. However, we believe the extensive bonus activity from the fourth quarter of 2014 will not repeat itself. As we've said many times in the past, we look at the full year issuance as the key metric in the business since the timing of promotional activity can significantly skew results in any given quarter. We still expect full year issuance for growth for 2015 to be in the mid-single digit range. AIR MILES redeemed also increased 10% compared to last year and this was primarily due to AIR MILES Cash, our instant reward option. The cash program continues to be a very popular reward offering, and it enjoyed a 60% increase in redemptions over the same period last year. We should note the cash redemptions are prevalent in our grocery partners and so it's following the same growth trend that we are experiencing for issuance in the segment. For the full year, we anticipate redemptions to increase by mid to high-single digits primarily based on the strength of AIR MILES Cash. So now, let's turn to BrandLoyalty. On a constant currency basis, both revenue and adjusted EBITDA were down compared to the second quarter of last year, but they were in line with management's expectations. As we mentioned in the – on the first quarter earnings call, some clients pulled forward programs that were executed in the second quarter of last year and this – and they were pulled forward in the first quarter this year, creating some bad year-over-year comps, again timing. Keep in mind that BrandLoyalty's revenue is actually up 41% and adjusted EBITDA is net – is up 29% for the first half of 2015 versus the first half of last year on a constant currency basis. Based on the results to-date and the book of business, we see plan for the balance of the year BrandLoyalty is still very much on track to achieve the full year projections of double-digit top and bottom-line growth, again on a constant currency basis. And now, a couple of updates on our North American expansion efforts with BrandLoyalty. We're in the final stages of establishing the U.S. pilot program later this year and this represents an important milestone in our U.S. strategy as we build on both our Canadian and U.S. experience through this year. Additionally, the Canadian programs that we first announced in the fourth quarter of last year are progressing well with proven results, and we plan to roll out additional programs in 2015 in that market and maintain a 100% customer retention. Last, let me update to you quickly on dotz. We continue to see steady growth in our collector base and are tracking to reach approximately 18 million collectors by year-end that would be up 30% from the end of 2014. In addition to the continued member growth, the level of sponsor interest is also building and it could be a catalyst for expansion into one of Brazil's largest markets over the next 6 months to 12 months. In closing LoyaltyOne, while the second quarter was a bit choppy due to timing, we've achieved solid year-to-date results with 17% and 7% growth in revenue and adjusted EBITDA net respectively on a constant currency basis. While the strong U.S. dollar continues to be a headwind for both units, we have great visibility on how our clients will engage with our loyalty platforms over the remainder of the year and into 2016. I would like to personally thank the leadership teams of both organizations for their continued commitment to both our clients and to the success of LoyaltyOne. Great job, everyone. And I'll just pass it back to you now, Charles.

[Charles L. Horn:]

Thanks, Bryan. Let's flip to the next page and talk about Epsilon. Epsilon's revenue and adjusted EBITDA increased 39% and 66% respectively compared to the second quarter of 2014. Big increases but not yet where we want them to be. Looking at the legacy Epsilon business, results were close to our expectations with mid-single digits growth in both the revenue and adjusted EBITDA, a little short on top-line growth but with solid flow-through to EBITDA. Turning to Conversant, revenue was down about 9%, while adjusted EBITDA was flat compared to the second quarter of 2014 on a pro forma basis. We are running a couple quarters behind on revenue growth, but did see some positive developments during the second quarter. First, we gained traction with our cross-sell initiatives signing over 10 contracts including names like Hormel, Cornerstone, Nine West, Ann Taylor, Sally Beauty, and Helzberg, to name a few. We estimate that the annualized run rate for all these new programs will be in the $50 million range which will drive return to revenue growth in the back half of 2015. While we work to return the top-line's positive growth, after pruning some lower margin offerings, the shift to more profitable business led to a 300 basis point expansion in the EBITDA margins at Conversant. Looking forward to the remainder of 2015, we expect organic revenue and adjusted EBITDA growth in the mid-single digit range, down from our beginning of the year expectation of 7% to 8%. Unexpected softness in our agency offering where we have a couple of very large clients that can move the needle quickly is the primary reason. For Conversant, we are expecting return to revenue growth by the fourth quarter, led by strength in the CRM offering, and solid adjusted EBITDA growth beginning in the third quarter. Page 9 lays out our expectations for the turn, which Ed will talk about later. Let's flip over and talk about Card Services now. For Card Services, we continue to see very strong results, with the revenue increasing 27%, which translates to a 20% increase in adjusted EBITDA net. This now represents the 14th consecutive quarter of double-digit revenue growth. Just as importantly, revenue outpaced expenses by 6%, as Card Services continues to drive operational efficiencies, while delivering on commitments to clients. As a percentage of average card receivables, operating expenses have decreased a full point to 9.8% compared to last year. The provision for loan losses increased 61%, primarily due to the substantial growth in card receivables as we held the reserve rate essentially consistent with last year. Fueling these impressive results, we saw credit sales increase 34%, which translated into equally strong average receivables growth of 33%. The fundamentals remain very strong, despite a relatively early Easter that pulled some sales into the first quarter. Where measurable, we continue to see tender share gains of more than 175 basis points. Tender share is the key business metric we track closely as it demonstrates our ability to not only grow with our clients, but also help them grow through overall business and program. Importantly, the growth in credit sales was balanced. Our core sales, those are the clients who joined us in 2011 and prior, grew 9% in the second quarter, driven equally by stronger traffic and increased spend from existing card members. This is a continuation of our 3x client growth strategy for credit sales. Growth in the core added about seven points to the total growth. Intermediate sales, meaning clients who joined us 2012 to 2014, grew about 36% (13

[Edward J. Heffernan:]

Great. Thanks, Charles. If everyone can turn to the slide that says first half summary, I think this is, frankly, a pretty helpful slide in the sense of it begins to even out some of the choppiness you'll see in the quarters, and it gives you sort of the first half report card on how the overall company is doing. If you were to go through the individual pieces, again, I know everyone's getting tired of hearing about the dollar, but at the health of the business if we look at Bryan's group, LoyaltyOne, again, there were a number of timing issues where Q1 was (14

[Operator:]

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

[Sanjay Sakhrani:]

Questions on the agency side of kind of legacy Epsilon business or the core Epsilon business. Could you just talk about what kind of opportunities there are to accelerate the growth there and maybe diversify away from some of your core customers?

[Charles L. Horn:]

Yeah. If you look at agency, what's unique about it is agency is more project-based versus contract-based. That makes it a little bit more difficult for us to forecast; and with several large clients in the agency, they can increase their projects, they can pull back, so they can influence the growth rates very quickly. We talked last year about Ford onboarding, it's ramping nicely. Conversely, we had another large client pull back a little bit. So that's a situation where it's always going to be a little bit bumpy being project-based. The upside for ADS is we continue to grow the technology side double-digit within Epsilon plus you ladder in Conversant, you get that back to double-digit growth. That will further diversify the product offering within Epi and allow it to mitigate some of these swings on project-based offerings.

[Sanjay Sakhrani:]

Okay. And then maybe one on Conversant, obviously, good traction in terms of the cross-sell opportunities. When we think about the sizes of the revenue opportunities that you're currently signing versus what might be out there prospectively, I mean, is it safe to assume that some of the opportunities are larger than what you're signing right now?

[Edward J. Heffernan:]

No. I think that if you used somewhere between $3 million to $5 million per signing, we're probably at the higher end of that right now. So say, call it $5 million per over 10 clients. Sanjay, in that 10, you're going to have a swing between $1 million and $10 million. So, it depends on how big a set of services they sign up for whether it's just an affiliate transaction or whether it's the big CRM type data work. So, I focus more on if we got traction with 10 clients and let's say we add another half a dozen or so by year-end, there's probably about 300 clients between our Card Services group and core Epsilon that I think would be a nice target audience for this. So, you do the math, that's what we're focused on. Obviously, we're not going to get all 300 clients, but if we can add 15 clients, 20 clients a year, this could be a nice story.

[Sanjay Sakhrani:]

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

[Edward J. Heffernan:]

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

[Sanjay Sakhrani:]

All right. Great. I have one last one. So, I guess one of your competitors in the private label space talked about how there's opportunities sub $1 billion and obviously there's all sorts of deals out there sub $1 billion and types of companies. It doesn't seem to be really impacting you guys in terms of your growth. I mean, is that a safe assumption to make that you're really not seeing a lot of competition as it relates to your niche part of the market?

[Edward J. Heffernan:]

Yeah. It's always hard to comment on what other people are saying, but from – look, we're focused on getting a $2 billion vintage every year and growing tender share in the core. The vast bulk of our stuff, Sanjay, as always will be finding retailers that have never had a program before or had one and had a very bad experience. And we start them up from scratch and it takes three years or four years to churn them up. And those are things that quite frankly, the large card players in the industry. That's a lot of time, patience, effort for a file that may reach a $100 million or something like that, which is sort of our average file, if not smaller. So, it's just, I don't think, moved the needle at the big guys, you've got to go after these huge ones. So to answer your questions, no, we haven't seen it. That doesn't mean that going forward, there could be some irrational bids thrown in for some of our existing clients and if that happens, we're going to make money on this business, we'll make two times or three times what other card players do and we're growing five times faster. So it's a model that works and we're focused on making sure we do it profitably.

[Sanjay Sakhrani:]

Okay, great. Thank you.

[Operator:]

Your next question comes from Andrew Jeffrey with SunTrust.

[Andrew Jeffrey:]

Hi. Good morning. Thanks for taking the question.

[Edward J. Heffernan:]

Hey.

[Andrew Jeffrey:]

Ed, I wonder if we could just dig in a little bit on sort of the puts and takes of the transition that's taking place at Conversant. Can you be a little more specific on the business that you're pruning? I assume that's the – their traditional media business and the precise rationale behind that. And then also the nature of new the business you're signing if you exit with $75 million or $80 million of annual run rate revenue from cross-sells, there's multi-year deals and what could that number be like next year if you see continued momentum?

[Edward J. Heffernan:]

Sure. Without getting too far into the specifics, it's pretty basic to think about our – what would be pruning for us, what are areas that aren't that exciting. The pruning areas for us would be, look, there's a chunk of that business that is a commodity and everyone has seen what has happened in ad tech over the last few years and what used to be real juicy stuff is now turning into more commodity type business especially on the agency side. That, to us is less exciting, because it brings in a whole lot of revenue, but it doesn't do anything for your bottom-line. And we're not out there looking to trade it 20 times revenue and some of that crazy stuff without earnings, we are known for generating huge cash flow. So that stuff we don't feel is sticky, we don't feel it's additive to our clients and as a result, those types of plays have been deemphasized. That being said, I think there's a lot of very exciting stuff on the agency side that will involve the use of data down to the individual level that we haven't really put into place until just now. And so, very quickly that could be something from – going from, hey, a client says, here's $3 million, I'm having a sale this week, and let's get a bunch of eyeballs on it across devices to, hey, I'm having a sale this week and here's $3 million, let's go out and go after the folks that we know have a very strong interest in the brand, have shown a willingness to shop here before, live close to where the stores are, et cetera, et cetera. That's the type of stuff that is very, very additive from a value perspective. So that sort of both, what's being deemphasized and then where we see the emphasis coming on the agency side. From the deal side, what you're finding is the vast, vast bulk of the wins are as you might expect and what was the – called the CRM or the old Dotomi side where the client will feed us both offline and online historical SKU level, purchase transactions, we will combine that with some Epsilon data that we have. And again, we'll go out almost on a one-to-one basis to target individuals across the web with relevant ads and offers and link them through unique ID across the three devices. With the upsurge in mobile, we want to make sure that desktop, tablet, and mobile can all be linked together. And that's pretty much what we're doing. So, think of the big growth. Think of everything at Conversant basically as the more data that we have, the more unique SKU level purchased online, offline data, the more we're going to put our shoulder into it, the more our clients like it and that's what's going to make it a differentiated model.

[Andrew Jeffrey:]

Okay. And then a follow-up on BrandLoyalty, just looking at obviously, very strong first half from a profitability perspective, it looks like almost all of the EBITDA was generated in the first quarter. Is that revenue timing? Is there a fixed cost component that pulls down the second quarter margin versus where you were in the first quarter, just trying to get a sense of that and whether or not you can have – whether or not we should expect the possibility of choppy margin quarters in BrandLoyalty over time?

[Bryan A. Pearson:]

Andrew, it's something we've kind of talked about before, which is BL tends to have a high fixed cost structure, which we added to during the second quarter as we look to move further into Canada as well as to in the U.S. So, what happens is when we have good sales volume and drops to the bottom line, when you have a decline in revenue like what we did in Q2, it was down 7% year-over-year, a high fixed cost structure is going to hurt you. So, what you really have to do is you'll have a little choppiness there as we talked about before, but if you're hitting your revenue growth targets of 10%, 15%, 20%, you're going to see it flow through over the course of the year. But a pullback in any one quarter given a high fixed cost structure is punitive to your share earnings.

[Andrew Jeffrey:]

Okay. Thanks. Appreciate it, guys.

[Operator:]

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

[Darrin D. Peller:]

Thanks, guys. I just want to touch on this one, organic growth rate in Epsilon for one more minute just briefly. I mean I know there was a client you said pulled back. And obviously, Ford's going well. But I guess it's been a few quarters now where we've seen sort of mid-single digit growth there from the legacy organic business. Should we be looking at Epsilon now as a story where really to see that high single-digit growth rate, again it has to be really encompassing the full synergies and cross-selling from Conversant? Or is your legacy Epsilon business powerful enough by itself to still be a high single-digit grower? Just if you can help us think about that.

[Edward J. Heffernan:]

Yeah. I mean, look, it's – we're pleased with the flow-through. We're not pleased with the top line. I do think Epsilon is a 7% to 8% top-line organic growth shop by itself. I think with Conversant now that we're getting on the upswing that will bring the whole segment up a few points. And that's really what we're looking to do. But I don't think 5% growth top-line for Epsilon is what we're shooting for. I don't think that's an acceptable long-term number.

[Darrin D. Peller:]

Okay, all right. So it's still a 7% to 8% in your mind?

[Edward J. Heffernan:]

Yep.

[Darrin D. Peller:]

Okay. Just – all right. Shifting gears, BrandLoyalty, I know this quarter again you had a pull forward in first. I mean that's an area that does seem like with the build-out in Canada $25 million incremental revenues there and then potentially U.S., it could be a very large contributor maybe a year from now. I guess two questions. Number one is how substantial of a ramp do you think we could see for that in the new markets outside of just Europe? How's Europe going for, I guess – how's Europe going first of all, but more importantly, I mean in terms of the opportunity in the U.S. and Canada, is there something we can see in 12 months to 18 months to be really substantial? And then in terms of ownership stake of BrandLoyalty, I mean I think you were expecting that to increase per year, right? Could you just remind us on the economics around that?

[Bryan A. Pearson:]

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

[Darrin D. Peller:]

Okay. Thanks.

[Charles L. Horn:]

And on the business side, I would say that what's the nice thing about BrandLoyalty, as Ed alluded to in his comments towards the end, is that the growth is very solidly happening across the European and Asian base right now. I mean that's where the primary growth is coming from. Canada is certainly additive to it, but it's – what we're seeing is a lot of client renewing programs, a lot of new clients coming on board, companies like Lidl extending programs into other markets that they operate in. And so, I think we feel really quite confident about what we're seeing in the existing markets that they are operating in today. And to answer the second question which is what's the horizon on the North American marketplace growing, if Canada is any indication, it will take two – a couple of years sort of starting the deal and starting the relationships with the clients. I think what happens is that, you see a pilot program or you may see an initial program run, and then what we've seen in Europe is that, the ultimate goal is to get your clients running a couple of programs a year. And so, they kind of dip their toe in the water, figure out how this works for them. They see the results, because we see that this definitively has an impact on our partner results, and then they are looking at – we're doing a program again to fix the go over issues that they'd have in the following year. And then they look at adding the second program. So it's sort of a stair step thing that happens over time. The big thing -

[Darrin D. Peller:]

All right.

[Charles L. Horn:]

...for the U.S. would be how many clients we get. So (51

[Darrin D. Peller:]

Yeah. It seems like a – yeah, obviously, a much bigger opportunity in market wise, the only question is just how much competitive there is around loyalty solutions and rewards type programs in general in the U.S., but it seems like just with your pilot and what you're doing in Canada, it is a good start. So, you're not worried – just I guess the question is you're not worried about the competitive dynamics in the U.S., you still think that's something that can really be big?

[Bryan A. Pearson:]

Yeah. It definitely can be big and I would say that if Canada's indication what we're seeing is that they're layering this program in, in addition to the long-term loyalty initiatives. So they're replacing other promotional activity and running the short-term 16-week to 20-week promotional campaigns and if the results – so there's no reason to believe that the programs would not work equivalently well in the U.S., I think the markets...

[Darrin D. Peller:]

Okay.

[Bryan A. Pearson:]

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

[Darrin D. Peller:]

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

[Charles L. Horn:]

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

[Darrin D. Peller:]

Yep.

[Charles L. Horn:]

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

[Darrin D. Peller:]

Okay.

[Charles L. Horn:]

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

[Darrin D. Peller:]

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

[Operator:]

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

[Josh Beck:]

Thank you. I had a question really on going back to some of these CMO conversations that you're having, you've talked about 300 plus targets more or less among your Card Services in Epsilon client base. Could you just help us maybe bring to life some of those conversations, help us understand how CMOs are viewing your differentiation relative to competitors? Obviously, there's a lot of other people knocking on the doors as well. So just help us understand kind of where you're staying now, is it your data assets? What you're doing with attribution, transparency? I'm not sure exactly what it is, but if you could just give us some color there, I think, would be very helpful.

[Edward J. Heffernan:]

Sure. Not a problem, Josh. I think that if you look at what we're trying to create here across – we talked about Card Services. We talked about Epsilon. I'm bugging Bryan to – who's sitting across from me – to get going on Canada and then, frankly, get going on Europe and elsewhere. But he's a little busy right now. Anyhow, there's probably – if you look at it in terms of all the stuff that's out there swirling around in the marketplace and there's a lot of good models and everything else, we are focused very closely on sort of five things to differentiate us from the rest of the pack. The first one is as we've talked about because of our size and because of what we do for a living, we only do one thing, which is using data to engender loyalty and drive sales. And our ability to reach any CMO across the spectrum is solid. We can get in the door anywhere, get a meeting whenever we want. And so that's sort of the first step is you need to get an audience with the people who are making the decision. And that's something that was fading at Conversant and so we can offer that. Point two is that these are existing clients, and recall again, what we do for a living, we are already sort of the trusted partner when it comes to handling their most sensitive information. And so, if you think about, they're offline and online transactional level information, they don't give that to just anyone and we're building the biggest loyalty platforms in the world. We're building these huge card programs. We're the ones collecting that information. We have a good trusted relationship. So they're not going to freak out when we say with Conversant to do targeted ad across multiple devices, hey, we're going to need a couple of years of historical online/offline SKU level information. In a lot of cases, we have it. And in other cases, the CMO is going to be very comfortable giving it to us. That's something that the CMO would have trouble with especially when you get into some of the – a couple of the really big guys. We're viewed as sort of a neutral party. The third thing, again, is we're not – look, we're never going to use social information to help drive our targeting. Our mousetrap is purchase level – actual purchases that are made online, offline and again that makes us a little bit different from others. The fourth would probably be the fact that we have unique identifiers that have been able to link your desktop with your tablet with your mobile device. In this unique ID, means basically our targeting can be that much more precise and specific and we're not wasting a bunch of the client's money hitting the same person across their IDs like there's three different people. And then finally, again, we're not software-as-a-service; we are a services company. We've got 8,000 folks in Epsilon, Conversant. And we believe that there's a huge market out there for CMOs who want all the technology that we have, all the creative that we have, but also wrap together and services so they can pick up the phone with one throat to choke. And that's a very longwinded answer, Josh. But the end of the result is there's sort of those five things that we think will make this unique. We're not going to be all things to all people, but for our 300 clients, we think it's a compelling offer.

[Josh Beck:]

Great. Yeah. That's very helpful. Certainly, a lot of moving parts to get there, but I do understand what you're saying there. I also wanted to ask on BrandLoyalty, how do you see the margins through that business at scale? Obviously, it's an earlier business and you're building it pretty substantially. So where could that go if you put your longer-term hat on? And then how should we think about seasonality kind of moving forward? Obviously, this year, we've had some moving parts between Q1 and Q2. And then I think we probably also have some moving parts around expanding that business. So maybe just help us think a little bit more about the seasonality of that business and how it evolves?

[Bryan A. Pearson:]

From the margin side, I think, to say it's 20% plus would probably be in the right range. I mean, we're – Ed talked about – or sorry, Charles talked about the fixed cost nature of the business. But I know that there's continuing focus there on how we grow margins over time, but I think that would be safe. And then on the second question around seasonality, I mean, you've got to think about when grocers really want to focus on, on what happens in their business. And that's heading into the holiday seasons. And you can imagine, in the U.S., Thanksgiving will be a very large period of time and then the holidays after that with Christmas. And so, what you see is that the programs tend to skew a little bit towards the latter part of the year and then sometimes those programs run into the beginning of the following year into the first quarter. So you might get a little flop over of revenue and profits as you clean up the fall programs. And then people tend to run spring programs as well. So, it really is dependent on the clients and what the clients are trying to do in their business. We start from what the grocers are thinking about in terms of where they're looking to add sales and sort of create excitement for customers, and so that creates a little bit of the shift back and forth in terms of how you see the (59

[Josh Beck:]

Q4 is usually the biggest, right?

[Bryan A. Pearson:]

Yeah. Q4 is usually big.

[Josh Beck:]

But -

[Charles L. Horn:]

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

[Josh Beck:]

Yeah.

[Charles L. Horn:]

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

[Josh Beck:]

Great. Thank you.

[Operator:]

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

[Dan Salmon:]

Hey, guys. Good morning. Ed, when you look at the robust pipeline that you've got on the private label side, you mentioned sort of if we look – if you look back three years, you feel like it's just as strong now as it was then. How is it different? Is it maybe more tilted towards co-brand? Are there different verticals that are driving it more? But just as we think about the run rate over the next few years, we've obviously seen some new types of clients coming in there. If you could just give us a little bit color on sort of how you see that growing and executing against that sort of robust sort of growth numbers that you've talked about?

[Edward J. Heffernan:]

Yeah. It's a fair question. Some of it again will be self-imposed on our end, which is I do think that, you know, our – the co-brand side of it, we're going to be a bit more cautious on because the co-brand stuff tends to attract some of the other players in the marketplace who are looking to make it sort of the number one card in the wallet, which is not necessarily what we're after from our clients' perspective. They just want to make sure it's number one when you're shopping at their store. And so I would expect that you would continue to see the vast, vast majority of our announcements to be private label as opposed to co-brand, which is really our basics. The co-brand stuff for the most part, if you looked over the portfolio, has either been in T&E, which is sort of unique to the T&E space or more specifically, they're co-brands that have been – that the clients have said, all right, I have a private label, maybe I can get even more penetration with the co-brand. So a lot of our stuff are dual card programs. And that's where I see some of our growth on the co-brand side going forward, which is an existing client, he says, hey, can I get another 10 points of tender share if I offer a general purpose card. So we're looking – we're pretty attracted to that stuff. But for the most part, private label, probably 75% of our stuff will be private label. The portfolio we'd like to keep it 75%-25%. We think that's a good mix on a long-term basis. In terms of where the deals are coming from, again, whether depending on how you cut it in our sort of little sandbox, we've talked about 350 or so type clients that we think would be a good fit. And of those, there's only still about 150 who have a program, so we still got – we're not even half penetrated at this point. It's just a lot of folks who are turning off the general spend marketing and moving over to the measurable data driven targeted marketing. So, it's a reallocation of their budget dollars, and we're just seeing it in waves today that started three years ago. You cover the space which goes on.

[Dan Salmon:]

Okay, great. Thanks, guys.

[Edward J. Heffernan:]

Okay. We'll take one more.

[Charles L. Horn:]

We'd already cut it off.

[Edward J. Heffernan:]

That's it?

[Charles L. Horn:]

Yeah.

[Edward J. Heffernan:]

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

[Operator:]

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