Bread Financial Holdings, Inc. (BFH) Q1 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Alliance Data First Quarter 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. Steve Calk of FTI Consulting. Sir, the floor is yours.

Thank you, operator. By now you should have received a copy of the company’s first quarter 2016 earnings release. If you have not, please call FTI Consulting at 212-850-5721. On the call today, we have Ed Heffernan, President and Chief Executive Officer of Alliance Data; Charles Horn, Chief Financial Officer of Alliance Data and Bryan Pearson, President and Chief Executive Officer 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 would like to turn the call over to Ed Heffernan. Ed?

Thanks, Steve. With me today as mentioned is Charles Horn, our CFO and Bryan Pearson, Head of our LoyaltyOne business and that includes both the AIR MILES business in Canada as well as the BrandLoyalty business headquartered out of the Netherlands. Charles will update you on the quarterly results and Bryan will give you some color into the various businesses of LoyaltyOne and I’ll wrap it up with a score card Q1 results as well as my outlook for full year 2016 based on past comments we’re going to move with pace, so we can have more time for questions at the end. Take it away Charles.

Thanks, Ed. Turning to slide two, we’ll talk about the first quarter results and they were pretty much as we expected with revenue up 5% to $1.68 billion and core EPS of 5% to $3.84. It was a quarter with several positives, but also a few negatives that tempered overall results. One of the negatives foreign exchange rates reduced both revenue and core EPS by about 2 points for the first quarter. The good news is that FX rate seem to have stabilized and the drag could drop to near zero in the back half of 2016. Looking forward we expect growth in each quarter to accelerate as 2016 progresses. Revenue growth of 5% in Q1 is expected to increase to 8% in Q2 and then double-digit growth in Q3 and Q4. Adjusted EBITDA and core EPS were expected to follow a similar trend. Now why do we believe this? Putting this side improving foreign exchange comparables there were several reasons. First, gross yield compression at card services should lessen each quarter as we anniversary several program changes made last year. Second, loss rates were expected to drift downward from first quarter highs. Third, BrandLoyalty has passed its most difficult comparable if you remember in the first quarter of 2015 the revenue was up over 100% on a constant currency basis. Lastly, Epsilon’s agency weakness should lessen coupled with a record CRM backlog for second half delivery. During the quarter we acquired 2 million shares under our repurchase program for approximately $440 million. The buyback program remains our top capital allocation priority and we expect it will be executed somewhat ratably over the remainder of 2016. Essentially we will look to deploy our free cash flow while maintaining the leverage ratio of less than 3 times. With let’s go to next slide and Bryan will walk you through LoyaltyOne results.

Thanks, Charles. LoyaltyOne had better than expected quarter as revenue decreased 2% to $381 million, but adjusted EBITDA increased 10% to $85 million on a constant currency basis. Breaking it down further at AIR MILES our revenue increased 4% and adjusted EBITDA increased a robust 11% on a constant currency basis and that was driven by favorable issuance mix and prudent cost controls. As expected at BrandLoyalty revenue was down 9% on a constant currency basis due to program timing differences. Encouragingly, adjusted EBITDA increased 9% on a constant currency basis due to higher margin programs that were driving a 300 basis points expansion in adjusted EBITDA margins. AIR MILES issued increased a robust 5% or 57 million miles over the same quarter from last year, issuance was particularly strong with our financial vertical as we continue to convert Vimeo [ph] MasterCard holders to the premium World Elite Card that has a more compelling consumer proposition and higher AIR MILES earn offer. This strong growth was achieved despite economic uncertainty in Western Canada as a result of the declining global oil prices, but as the negatively impacting activity at our grocery partners and also the suspension of point issuance on prescriptions in British Colombia. Looking ahead we anticipate a 2% decline in issuance growth for the second quarter due to reduced promotional activity and the one-time conversion of the Sobeys legacy program that happened in 2015, which of course would not be repeated. As we’ve stated previously, quarterly results can vary based upon the timing of promotional activity. But our target remains a full year issuance growth of mid-single-digits. AIR MILES redeem increased 6% compared to the first quarter of 2015 with our AIR MILES cash program that instant reward option driving approximately half of the increase as its liquidity feature resonates with collectors in the current macro environment. For the full year, we anticipate redemption growth to be in line with issuance growth. For the year, we anticipate full year constant currency revenue and adjusted EBITDA growth for AIR MILES to be in the mid-single-digit range as well. Now, turning to BrandLoyalty, we anticipate a very strong second quarter whereby revenue could be up as much as 50% on a constant currency basis. On the North American expansion front, BrandLoyalty continues to increase its presence in Canada with six promotions that have been planned for 2016 and this represents a significant increase in sales over last year. In addition, we launched our first pilot in the U.S. late in the first quarter. We are pleased with the results to-date and look forward to additional programs in this market. The full year expectation for BrandLoyalty continues to be mid-teens growth in both revenue and adjusted EBITDA as compared to 2015 on a constant currency basis. Lastly, let me update you on dotz and Precima. Starting with dotz our Brazilian coalition program where we continue to see steady growth in our collector base to over $18 million currently. In November of last year, dotz successfully launched the coalition program in Rio De Janeiro with the Cencosud grocery banner called Prezunic as a key partner. Cencosud is the third largest grocer in Brazil and collector reception has been positive with over a million collectors now enrolled and active in Rio. Precima, our data analytics unit continues to fire on all cylinders, recently signing the deal with Morrison one of the UK’s top four grocers, where we will apply data intelligence and shopper insides to help Morrison’s more effectively apply their customer centric retailing approach. In closing, LoyaltyOne achieved solid first quarter results with a positive outlook for the remainder of 2016. I’d like to take this opportunity to congratulate the entire team on a great quarter and look forward to their commitment to our valued clients and to LoyaltyOne awesome job to everyone. I guess it’s back to you Charles.

Thanks, Bryan. Let’s turn to slide four. Epsilon's revenue decreased 2% to $493 million and adjusted EBITDA decreased 22% to $81 million for the first quarter of 2016. Results in this segment were mix at three fourth of the business digital and technology platforms grew about 8% during the quarter while the remaining one fourth agencies and reforms with revenue declined by 23% versus the first quarter of 2015. Adjusted EBITDA increased $23 million from the first quarter of 2015, primarily due to higher payroll cost, staffing levels increased the anticipation of revenue that is yet to occur. Before we dive into the individual portion, you see that we have a new reporting format here. We felt that the old formats where we used to talk about database and data and so forth really is not reflective of the way we go to business these days. Specifically is the broad portfolio of offline, online services Epsilon delivers are packaged or bundled omni-channel solutions it just doesn’t make sense for us to give it to you in that format. So what we’ve done is we put this together, where we’re going highlight two categories that represent the underlying services and assets deployed to serve our clients. The first category digital and technology platforms, consists of businesses which is primarily derived from revenues tied to one of the many core data and to our technology platforms that Epsilon and Conversant manage. These platforms were used to house and manage data in real time to analyze the model data and to automate the usage of that data across a variety of channels whether it be through a loyalty program with the email communication or an online message delivered on mobile or desktop devices. The remainder of the business, agency media and services consists of services which are primarily focused on supporting the agency sector. Both media services delivered to agencies on behalf of their clients as well as agency engagements in which Epsilon acts as the primary agency directly on behalf of its clients. Now let’s turn to the digital and technology portion of this segment where quarterly revenue grew by $28 million year-over-year or about 8%, mostly due to continued success of the cross-sell efforts and onboard of the strong CRM backlog within Conversant. The products offered within the CRM business continue to resonate with both new and existing clients as 50 new contracts have already been signed this year versus 30 all of last year. The 2016 vintage thus far includes G&C, Brooks Brothers, Coach and Sears is a great follow-up to last year’s efforts. These clients along with others such as Wolverines are connecting with real people as a result of combining an atomized first-party with third-party data and 80 billion daily online interactions to develop a persistent consumer ID. Moving on to agency media and services revenue declined 23% from the first quarter of 2015. For Epsilon’s traditional agency business we saw broad-based weakness, especially in the Telco, CPG and retail verticals. In addition the agency business at Conversant, which is the non-data driven traditional display business was down as large agencies push more programmatic buying due to our internal trading platforms versus using third-party DSPs. We do not know if this bubble or is a bubble within agency or more structural needs to play out as the year progresses, if it’s structural we will have to be more aggressive on going after a cost cuts to maintain our earnings. Although we are likely continue to see volatility within agency on a quarterly basis, it is a key part of the CMO selling process, which attracts more broad and less IT centric relationships. Now let’s go over to the next slide and talk about Card Services. Card Services delivered strong financial results achieving a 17th consecutive quarter of double-digit revenue growth. Revenue increased 17% for the first quarter of 2016, driven by 27% increase in average receivables. Adjusted EBITDA net grew 9% dampen slightly by the provision bills. Importantly, principal loss rates were 5.2% for the quarter 10 basis points better than our original guidance. Focusing on the key drivers for our growth, credit sales increased a healthy 25% driven by our proven ability to build customer loyalty for both our long standing and newest brand partners as well as favorable weather and an early Easter. Our core business brand partners with us from four years or more continues to contribute roughly half of our credit sales growth. Importantly, we continue to grow tender share up over 200 basis points for the first quarter by leveraging our large understanding of our brands along with a deep data analytics we bring there. Most of the tender share pick-up has been driven by card members that have been engaged with our card for multiple years and offer new accounts. In other words, these are 10 year card members with a proven spending and payment history and they are demonstrating increased spend for the brands they love. This is a testament to the power of our customized marketing programs and the value they deliver to our long standing partners; it is also a key differentiator and critical element in our ability to welcome with new partners. Looking at the remaining drivers of our performance, we talked about revenue grew 17% driven by the strong AIR growth. Importantly, we realize strong operating expense leverage as we are able to drop our expense ratio by 70 bps for the quarter. As expected, gross yields will experience some compression driven primarily by brand mix, accounting for acquired files and lower late fees as we have seen several declines for several months in our first stage delinquency bucket. This pressure is predominantly in the first-half of the year and we expect yields to normalize as we anniversary these items. Managing losses was key in the first quarter and we exceeded guidance previously outlined. Losses delinquency levels and funding cost were all in line with both expectations and seasonal trends. During the quarter we decided not to renew the card programs net renewal at year end. The related receivables, net of the allowance for loan loss, have been reclassified to assets held for sale at March 31, 2016. Accordingly $430 million has been removed from card receivables and $15 million has been removed from the allowance for loan losses. Our reserve for loan losses was 5.7%, our receivables at March 31, 2016 up from 5.5% at December 31, 2015. Reserve dollars dropped by $15 million from December 31 due to the reclassification previously discussed. In closing, for Card Services, we delivered another stellar quarter with all the key metrics outpacing the industry and consistent with our expectations. We are positioned for another record year, in line with our strategy of 20% plus credit sales and AIR growth leveraging both organic growth and new partnerships. With that I’ll turn it over to Ed.

Thanks, guys. When we turn to first quarter score card and the goal of course is to have more greens and yellows and reds and right now we are tracking with 30 being green. I would say in terms of Q1, a couple of general comments; one is as Charles mentioned, this was obviously our toughest quarter; comp versus last year was very difficult and putting in a plus five top, plus five earnings was right on the money of what we wanted to do and our view into the rest of the year looks solid. So it’s good to get that behind us. Also you’ll find that it was kind of a mix bag in terms of what it got us from A to B, but at the end the plus is sort of out way the minuses and we got where we wanted to be. As we move into the second quarter and the rest of the year things are accelerating nicely. We have good line of sight into the rest of the year. From a first quarter perspective consolidated we came right in where we said in terms of guidance at about $1.7 billion top and about $384 million on earnings, that included getting hit on the FX side with about $26 million in top and about nickel on earnings from FX, which if it holds we’ll fortunately start to anniversary as we move into the back half. We talked about the toughest comp of the year is now behind us and we were pretty active in the buyback taking in a bunch of shares which we thought were pretty cheap. So overall consolidated we got where we wanted to be and we remain on track for the year in current services. Just the highlight of course the portfolio continues to grow very quickly with over 20% growth revenue in the high teens and then obviously due to the fact that we’re growing so quickly we need to obviously set up reserves and that tends to be a damper on EBITDA. Nonetheless that did grow 9%, yields gets the yellow. It was a little over 200 basis points due to multiple factors that we can talk about. Again the good news there is that it’s already beginning to burn away and we expect less compression as each quarter goes by for the year and we have pretty good visibility into that as well. So more of a Q1 issue. The loss rate, we spent the first three months of the year here in dealing with two questions that people were spooked about. The first being credit quality and the second being Canada going into a depression and what’s interesting is those are the two items that probably perform best during the quarter. Credit quality actually came in a little bit better than we had anticipated. We now expect it to drift downwards as the year progresses from a seasonally high Q1 and similar to what we’ve said three months ago we’ll say the same thing now, we check with our collectors and everyone else, there is zero pressure that we are seeing coming in that would suggest that there is any type of stress on the consumer at this point. So we are just not seeing it, we didn’t see it before and again we are just normalizing the lost rates in the file, which right now we are tracking nicely to that. I will emphasize and explain which is tender share, that’s often lost in all these discussions about growth and are you growing too fast, too slowly, how are you growing, is it good quality, bad quality and all that other stuff. Tender share is up 200 basis points, which means if 30% of the sales at a retailer were on our card a year ago now it’s 32% and that is not being moved by putting on a bunch of new accounts. And in fact what it essentially means is that when the retailer is growing 2%, 3% we are growing 10%. And so the first 10 points of portfolio growth are coming from a deeper penetration of that retailer sales base and the next bullet point to me really brings at home the 80% of this tender share gain they are coming from the mature accounts. They are coming from accounts that have been with us for 20-24 months or more, which means they’ve passed the peak sort of loss point and they are very mature and our ability to get in there and motivate incremental spend is what it’s all about and that’s the data driven targeted marketing and I think that’s probably the most important takeaway is that this is not coming from tossing on a whole bunch of new accounts or changing underwriting or anything like that it’s coming from driving those very long-term loyal customers to visit more often and spend a bit more on each visit. So that continues to work out well. The pipeline, we expect another year of $2 billion in new vintages. We have a bunch that have been signed haven’t been released then they will be released over the next couple of quarters. So the pipeline was good. And as we move to Epsilon on the next page that’s where we run into probably if you were to ask me about where the concern is for the year, it certainly not on the credit side, it’s certainly not Canadian side, it’s certainly not on the technology and data and digital sides of Epsilon Conversant. We are focused however on some weakness on the agency side, which is about a quarter of Epsilon Conversant. And what we saw there was sort of a general pull back in a number of the verticals. And we’re going to watch that carefully as Charles said we don’t know whether that’s just a result of CMOs taking a breather in the first quarter given the turmoil or whether that’s more structural in any event if it is structural we’ll make sure that earnings will be remain on track, which means we would have to focus on the expense side. So we don’t know right now and we’re not going to need jerked at this point. On the other side of it, the digital technology platform stuff up 8% that’s three quarters of Epsilon Conversant and we continue to see very, very strong take up in terms of the data driven targeted display offerings from Conversant, the number of wins that we’re seeing right now are already half of they were for the entire year last year. And then from an expense perceptive and flexibility perceptive our India office is up and running and we hopefully continuing to staff that up as the year progresses and that will finally begin to move the needle on the expense side towards the later part of the year. LoyaltyOne I think Bryan covered that obviously BrandLoyalty is a very choppy business it’s had a frankly a little bit better Q1 from the EBITDA perceptive than we had initially talked about, but recall last year Q1 was when revenue was up 100%. So it was then down in Q2 this year will be more of the reverse where it will have a very strong Q2 for BrandLoyalty and it’s all driven by when the grocers have decided to put the programs on the calendar. Bryan also talked about the BrandLoyalty expansion into North America, Canada is doing quite well and moving nicely towards our goal there. And the U.S. actually we’re beginning to make some nice inroads there as well. So good news on that front. The -- again the concerned on the AIR MILES side in Canada was that issuance would fall off as consumer spend was weak what we found was the reverse which was issuance was very strong and specifically issuance in the financial services space, which had been lagging before actually came back quite strongly. So it looks like Canada is still alive and picking is doing quite well. Revenue and EBITDA plus 4, plus 11 frankly constant currency basis was the best we’ve seen in years. And so it looks like the business up there is back in growth mode. Overall for those of you who have covered ADS for a number of years, it’s kind of a typical ADS quarter. You’ve got a bunch of things then went a little bit better than expected. You had some things that went worse than expected. And the end results is they kind of even out. And we meet or we beat our guidance and that’s pretty much been our track record for the last 15 years. We expect that to be the case going forward as well. If you look at it in the cards group the yields were a little bit worse than we had anticipated, but losses are a little bit better. And then at Epsilon, the digital and tech platforms remained on track, we talked about agency and media was weak that was offset by the fact in LoyaltyOne that AIR MILES was better, our BrandLoyalty was tracking. So again with us you can pick and choose whatever data points you want, but at the end of the day, the pluses and minuses hopefully even out to get to a double-digit growth rate for the year. And as we turn to our full year guidance that’s exactly what we’re saying. It’s very straightforward now with Q1 behind us we have even a higher level of confidence in how the rest of the year is going to play out. And we feel very comfortable reiterating our full year guidance of revenue of $7.1 billion, up 10% and earnings of $16.75, up 11%. And the nice thing about it is the slowest quarter is behind us. We’re going to ramp to high single-digits in the second quarter and then we’ll do double-digit top and bottom Q3 double-digit top and bottom in Q4. And that will give us a nice jump off into 2017 visibility is quite strong. Q2 guidance revs around $1.6 billion, up 8% and earnings also up about 8%. I think those are good numbers to start the acceleration. From a card services perspective, you’ll see the principal loss rate forecast that we gave a while ago. And loan behold it seems to be playing out at that level if not just a snitch better, which is good. We expect for the year Card Services to once again deliver double-digit growth in revenue and adjusted EBITDA net of funding. Yield compression, which I am sure we’ll get some questions on will lessen each quarter as the year progresses. So that we wind up at the end of the year with a very modest impression, which is how we want to take it into ‘17. And then we said the pipeline is very robust and that we’ll get into a little bit about our decisions around who to renew, when to renew at what levels will we renew clients given that there is a certain amount of capital we want to put into the business, but we want to maintain a sort of a 20 plus growth rate in the file. And that means maybe our capital is better spent on other areas and we don’t renew certain folks. So that’s where we are on Epsilon. We talked about digital and tech platforms are three fourths of the business, we expect that to continue clipping along in the high single-digits. The signings for the Conversant CRM vintage if you recall last year was about 30 wins and a very strong vintage signing of 80ish plus once they fully spooled up. We expect to lease that this year if not a little bit better which would be great. And then the agency stuff, look we’re going to watch it and we’re going to see the people intensive business to about quarter of Epsilon Conversant from what we’re seeing it looks soft, but it looks already like it’s lessening in terms of the softness as we progress into Q2 and the rest of the year. Okay, last slide full year, LoyaltyOne, BrandLoyalty Q2 is the big one for them. So expect very, very strong double-digit rev and EBITDA. And then in AIR MILES, we remain comfortable that issuance, which is the key metrics there it’s how we get paid is going to be up about 4% for the year, which will drive on a constant currency basis low single-digit revs and EBITDA for year, which again would fly in the face of sort of the weakening consumer in Canada. Overall, as I mentioned several moving pieces, but full year is shaping up nicely. We are seeing zero stress on the consumer side; we are not seeing weakness in Canada. So those two data points are consistent with last quarter and the quarter before that. I just would talk a little bit about the model itself for Alliance. From 2007 through 2015 we’ve produced annual growth rate of 15% and 18% for revenue and earnings per share respectively every single year. And for ‘16 and ‘17 as losses normalize and with a huge growth in the file we’re setting aside reserves for future losses, which are essentially doing is knocking that growth rate down a bit, but you’re still looking at low and double-digit growth rates in top and bottom. So this year we’re looking at 10 and 11 and that includes some drive from FX. And then in ‘18 it’s in fact we’re right and these rates have stabilized then there is no reason to doubt that it would snap right back to the prior model and you can have re-acceleration in growth rate. So if you look at long-term for the company you’re looking somewhere mid-teens to high-teens revs and core EPS then when you are in a period of normalization and building reserves you’re probably looking at the low end, top and bottom double-digits. And then you snap back sort of mid-teens when that normalizes. So overall not too shabby of a model you’ll also find with us that we tend to have different levers in different businesses, cycle up and down at different times, but overall the model holds together quite nicely for guidance on the last slide. We’re keeping at the same and we’re not going to spend a lot of time going through the nits and nets of how we get there, but it looks pretty solid at plus 10, plus 11 and that puts our organic growth rate actually quite a bit above our 3x GDP target it looks like cash flow looks very nice, very strong we shared about $1.4 billion. And when it comes to FX and all that other stuff we’ll adjust it when it becomes meaningful as the year plays out, but again we’re not going to be tweaking everything, every quarter we’re going to try to get this thing going on a consolidated basis. So that’s all I had, why don’t we open it up for Q&A. Operator?

[Operator Instructions] And our first question comes from Sanjay Sakhrani with KBW.

I guess my first question is on the agency side of Epsilon, I guess Charles you mentioned that you’re not sure if it’s structural or not in terms of the weakness there. And maybe Ed or Charles you can talk about a little bit more I mean is that weakness specific to Epsilon or other seeing similar weakness obviously adjusting for maybe one or two large clients that have unique issues?

It’s a good question don’t know enough yet at this point, we do know I mean I’m going to say what happened in our business, which was across a number of our verticals CPG and Telco and Retail it was interestingly also a pull-back in Q1. It looks like it’s beginning to trickle back in as we start moving into Q2, but it’s still little bit soft. So we don’t want to call it yet, but it seem like a lot of people just stepped on the breaks in Q1. So I just don’t know what the others are seeing out there right now Sanjay, but from us it looks like Q1 people just pulled back and then as we’re looking at Q2 it looks like it’s beginning to loosen up a little bit. And so if it continues to loosen up we’re not going to need to take any action if it continues to stay soft like this we’re going to have to take some internal actions.

And I assume you’re assuming continued softness for the rest of the year in your guidance?

We’re assuming for the three quarters of Epsilon Conversant that’s the tag in digital and everything else we assume they’re going to continue to be quite strong at about plus 8. And then on the agency side to your point we’re assuming in our guidance that it will be soft, but not nearly as soft as Q1.

Got it. And then just second question, my final question, just on those two portfolios that you closed, are they are not renewing in card. Could you just talk about how that unfolded, kind of why and how tenured were those relationships?

Yeah, it’s a good question and we are kind of at the point now where we’ve got the business growing the files growing 25% a year, which is pretty much we don’t want to drift much higher than that, but we are also finding that the pipeline the number of opportunities that are out there as people shift their dollars to the data-driven targeted spend. Frankly there is a whole bunch of business out there and there are times in the past where we’ve had some clients who have decided not to pour all their energy and efforts into driving tender share growth and card growth, that usually comes with a change in management, other times it’s a change in strategy and normally we’ve just sort of said that’s fine we’ll go with the flow. Right now we’re dealing with how do we allocate our capital and if we want to continue to grow the business the files 20 plus percent a year, how do we maintain the type of returns that we expect. And frankly there are a couple of programs there that based upon how do we stay as the comments being made about the dollars that folks are willing to put into it in the direction of those businesses. It didn’t look like the best use of our capital. And so we’ve reallocated that capital to a couple of wins that we think are I think more down the fairway for us. So it’s a nice, I’m trying to be a polite way of saying there is going to be sometimes where the capital is better used elsewhere and this is one of those times. We’ve just never been capital constraint. But we are at the point now where the growth rate in the file is pretty much at our max level.

And how does it affect the growth assumption for that business? Does it?

Doesn’t effect. No, there is no effect at all. It’s already been spoken for and I know we had some already some questions about whether it was which client it was and obviously we haven’t negotiated anything in terms of where we are going to put the file. But it’s just FYI, it’s not any client on the left coast. So that’s all I can say on that one.

Okay, great. Thank you.

Thank you. Your next question comes from Darrin Peller with Barclays.

Thanks, guys. Let me just quickly follow-up on the F1 side. I mean if you can give us a little more granularity booked into the strength of the second data side there and I know Conversant in the pipeline look strong still. But I mean I guess just want to make sure that’s sustainable in terms of you’re opting here the same clients on the agency side pull back any at all on the tech side obviously the growth doesn’t show that yet. I mean then if you can give us a little more color on the levers that you have capable of pulling from a cost standpoint in Epsilon if it has to start next quarter. I guess how much room do we have, it seems [ph] like an area that you’ve tried to cut cost in the past and outsource things to India, et cetera. So I love to hear more color on how much room there is?

Yeah. I mean right now what we are seeing is continuation of strong demand for the digital products at Conversant, specifically sort of the SKU level data-driven targeted display offerings. It’s very strong. In general the more core Epsilon big loyalty and customer database builds are strong and data offerings are strong. So all that heavy tech stuff demand continues to be strong, we expect that to continue for the balance of the year. On the agency side, look we need to be very careful, we don’t meet your [indiscernible], if it’s an air pocket, then great and we are back in business if it looks like it’s softer than we expect then it’s a very project intensive, people intensive business. You would have to move quickly to make sure that revenues and expenses sync up. But what we’re seeing right now is the softness in Q1 is already lessening a bit as we move into Q2. So we’re going to hold off knee jerking this thing and if in fact Q2 comes in very soft on the agency side, we’ll still make our nums for the company from a guidance perspective for us. But we’ll have to take some expenses out to make sure we make our nums for the year.

Maybe I just missed it, but in terms of the 5% what was your overall Epsilon outlook for the year now in terms of organic growth for all segments?

What we talked about for Epsilon is mid-single digit plus on top and bottom. I think we’ll stay there.

Same, okay. Alright, thanks. Let me just shift and then I’ll turn it back to the queue. But on the private label on the card services side, I guess first on growth do you agree I mean co-branding I know is tougher now from a competitive understand point. So just revisiting the addressable market in terms of opportunities. Obviously giving your investing I think this is the first time I remember hearing you guys investing a couple of portfolios, based on better opportunities to probably go profitability elsewhere. But either way I mean I guess just revisiting the addressable market would be helpful given it seems like it’s more probably a little more focused than co-branding now. And then on that note, yield compression as a combination of things like you guys mentioned automated payments and new vintages and also co-branding. With all of those things anniversarying and co-branding potentially moving lower now as a percentage of the mix should be yield potentially rise in ‘17 or it must be stable?

I think the yield will be relatively stable in ‘17 exactly to your point. As we’re burning through these compression issues and it seems to anniversary and to your point exactly a little less emphasis on the co-brand side. You won’t have that sort of large compression that you’ve seen in the last couple of years of 100 basis points or so on the yield side be significantly less than that. And that has to do again with we’re looking to optimize the portfolio, which means that at this part of the cycle you’ve got an awful lot of miles proceed when it comes to co-brands. So that isn’t quite as exciting to us at this point in the cycle. We’ve seen this play out before. So we’re looking to optimize the file continue the growth at 20 plus percent and keep the compression much more modest on a go forward basis. And based on the pipeline and what we’re signing and what you’ll see released later this year, we feel pretty good with it.

Alright that’s helpful guys. Thank you.

Does that complete your question?

Yeah.

Thank you. Your next question comes from Kevin McVeigh with Macquarie.

Great, thanks. Hey nice job guys. In terms of Charles, the improvement in credit to 10 bps. What would drove that and how should we think about that over the course of the year still sticking with kind of the 5-5 or should we kind of expect some improvement there as well?

So what we gave guidance to is a 5 as a loss rate for the year.

5 loss rate.

We came in a little bit better in Q1. I think you’ll see we could come in a little bit better in Q2 and Q3. It could be up a little bit in Q4 compared to original guidance. But I would say we’re right on track to hit the 5% for the year. In terms of mid-teens doing better by 10 bps in the first quarter some of its timing. But I’d say for the year we’re tracking right the 5% the loss rate that we gave as guidance.

Got it. And then as we think about the mix of private label versus co-brand going forward, we still come in the range you talked about historically more of a shift on the private label side.

I’d say we’re still around 20-80, 80% private label 20% co-brand. To Ed’s point before we’re doing less co-brand that’s where the most of the competition is. So we’re focused more on private label. You know us private label were secret soft that’s where we have all the expertise. And so you’ll see more growth coming there, which long-term should benefit the yields going back to Darren’s question before.

Awesome. Thanks I’ll get back in queue.

Thank you. Your next question comes from Bob Napoli with William Blair.

Thank you. Good morning. Hey Ed just and Charles are the additional buybacks in your guidance, so you bought back about $400 million, you said you’ve had $500 million and I think you expect to buyback closer to $800 million to $1 billion.

So the second piece of our authorization is not considered Bob. So the initial $500 million was considered the second $500 million is not considered in guidance.

Okay, thank you. Then on the tender share improvement, the 80% for mature accounts that’s very helpful with, but are you -- is that piece being driven by increasing credit lines for those individual that are using the line and obviously since the mature accounts they I am sure they’re performing well, credit wise.

Yeah. I mean, it’s -- we’re not passed enough lines. We’ve never had really an issue with an open to buy I think Charles you know better than I, but we have a $500 balance we may have an $800 line. So there is plenty of room on the open to buy and we rescore all $40 million accounts every quarter. So it’s not a credit line issue, it’s more of if I have $800 line and a $500 balance and I’m growing it normally 5% a year, how do I get it to 7% or 8% and that’s basically the whole tender share gain, which is how do I get her to make one more visit if they’re not visiting the store itself a lot of our tender share gains or I’d say the bulk of it is coming through online sales where we reach out to her and make some type of compelling offer to her and she will go online to buy it. A lot of this has to use the lingo again, she is snacking online meaning that we’re seeing a lot of incremental purchases that are relatively small in size, but they’re happening very frequently.

Okay, Great. Thanks. And then just last question on the agency business on the Epsilon business on the Epsilon business, is that -- I mean have you lost, is this just pull back by client, have you lost some clients are you losing share of a client to another competitor or piece? So what’s going on there, I don’t think the industry is pulled back, as much as we saw in your business in the first quarter and who are you primarily competing with today in those sectors?

It’s a good question, one quarter doesn’t a trend make, so it’s still up in the AIR, in terms of what exactly, all we did see was we saw project business basically dry up in the first quarter that we accounted on and as a result the business we needed to close to make agency hit Q1 didn’t happen. Now are those projects beginning to drift back in it looks like they are slowly drifting back in. So that’s all we know at this point.

Who you are seeing is your -- I mean by sector, the agency versus tech, who would you point out as your two or three largest and toughest competitors?

I think, it’s all over the board in terms of when it’s pure agency you could have the big Madison Avenue players involved there, you could have some of the other digital smaller agencies involved there. But for the most of part what we do is we like to link the agency as sort of the tip of the arrow to get in the door with the CMO to flow through to the big heavy duty, high visibility tech platforms that we build for them. The project based stuff on the agency side as you can tell us the stuff that can jerk around quite a bit on a quarterly basis. So that’s sort of -- but we’re seeing the big tech platforms continued to be built and it’s just these projects on the agency side that we just saw a softness in Q1. So we just don’t want to get out in front of this thing and start saying oh my gosh we’ve got long-term weakness in agency when it could very well just be one quarter phenomenon.

So Bob, the only thing I would add is, it’s not a case where we’re losing clients, it’s not a number clients gone away she is spent. So in the first quarter we really saw less spend going back to Ed’s point where on a project basis CMOs cut their budgets with us for whatever reason.

Okay, thank you.

Thank you. Your next question comes from Andrew Jeffrey and he is with SunTrust.

Hi, good morning guys. Thanks for taking the question. Ed, I guess I want to ask a big picture strategic question with regard to Epsilon is there as you think about agency irrespective sort of the quarterly volatility in that business is there still the same sort of competitive strategic rationale for having agency as part of Epsilon as you might have thought there was five years ago? Has your thinking changed on that at all?

No I think it’s absolutely critical that we have that skill set because that’s the skill set that can get in the door have the conversation with the CMO and that will then lead to the pull through to the big client database where it’s the big Loyalty platform builds the big CRM business at Conversant. So, no I think the skill set there is critical in order to pull through for the other parts of Epsilon it’s almost like if even though it’s a bit soft this quarter my view is if you take it away, what you’re going to wind up is you’re going to cut the head off the rest of the big tech pull-throughs at the rest of Epsilon and the whole thing will eventually slowdown.

Okay. And is there with regard to again agencies there are customer concentration issue you think within that business is that part of the reason we see the volatility is there anything you could about it if there is?

It is part of it Andrew if you look our biggest clients in Epsilon are all on the agency side of the business. So when they pull back on any project or maybe not supporting us with a particular offering they can move the needle quickly and be in project based they can do volatility in for a quarter quite a bit for the year you can pretty well estimate what they’re going to do. But they can basically open up it fast sort of close it quite quickly based upon what they’re wanting to do with the marketing spend. And so what we saw in Q1 was they basically closed this ticket we think that they will open it up as the year progresses. So we’re not sending alarm bells, but it is big companies, big budgets and they can flux it quite quickly.

Okay. And then quickly with regard to your outlook for what maybe a loss rate plateau in ‘18 and beyond, can you dig a little bit into the rationale of the thought process that gives you confidence that we might do something that’s pretty unprecedented historically in terms of stable charge-offs?

Yeah I mean if you look at it it’s a great question, the fact that as we talked about the bulk of our growth the 10% in the quarter growth that we’re seeing is really coming from accounts that are very mature have been well seasoned, well passed the peak charge-off cycle we are normalizing the loss rate. I think maybe two more stats might be helpful, which is look we thought before the great recession our normalized loss rate was 6.5% we’re seeing it’s 5.5% now. Why is that why are we comfortable that that’s our long-term run rate and that’s what we’re normalizing towards probably a couple of interesting stats there one is, with the new mix of co-brand which carries a higher scoring customer as well as some of the higher end type retailers that have joined us we’re attracting cardholders that tend to skew a little bit higher on the credit spectrum. So for example if you were to compare all of our active accounts today versus 2007 the scores today on average are higher than they were in 2007 even with some of -- a lot of the accounts we’ve added recently. So from an active account basis the average score is higher. Also if you look at it from a balance perspective the average score for balance today is higher than it was in 2007. And so you put those two together and that’s how you get to we’re not going to normalize out at 6.5% we’re going to normalize out at 5.5%, but look it’s not like we’re trying to keep it lower. The fact is you give up some yields by not being at a higher loss rate. So I’m not sure it’s a strategy of ours to keep it at 5.5% it’s just the way the file is playing out right now.

Okay, appreciate it. Thank you.

Thank you. And your next question comes from Ashish Sabadra with Deutsche Bank.

Thanks. Just a quick follow-up on the agency weakness here. So the agency has both conversant as well as core Epsilon. I just wondering if the 23% decline that you saw that was consistent across both of those segments. And then Charles, you mentioned that there is intra-quarter volatility there depending on the projects. Is there something you can do strategically going forward to lower that volatility or is it just that as tech continues to grow faster it will be bigger portion of the revenues. I was just wondering how should we think about the volatility coming down in the agency. Because it has been volatile over the last several quarters now.

You’re right Ashish we’re going to have to grow the technology piece of the business quicker that’s just frankly where it’s going to be agency in a good year is going to grow 3%, technology in a good year is going to grow 10 plus. So from a mix standpoint you’ll basically take some of the volatility away from it. If you look at the breakdown it was weakness in both categories. We saw weakness in traditional agency for Epsilon where we saw weakness across many verticals. I couldn’t pinpoint anyone client because it was broad based. On the Conversant side, on the traditional display, we’ve definitely seen fewer people trying to use our private exchange. You’ve got the big agencies trying to push the programmatic buying through their own and trading platforms. So regardless of the quality of the impressions we can provide, they’re trying to stuff it through their own system and we just saw a general pull back there. So that was a little bit unexpected. So I’d say it was both sides of it. We do think we’ll get some stability as the year goes on, but there is really going back to Ed’s point out not any particular we can point to aside from it just seem like there was soft spend in Q1.

Okay. Just quickly on the margins for the Epsilon business, you highlighted couple of reasons for the margins being lower. But how should we think about margins going forward? Technically if agency pertains to be a lower margin, tech was a higher margin business and as tech is growing faster, you would expect the margins to grow up going forward. So just wanted to better understand how should we think about the dynamics for Epsilon margins over the next several quarters, but also the longer term?

So the way you look at it is basically you’re right. Agency will grow slower it’s the lower EBITDA margin, your technology will grow quicker is the highest EBITDA margin. So it’s from a pure mix standpoint, you should get some EBITDA margin expansion this year and in the future. Clearly, we’ll have to look at the agency and play through it this is the short-term hiccup or air pocket as I said before. Or is a case where we have to structurally cut back on cost to get our margins back where they need to be. That’s a little bit unknown at this point. But long-term I would expect the margins to expand slightly based on mix.

Okay, that’s really helpful. And one final question on the grocery compression. So the late fees have been weighing on or the lower late fees have been weighing on which is actually better because it helps you or it reflective of a better consumer environment. But just how should we think about that compression? Like how much visibility or how much confidence that you have that comes off in the second half and going into ‘17? Thanks.

Yeah we have very good visibility into this as we go into the second half. A large chunk of it probably half of it relates to what I called consumer friendly programs, which I probably should fund. It basically as we look at all of our practices and basically said how do we continue to see the premium provider in the marketplace, the most customer friendly provider in the marketplace as we continue to ramp up. And so there is a bunch of things that we put in place as we went into the back half of last year. So for example, it doesn’t seem like a lot, but it does move the needle in terms of if someone gets paid on the 15th of each month, but their ability to do on the 13th. Well that doesn’t work out all that well sometime. So what we’ve done is we’ve given everyone the right to move their due date to later on in the month if they wanted to. And that again it’s doesn’t seem like much, but it actually does affect the late fees and -- but at the same time it also helps our OpEx as you see with the leverage, because we have much lower talk time of people calling up saying hey, I need a couple of more days. So you have that you have people who are calling in where they used to be a fee. If you are paying by the phone we decided that wasn’t best practices, we took that out as well. And so we just took a number of things out of system that’s frankly caused more grief than they added. We got a lot of it back in lower OpEx in terms of talk time and everything else and we have a much happier client in customer base. And so I think that’s sort of what it is, none of it was dictated by any regulatory authority. It was something we proactively went out just did and we think taking the hit now for it and seeing in anniversary in the back half is probably the best thing to do and hopefully that will pay dividends down the line.

Thanks Ed.

One more.

Okay.

Thank you. And your final question comes from David Scharf with JMP Securities.

Good morning. Thanks for taking the questions. I’ll apologize in advance because it’s sort of a repeat of some that have been asked, but I just want a clarification. On the agency side can give us a sense for how much of the business for agency is so called project based versus I guess worth that you would deem to be well not an annuity pretty reliable and recurring. Obviously it’s all based on CMO budgets. But is the vast majority of the business things that you would deem to be quarter-by-quarter project base whether is it necessarily great visibility?

Definitely on the Epsilon side of it that’s the case where it’s you got one or two year contracts, but it’s project to project on the conversant side it’s not going to be a more volume driven because it’s basically side display. Basically you’ve got a lot of unpredictability when you get to agency you can have a longer term contract, but it reflects based on volume, predicting what it’s going to be on a quarterly to quarter basis is just a difficult thing to do David.

Got it. And when we think about the cost structure and obviously the agency business has always had the least amount of operating leverage given it’s people intensive. But you’ve talked about in the disclosure that agency is roughly maybe a quarter of the Epsilon segment the traditional Aspen business plus Conversant. But from the standpoint of the percentage of fixed cost, how should we think about it?

I would say your premise is right, David. It is a higher fixed cost business, it’s more of a people driven business. So variability is pretty low, for the reason why you saw that our EBITDA was down quite a bit in the quarter was because the revenue was down on agency and it doesn’t flex very much. So you are right I don’t have an exact percentage, but you can assume it is our highest fixed cost business would be within agency. So if we see it’s a structural issue in the market then we’ll have to go through and address the fixed cost and we can do so pretty quickly if we need to.

Okay. And as we think about the description of a lessening degree of revenue decline in Q2. I mean 23% is a big number, I mean should we be thinking 15% to 20% down or more closer to 10%, just trying to get a little bit of context.

Yeah I don’t think we are in a position to really say that at this point as to what it’s going to be. We do feel good, it’s going to get better we had a difficult comp in Q1. So we know it’s going to be less in Q2. But at the stage it would be very difficult for me to quantify it Q2, Q3, Q4 as you know David we look at our guidance in total, not in any single piece. So just like in the first quarter we had over performance in some areas and weakness in other. We would look for the year to be the same way. So it’s very difficult for me to quantify that for you by quarter David.

Got it. And as you referenced a little bit of loosening in Q2, maybe some of the project based expected or hope for backlog is starting to materialize again. Are those coming specifically from those larger clients that may have pulled back unexpectedly or these new wins new contracts?

I’d say it’s little bit of both. You do have some new wins coming through and we’ll look to focus on that during the course of the year and I do think you are going to see budgets open up a little bit with us as the years progresses as well. As I said before we think it was a little bit of nature of reaction with CMOs in Q1. I know I was told over and over we’re heading into recession quite quickly in the U.S. So I think many people listening to the rhetoric and I think it’s on project based, discretionary based marketing, I think it pulled back a little bit in Q1.

Got it. And then just lastly on the card side, it sounded like some pretty guarded or crafted language regarding the two programs that will be renewed, but is it fair to say I mean should we think of that as two retailer partners that perhaps are not willing to commit as much marketing push behind the product as before basically deemphasizing the store card is one of their marketing tools.

Yes.

Got it, okay. Thanks very much, guys.

Okay. All right everyone, thank you, we will see you next quarter.

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