Alliance Data CEO Sees Agency Offerings Driving Growth

Ed Heffernan, president and CEO of Alliance Data Systems Corp., said during today’s first-quarter earnings call that agency offerings – and not technology -- will drive future company revenue growth.

A key component in Alliance Data’s agency offerings strategy stems from its 2012 acquisition of HMI (Hyper Marketing), the largest privately held marketing services agency in the United States. HMI offers a wide range of ROI-based marketing services through Ryan Partnership, CatapultRPM, SolutionSet ,and, including: digital user experience design technology, specializing in websites, social media platforms and mobility; customer relationship marketing; consumer promotions marketing; direct and digital shopper marketing; distributed and local area marketing; and analytical services that include brand planning and consumer insights. 

Alliance Data Systems Corp. provides card services, loyalty and marketing solutions, payment processing, and business process outsourcing services. It also provides such services to the retail, petroleum, utility, financial services, and hospitality markets.

Alliance Data consists of three businesses: Alliance Data Retail Services, a leading provider of marketing-driven credit solutions; Epsilon®, a leading provider of multichannel, data-driven technologies and marketing services; and LoyaltyOne®, which owns and operates the AIR MILES® Reward Program, Canada’s premier coalition loyalty program.

After a somewhat disappointing 2012, Epsilon quickly shifted gears and saw its organic top-line growth jump more than 7% in the first quarter, along with bottom-line growth of more than 15%. The increase was driven by double-digit growth in agency business, which Heffernan said was bolstered two years ago through the acquisition of Aspen Marketing Services.

“The primary reason at the time was that we anticipated a ‘pivot point’ – that future revenue growth would increasingly be driven by agency (including digital), rather than technology offerings,” Heffernan said.

HMI is privately owned by Lake Capital and its affiliates, and has about 1,100 employees based primarily in Chicago, San Francisco and Wilton, CT. HMI companies partner with chief marketing officers for many of the world's best known brands including Dell, eBay, Kellogg's, Office Depot, The Home Depot, and Unilever to develop integrated programs that deliver profitable results.

Last year when Alliance Data Systems acquired HMI, Heffernan said the company looked at more than 50 companies, “got serious about a half a dozen of them, and chose only one, HMI.”

Heffernan predicted Epsilon would represent about one third of Alliance Data’s top-line growth this year. In the first quarter, revenue for Alliance Data Systems rose 18%, to %1.05 billion – marking the first time the company had reached $1 billion in revenue for a quarter. To highlight the company’s overall growth pattern, Heffernan noted that in 2001 when the company went public total annual revenue was about $750 million.

For the first quarter, Epsilon’s revenue increased 39%, to $318 million. Agency revenue soared 110%, to $174 million, largely due to the acquisition of HMI in the fourth quarter last year. Excluding the HMI acquisition, agency revenue growth was about 21% driven by strength in the telecom vertical.

Charles Horn, Chief Financial Officer for Alliance Data Systems, said there has been tremendous amount of traction from the HMI acquisition resulting in several cross-sell successes, “validating HMI’s tremendous talent. Epsilon remains very positive about HMI’s fit.”

Horn echoed Heffernan’s sentiments, saying growth has and will be driven by agency offerings rather than technology.

Alliance Data Systems’ Private Label category recorded a stellar first-quarter with top-line growth above 22% and bottom-line growth more than 15%. All the trends remain positive – core credit spending growth of about 11%, principal charge-off rates below 5%, and portfolio funding rates below 2%.

LoyaltyOne experienced a strange first quarter with a 7% decrease in its top-line, coupled with a 7% increase in its bottom-line. The only surprise was a 3% decrease in AIR MILES® reward miles issued during the quarter due to weakness of its credit card sponsors. Alliance Data Systems believes it can still achieve mid-single-digit issuance growth for 2013.

The acquisition of HIM essentially doubles the size of Epsilon's agency offering.  As a result, Epsilon will have more strategic resources to interact with and assist C-Suite executives.

Heffernan said there is so much marketing money now thrown in the direction of CMOs that having a C-Suite presence is “absolutely critical. The pivoting we did toward digital agencies means the uniqueness of Epsilon is the ability of having an existing C-Suite presence.”

CMOS are “getting absolutely buried with all these opportunities out there,” Heffernan said. “Our job is to make it easy. We’re clearly heading in the right direction.”

Heffernan noted the marketing spend shift away from traditional general advertising and toward measurable, ROI-based targeted marketing. Epsilon offers the “critical five" capabilities that provide the optimal suite of solutions to capitalize on this secular shift, with a focus on meeting the changing set of needs at the CMO level:

  • Strategy/creative – working with the C-Suite to conceptualize, develop and execute comprehensive brand marketing strategies focused on customer acquisition, retention and brand loyalty.
  • Data – providing clients with unique, proprietary insights into their customers' behaviors and channel preferences through transactional, demographic and psychographic data.
  • Database – processing significant amounts of consumer data and populating sophisticated loyalty and acquisition marketing platforms to enable dynamic marketing initiatives.
  • Analytics – using advanced analytic techniques to discern and optimize customer behavior.
  • Distribution – optimizing consumer targeting by leveraging all communications channels, including permission-based email, targeted display, mobile, social, direct mail and point-of-sale.

During the first quarter, LoyaltyOne signed a new multi-year agreement with Staples Canada, Canada’s largest supplier of office supplies, technology, office furniture and business services, to issue AIR MILES reward miles in-store and online starting March 2013. On the international expansion front, the rollout of the dotz coalition loyalty joint venture in Brazil is on track with about 7.2 million collectors enrolled at quarter-end, up from 2.2 million in March of last year. 

Heffernan noted more than 50 sponsors are committed to the loyalty program and he predicted 10 million enrollees by year’s end.

Credit sales increased 32% in the first quarter, driven by an 11% increase in core cardholder spending and new programs added over the past 12 months. Horn was “particularly impressed” by the increased average credit card spend amid economic uncertainty.

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