When Alliance Data Systems Corp., the Dallas-based credit and marketing services provider, filed for an initial public offering, it was a much different time on Wall Street. Dot-coms were still all the rage, and at the time, ADS’s solid growth prospects were not nearly as spectacular as what many investors then craved. “When we first started talking to bankers in late 1999, they didn’t think we were nearly as sexy as a lot of other companies out there,” says J. Michael Parks, the company’s chairman and chief executive officer. “Compared to the dot-coms, we were kind of boring.” So the company, which first registed to sell shares in January 2000, delayed its IPO , for nearly a year and a half.
ADS finally went public last June, long after investors had abandoned their dot-com delusions, and its patience paid off. ADS shares hit the market at $12 and rose 16.7 percent the first day to close at $14. Since then the company’s shares have continued a slow but steady climb despite volatile market conditions. By mid-March ADS shares were trading at about $23, giving the company a market capitalization of $1.3 billion.
ADS is the brainchild of private investment bank Welsh, Carson, Anderson & Stowe, which formed the company in 1996 by merging two businesses it had acquired: J.C. Penney Co.'s transactions services business , billing and payments , and the Limited’s credit card bank operation. Now ADS provides credit, transaction and marketing services to some 50 credit card issuers with more than 70 million cardholders. Welsh Carson still owns about 60 percent of ADS; the Limited owns an additional 20 percent and remains the company’s biggest customer, accounting for more than 20 percent of revenue. Other major clients include catalogue retailer Brylane, Royal Dutch/Shell Group and Bank of Montreal.
The company continues to grow that client base; in January it signed long-term contracts to provide private-label credit cards for clothing retailer AnnTaylor Stores Corp. and Williams-Sonoma’s Pottery Barn chain. ADS expects to add 12 new customers this year.
Last year, in the teeth of a recession, the company’s revenues rose 14 percent, to $772 million, and its earnings before interest and taxes for the year increased 30 percent, to $0.52 per share, though it has yet to post a net profit, primarily because of high depreciation charges. ADS’s guidance for 2002 promises to deliver revenue growth of at least 12 percent and a 15 percent increase in ebit per share.
ADS focuses on handling electronic transactions, such as credit cards and billing, between its corporate clients , including retailers, utilities and financial services firms , and their customers. It helps retailers like Victoria’s Secret administer their own credit cards, which are designed to strengthen the relationship between the brand and the customer. Half of its revenues come from transaction services, such as billing and payment processing. Credit services such as financing for retailers’ credit cards generate a further 25 percent, and the remainder comes from ADS’s marketing services unit, which builds loyalty programs through offerings like air miles.
Parks joined the company in March 1997 after 18 years at First Data Corp., where he headed First Data Resources, the company’s credit card processing and billing division. He recently discussed ADS’s outlook with Institutional Investor Staff Writer Justin Dini.
Institutional Investor: Why go public?
Parks: We had been very successful in pulling the company together, adding new customers and continuing to acquire them. We had a banking relationship that allowed us to borrow a little over four times our earnings before interest, taxes, depreciation and amortization. We had drawn down on that to help build the company through acquisitions, and we’d gotten to the point where we didn’t have much acquisition capital anymore. So we wanted to pay down that debt. We also wanted to establish our public currency for possible future deals. And we really wanted to establish a public name and presence for future opportunities.
How have you continued to perform well in such a soft retail environment?
We’re in a number of businesses , whether it be our marketing business or our transaction processing business or credit business , that are all centered around long-term contractual relationships. It’s not something that you have to resell every 30 days like some software. We’re also in businesses , like groceries and petroleum , that tend to be less prone to the impacts of recession. People still have to fill their cars with gasoline. They’ll have to buy groceries. They still have to do their banking ser-vices. So we’re really in very predictable markets. That combination has allowed us to hit our numbers.
Are you concerned that so much of your revenue comes from one customer, the Limited?
It’s a concern because it worries some of our shareholders, who look at the Limited as one customer. In reality, they’re not. Every one of those brands has its own separate contract and a separate relationship, and we treat them as such. So even though they might represent 22 percent of revenues, no one contract is greater than 10 percent. Once we started to talk with shareholders about that, it settled the concern somewhat. We’re not doing anything unusual to make the Limited smaller. We’re not going to say, “We don’t want your business.” But just our natural growth in a variety of businesses will continually make them a smaller and smaller percentage over time. Plus, we’re very active in the utility market, and that’s a $3 billion market that is just now beginning to be tapped. All of this is being driven because that’s what’s right for the company’s growth.
What makes the utility business so attractive?
Utilities will be the fastest-growing part of our business as a percentage. It’s a nice steady kind of environment that gives us predictable growth. There are two ways we gain business: through deregulated companies that now have to compete for consumers for the first time and, most recently, our first partnership with a regulated company, Puget Sound Energy, which opens up a whole new arena for us. We will continue to work with companies as each of these states begins to migrate toward deregulation. But we also are starting to see a lot of the regulated entities recognizing that they might stand to lose business, and therefore they’ve got to get much more customer-centric, much more cost-oriented and much more marketing-oriented. Based on the capabilities that we have in the retail world, we’re a perfect fit for these companies, which now have to anticipate competing with other utilities as deregulation spreads. That’s triggered the opportunity to grow in the regulated space much sooner than we expected. We’re actually going to start to get some business earlier than we thought.
How saturated is the market for private-label cards? Doesn’t every retailer that could conceivably have its own card have one?
No. Of the new customers we’ve landed over the past year, probably a third are clients that have never had a private-label card before. We also get growth from existing retailers that have their private-label card business in-house. We get growth by taking customers from our competitors, and we get business from start-ups.
One emerging trend is private-label cards that also serve as a Visa or MasterCard. Is that a threat to your business?
The store brands of Visa and MasterCard aren’t necessarily a threat. We actually operate those too. What you want to measure is, are you getting more consumer business to your stores, and are you getting more sales dollars? And we know right now that the private label store brand and card will drive more than double the business in number of dollars sold compared with a generic bank card. There have been quite a few co-branded programs over the past ten years. I would say 90 percent of them have failed because there are competing interests for the store brand. And if you begin to take focus away from the store, then you end up losing sales.
So the jury’s still out on whether that is an attractive alternative to store-only cards?
Right. For the moment, we believe a card that’s solely focused on our retailer’s brand, and not confused with anybody else’s, is still the way to go. But that may change over time if we can come up with a process that doesn’t have competing interests. The capability is there, but I haven’t seen the payback yet in terms of actually driving higher incremental sales. We have to put ourselves in the shoes of our clients.
