|Shares Out. (in M):||62||P/E||10.6||9.5|
|Market Cap (in $M):||11,100||P/FCF||9||8|
|Net Debt (in $M):||3,900||EBIT||1,575||1,725|
|Entry||02/10/2016 09:24 PM|
My sense: Epsilon approaches their target customer base in a more tailored manner than ACXM and EXPN, seeking to provide a fully outsourced marketing service that is primarily loyalty driven, rather than providing a scrubbed data set that the customer then utilizes to drive their own marketing effort (that customer then manages themselves). So Epsilon has the same data aggregation and analysis focus as the others, but they attempt to monetize it via a recurring service program to the customer.
I think the Ford and Toyota relationships for Epsilon are good case studies. A large portion of an auto dealer's revenue (and even larger % of gross profit) comes from maintenance work of cars still under OEM warranty. Ford and Toyota outsourced the marketing and customer relationship function for its dealers here, with Epsilon managing a consumer loyalty program aimed at keeping car owners' maintenance business in house and on a scheduled, recurring basis. So Epsilon is utilizing all of the online and offline data it has in its standalone database on the dealer's specific customers to target them with direct marketing to get them into the dealership for an oil change...but it then also gets proprietary data from the customer's visits to the dealership. Due to agreements w the OEM, third parties dont have access to this flow of transaction data, so Epsilon can keep iterating its marketing to this captured consumer with more recent and actionable data than competitors.
AXCM suffered through a lot of poor M&A and management turnover over the past few years, trying to transition from being a commodity type data provider to something more valuable and differentiated (I think). Weak recent M&A experience could also be argued for Epsilon, and the unit has certainly been the weakest leg of ADS' stool. But Epsilon has benefitted from cross selling existing Card or LoyaltyOne customers, and this is where management's focus is at the moment.
|Subject||Re: Re: Epsilon|
|Entry||02/10/2016 11:09 PM|
As bluegrass says, Epsilon offers the full integrated consulting. They purchase datasets from Acxiom and Experian as part of that analysis. So Epsilon will work wth a customer to tell them exactly what offers and what catalogs to send to a particular customer.
The others are data providers. I have been baffled for years as to why Acxiom could never figure out how to leverage its dataset into a better business. It seems like they hold a key piece of the equation but it never works out that way for them.
|Subject||Loyalty will become payments' killer app|
|Entry||02/13/2016 01:59 PM|
Related to point #4, from the Q4 2015 earnings call:
"40% of our credit sales were online for the fourth quarter of 2015"
|Subject||How mobile payment acceleration aids private label card adoption / value prop|
|Entry||02/13/2016 02:15 PM|
from Sep 2015 DB Tech conference:
<Q - Ashish Sabadra>: Okay. That's helpful. Question on mobile payments, can you just talk about how the private label fits in with the whole Apple Pay and the Android Pay, Samsung Pay that we are hearing and also merchants-owned mobile payment strategy?
<A - Charles L. Horn>: We personally believe [merchants will] look for individual solutions and the individual application that can be used to drive their loyalty program, an individual app that could be used to apply for credit, an individual app that can drop a virtual card, so when you walk in the store, it geo-fences you, you walk up to pay and that's your default card at your point of sale. We believe those are really the key advantages.
So, retailers are always trying to get to know more about you. They'll ask you for your phone number. They're asking you for your email address. They're always wanting to know more about you. If they went in the purest form of tokenization, they could lose insight as to who you are. Now, we have some clients over on the Epsilon side, they still work around it, and you may have run into this before, where if you go up and you want to do your Apple Pay at the point of sale, they still make you to scan your loyalty card or put in your phone number. That way, they can still capture who you are, know you're in the store and basically allocate what you bought to you as a client.
So, from a convenience standpoint, it's not any more convenient than pulling out your card except for it provides card not present. Card not present is really not too big of a deal these days; probably about 35%, 40% of our spend right now is card not present. You have the ability to go into a store. We're tied into the POS. You can do a POS lookup, show your driver's license, make a spend. You can do it in-app. You can do it online. So, really, card not present is becoming less of an issue. So that's why I gave you a long-winded answer of saying we don't really know. It's going to come down to our clients wanting it and we believe our own clients will look for individual solutions versus a more generic solution.
<A - Tiffany Louder>: Yeah. And just real quick, a trend that we're seeing on the Card Services side is 10 of our top 20 clients have asked us to design apps for them. So that just shows that we're seeing they want to get close to their customers to really build their brand affinity that way rather than going to a wallet of some sort.
<Q - Ashish Sabadra>: That's very helpful. And then quickly on the mobile, how is that help you on the activation side? You can just talk about the activation and how that's helped you create new users?
<A - Charles L. Horn>: It's actually quite effective. Think of it this way. If you were a little bit worried that your FICO equivalent would be good enough, historically, you would have had to go up to the point of sale to apply for credit. If you were at the point of sale and you have a number of people stacked up behind you and you get basically rejected for whatever reason, that could be a little bit of an embarrassment factor. Or it could be a case, it's the holiday season, you get a sales clerk up there. You got customers stacked up 12 deep. They really don't want to ask if you want to apply for the card today, because it will slow down the process.
So, the ability for us to do it now where you can sign up for it online or with the mobile app; you could be the store, it could be a clothing store, you walk in to the dressing room and secure our code on the wall, scan your smart device. Within 30 seconds, you know if you're approved. And importantly, you know what your credit limit is.
If you know what your credit limit is while you're still shopping, what does a consumer do? He or she buys more. So, the average initial ticket when you apply for a credit online is about 20% higher than it is if you've done it at the point of sale. So, we do think it facilitates, obviously, efficiency within the retailer and it drives a higher ticket for us, which is very advantageous.
|Entry||04/17/2016 02:59 PM|
Nails - thank you for continued interest. Find my analysis below. I *think* you highlighted a competitive advantage that supports ADS having some sort of moat, rather than discovering a source of potentially eroding economics. Based on your conversations with the company, please share management’s feedback (and yours) on related strategy in this thread, especially if contra.
Surface logic supports a card co having a retailer share arrangement with its retail partners: the more interest and fee revenue the card company makes, the more cash is funneled back to the retailer, confirming that partnering with said card company was a good idea, motivating retailer to seek more credit related sales, driving more fees to card co, etc etc spin the flywheel. In this relationship, the retailer believes the card co’s primary value proposition = credit extension to its customer base, monetized via finance charges and transaction fees, and the retailer wants its fair share of the honey pot.
ADS pitches a different value proposition to retailers, and they monetize it via a service bundle (which always helps obscure relative pricing from the client’s POV). ADS targets what the client really values: higher SSS. Instead of paying out a revenue share, ADS reinvests money they would have paid out to the retailer into ADS’ own internal operating expense, supporting the marketing and loyalty programs they manage for the client. When an RSA relationship is present, funds received by the retailer from RSA payments may or may not be channeled back into card promotions. In contrast, ADS determines their own expense levels and what constitutes a fair ROI on their spend, versus having a third party in the kitchen impacting how marketing dollars are spent, or whether they are spent at all.
From an economic standpoint, a retailer share arrangement disincentivizes the card provider from achieving the best outcome for the retailer, assuming there is usually a threshold that must be achieved before the retailer gets its split, as is the case for SYF (1). If the card provider receives 100% of (n), but only 80% of the >(n) cohort, theoretically they wont be working as hard for the marginal dollar of revenue above threshold. Conversely, if higher overall sales are the retailer’s primary goal, then the services ADS provides are 100% economically aligned with the retailer, especially when considering how ADS goes to market (ie credit agnostic, providing customers w outsourced loyalty programs with no credit component if a better fit for customer's goals).
From a competitive standpoint, if the card company doesn’t have to give up a revenue share to its win / maintain client relationships, it wont. Another sign of relative weakness in the customer relationship / value proposition could be how terms of the RSA are determined; again see SYF for an example (2). Viewed through the lens of SYF’s increasing payout of its net interest income (17% paid out to retailers in 2011 vs 23% in 2015), the composition of its largest customers (Walmart, Lowes), and recent customer wins (Amazon), its easy to pick one private label credit card revenue model over the other, given the choice.
Some related questions are a) how much more runway does ADS have with existing and new SME customers whose internal marketing and loyalty capabilities are inferior to ADS’ ? b) what is the customer size tipping point for ADS increasingly overlapping with larger card only comps eg SYF, and are we already there on a new customer basis? c) will ADS feel pressure to accept economically inferior retailer customer relationships going forward, and eventually disintermediate their own service bundle in the name of growth? I don’t view any of these as material threats over the next few years, but also don’t have concrete data to defend my view.
1 “Most of our Retail Card program agreements and certain other program agreements contain retailer share arrangements that provide for payments to our partners if the economic performance of the program exceeds a contractually defined threshold. These arrangements are designed to align our interests and provide an additional incentive to our partners to promote our credit products. Although the share arrangements vary by partner, these arrangements are generally structured to measure the economic performance of the program, based typically on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for loan losses, retailer payments and operating expenses), and share portions of this amount above a negotiated threshold.”
2 “The threshold and economic performance of a program that are used to calculate payments to our partners may be based on, among other things, agreed upon measures of program expenses rather than our actual expenses, and therefore increases in our actual expenses (such as funding costs or operating expenses) may not necessarily result in reduced payments under our retailer share arrangements.”
|Subject||Re: SYF readthru|
|Entry||06/19/2016 05:45 PM|
I think this is SYF's management transitioning into becoming a public company management team. After bouncing around cycle lows during 2H 2015, the slight credit deterioration trends were present in Q1 for SYF, sparking many related analyst questions / comments. ADS mgmt communicated a slight rise (1) in forward loss rate expectations during its Q4 call, before it became apparent in the data. SYF mgmt did the opposite.
I dont see any weakness in ADS' card division at the moment. Would appreciate others' thoughts.
(1) Not driven by weakened consumer credit, but from maturing of older portfolios and mix shift in overall credit book
|Entry||06/19/2016 06:42 PM|
ADS signed an agreement to takeover Zales' private label card offering in 2013, with a targeted go live date of Oct 2015 (post prior financing partner contract expiration). In the interim, Signet Jewelers acquired Zales. Signet provides in house customer financing to its non Zales brands (72% of revenue = non Zales). The Zales brands utilize third party credit programs provided by Comenity (ADS) in the US and TD Bank in Canada.
Using data from Signet's 10K on its own customer financing programs, and specifics provided for the Zales portfolio, I estimate Zales US sales = $1.5b, Zales US credit sales = $620m, and Zales US credit receivables balance = $475m. Weighed against ADS' May 2016 card receivables balance of $13.5b, Zales could account for as much as ~3.5% of ADS' run rate cards business, or ~1.6% of ADS total company revenue.
The receivables transfer did not occur until January 2016. Loss rates for Signet's in house credit portfolio have averaged ~100% higher (ie 9-10% vs 4-5% for ADS) over the past 2 years. With recent scrutiny around Signet, and materially weaker credit performance at their in house financing operation, I assume ADS' mgmt was cautious when evaluating and purchasing this legacy portfolio. FWIW, ADS' average card receivables balance increased by $384m from Dec to Jan (vs my estimate of $475m above related to Zales).
Some related commentary is here https://thecapitolforum.com/wp-content/uploads/2013/12/Signet-2016.02.24.pdf , which suggests Signet's in house finance arm may become a larger portion of Zales' customer financing going forward as ADS installs tighter underwriting.
|Subject||Re: Re: Zales|
|Entry||06/22/2016 08:23 PM|
No real value add from me here. Sorry.
|Subject||ValueAct files 13D|
|Entry||07/11/2016 11:57 AM|
Discloses 6.8% ownership
Reporting Person Trade Date Shares Price/Share ---------------- ---------- ------------ ----------- ValueAct Master Fund 06/15/2016 35,300 $200.99 06/15/2016 137,000 $200.87 06/15/2016 210,000 $200.12 06/15/2016 63,000 $200.80 06/15/2016 15,580 $200.70 06/15/2016 75,000 $200.89 06/21/2016 80,000 $197.78 06/21/2016 120,000 $198.26 06/22/2016 125,000 $200.07 06/23/2016 63,000 $200.94 06/24/2016 100,000 $194.92 06/24/2016 112,000 $195.43 06/27/2016 150,000 $188.36 06/27/2016 150,000 $187.25 06/27/2016 112,560 $186.66 06/28/2016 50,000 $187.18 06/28/2016 50,000 $188.24 06/28/2016 100,000 $187.55 06/29/2016 50,000 $190.11 06/29/2016 155,000 $192.59 06/30/2016 75,000 $192.51 06/30/2016 16,000 $194.22 07/01/2016 100,000 $195.63 07/01/2016 50,000 $195.31 07/05/2016 150,000 $193.40 07/05/2016 100,000 $193.30
ValueAct Master Fund 07/06/2016 12,090 $193.89 (cont.) 07/06/2016 100,000 $194.97 07/07/2016 200,000 $198.00
|Subject||Citron short thesis|
|Entry||08/19/2016 11:19 AM|
|Subject||Re: Re: Citron short thesis|
|Entry||08/22/2016 11:58 AM|
Always appreciate shorts making their work public. This specific analysis was light on substance, sloppy in form, and primarily a re hash. But it did bring up two themes worth evaluting: 1) what is the correct industry classification? 2) for a co with off balance sheet leverage, what is the correct way to evaluate FCF and capitalize it in valuation?
Citron argues ADS is a bank, not a technology company, and should be valued as such. Ive argued for a hybrid, and implicit to that is an argument for earnings multiple expansion (and/or mean reversion). It would be much easier to claim ADS is a technology co if it were 2005, or 2010 (based on relative industry perceptions, not a negative change at ADS). And despite 40% of ADS' end credit sales coming via online channel, their customer base = brick & mortar retailers, which also doesnt inspire a technology multiple. Based on ADS' returns on capital through the cycle, customer retention and ongoing diversification away from PL cards, I think the co deserves a multiple higher than a TBTF bank or a general issuer credit card. However, with the recent (albeit small, telegraphed and explained by management) rise in credit delinquencies, the market is focused on credit risk, and "credit risk" sounds like "bank."
Citron argues that management overstates actual FCF generation, and conveniently changes the way they communicate the calculation when it suits their goals. Ive never seen or heard this from management, and think the FCF is straightforward. But their FCF does benefit greatly from the relationship w Comenity, and despite protections in place walling off capital light ADS from its capital intense cousin, there will always be some overhang on the stock from fear of a cascading credit event and potential putback liabilities. Add in the other, non card businesses (Epsilon, Loyalty One) to the mix, and ADS remains a complicated, confusing story that takes a lot of work to understand.
Summary: The long thesis is driven by multiple expansion to a greater degree than I initially realized, and the event path of complexity > less complexity > little complexity has not yet materialized. ValueAct putting a stamp on future capital allocation and explaining the investment thesis to investors should help, as should continued benign credit conditions. ADS performed well in Q2 despite poor macro ex US, and management has ramped up their capital return to shareholders, which worked out well the last time credit risk was an issue for the market.