Q3 2021 Alliance Data Systems Corp Earnings Call
Hello, everyone and welcome to the Alon stages third quarter 2021 earnings conference call. We will begin shortly if you'd like to register a question ready for the Q&A. Please press star followed by one on your telephone keypad. Thank you for your patience.
[music].
Good morning, and welcome to Alliance Data's third quarter 2021 earnings conference call. My name is Daisy and I'll be coordinating your call today.
At this time all parties have been placed on listen only mode. Following today's presentation. The food will be open for your questions.
To Register a question. Please press star followed by one on one telephone keypads. It is now my pleasure to introduce Mr. Brian Burke from head of Investor Relations at Alliance data. So the floor is yours.
Thank you copy of the slides, we'll be reviewing in the earnings release can be found on the Investor Relations section of our website.
On the call today, we have <unk>, President and Chief Executive Officer of Alliance data and Perry Bieber Executive Vice President and Chief Financial Officer of Alliance data.
Before we begin I would 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.
We 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 alliance data dotcom.
With that I would like to turn the call over to Ralph and data well.
Hey, Brian Thank you and good morning, and thank you all for joining.
I will start on slide three with the key takeaways for the quarter.
Our performance demonstrated considerable operating progress as we continue to move forward with the transformation of the company. We are seeing the success of investments interest strategic decisions. We have made and we continue working to position our company for strong profitable long term growth.
Our business development pipeline is robust.
As evidenced by the new signings and renewals during the quarter.
A highlight of few of these names on the coming slides, we continue to win new opportunities and will share our progress at the appropriate times.
Earlier this week, we announced a new partnership with Stifel.
They will integrate with bridge fintech payments platform for installment lending on this big ticket purchases. This is another example of the multiple ways, we can drive new growth for Red versatile platform.
Our investment in the brand platform and our digital capabilities are ongoing and set the stage for sales scaled growth in 2022 and beyond.
Our full suite of consumer lending products, coupled with our expanded total addressable market has created new opportunities. These opportunities to provide increased flexibility to optimize and balance of our portfolio from a growth margin and responsible lending perspective, we are no longer as reliant on a few large partners.
We're a single product to drive our success.
The long term growth, we outlined at our remain investor event remains in our sites. Our leadership team is focused on driving net partner growth, while delivering industry leading returns are.
Our credit performance remained strong as a result of our disciplined risk management and the government economic stimulus program.
We anticipate the payment rate will continue to slow and credit metrics will moderate in 2022 as stimulus programs expire consumers have returned to Omnichannel shopping and we expect credit sales improvement to continue into the holiday season.
The spin off of our loyalty one segment as loyalty Ventures, Inc. Is expected to be completed on November 5th advancing our strategic transformation and furthering our ability to deliver long term sustainable growth.
The spin positions, both alliance data and loyalty ventures to focus on the unique growth opportunities and is expected to strengthen alliance data's enterprise level capital metrics and other key metrics Alliance data will retain 19% ownership interest and expects to receive a $750 million cash.
<unk> from loyalty ventures, which we will use for deleveraging.
We expect an approximately 300 basis point improvement in our TCE to Ta ratio as a result of the spin off in November.
Yeah.
Slide four provides highlights of our key financial metrics for the third quarter total revenue for the quarter was $1 1 billion and net income was $224 million.
Revenue increased 5% year over year, while total expenses, excluding provision for loan loss declined 3% the.
The allowance for loan loss remained nearly flat for the quarter, resulting in reported diluted earnings per share of $4 47.
Credit sales were up 20% year over year to seven $4 billion or net loss rate three 9% for the quarter, which marks our lowest third quarter rate in the last 20 years.
Slide five highlights select brand brand partner additions and renewals, we added <unk> as a new retail card partner and signed renewals with Gamestop and pet land.
We continue to thoughtfully manage our new business and renewal opportunities to drive profitable growth and optimize our portfolio.
Brent continues to successfully add new online merchants to its direct acquisition channel.
A select few of the partners added to the platform are displayed on the right side of the slide.
I would highlight recent signed for the recent signing of our current retail card partner El Dorado onto breads payment platform.
We continue to have positive dialogue with many existing and new retail card partners to enable breads digital offerings and we are working to align with those partners integration timelines, which vary by merchant.
Breads platform provides quick and flexible integration options with an exceptional customer experience that sets it apart from the competition.
I will cover our exciting announcements settle on the next slide.
Yes.
Slide six provides more details on the progress of each of our bread business models. We continue to invest in branch modern platform as we have more than doubled the number of our digital engineers and continue to enhance our product and integration capabilities across our models.
One area that we're very excited about is to rollout in store capabilities. In early 2022. This will expand our consumers' ability to use buy now pay later products at physical locations and provide merchants, the omnichannel acquisition and payment of flexibility they required going forward.
Looking across the different business models, we're seeing momentum build in our direct acquisition model with nearly 30, new merchants signed on a bread platform in 30 days.
And our distribution model, we are integrating into settles network of over 40000 merchants for big ticket financing.
Several of merchant partners will have the ability to leverage breads fintech platform to provide our consumers with more options to check to check out with it with addition, with the addition of brakes flexible installment payment solutions.
Alliance data will underwrite service and retain the receivable for the installment loans on our balance sheet.
We continue to progress forward with a full launch across all of <unk> merchant acquiring platforms, including the Clover, a Pos system in 2022.
What distinguishes our relationship with Fiserv is that we are able to leverage <unk> sales force to promote and distribute our lending products across five serves expansive merchant network and the offering is integrated into their merchant dashboard.
Also we expect to initiate our in store technology capabilities with fiserv by the end of the year.
Finally, we are seeing strong momentum in our technology platform offering with RBC in Canada Rbc's pay plan pay overtime solution powered by <unk> is now live in EP games, best buy and the source and as the exclusive way to pay for Microsoft Xbox full access program in Canada.
Additionally, there were several small to mid tier mid sized merchants that launched in Rpc's pay plan on bridge platform during the quarter. The pipeline remains robust and we expect to have additional launches with RBC and a fourth quarter prior to the holiday season.
Yes.
Let's turn to slide seven.
I expect this to be the last time, we will review the performance for the loyalty one segment, which includes the air miles rewards program in Canada, and the Netherlands based brand loyalty program.
The spinoff of that business to loyalty Ventures, Inc. Is currently on track for completion on November 5th.
The business is well positioned for success with a strong management team transitioning to lead loyalty ventures.
I wish all of our departing colleagues the best and appreciate all the hard work and dedication to alliance data over the years.
As displayed in the graph on the right air miles reward miles issued and redeemed improved in the quarter at flight bookings increase in merchandize redemptions remained strong.
We remain optimistic on our long term outlook as travel rebounds, and are excited about the relaunch and rebrand of air miles in October with enhanced benefits, a new logo and digital properties.
Brand loyalty at a strong initial campaign launches in September with momentum continuing into the fourth quarter of course, we continue to closely monitor conditions throughout the world, including supply chain interruptions that have the potential to impact macroeconomic environment and our business with that I'll turn it over to Perry.
Thanks Ralph.
Slide eight provides our results for the third quarter 2021, compared to the third quarter of 2020.
Revenue was up 5% driven by higher receivables and improved card yields from last year.
Total expenses, excluding the provision for loan loss were down 3% to the third quarter of 2020 as a result of lower interest expense, which currently resides in total expenses for the company.
Pre tax pre provision earnings for <unk> were up 69 million, 18% year over year aligned with our focus on driving core underlying earnings growth. Finally, net income was up 68% driven by the PPR growth combined with lower provision expense than last year I will provide.
More details on our third quarter results in the coming slides.
Slide nine provides our segment level results for the third quarter.
Royalty revenue was down 8% year over year, while card services revenue increased 7%.
Loyalty, one EBT was up 143% due to lower cost of redemptions and amortization expense.
The improvement in card services EBT is primarily a result of higher underlying PNR combined with a lower loan loss provision expense, resulting from continued strong card member payment behavior and strong credit metrics.
Looking forward our financial statement at the end of the year will present, the loyalty one segment as a discontinued operation.
At the same time, we expect to align the financials to be in a format more consistent with those of our peers. For example, we plan to move interest expense be part of net interest income going forward. We will provide more details in a historic view once available later this year.
Moving to slide 10, I will review some of the key business metrics for the company.
Starting on the left side of 10, we show our average receivables and our total credit sales trends for the quarter. We saw credit sales come in at $7 4 billion or up 20% year over year and flat sequentially.
Average receivables were up slightly sequentially.
Both figures were partially impacted by the sale of the non renewal portfolio in the third quarter.
Moving to the right revenue yields improved slightly from the second quarter in line with seasonal trends and our guidance.
We expect the influx of transactional balances to lower the revenue yield in the fourth quarter to be more in line with the second quarter yield of 22, 5% consistent with seasonal trends.
Card services cost to funds continue to trend lower down approximately 30 basis points from the second quarter as we continue to shift the mix of our funding towards low cost consumer deposits.
Turning to slide 11, I'll start on the upper left.
Our delinquency rate increased 50 basis points versus the previous quarter to three 8% due to normal seasonal trends on a year over year basis. The delinquency rate was down 90 basis points on.
On the upper right you can see that we finished at a loss rate of three 9% the lowest third quarter rate. We've had in the last 20 years. These low rates are the result of our disciplined risk management as well as the economic stimulus, which is driving higher consumer saving rates across the industry and a greater ability to pay.
Turning to the bottom left of the page our allowance state nearly flat at $1 6 billion, leading to a reserve rate of 10, 5% outside of seasonal movements expecting rather steady reserve rate until more economic certainty emerges.
Lastly, on the bottom right hand side of the page our revolving credit distribution shifted slightly as we had projected last quarter and what the reduction in 660, plus from 64% to 62% sequentially is driven by the anticipated customer risk or migration to a more expected level.
Overall, we expect to maintain a healthy portfolio from a risk mix perspective, and better than pre pandemic levels. One that allows us to get rewarded for the risk, we take and drive sustainable profitable growth at lower than average historical loss rates.
Slide 12 provides our financial outlook for full year 2021.
Our full year average receivables guidance remains down mid single digits year over year with credit sales up double digits in 2021, while payment rates are moderating month to month. The elevated level continues to pressure receivables growth related to credit sales growth.
Our outlook for the full year total revenue remains unchanged, including our expectation that gross that card gross yields will remain steady for the full year.
Total expenses are expected to be flat to modestly down due to improved funding cost and efficiencies in operations, partially offset by higher investments in marketing technology infrastructure digital and breadth, we expect seasonally higher expenses in the fourth quarter looking farther ahead, we plan to continue to inch.
<unk>, our investments into 2022 to drive growth and innovation, we have the ability to flex our investment dollars up or down as needed to align with market conditions and our outlook to achieve positive operating leverage.
As both our loss and delinquency remains low we are adjusting our full year loss rate guidance to be in the high 4% range.
We anticipate that credit metrics and payment rates will moderate as stimulus programs wind down.
We expect to resume high single to low double digit receivables growth in 2022, and we will provide full year 2020 guidance on our fourth quarter earnings call in January.
Now I'll pass it back to Ralph to discuss progress on our business transformation on slide 13, Okay.
Hey, Thanks, Barry before we move on to Q&A I wanted to highlight some of the accomplishments. We've achieved recently as part of our ongoing business transformation. We continue to make great strides in simplifying our business model, including the spinoff of our international loyalty business, which I've already discussed we are focused on where we see the best opportunity to build value.
For our stakeholders.
We continue to develop our full suite of products to provide consumers with choices they desire.
A little less than a year ago, we acquired bread, adding buy now pay later and digital installment lending to our offerings, which was instrumental during a time of increasing omnichannel focus by our partners with.
We launched our proprietary card, which continues to perform well with over 1 million cardholders and growing.
We're excited about the many strategic relationship we have built in conjunction with breads versatile modern modern platform, including RBC Fiserv and settle these relationship Leverages breads, nimble and flexible platform in different ways to expand and improve their customer experience and increase their ability to provide payment choices.
To consumers.
We are enhancing our technology infrastructure with our core processing conversion to fiserv in 2022, we will invest over $100 million in digital advancement in 2021, and we will continue to invest in digital.
We have added industry, leading talent that is driving our organization forward.
We are focused on creating a collaborative and inclusive culture, we have changed the way we work our associates have increased flexibility, which is driving better productivity as well as cost efficiencies, including the optimization of our real estate footprint.
Last but not least we have continued to mature and prioritize our environmental social and governance strategy.
Our multiyear board Refreshment program has produced an outstanding board of directors, reflecting diversity of expertise and experience as well as gender race and ethnicity.
With the board's support and oversight, we released our annual ESG report, including the result of a third party conducted materiality assessment earlier this year.
We established an empowered a new dedicated the Eni office engage shareholders on ESG matters and increased ESG and sustainability awareness across our business.
We also look forward to rolling out a new comprehensive ESG strategy over the coming months.
Although we've been busy.
Our efforts do not stop here.
We remain dedicated to further strengthening our competitive positioning which includes the expected improvement of our leverage and our capital metrics post spin and investing in our strategic initiatives to continue to drive sustainable profitable growth.
Operator with that we're ready to open up the line for questions.
Thank you very much Perry if anyone would like to register a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by T. When preparing to ask you. A question. Please ensure you our many likely yes.
Yes before the question to start I, just want to let the participants know that Ive asked Val Greer, our chief commercial officer to join Us as well as Tammy Mcconaughey head of customer service and our chief risk officer, So they're joining paradigm for the Q&A.
Our first question comes from Sanjay <unk> from K B W. Sanjay. Your line is open. Please go ahead.
Thanks, Good morning all.
Obviously, a lot going on there I guess I have one question.
For Ralph in Val and then maybe one for Perry and Tammy So I'll get everyone involved.
I mean, maybe you guys can talk about.
Slide five, but maybe you could just talk about that.
This pipeline that you have that's upcoming wins and maybe other renewals that you might have and then.
I know Ralph you kind of touched on a little bit, but fiserv also announced a partnership with one of your peers, maybe you could just differentiate and flush that out a little bit what theyre doing for you versus what Theyre doing for your peer and then second question I'll just ask them upfront for Perry and Tammy is we're hearing a lot from some of the subprime consumer <unk>.
<unk> companies that they are starting to see a little bit of the turn in delinquencies.
Inside their pools, obviously your credit metrics look stellar but I'm just curious if youre seeing any subtle shifts.
And I know thats to be expected given we're moving away from stimulus. So maybe you could just flush that discussion now thanks.
Well Sanjay I think you should you should take our <unk> placed a lot of questions.
I think first let me talk about the pipeline one of the things that I think we've done.
Since our arrival here.
As we put in a a robust business development team that team now is proactive instead of reactive so they look at renewals when they made occur what's in the marketplace, where we could grow the pie for not only us, but our partners and we have a calendar of renewals that we go after our Salesforce now.
Enhanced and robust and very proactive in the marketplace, whether it's with our existing partners new partners or digital part news with.
With Brett so it is.
Constant conversation about opportunities in the marketplace and how we can take advantage of them.
Yes.
On <unk> I think the distinguishing factor is what I would add mentioned Sanjay is that we are we are part of their offering to their to their to their merchants. We are part of their sales force <unk> sales force is telling us when they are selling merchants, we are part of their dashboard.
Really integrated into their into their sales price of approximately so I feel good about that.
Hi.
I wasn't surprised by the signing.
It makes it makes good sense, but for US we're beyond our current partner base.
With their vast merchant base without anything to add to that.
No I think Thats right, Ralph I think the integration into either of the acquiring platform, which is not limited to Jeff Clover and that integration into the merchant dashboard.
Really does differentiate along with the fact that by their sales forces.
We out there selling our product.
I guess the last thing I'll say Sanjay about the pipeline we have will.
Announced wins.
As appropriate.
And in conjunction with with new and existing partners. So we're.
I'm excited to do that in.
Stay tuned.
Alright.
Sanjay This is Tammy so your question in regards to credit and whether or not we've seen fat.
These subtle shifts I would say not quite yet.
We did announce our delinquency up from second quarter to third quarter, but that's within our seasonal trends as Perry mentioned, we have seen we have seen payment rates as we expected start to stabilize so we do expect normalization of our times. However, our consumers were propped up quite a bit and we are responsible with the actual.
Stimulus that they receive and so we haven't seen anything quite yet, but we do expect some normalization and the timing will be what we continue to monitor.
Great. Thank you.
Our next question comes from Bob Napoli from William Blair Your.
Your line is open. Please go ahead.
Thank you and good morning.
Everybody.
Maybe just on.
Brad.
It seems like the buy now pay later the business model the profit model still seem to be in flux.
And certainly investors trying to figure it out.
Can you maybe give a little color, Ralph where you thought the revenue mix between merchant discount interest income and then the profit model long term are you are you do you feel like it's settled.
Or is there a law.
A lot of movement yet in the industry.
Come up with a sustainable profit model.
Yeah.
I think the thing to remember with our buy now pay later product Bob is that it is one of several offerings that we have so we're not completely reliant on the buy now pay later economic model. It's a choice we could give.
Consumers so as we approach merchants and we approach existing partners. We approach it from a partnership perspective with a basket of of pricing. So we're not we're not reliant. So we can be flexible with pricing we can respond to the market because we have the ability to do that because of the relationship we have and again.
Different from other buy now pay later.
Organizations, we're there to help the merchant create a transaction, where if you think about buy now pay later.
Be proactive out there so I expect that there.
<unk> partners in 30 days I expect that they will continue to push the pedal to the metal and and and signed more partners on a on a frequent basis. So I am pleased with the results so far and I'm really looking forward to as.
As you said the next hundred 20 days and see how many partners, we we rack up on the bread platform.
Thanks, and then just last question to 19% ownership in the air miles how long would you expect to hold that too so I mean.
I would expect that is not a long term position.
Our expectation is to hold at.
Probably less than a year as an organization, we want loyalty ventures to get on their feet before we would consider selling that silly at 19% stake but.
Our expectation is less than a year so.
Mitigate any tax leakage.
Great.
Thank you appreciate it.
Our next question comes from John <unk>, sorry from as a coach on your line is open. Please go ahead.
Good morning.
Uhm morning stuck to the credit topic I know you kept the the reserve essentially stable, where you added slightly very slightly to the reserve ratio. After you know you had seemed pretty steady releases to the reserves in the prior several quarters can you just talk about how you're thinking about it from here on in.
Now you indicated in your prepared comments that you need to see more economic certainty. So I guess the way I can think about is what what changed given this outlook today versus previously that's giving you that you know, but you expect that the reserve will be more stable here. Thanks I'll take.
That his parents.
So I think about it is really not a lot has changed and I think that there's no way to think where I'm thinking about it you know, we're maintaining a cautious posture and if you think of where we are we're only 12% above day, one Cecil and if you look at I will say the rest of the industry on average about 20% about once a week actually.
Closer to our day, one cecil than others and.
We didn't you know.
I'll say increase salaries or to the same extent, so we've got ourselves to a place that we feel comfortable with.
Look at your reserve rate is a number of factors that go into it the economic conditions, obviously, what the outlook for inflation unemployment wage growth the government stemless stimulus winding down and is Tammy spoke earlier, we haven't really yet seen the effects of that in the portfolio. So that's what we want to watch for and as well you know I think the third verse.
Cable all companies go there was the model enough seasonal and we're working to next generation of modeling. So there's a number of factors, but in terms of the economic outlook I'd say, we've maintained our view of the future for right now and waiting to see how things unfold before we continue to move our reserve right.
Okay, Alright, Thanks, and then on the expense front I know you.
[noise] kitted that you expect some increase in the fourth quarter, mainly on seasonality and then you expect to increase your investments into 20 twenty-two how should we think about expense levels, then for the fourth quarter and more importantly for 2022 as you continue with the business investments versus.
This year.
Yeah, I think the way to think about expenses is remember right now interest expenses included in there. So we're continuing to see about 10.
10 basis points, a quarter of improvement on that side and we're gonna see seasonal increases in the fourth poor along with a little bit of an increase in.
Vestments for next year will give guidance for 2022 in January.
But again, we're going to deliver positive operating leverage for next year. So.
I wouldn't be worried about our expenses are gonna outpace our revenue yeah, I think the thing to keep in mind as well.
When we invest in the business. We have we have flexibility we can lenient on investments that we think are moving.
Hanging off in the near term we could.
Potentially ease off on investments out of that so we have that flexibility too.
And the expense space to invest heavily already for ease up based on the environment and the macroeconomic conditions.
Got it okay. Thanks for taking my questions.
Thank you. Our next question comes from Bill <unk> cash from both research belly line as a pen please come to help.
Thank you good morning, everyone.
I wanted to follow up on the business transformation as you continue to look more like your peers can you discuss how you were thinking about your your bank subsidiaries, how long before you started thinking about capital at the enterprise level have you communicated any attention to your regulators or any potential changes in that bank subsidiary versus parent structure and and it is it.
Reasonable to expect that you would suspend the buyback until you rebuilt capital Ah at the enterprise level sufficient to get your she eats you wind up to peer levels and that sort of come to 11% range.
Yeah, a couple of things. So we're we're considered based co span of a considering the back instruction what should that be we've not made any decisions yet on that as of as of yet but we are.
Evaluating evaluating structures and obviously, we will keep our regulators.
Apprised, that's appropriate going forward in terms of buybacks are view is we will work with the board and we wanted to ensure that we are well capitalised and we have our balance sheet is a strong enough to sustain buybacks and.
As we move forward that will be a decision that we make with support.
Oh understood separately can you discuss how you were thinking about the interplay between the the pace of normalization not just in the net charge off rate.
But also in payment rates at a high level do you think that net charge offs in payment rates would eventually both normalized back to that you know 2019 range at a similar pace or do those metrics not necessarily have to move in lockstep with one another.
Yeah, I think the way to think about it and and Tamil correct me, if I'm wrong, but the payment.
Payment rate and delinquency are intertwined right as payment rates start to normalize back down.
Delinquency walls start to that you would expect to increase some for us as we continue to transform our book of business through new products and risked mix I don't I wouldn't expect that payment rates will get as low as what they were in 2019 Prepandemic because.
Portfolios Gonna look different in the future.
Is it 12 months from now is it 18 months that who knows where the end state is but that's that's what I would say on that and then even from that point forward. The book is going to continue to look different depending upon how we lever up proprietary card or co brand relative to private label and the new products that we're adding an for install Malone and breath.
Got it that's really helpful. Thank you for taking my questions.
Our next question comes from Manhattan Bhatia from bank for mankind to hang on the line as I pumped. Please go ahead.
Thank you good morning, and thank you for taking my questions. Maybe I just wanted to stop if you could go ahead and do that says Oh partnership Ah maybe you could just give us some more details that you'd be willing to share just are you going to need to sign up merchants individually all will not.
Anyone who's offering says, though will get function.
Functionality just don't it automatically is painful in that relationship ceded that says though.
Who owns the customer relationship you know is it you is it says though how is the fact that should go into work in terms of you know just the way of the Lord and said and who gets which loan just any additional details you can shed like revenue sharing or anything that's going on there.
Me.
Obviously things are confident you'll let me start so we will be integrated in several offerings for 40000.
Of their merchant so the presentment will be will be a several presentment, but will be integrating that presenting as a choice for installment wrong on 40000 40000 of their merchants.
Will we will underwrite we will service and the receivable will be on our balance sheet for install mcglone.
In terms of buy now pay later will be in competition with settled for buy now pay later.
So we feel we feel good about the opportunity to work with settled across their 40000 merchants and again, we will we will service and have that one on our balance sheet Belle any other any other details that.
We could provide I have left out.
Yeah, I I I think you hit it Brown and now I'm Gonna get anything I would highlight on there and you know we do have the ability because we do on the receivables and it's on our books and with everything we also have the ability to cross selling to other products down it's a bad relationship breath at a line very much like our distribution.
Oh very similar either.
Either and gives us an opportunity to distribute that installment lending Friday, yeah. So one to one to many data.
Understood and then if I can ask the question just on.
This call. It though you had a nice benefit of men really on both the grocery inside and cost a fun site, maybe talk a little bit about what drove that this quarter, how sustainable is that going forward and like just any expectations you could share a bit.
<unk> Q for even for 2022 would be great just on both the grassy land close one got the funds right. Thank you.
I think that's my question, so gross yield as I talked about in the prepared remarks, it's seasonal so I would expect the fourth quarter to come back down at 20, 2022, and a half range similar to what it was in second quarter and it's everything I can offer a lot more comments on that going forward, except to say that our goal is to maintain.
<unk> strong returns and and steady gross yield as it relates to cost of funds were seeing continued improvement as we become less reliant on asset backed securities or other cost of funds that are a little bit higher and growing or retail deposit base. So as we grow our portfolio well funded more.
Direct consumer retail deposits that have lower cost of fun. So I would expect that will continue to come down over time.
Sorry can I just ask one follow up has you add most needs RBC type relationships in place would wouldn't I guess it would be at a b C right now, but we wouldn't that.
Bush gross yields higher and jump back in queue off of that thank you.
Oh, that's a fair point is that when you think about an RBC relationship where it's just a direct revenue stream that could be a slightly accretive to grow shield at the same time as you put other products into the mix. Some may have lower gross yield so it really depends on the product mix and streams that will end up.
Resulting gross revenue outlook.
Okay.
Next question comes from Jeff Adelson from Morgan Stanley Jaffe line is I've been please go ahead.
Good morning.
Good morning, John too.
Good morning, now there were a couple of months away from the end of 2022, just wanted to get a sense of what you're seeing or what you're thinking on this trajectory and timing of your Ah.
High single digit low double digit receivable growth expectation for next year, just wondering about the cadence of that is is should we be expecting this more of an angle for the year or more of an average goal for the year.
Yeah at this point I think we've said receivable growth in that range. The range is arrange for a reason and there's a lot of factors that go into that including obviously customer behavior in payment rates will influence, which ended the range where at.
You've heard from the team or a pipeline as strong our business activities are robust and we're feeling very good about consumer health driving topline spend credit sales and then it.
It turns into will be largely dependent on payment rate.
Got it and just on the competition out there wondering in your conversations how the competitive tenor feels right now it feels like everything is kind of increased intensified in recent months.
And as part of that I, just wondering you know, there's a pretty large portfolio out there with.
With Amazon's relationship are you guys involved in the conversation and just wondering how you were thinking about that portfolio potential.
We're always involved in the conversation and it comes down to a couple of things. One is is it profitable for avs too.
To to to partner or to go after that portfolio and second.
How hard will be to integrate and how hard it will be to service and we take all those things to account as we as we move forward.
Some of the some of the larger portfolios quite frankly, our margin crushing because there are a lot of competition out there for all those large portfolios the beauty about avs as we can play in the small and mid sized businesses. So if you think about a billion dollar portfolio. That's a great portfolio have your margins, maybe a little thin and you have to do a lot of some customization.
We love those portfolios and we are in competition with those but that magic middle that $100 million portfolio. You put 10 of those together that's a billion dollars. The economics are usually very good on those portfolios and they're easy to integrate and their standardization there so wow.
We like to go.
Elephant hunting, we like a mid mid to your portfolio is because they're very very profitable for us and we service those very well.
Understood. That's all I had thank you guys.
Oh next question is from <unk> from Deutsche Bank menu line is I've been please go ahead.
Great. Good morning, guys. Thanks for taking my question, Ralph I think Intraquarter, you mentioned that installment loans might be a little impacted by supply chain management issues I just wanted to get your thoughts on one do you still believe that you could put a double you know an installment loan receivables by year end 21, and then two at the supply chain management issues.
I still persisting or a baby the gone to moderate any color that would be helpful. Thank you.
Yeah, a couple of things so if.
If.
I know.
There's been a lot of talk about supply chains, and if you think about where we are we are right now we haven't seen a big impact on supply chain, thus far what our merchants have done is they've extended the Christmas season. So they have extended it is October and we're starting to see some some some good sales there. So I'm speaking about credit card in particular and.
Some of the vertical that were in which we're luxury beauty apparel.
Seem to be holding up fairly well, but that said, we're working with our merchants in terms of what they're up what they are.
What their constraints might be going forward. So we may be impacted by the supply change that we move forward in terms of installment loan and doubling our receivables.
I'm very pleased with where we are with Greg as I said, we're adding partners every day, we've got strategic relationships with several in five serve.
Are we are really poised to scale in 2022, we've hit a couple of weeks at a little headwinds as it back into the payment rates would be probably the headwind I would say that.
That that slowed us down a little bit, but by and large were really bullish on the growth for 2022.
Gotcha, Okay, and then I use my second question, it's probably for for Tammy and Perry I think you know you guys you guys got it the net loss rates in the high 4% of anything I think I mentioned profitable growth at lower than average install the loss rates I'm curious if you expect losses, a trend back to that historical 6% to 7% level or if.
You can actually see structurally lower losses, giving your portfolio mix change there.
Yeah, I think thanks for the question I think the.
From what I said earlier, I would expect structurally lower loss rates and what that 6% to 7% range again, Tammy can speak to our underwriting a strong we know what we're doing in this space and but with the product mix that we're going after a little bit more mix of proprietary card co brand and some of the partners will bring on I would expect.
Us to be able to have a lower than prepandemic losh recalling forward, yeah, that's right Harry and I think we even discussed that and demand that call. When we talked about our future portfolio next will drive us kill a lower.
Normal historical loss rate and again, our continued focus will be unprofitable going forward and is Gary shared certainly our credit underwriting and account management strategies are critically important to that in a few Tammy continued to focus on that.
Great. Thank you.
Next question comes from John off Strung from obviously capital markets. John Your line is open. Please go ahead.
Good morning, everyone.
Morning.
Just kind of a simple question here, maybe for your period, but.
You beat earnings estimates by I guess a dollar.
First one dollar.
And.
When you look at your numbers.
Going forward is it as simple as taking out the $45 million in earnings from oil to one.
And saying that.
That can be a run rate for your company or is there anything else you would call out and say aw.
No that doesn't count or is that just the right way to look at it as simple as that.
Yeah, I mean, you have this segment results.
And I think you are pretty close to looking at it in a reasonable way right I mean.
I'm not going to suggest how you should model run your models going forward.
Sort of inputs into it obviously, but that should look at loyalty one that has the value that you would extract.
Uh-huh.
Okay again.
Artist seasonality and things of that nature.
Yeah, Okay. So yeah I mean, it's just down again, it's a simple question, but you are saying.
On a court basis, it could be high three eight he's on a quarterly basis, and we have to make our own decisions on credit card, but it's it's as simple as that from your point of view.
Credit card good point in credit costs reserve as you grow almost reserve build that you have how much investment seasonality all the things that go into it.
For this quarter that is correct.
Yep, Okay, alright, thank you.
Oh next question comes from dominate Gabriel from <unk> dominate your line is <unk>. Please go ahead.
Hey, great. Thanks, so much in the great quarter, you know I had the opportunity opportunity to speak with the Cecil C E O and money 2020, and and there's obviously just a lot of excitement around this partnership and maybe you can talk about you know what opportunity to cross sell into that.
Base. Besides just even an installment loans could be and then maybe you could talk about.
The difference between white labeling your product and having your bread product and then also having at the same time the bread logo at an existing partners. So two buns. So the partners branded button and the bread button is that possible maybe we can just walk through a few those thanks. So.
[noise] much.
So let me let me.
Let me start and I'm going to ask to jump in I am as excited as as Charlie is in terms of our partnership together I put a lot of respect.
An aberration patrolling I think it's both a great product and a great company and I'm really excited to partner with them.
The white label.
The the white label approach I really.
I think that is an excellent approach for buy now pay later installment loans, because we ended up into by flow and the customer.
Use it as just a continuation of the purchase process and so there's no punch out there is no downloading of an app. It's just it's just an extension of the process and offering which I think is is critically important as I said before we're not asking the customer to download or have we are servicing the customer right. There on the merchant's website and.
With data and analytics and everything we do we want to generate our next transaction for the merchandise with our buy now pay later platform. So.
That I think is up distinguish between white label.
Val to kind of that was at 2020 I was not so.
So.
A little bit about Brazil opportunities and she has some time it charged me as well.
Great. Thank brown.
Yeah, I think it's all gone round point, Iran. At the White label, you know clearly a weight.
To ensure that we are kind of friendly banter at the point of sale and with that though that that will be the marcinek record for the relationship Bradwell Ellen in service the receivables and so I think consumer will also see the brand name and their service, saying that loan and portfolio. So Ah nice lay on the Brandon site.
We have an opportunity on crosstown. If you think about you know today, you heard Kerry talked about cost of funds and increasing our container deposit we have an opportunity to process. All on the private side. We also had to have an opportunity to cross that line or proprietary add credit card. So.
As we continue to expand on somebody that would direct to consumer opportunities. We continue to have the opportunity to set up at crosstown at the customer base that.
Great and then just maybe one more on the gross yield. This this quarter just so you know we.
We don't go running off and then perhaps having a really high third quarter twenty-two yield could you just talk about the the benefit given the reduction probably an interested and feed net charge offs that boosted the yield quarter over quarter, the yield benefit quarter over quarter there.
It may not be repeatable and then twenty-two thanks.
Yeah, I don't know if I'm going to give them a lot of detail into the gross yield except to the extent that this is normal seasonality that we see in our yield.
When you look back to sleep.
Last year.
The delinquency starting to tick off so you get a little bit more late fees coming back in but outside of that things are looking strong within yielded.
Again, we signal that we expect steady yield outside of normal seasonality.
Great. Thank you.
Oh next question comes from Michael Young from Travis Securities. Michael Your line is open. Please go ahead.
Good morning, Thanks for the question I'm not sure. If this is better for Ralph for Perry, but it's been a long time since we've seen you know more material inflation in the U S and just wanted to get your maybe high level thoughts on impact too sales volume, an average receivables versus impact to the expense space and you know.
If that would be a net positive for a D S or not.
Yes. This is Terry I'll take that.
There's a lot of debate on inflation, we're all reading the different points of views out there in the range the gamut.
I think so point of view is around inflation, the consumers asking of goods increases.
It doesn't change the credit lines and the lines of customers have available so and with wage growth.
Perhaps that will increase lines as they demonstrate their ability to pay so as I think about it can help and aid are overall.
Sales growth factors into the next year, so long as the customers wages increase to afford it and if you look at the the base of who our customers are and Tammy could probably stand more on it when you think about minimum wages going up in the wage growth attacking overall and incentives that are out there for companies to read.
Higher.
I think that's a positive for us and it gives people more than the ability to buy buy more discretionary and then those things cost a little more.
That doesn't hurt our overall sales growth. The question is does wage growth keep up with that so that does create strain on the customer.
Yeah, I think the only thing I would say about.
Think about inflation you also think about wage inflation and there was a war on talent out there and that May impact as we move our expense space is move forward, but I think it's it's it's.
Environment wide, but that's where I see us getting impacted from a from a expense perspective.
Okay, great appreciate it and as a follow up I apologize that's a little different question, but just on the stores and physical store locations being open you guys have a perspective on you know kind of what percentage of your partners have their stores fully open and what remaining tailwind there could be.
Is more stores open up in a post kind of Delta variant.
Yeah I think.
I think all of our partners have their stores open I haven't heard of any of our partners not opening their stores and.
As I go to the to the bricks and mortar I think is good good traffic I think we've collected trapped during the holiday season.
People are cautious I mean, there's mask wearing I think everybody's obeying the rules, which I think is a good thing as vaccinations become more prominent.
You'll see I think you'll see more.
Influx into the mall, so I have not seen anything that would give me a concern that.
At the malls are not functioning as as we'd expected as we've expected in this year.
Okay, great. Thanks.
Our next question comes from vaginal Smith from J P. Morgan led to know what your line is open. Please go ahead.
Thank you good morning, guys. Thanks for taking a question.
I wanted to talk a little bit about the bill.
Bill.
Somewhat surprising that you guys announce that that we didn't expect it and it feels like.
An endorsement of of your bread platform I guess the question I have is.
What are the advantages in your mind do.
It says it'll get.
By using your platform rather than developing in house and then my second question Oh, a follow up to that is have you considered.
Something greater than a partnership and so I'm looking at the valuation scheduled I'll look at what you pay for bread I think about you know the.
The dividend that you're going to receive from.
The loyalty when you consider anything more substantial.
And talking to death.
So I think we have several guests as a top quality product and customer experience.
For this distance between two points right it's about execution.
So I think for both companies that's that's a great advantage we get the.
We get the.
Access to a 40000 merchants they get a top quality product that they can implement.
Faster than when they that would have been in terms of development. So there's no capital outlay if shifts were in market. So I think that's the for both of US that's a win win for both organizations.
In terms of other other other relationships.
<unk>.
We're strictly in our balance sheet right now and we're really focused on.
Executing everything that's on our plate and rather than looking for something new to put on our plate at this point.
At one point towards Ralph just said with the proceeds from the spin for governance of our current debt.
Required to pay down the debt.
Proceeds and invest it somewhere else.
I understood and if I can get one more in my call dropped it really something that yoga was covered but did you guys provide any any color on I guess the in store sales versus digital sales.
Any anything of that nature to come and help us understand what's going on within you mix.
Have your business. Thank you.
It gives us.
So if you look in the presentation, we actually provide in store versus digital sales and so you'll find that on the last page.
And I really don't have.
We're not going to provide an outlook for that but you can see how things are trending and it's basically as consumers reason is rosten early people will talk to the malls and resuming in store I think you're seeing that become labutta, increasing mixed for us given our merchant partners, but still maintaining a strong digital presence and we are impacted by a little bit of a non renewal and this <unk>.
Quarter that was more.
Digital and can store yeah.
I think the thing to remember is two years ago, we were pretty much very much MC brick and mortar focus in digital sales was that a big part of our portfolio. We leaned heavily over the last two years and digital and we're seeing some of the benefits of that in the mix. So we are everyplace, our customers want to transact whether.
It's at the mall or or online, where we're able to transact with him more now than we've ever happened before.
Perfect. Thank you.
Our final question comes from David Shelf from J M. P Securities. David Your line is open. Please go ahead.
Great. Good morning, and thanks for squeezing me in here at the end.
One one follow up question.
And bread I know there.
He continued to be obviously, a lot of questions about sort of longer term the economic model.
A fine now pay later, how it may evolve.
But I think what one of the most difficult things.
Maybe to get visibility into is that in you know.
In contrast to private label, which historically is an exclusive arrangement. This is sort of the first product a D. S is involved in.
And which there's not client exclusivity.
And I'm wondering.
Can you give us a sense for example.
When we get metrics like 30, new direct signings in the last 30 days, whether those were all exclusive arrangements or whether you were added as a additional provider to those merchants and maybe the same thing.
It says all to give us some sort of context about you.
You know just what the.
Current footprint already is with with these merchants in terms of other providers.
Yeah. So.
I can't speak for the 30 30 merchant sign in 30 days.
But I'm sure some of them may be exclusive.
May not be exclusive I think the key for us is.
Competitive pricing and ease of use that's going to put us at the top of the league table, whether we are obviously for exclusive exclusive and a desk and appears to the top of the table. We have good rates were fair with the consumer and we are able to.
They are able to transact with a seeming seamlessly I think that's the.
That's the most important.
Val any anything to offer in terms of settle in in terms of how we're how we're approaching it.
Yeah, and and I would just add I think one of the other big Differentiators for US is our model you know in Ralph mentioned it earlier.
We do go to market and driving loyalty and sales and increasing average order value for our brand partners. Many of our competition is really more trying to get the intermediate the customer and that shopping experience and positioning themselves at the start of the shopping journey through an app and so yeah that type that model resin.
<unk> Wow with our partners and so I think that's a key differentiator and and then the other thing I would say on the it said both died again predominantly at village relationship. There is a single party, providing the buy now pay later and so many of them are <unk> <unk> <unk>.
Most of the S. M B market merchant you have a a singular.
<unk> that they do elaborate you're in the in the pulling for example.
Got it no no. That's that's very helpful. Eight one follow up completely different topic on cost of funding.
It's been a while since the topic of deposit funding.
It was kind of you know.
Broached in much detail it any any updates on the plans there and kind of long term.
That night factor in in terms of the overall mix.
Funding profile.
I think as I mentioned, we're expecting to come down and say at least 10 basis points per quarter for a period of time as we throw the portfolio and we increase the mix of retail deposits is just by that mix alone.
We're going to.
Get the benefit from that from a lower funding costs and is Val mentioned in Ralph Merchantville cross sell that into existing customers as well as offer direct.
So Perry Val and Tammy. Thank you for joining me today. Thank you all for joining us for the call and your interest in alliance data just to be clear, we remain focused on executing our strategy a strategy in our transformation plan and building the future. So everyone have a terrific day and thank you all again.
Thank you everyone for joining today's cool you may now disconnect your lines and have lovely day.
Uh-huh.
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