Alliance Data Systems Corp (ADS) Q2 2019 Earnings Conference Call July 18, 2019 8:30 AM ET Company Participants Viktoriia Nakhla - AdvisIRy Partners Robert Minicucci - Non-Executive Chairman Melisa Miller - President, CEO & Director Charles Horn - EVP & Vice Chairman Timothy King - EVP & CFO Conference Call Participants Sanjay Sakhrani - KBW Darrin Peller - Wolfe Research Robert Napoli - William Blair & Company Andrew Jeffrey - SunTrust Robinson Humphrey Jason Deleeuw - Piper Jaffray Companies William Nance ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Large accelerated filer ☑ Accelerated filer ☐ FORM 10-Q (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-15749 ALLIANCE DATA SYSTEMS CORPORATION (Exact name of registrant as specified in ...

Client Base and Services - The company serves over 2,200 clients, including major brands like Bank of America and General Motors, across various industries such as financial services and retail[9] - Epsilon, a key segment, has over 1,800 clients and provides integrated marketing solutions leveraging data and analytics[21] - The company offers a comprehensive suite of marketing solutions, providing a competitive advantage over competitors with limited service offerings[9] - Epsilon's loyalty program management includes well-known programs like Dunkin' Donuts DD Perks and Walgreens Balance Rewards[23] - The company employs behavior-based customer segmentation and predictive modeling to optimize marketing strategies[25] - Epsilon's integrated marketing services are designed to improve client customer acquisition and retention[34] AIR MILES Reward Program - Approximately two-thirds of Canadian households actively participate in the AIR MILES Reward Program, which has been recognized as a "most influential" Canadian brand[16] - The AIR MILES Reward Program allows consumers to earn reward miles at thousands of retail locations, enhancing customer engagement and loyalty[18] - The AIR MILES Reward Program features approximately 140 brand name sponsors, enhancing its market presence and consumer reach[17] Financial Performance and Revenue - The company's top 10 clients accounted for approximately 31% and 33% of consolidated revenue for the years ended December 31, 2018, and 2017, respectively[56] - LoyaltyOne contributed 14% and 17% to consolidated revenue for the years ended December 31, 2018, and 2017, with Bank of Montreal representing about 19% and 21% of this segment's revenue during the same periods[58] - Epsilon represented 27% and 29% of consolidated revenue for the years ended December 31, 2018, and 2017, with no single client exceeding 10% of Epsilon's revenue[59] - Card Services made up 59% and 54% of consolidated revenue for the years ended December 31, 2018, and 2017, with L Brands accounting for approximately 13% and 16% of this segment's revenue[60] Credit Services and Risk Management - As of December 31, 2018, the company had $16.9 billion in principal receivables from 41.7 million active accounts, with an average balance of approximately $762 for accounts with outstanding balances[29] - The company processes millions of credit card applications each year using automated proprietary scoring technology to make risk-based origination decisions[29] - The accountholder base primarily consists of middle- to upper-income individuals, focusing on prime borrowers and not targeting sub-prime borrowers[30] - The net charge-off rate for 2018 was 6.1%, compared to 6.0% in 2017 and 5.1% in 2016, indicating a rising trend in charge-offs[64] - Delinquency rates were 5.7% of principal credit card and loan receivables at December 31, 2018, up from 5.1% in 2017 and 4.8% in 2016[64] Strategic Alternatives and Growth - The company is exploring strategic alternatives for Epsilon, including a potential sale, with preliminary bids received in January 2019[10] - The company anticipates growth in the Card Services segment from new and acquired credit card programs, which may lead to increased portfolio losses[61] - Future growth in credit card operations is expected to stem from acquiring existing credit card programs and initiating new programs with retailers[62] Regulatory Environment - The company is subject to extensive federal and state regulations that impose significant restraints on its operations[41] - Comenity Bank and Comenity Capital Bank must maintain minimum amounts of regulatory capital and meet specific guidelines involving measures and ratios of their assets and liabilities[42] - The Dodd-Frank Act and its regulations could significantly impact the company's operations and financial condition, with ongoing compliance costs expected[106] - The company is exposed to regulatory changes that could limit business activities and fees charged, potentially affecting profitability[97] - The CFPB's rulemaking authority may increase compliance costs and litigation exposure for the company[101] - The company must comply with various privacy laws and regulations, including the GDPR, which imposes greater compliance obligations compared to previous directives[47] Competition and Market Challenges - The company faces intense competition from marketing services companies, credit card issuers, and data processing companies, as well as in-house teams of current and potential clients[37] - The proliferation of ad-blocking technologies could limit the company's online advertising revenue, particularly on personal computers[124] - Increased consumer awareness and concern about privacy may lead to higher opt-out rates, affecting promotional offers and customer engagement[113] Operational Efficiency and Technology - The company operates one of the largest global permission-based email marketing platforms, sending tens of billions of emails annually[26] - Epsilon's marketing technology solutions support real-time data integration from multiple sources, enhancing client marketing decisions[23] - The company utilizes multi-channel marketing communication tools to assist clients in acquiring and retaining valuable repeat customers[34] Corporate Governance and Structure - The company’s organizational documents and Delaware law include anti-takeover provisions that may discourage unsolicited acquisition proposals[142] - The company’s Board has the authority to issue preferred stock without further stockholder approval, potentially complicating acquisition attempts[143] - Section 203 of the Delaware General Corporation Law may prohibit certain business combinations with stockholders owning 15% or more of the voting stock[144] Employee and Corporate Information - As of December 31, 2018, the company employed approximately 20,000 employees, maintaining good relations without collective bargaining agreements[52] - The company's corporate headquarters is located at 7500 Dallas Parkway, Suite 700, Plano, Texas 75024[53]