Q2: Alliance Data Systems Bets On Conversant’s Pipeline

alliance data ed heffernanAlliance Data Systems CEO Ed Heffernan isn’t thrilled with data marketing unit Epsilon’s 5% top-line performance, he said during Alliance Data’s Q2 earnings call Thursday.

“That isn’t an acceptable long-term number,” he said, adding he thinks its potential is 7% or 8%. Getting to that potential will require double-digit growth in Epsilon’s tech offering – which Heffernan said he believes it can accomplish – as well as performance from Conversant, the ad tech acquisition Alliance Data made last year.

But Conversant itself also faced hurdles, in that it had lots of practices that drove revenue but produced low or no margins. Since the acquisition, Alliance Data has been working to cut that dead weight, Heffernan said.

“We’re not out there to trade in 20x revenue without earnings,” he said. “We’re known for generating huge cash flow.”

He declined to specify what exactly Alliance Data trimmed.

“There’s a chunk of [Conversant] that’s a commodity,” he said. “Everyone has seen what has happened in ad tech in recent years and what used to be juicy stuff is more commodity-type business.”

The Conversant stack inherited by Alliance Data constitutes a demand-side platform, ad-serving and tracking technologies, tag management, mobile in-app advertising, affiliate marketing through Commission Junction and a traditional media network from back when Conversant was the ad network ValueClick. Much of those products have or are in the process of being merged into a consolidated offering.

The “pruning,” as Heffernan put it, took longer than Alliance Data execs initially expected. Consequently, Conversant continued to post revenue declines even after the acquisition.

“We thought Q2 would be relatively flat, but it came in about $13 million short on revenue,” he said.

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The upshot is that Conversant has inked deals with 10 existing Epsilon clients that Heffernan expects will drive an annual run rate of $50 million. The goal at the end of the year is inking deals with an annual run rate of $75 million to $80 million.

Alliance Data is leveraging its influence in the C-suite to get those deals done – something that Conversant, prior to its acquisition, had a hard time doing.

“When we first looked at Conversant … it was becoming dwarfed by large players in their space and had more trouble getting into the C-suite where spending decisions were being made,” Heffernan said.

The bulk of the company’s recent wins, Heffernan added, come from Conversant’s CRM business as well as the ad tech from Conversant’s Dotomi acquisition. These business units play into the core value prop of the unified Epsilon-Conversant offering: “using offline and online SKU level information to drive targeting on any devices – mobile, tablet and desktop.”

But for Alliance Data’s optimistic forecast around Conversant to play out, it will need to onboard quickly its 10 recent client upsells – about half are ready to go now.

“We need everything boarded by the end of Q3 to exit the year in strong growth mode,” Heffernan said. If that happens, he said expects a very strong start to the next fiscal year.

It will also catalyze Epsilon’s top-line growth rate, which has been hit by “softness” in its agency business. That business, described on the call as “project-based rather than contract-based,” is subject to the fickleness of clients. Alliance Data hopes growth from both Epsilon’s tech units as well as Conversant will mitigate that lack of stability.

In terms of quarterly revenue, Alliance Data saw a 19% YoY increase to $1.5 billion and Epsilon saw a 39% YoY increase to $495 million.

Epsilon’s first-half revenue performance was $739 million, while Conversant’s first-half revenue was $261 million.

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