WELCOME BUILDING BUSINESS ACUMEN Important Questions How much do you know about Epsilon and ADS Corporation’s Key Success Measures? (or Key Performance Indicators (KPIs)) Let’s find out! Pop Quiz For fiscal year 2010: Epsilon ADS $______ N/A $______ N/A $______ $______ 3 - What was our Total Revenues? $______ $______ 4 - What was our Net Income? N/A $______ $______ 5 - What was our EBITDA Margin? ______% ______% 6 - What was our Net Margin? ______% N/A ______% 7 – What was our Return on Assets? ______% N/A ______% 8 - How much did Total Revenue change YOY? ______% _______% 9 - How much did EBITDA change YOY? ______% _______% ______% N/A _______% 1 - How much Cash was on hand? 2 - How much Cash was generated by Operating Activities? 10 - How much did Net Income change YOY? Learning Objectives Understand the 10 key performance measures that are important to Epsilon, ADS and the Executive Team. List and describe the five business drivers all successful businesses must focus on. Teach specific components of ADS financial statements. Better articulate company performance & strategy. Create a personal action plan that can positively impact personal performance and company results. Acumen Means? 3 ~Wayne Gretzky~ “The Great One” When Gretzky’s Dad was asked by a reporter, “What makes your son so great?” He responded by saying; “Wayne doesn’t skate to where the puck is.” “ He skates to where the puck… is going to be.” (Hockey Acumen!) Acumen Means? …the ability to make good business decisions in a timely manner with an understanding of how the decision should impact the business. 3 Business can be tough! Only 5-10% of business start-ups survive past 5 years. 16% of CEOs lose their job every year. Booz Allen Hamilton 5th annual Study 70% of merger and acquisition activity do not live up to expectation. Wall Street Journal 2007 Why do businesses fail? 6 Business Acumen: Every business must focus on five business drivers. If they do, they will be successful. If they don’t, they’ll fail. Let’s Start a Business! 4 Cash is King! “Cash is a company’s oxygen supply.” -Ram Charan “Cash is more important than your mother." Al Shugart Former Seagate CEO What happens to a company who runs low on cash? Cash & Cash Flow Sources of Cash • Earn it •cash from Operation • Sell Assets Pro: No Cost -Con: Time Pro: Immediate -Con: Reduces Assets •Cash from Investing • Borrow it Pro: Immediate -Con: Cost (Interest) •Cash from Financing Can a company have too much Cash? 9 Cash Can a company have too much Cash? 1)More attractive in a buy-out. 2)Low return. 3)Shareholders don’t like it. 4)May make poor decisions. 9 How much cash should you have? Companies ought to keep just enough cash to cover their interest, expenses and capital expenditures; plus they should hold a little bit more in case of emergencies. Investopedia Definition: Cash DEFINITION What is required to grow and maintain the business. MEASURES Cash Cash – the bills and coins in the register, petty cash, and cash in the bank. Also includes cash equivalents, like CD’s and other highly liquid investments, that easily convert into cash within 90 days. Cash Flow – The cash generation from core business activities calculated from the difference between the cash that flows into and out of the business in a given period of time (month, quarter, annual) 8 Cash ADS (In Millions) ADS ADS ADS ADS 2010 2009 2008 2007 $2,791 $1,964 $2,025 $1,962 Cash and Equivalents $139 $213 $157 $219 Cash as % of Revenue 4.98% 10.86% 7.75% 11.17% $903 $358 $451 $572 Business Measures and Metrics Total Revenue Cash Cash from Operating Activities 9 Cash Benchmarks (In Millions) Business Measures and Metrics Total Revenue Cash Cash and Equivalents Cash as % of Revenue Cash from Operating Activities ADS VISA AMEX HarteHanks, Inc. ACXIOM 2010 $2,791 2010 $8,065 2010 $30,242 2010 $861 2010 $1,160 $139 4.98% $903 $3,867 47.95% $2,691 $2,498 8.26% $9,288 $86 9.99% $95 $207 17.85% $166 9 Equation: Purpose: Cash from operations + Cash from investing + Cash from financing = Net Change in Cash Cash Management ? Net Change in Cash Started Year Ended Year ? Definition: Profit DEFINITION What is left over after you have subtracted expenses. Can be expressed in dollars ($) or percent (%). MEASURES Profit EBITDA/EBITDA Margin– Reflects earnings before interest and taxes. Net Profit / Net Profit Margin – Profit after all expenses have been subtracted from sales. 10 Every business must earn a return that is greater than the cost of using other people’s money. -Ram Charan No Margin, No Mission. -Stephen R. Covey Two ways to impact PROFIT Total Revenues (Sales) $100 - Cost of Operations $ 55 - Provisions For Loan loss $ 14 - General & Admin. (G&A) $ 100% 3 =EBITDA $ 28 -Depreciation & Amortization $ = Operating Income $ 23 28% 5 -Interest & Other Expense $ 11 -Taxes $ 4 = Income From Continuing Operations $ 7 -Losses from discontinued operations $ -- = Net Income $ 7 23% 7% 7% Driving Profit High and Low Profit Margins S&P Average TTM: 11% Who has much higher profit margins? Coca Cola Microsoft Google Apple 33% 30% 29% 21% Why the high margins? Driving Profit High and Low Profit Margins S&P Average TTM: 11% Who has lower profit margins? ExxonMobil Wal-Mart Costco 8% 3.8% 1.7% Why the low margins? Calculating Adjusted EBITDA 2010 EBITDA $ 772,446 +Stock Compensation Expense $ +Loss on Sale of Assets $ -- +Merger and Other Costs $ -- = Adjusted EBITDA $ 822,540 50,094 Profit ADS (In Millions) Business Measures and Metrics Total Revenue Net Income ADS ADS ADS ADS 2010 2009 2008 2007 $2,025 $1,962 $206 $164 $2,791 $1,964 Epsilon 613,374 514,272 $194 $144 Profit EBITDA Margin 27.67% 27.14% 29.45% 27.94% Net Margin 6.94% 7.32% 10.19% 8.36% 11 Profit Epsilon (In Millions) Business Measures and Epsilon Epsilon Metrics Q2-2011 6 Month Total Revenue Profit Adjusted EBITDA Margin Operating Income From Continued Operations Margin Epsilon Epsilon Epsilon 2010 2009 2008 $188 $344 $613 Epsilon 613,374 514,272 $514 $491 21% 21% 24.83% 24.94% 25.78% N/A N/A 10.61% 9.62% 8.06% 11 Profit Benchmarks (In Millions) ADS VISA AMEX HarteHanks, Inc. ACXIOM 2010 2010 2010 2010 2010 $2,791 $8,065 $30,242 $861 $1,160 $194 $2,966 $4,057 $54 $(23) EBITDA Margin 27.67% 60.19% 19.72% 13.30% 2.67% Net Margin 6.94% 36.78% 13.42% 6.23% -2.00% Business Measures and Metrics Total Revenue Net Income Profit S&P 500 Averages: Net Margin = 11% 11 Profit In Action United Parcel Services (UPS) – Avoiding left-hand turns -92,000 trucks worldwide -Saved over 28,541,472 miles -Saved 3 million gallons of fuel -Reduced insurance premiums -Reduced maintenance frequency and costs 11 Epsilon Financial Statements The Annually Reported Financial Statements • Statement of Income (P&L) • Balance Sheet • Statement of Cash Flows 1. What is the basic equation for each statement? 2. What is the purpose of the statement? 3. What are the key numbers and how are they trending? 4. How can you impact each statement? Indicates: Equation: Revenues- Expenses= Income P&L Profitability SG&A: (Revenue = Sales) = Top Line • Salaries •Sales commissions •Benefits/Severance • Rental Expense • Bad debt charges • Merger integration costs • Professional services: Attorney fees, Accounting (G&A) EBITDA margin =27.67% = EBIT = Bottom Line Net profit margin = 6.94% EBITDA Margin Total Revenue: 2,791,421 EBITDA: EBIT 629,220 +67,806 +75,420 = 772,446 ÷ 2,791,421 = 27.67% Net Profit Margin Net Income: Total Rev. 2,791,421 193,737 ÷ = 6.94% = Net income / Diluted # of shares S&P 500 Ave. = 11% Increase revenue by 100K Statement of Income (P&L) 100K 55K 55K 45K 45K 17K 28K Statement of Income (P&L)Lower costs by 100K 100K 100K 100K 100K 37K 63K Which is better? Raising Revenues $100M = -or- $28 Cutting Costs by $100M = $63 What are the implications of each action? Assets (Read from guide book p. 12) Balancing… Asset Strength & i.e. cash, inventory and ratings Asset Utilization Definition: Assets DEFINITION Assets What we have and how well we use what we have. MEASURES Return on Assets (ROA)— percent value of Net Income to Total Assets 12 Example of Profits and Assets “In 1912, the Model T for the first time cost less than the prevailing average annual wage in the United States.” “Ignoring conventional wisdom, Henry Ford continually sacrificed margins to increase sales. In fact, profits per car did fall as he slashed prices from $220 in 1909 to $99 in 1914.” “But Sales Exploded!” “Ford demonstrated that a strategic, systematic lowering of prices could boost profits, as net income rose from… $3 million in 1909 to $25 million in 1914.” ~Daniel Gross, Forbes Greatest Business Stories 13 Assets ADS (In Millions) Business Measures and Metrics Total Revenue Net Income ADS ADS ADS ADS 2010 2009 2008 2007 $2,791 $1,964 $2,025 $1,962 $194 $144 $206 $164 2.34% 2.75% 4.75% 3.94% Assets Return on Assets (ROA) ROA = Net Income = $194 = 2.34% Total Assets $8,272 13 Assets Benchmarks (In Millions) Business Measures and Metrics Total Revenue Net Income HarteACXIOM Hanks, Inc. ADS VISA AMEX 2010 2010 2010 2010 2010 $2,791 $8,065 $30,242 $861 $1,160 $194 $2,966 $4,057 $54 $(23) 2.34% 8.88% 2.76% 5.78% -1.77% Assets Return on Assets (ROA) 13 Epsilon Financial Statements The Annually Reported Financial Statements • Statement of Income (P&L) • Balance Sheet • Statement of Cash Flows 1. What is the basic equation for each statement? 2. What is the purpose of the statement? 3. What are the key numbers and how are they trending? 4. How can you impact each statement? Indicates: Equation: Financial (asset) Strength Assets = Liabilities + Equity Snapshot in time Most Liquid Becomes Cash < 1 year Least Liquid Current Ratio = 1.6 Due First Due in < 1 year Due Last Balance Definition: Growth DEFINITION The ability to increase year over year, quarter over quarter, and/or month over month. “In today’s business world, no growth means lagging behind in a world that grows every day…” Growth “Investors expect it, employees are energized by it, customers are generally attracted to it and executives are measured by it.” MEASURES Revenue Growth EBITDA Growth Net Income Growth 14 Business in Rapid Decline… • Best & brightest leave first. • Productivity goes down. • Morale goes down. • Costs are cut, which limits ability to grow, company becomes less profitable. Studies Show: It usually takes 4 or 5 years for the company to recover. 15 Business in Rapid Growth… • Attracts/Retains the best & brightest! • Productivity goes up = more profit = more cash = more ability to grow! • Morale is high. • You have the ability to grow in your career! Growth gets more time & attention than any of the 5 elements in a public company. 15 Growth ADS (In Millions) ADS ADS ADS 2010 2009 2008 $2,791 $1,964 $2,025 $194 $144 $206 Revenue Growth 42.10% -3.01% 3.22% EBITDA Growth 44.91% -10.62% 8.78% Net Income Growth 34.79% -30.36% 25.81% Business Measures and Metrics Total Revenue Net Income Growth 15 Growth Epsilon (In Millions) Business Measures and Epsilon Epsilon Metrics Q2-2011 6-Months Total Revenue Epsilon Epsilon Epsilon 2010 2009 2008 $188 $344 $613 $514 $491 38% 31% 19.26% 4.68% N/A 26% 25% 18.8% 1.3% N/A Profit Revenue Growth Adjusted EBITDA Growth 15 Growth Benchmarks (In Millions) HarteACXIOM Hanks, Inc. ADS VISA AMEX 2010 2010 2010 2010 2010 $2,791 $8,065 $30,242 $861 $1,160 $194 $2,966 $4,057 $54 $(23) EBITDA Growth 42.10% 44.91% 16.70% 28.96% 13.14% 109.93% 0.05% 1.84% 5.53% -68.71% Net Income Growth 34.79% 26.05% 90.47% 12.32% -151.96% Business Measures and Metrics Total Revenue Net Income Growth Revenue Growth —Remainder of 2011 Outlook— “Maintain double-digit organic revenue growth in 2011. Augmented by the recent acquisitions, total revenue growth is expected to be in the mid-30 percent range compared to 2010. Adjusted EBITDA is expected to trend with revenue growth as margins are expected to remain consistent with 2010.” Q2 Press Release. 15 Q2 Earnings Release Page 47 Definition: People DEFINITION -The External Customer, Vendor/Re-seller, or Internal Customer that has the ability to impact the success of the business.. -Employees People 16 People What is more important than meeting customer expectations? Exceeding? Anticipating Customer Needs & Expectations! “If I would have asked my customer what they wanted, they would have said a faster horse!” ~Henry Ford 17 Failing to Anticipate customer needs/expectation! What companies have failed to anticipate customer expectations? What were the results? • GM/Ford • Kodak – Unprepared for recession and required government bailout money. Ford secured line of credit prior and retained full ownership. – decided to move to digital product line. Polaroid did not and is no longer a serious competitor. • IBM – In 1943, the CEO said the customer need for their product was approximately 5 computers for the entire world. • Sony – Did not move to a digital music player and lost a significant market share to innovative companies like Apple. 17 Goal for 2011 Sell More Fully Integrated End-to-End Marketing Solutions. “In our Epsilon segment, we have assembled what we believe is the industry’s most comprehensive suite of targeted and data-driven marketing services, including marketing strategy consulting, data services, database development and management, marketing analytics, creative design and delivery services such as email communications.” 2010 Year End Press Release Page 51 Industry Leadership We’ve Invested Over $1.3 Billion To Be The Comprehensive Provider Epsilon acquired by Alliance Data 1969 Epsilon founded Page 52 Oct 2004 Sept 2005 Epsilon acquired Bigfoot Interactive Nov 2005 Frequency Marketing, Inc. integrated into Epsilon ICOM integrated into Epsilon Epsilon acquired CPC Associates Apr 2006 Sept 2006 Epsilon acquired DoubleClick Email Solutions Feb 2007 Epsilon acquired Abacus Jan 2009 Epsilon acquires Aspen Marketing Services Ju l 2010 Jun 2011 Epsilon acquired the Equifax Direct Marketing Services Division Marketing Database Abacus Cooperative Design • Development • Hosting Transactional Cooperative Database • Predictive Modeling Interactive Survey Data Web design & hosting Real-time decision support Survey-driven Data • Targeted Marketing Solutions Loyalty Management Technology platforms & Program Strategy Services Compiled data Weekly New Mover • Lifestyle Demographic Data Processing Services CDI/PDI Data Hygiene NCOA, PCOA, Merge/Purge DM Agency Interactive Multichannel Communications Marketing Strategy • Account Management • Creative Consulting Services • Search Engine • Website Strategy & Analytics Print Production • Letter Shop Strategy Services • Modeling & Analytics Experiential Marketing Page 7 Direct Mail Hispanic Marketing Epsilon Ranked #1 in US Database Marketing Service Providers, Q1 2011 • Ranked #1 in Current Offering. • Leading scores in Database Management Execution and Fulfillment Corporate Strategy Industry Strategy Global Strategy • Strong Market Presence led by Financials and Employees Page 54 What are your best practices in anticipating CUSTOMERS needs? (Capture ideas on page 17) • Know your business and how you impact results! • Develop formal processes for listening to customers, both internal and external. • A quarterly meeting with your boss…ask, how am I doing? What could I do to improve? 629 + 143 = 772 2,791 194 2,791 194 2,791 629 + 143 = 772 194 8,272 1,964 408 + 125 = 533 144 1 139 2 903 3 2,791 4 194 5 27.67 6 6.94 7 2.34 8 42.10 9 44.91 10 34.79 Epsilon Corporation’ Key Success Measures 1½ SCORING: Right answer = 1 point Somewhat close = ½ point Missed it by a ways = 0 point 0 (within: $2B, $2, 2%) 35 Retaining Content over Time Content Retention Review Apply Teach 15% Time 52 Post Course Action Items: 1. 7 days: Teach one of the principals learned in class today, to someone in your department. 2. 7 days: Discuss your action items with your manager in the next 7 days. 3. 30 days: Read the first 90 pages of: “What The CEO Wants You to Know“ 4. 30 days: Get with your class partner and give an account of your progress on your action item(s). Start now: Build and practice your new business acumen skills. When making decisions, determine how the outcome will impact Cash, Profit, Assets, Growth, People… Learning Objectives Understand the 10 key performance measures that are important to Epsilon, ADS and the Executive Team. List and describe the five business drivers all successful businesses must focus on. Teach specific components of ADS financial statements. Better articulate company performance & strategy. Create a personal action plan that can positively impact personal performance and company results. Where to Find Information (page 55) * nasdaq.com * finance.google.com * reuters.com * hoovers.com * yahoo.com * smartmoney.com Glossary: page 58 One final thought… People will work hard for a paycheck, harder for a person, and hardest for a reason.