To read Ad Age's glowing coverage of Epsilon, the CRM giant, you'd think all is well at Alliance Data Services, the holding company that is its parent. It's not.
Start by looking at a recent NY Times column that savaged the way ADS' top executives get paid. Their compensation is based on something called "cash earnings," which as writer Gretchen Morgensen explains, is defined by adding up the expenses management spends. As management controls expenses, there's an inexhorable upward rise in pay:
So how does Alliance define "cash earnings"? As income that is adjusted upward by adding back certain expenses like the cost of the stock awards that the company gives to executives and employees.
In any other universe, costs reduce earnings. But in Alliance's happy world, expenses actually improve the bottom line.
Alliance adds other costs back into its income calculation as well. It takes a portion of the premiums that it pays when it acquires credit card portfolios and account lists, for example, and adds that to its earnings. Such premiums are normally viewed as a cost of doing business, but Alliance considers them to be an intangible asset, which it amortizes over time. Adding this amortization amount to its "cash" earnings each year generates a fatter figure.All this, of course, comes on top of the lavish perks -- for "living," having a car, paying taxes, country clubs and gold-plated health and life insurance -- that BNET described back in May. The NYT noted that some analysts don't like the way comp isn't linked to objective metrics.
Fair enough, if the company is doing well. But it isn't. It saw a 9 percent drop in revenue to $460 million in Q2 2009, and a 37 percent drop in net income to $29 million. There was also a $38 million loss of cash on its balance sheet.
And while Ad Age chirped that ADS' Epsilon unit "was distinguished by 7% growth," it turns out that all the rest of ADS' segments lost revenues.
This chart tells the story:
It divides ADS's revenues by its operating expenses, to find out how much the company earns in business per $1 invested in its everyday activities. As you can see, the company failed to anticipate the recession properly and its productivity is in a drastic decline. Where once it got $1.30 in revenue for every buck of expenses, now it only gets $1.22.
In short, ADS is currently a disaster area, and Age wrote about the one part of it that still seems to be functioning.