Amex Earnings Reflect Growth Investments

More than a year after it snapped back from the financial crisis, American Express Co. is ramping up investments for growth.

The New York company's expenses rose 17% to $5.6 billion in the fourth quarter. Part of that was tied to layoffs, but much of it was connected to its growth efforts in alternative payments, loyalty programs and security services.

"When everything imploded within the economy … American Express was uncharacteristically at the front of the parade, getting hit," said Brian Riley, a research director in the bank cards practice at TowerGroup. "They were distracted, and had to put everything down. Now, it's time to take advantage … and get back on the ball."

In November, Amex agreed to purchase the security technology provider Accertify Inc. of Itasca, Ill., for $150 million. The acquisition of the three-year-old company gave Amex a fraud-management system that works across all major brands: its own, Visa Inc., MasterCard Inc. and Discover Financial Services.

Amex's Business Insights unit offers information and consulting applications for consumer spending trends, advertising strategies and geographic expansion. It is also investing in its loyalty platform, Loyalty Edge, and the marketing firm Loyalty Partner, an acquisition it announced in December.

In 2009, Amex bought the alternative payments provider Revolution Money, which it now calls Serve. Riley said Serve's strength is its ability to enable debit transactions, though Amex has provided few details of its work with the company since it was purchased for about $300 million.

Amex spotlighted all of these as areas where it has begun channeling more money.

"It's going to take a real commitment that they have not shown up until now," Riley said. "They bought [Revolution Money] and the use was not quite evident. You couldn't easily justify the expense of the product."

That might be changing, analysts said.

Amex is now investing in prepaid products, a definite result from the Revolution Money acquisition, and it is also planning to improve its loyalty business.

Adil Moussa, an analyst for Aite Group LLC in Boston, said Amex is an a position to address a key fault of the many loyalty programs that commonly pitch inappropriate offers to their audience.

"There is no other way for making revenue in the future, if the players do not have a good loyalty platform," Moussa said. "Not only collecting data, but also having substantial analytics behind it, being able to predictively get people the right offer."

Though Amex highlighted its areas of investment, it provided few specifics as to how much funding it was providing or what its specific goals are for those units.

On a call with analysts, Dan Henry, Amex's chief financial officer, said these initiatives are intended to generate fee revenue and build out capabilities in the "digital space."

"Variable technology investments … are driving higher cost," he said. "Here, we're either investing to build capabilities to drive revenues or increase efficiency or in some cases, to support regulatory requirements."

Part of the reason for the increased expense is the closure of two call centers — one in Madrid, the other in Greensboro, N.C. Operations from those two facilities will be spread across Amex's global operations.

The move will cost about 550 employees their jobs, and about 3,500 employees will be affected in some way. Amex said severance and real estate charges from the move would cost the company $60 million to $80 million in 2011.

Last week, HSBC Holdings PLC said it too is laying off 500 employees from its credit card business this year.

Despite Amex's explanation for its rising expenses, its stock was down 2.81% to $44.51 by midday Thursday. Analysts said Wall Street is being short-sighted.

"I know the stock is down on perceived lackluster results," said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "[But], these seem like good, quality investments that need to be made, obviously."

Amex's net income rose 48% to $1.1 billion in the fourth quarter from the same period a year ago. Its revenue rose 13% to $7.3 billion.