Post-Costco, Amex shows signs of digital-driven recovery

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American Express responded to the stresses from the decline in cobrand business with record ad spending and a focus on digital delivery to lure new customers and expand relationships with existing accounts.

It appears as though that strategy is starting to pay off, as Amex attracted 2.6 million new cardholders in the first quarter of 2017, with 60% of these new accounts coming through digital channels, the company reported April 19.

"Digital has become an important strategy for acquisition of new card members, particularly the millennial customers," said Jeff Campbell, executive vice president and chief financial officer during American Express' first quarter earnings conference call.

SUSANA GONZALEZ/BLOOMBERG NEWS

American Express has focused on Internet of Things technology, participating in distributed ledger initiatives and accelerating its embrace of contactless payment technology such as host card emulation, both of which are key to supporting emerging mobile payments apps and e-commerce. Amex as also supported the expansion of third party mobile payments apps in Canada.

"We talk a lot about the nature of our closed loop network, which allows us to be adept at working in the social media field. We have been at the forefront of bringing digital, social and payments together," Campbell said, noting partnerships with companies such as Airbnb, Twitter and Facebook to appeal to mobile-savvy and younger consumers. "We are looking to build lasting relationships, not just the 'next thing' for six months."

The moves followed the hit Amex suffered following the lost of Costco's cobrand business in 2016, which sparked an accelerated embrace of digital payments. Amex senses a corner has been turned, and it's now working to lower marketing spending and operating expenses, setting a goal to remove $1 billion from the company's top line, a goal that will also rely on using lower-cost digital and social channels. "We expect that year-over-year decline in operating expense to become larger toward the end of 2017," Campbell said.

For the quarter ending March 31, Amex reported revenue of $7.89 billion, or a decline of 2.5% over the prior year. That's better than the $7.79 billion estimate from a Bloomberg survey of 21 analysts. Net income dropped 13% to $1.23 billion, or $1.34 per share; from $1.43 billion, or $1.45 per share, from the prior year. The drop was due to the lingering impact of the loss of Costco. Excluding Costco, revenue increased 6.22%.

Rewards expense increased 6%, Amex reported. The company is trying to rein in that expense through initiatives such as suppressing the number of people who apply specifically for the sign on bonus.

"I would expect see rewards cost go up over the next couple of quarters, but it's mostly [Platinum cards]. We are encouraged with the trend that we have seen in business metrics over the past few quarters," Campbell said, affirming the company's overall financial outlook for the rest of the year.