Debt Buyers Report Huge Earnings in First Quarter

Two publicly traded accounts receivable management companies late Tuesday reported financial results for the first quarter marked by large increases in collections, revenues and net income.

Norfolk, Va.-based debt buyer Portfolio Recovery Associates (Nasdaq: PRAA) announced Tuesday after the close of the stock market that it had achieved record first-quarter cash collections, cash receipts, revenue, and net income in the first three months of 2010. The company’s net income increased 47 percent to $14.8 million, or $0.91 per share.

San Diego-based ARM firm Encore Capital Group (Nasdaq: ECPG) reported similar success during the same time period. The debt purchaser said that net income in the first quarter increased 21 percent to $10.9 million, or $0.44 per share.

Revenues and Collections

Portfolio Recovery Associates (PRA) reported record revenue of $83.4 million in the first quarter of 2010, up 22 percent from the same period last year. Cash collections were up 33 percent to $119.2 million.

The results greatly exceeded the expectations of analysts. According to a Thomson Reuters poll, analysts were expecting earnings of $0.86 per share on revenues of $78.9 million.

PRA saw increases in all of its collection channels, but the receipts from its internal legal collection efforts made the largest gains. Internal legal collections accounted for $10.7 million – up 203 percent from Q1 2009 – while external legal collections grew 3 percent to $18.3 million. Call center collections continued to be the largest channel, accounting for $57 million in cash collections, up 12 percent, and collections from purchased bankruptcy increased 88 percent to $33 million.

The company’s fee-for-service businesses generated revenue of $15.4 million in the first quarter of 2010, down 8.9 percent from the same period a year ago. These businesses accounted for 18.5 percent of PRA’s overall revenue in the first quarter of 2010, down from 24.8 percent in Q1 2009.

Encore reported total revenues of $87.3 million in the first quarter of 2010, up 14 percent from the same period a year ago. Gross collections were $141.3 million, a 23 percent increase over Q1 2009.

Encore also saw significant gains in some of its collection channels, with collection agency outsourcing increasing 131 percent to $17.8 million. Collections from the company’s call centers increased 31 percent to $65.8 million while legal collections remained relatively flat compared to Q1 2009 at $57.2 million. Portfolio sales and other channels accounted for $538,000 in collections in the first quarter.

Revenue from bankruptcy servicing was $4.4 million, a 6 percent increase over the $4.1 million in the same period of the prior year.

Debt Buying Activity

PRA said it purchased $1.9 billion of face-value debt during the first quarter of 2010 for $102.6 million. This debt was acquired in 84 portfolios from 8 different sellers. The company invested $52 million to purchase $961 million in face-value debt in the first quarter of 2009.

Encore’s investment in receivable portfolios was $81.6 million, to purchase $2.1 billion in face value of debt, compared to $55.9 million, to purchase $1.3 billion in face value of debt in the same period of the prior year.

Other Items

PRA noted that in March, it acquired a controlling interest in substantially all of the assets of Claims Compensation Bureau, or CCB, a company that specializes in recovering funds and processing payments that are due under class action activities (“Portfolio Recovery Associates Expands Legal Services with Acquisition,” March 16).

PRA also announced in February that it had closed its previously announced public offering of 1.25 million newly issued shares of common stock with its underwriters exercising their option to purchase an additional 187,500 shares.

Encore said that in the first quarter of 2010, it expensed $8.5 million in upfront court costs, compared to $13.3 million in the same period of the prior year. The company also repurchased $25.6 million principal amount of its outstanding convertible senior notes, for a total price of $19.8 million, plus accrued interest. These repurchases resulted in a gain of $3.1 million or $0.08 per fully diluted share.