NCO Group Reports First Quarter Loss on Acquisition Expenses

NCO Group announced late Friday that it lost $9.2 million in the first quarter of 2008. But the company reported broad gains in its three main service lines and blamed part of the loss on acquisition costs relating to the purchase of Systems & Services Technologies, Inc. (SST) and impairment charges on purchased debt portfolios in its debt buying unit.

Horsham, Pa.-based NCO Group, Inc., one of the largest accounts receivable management and business process outsourcing companies in the world, reported revenue of $364.6 million in the first three months of 2008, an increase of 8.8 percent from the first quarter of 2007. But the company took a one-time charge of $5.5 million on the SST acquisition and a $6.2 million impairment charge on purchased portfolios to record a $9.2 million net loss. NCO reported a net loss of $2.45 million in the first quarter of 2007.

The company said in a press release that its ARM business line in the first quarter “operated above its revenue and profitability targets, primarily as a result of better than expected demand for early stage delinquency collection services, partially offset by the effect of the overall weaker than expected collection environment on third-party collections.” The ARM division recorded $273.2 million in revenues in the quarter, up nearly 14 percent from Q1 2007.

NCO’s customer relationship management (CRM) unit also performed above expectations, accounting for $85.7 million in revenue compared to the $79.1 million it brought in during the first quarter of last year.

Portfolio Management, the group’s debt buying division, “operated below its targets for revenue, profitability, and new purchases, primarily as a result of further deterioration in consumer payment patterns and a weaker than expected portfolio sale environment,” according to the release. The unit reported $28.7 million in revenues in the quarter, a 34.5 percent decline from the first quarter of 2007.

But NCO said that it did increase spending on portfolio purchases 4.8 percent in the quarter to $39.4 million. Michael Barrist, NCO’s CEO and chairman, said of the debt buying unit, “While our Portfolio business lagged our expectations, we believe our continued focus on underwriting discipline and efficiency has positioned NCO to take full advantage of the opportunities we expect will surface as pricing continues to rationalize.

In further comments about the company’s performance, Barrist said, “The first quarter of 2008 was very productive for NCO at several levels. Our ARM and CRM divisions exceeded expectations as a result of a stronger than anticipated environment for opportunity driven by the current economy and several rapidly growing client relationships. … Additionally, during the quarter we completed the acquisitions of SST (“NCO Group Acquires Loan Servicing Firm,” Aug. 31, 2007) and Outsourcing Solutions Inc. (“NCO Group Completes Acquisition of OSI,” March 3). I am pleased to report that both of these acquisitions are proceeding well and we are currently meeting or exceeding all of our operating and integration expectations.”

SST is a third-party collector that has serviced more than $22 billion in auto loan and lease, credit card and commercial equipment loan and lease debt since it began in 1995. Last year it had about 1,000 employees in its two Missouri offices in Joplin and St. Joseph, according to its Web site.

NCO’s purchase of SST brought together two collections firms largely controlled by JPMorgan Chase. The bank bought St. Joseph, Mo.-based SST in 2005. In November 2006, Chase’s investment arm One Equity Partners teamed with Barrist and other NCO executives to take NCO private in a deal valued at $1.2 billion. An NCO spokesperson told insideARM that One Equity Partners owns about 85 percent of NCO.