Portfolio Recovery Reports Lower Earnings on Record Cash Collections

Debt purchaser and collector Portfolio Recovery Associates (Nasdaq: PRAA) said late Tuesday that net income for the second quarter of 2008 slipped 12 percent. But the company also said that it set a new record for cash collections in the quarter.

The Norfolk, Va.-based accounts receivable management firm reported net income of $11.4 million in the second quarter, down 12 percent from the $13 million it reported in the same quarter a year ago. On a per share basis, earnings were $0.75 in Q2 2008 compared to $0.80 in 2007.

Analysts had been expecting earnings of $0.81 per share for the second quarter of 2008.

In a conference call with investors, PRA CEO Steve Fredrickson noted that net interest expense in the second quarter of 2008 was $2.6 million, compared to $200,000 in the second quarter last year. He said that this comparatively impacted earnings to the tune of $1.5 million, or $0.10 per share.

Cash collections in the second quarter hit a record $85 million, up 32 percent from the $64.6 million reported in Q2 2007. Revenue for PRA – which it defines as “cash collections reduced by amounts applied to principal on owned debt portfolios, plus commissions earned from its fee-for-service businesses” – increased 16 percent to $63.6 million.

Collections were up for all channels in the second quarter, on both a year-over-year and quarter-over-quarter basis.

Call center collections totaled $48.8 million, up 30 percent from Q2 2007 and up 4.5 percent from the first quarter of this year. Legal collections accounted for $22.5 million, up 7 percent from the second quarter last year and up 2.7 percent from last quarter. And bankruptcy collections totaled $13.7 million in the quarter, up 120 percent from Q2 2007 and up 26.9 percent from the first quarter.

PRA’s fee-for-service businesses generated revenue of $10.6 million in the second quarter of 2008, up 26 percent from $8.4 million in the same period a year ago. The company had previously stated that it would be focusing on growth its fee-for-service business (“Portfolio Recovery Fee for Service Business Thriving Despite Anchor Loss,” June 20), a point Fredrickson reiterated in the conference call. “We see our fee-based businesses as an important diversification of PRA’s growth engine,” said Fredrickson.

The company also said that it had closed on the previously-announced acquisition of government revenue enhancement firm MuniServices on July 1, an addition to its fee-for-service business after the closure of contingency collection arm Anchor. PRA announced the acquisition of MuniServices late in the second quarter (“Portfolio Recovery Associates to Acquire Government Collector for $29 million,” June 25).

Fredrickson also commented on debt purchasing noting that “In the difficult economy in which we find ourselves today, some competitors have begun to retrench either due to lack of capital or operating uncertainties. PRA is not.” He said that the company is sticking to its strategy of “seeking profitable and appropriately priced portfolio acquisitions.”

In the second quarter of 2008, PRA said that it spent $71.1 million on debt portfolios with a face value of $957 million. The debt was acquired in 58 portfolios from 21 different sellers. Approximately 95 percent of the portfolios, in terms of dollars invested, were a combination of Visa, MasterCard and private label credit card asset classes. The remainder came from pools of medical, utility, and installment loan accounts. Bankrupt accounts totaled 40 percent in the portfolios purchased in the quarter.