Encore Reports Modest Results but Big Jump in Purchasing Activity

Debt purchasing powerhouse Encore Capital Group (NASDAQ: ECPG) late Thursday reported earnings for the 2007 third quarter that showed an increase in revenue, income, and debt purchasing activity but fell just short of analysts’ expectations.

San Diego-based Encore reported net income for the three-month period ended September 30 of $5.4 million, or $0.23 per share, a nearly 4 percent increase from the third quarter of 2006. Revenues for the quarter came in at $62.7 million, up 3.5 percent from revenues reported in the same period a year ago.

Analysts estimates, compiled by First Call, had predicted Encore would report earnings of $0.24 per share.

In its earnings press release, Encore said that the relatively small increase in earnings over the year-ago period was primarily attributable to costs associated with its cost reduction initiative announced last month (“Encore Capital to Cut Jobs, Exit Healthcare Sector,” 9/18). Encore said in September that it would be exiting the healthcare sector and would lay off some 115 workers. On Thursday, Encore said that it took a charge of $2.1 million, or $0.09 per share, in the third quarter pursuant to the cost savings plan, but that a beneficial change in the company’s tax rate contributed $0.05 per share to net income.

The company said that operating expenses, outside of the announced cost reduction plan, increased 13 percent in the third quarter, driven by increased employee salaries and rising healthcare costs.

Encore also reported a sharp increase in debt purchasing activity for the quarter. In the third quarter, the company spent $47.9 million in debt portfolios with a face value of $1.3 billion, up 48 percent from the $32.3 million it spent on $1.1 billion in face value debt in the third quarter of 2006. Encore said that it spent $41 million of Q3’s purchase total — or 86 percent — on credit card portfolios specifically, with the rest being classified as “other.”

Gross collections for the third quarter were also up sharply, with $85.6 million reported for Q3 2007 compared to $75.8 million reported in Q3 2006, a 13 percent increase. Of the $85.6 million collected in the quarter, $42.6 million was through Encore’s legal collections channel, $30.6 was collected in the company’s collection call centers, and the rest through other collection channels such as outsourced contingency collections.

For the first nine months of 2007, Encore reported revenues of $195.3 million, up 4.4 percent from the same period in 2006, and net income of $10.2 million, down 41 percent from the $17.4 in net income reported for the first nine months of 2006.

On the home page of Encore’s web site today, there is a message to employees regarding the recent wildfires that have ravaged Southern California. Employees were urged to call an emergency number daily this week for updates on operating status. According to the recording at the number, Encore resumed business as usual on Wednesday of this week. It is not immediately known if Encore was inversely impacted by the fires this month.