Atlanticus Holdings Corp (ATLC) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2006 CompuCredit earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Jay Putnam, Director of Investor Relations. Please proceed, Sir.

Thank you. Good morning and thank you for joining us for CompuCredit Corp.'s fourth quarter 2006 earnings call.

Before we get started I would like to remind you that some of our comments today will be forward-looking statements. These forward-looking statements include all statements of our plans, beliefs or expectations of future results or developments including our plans and expectation with regard to account and portfolio growth, acquisitions of portfolios outside our complementary businesses, the performance of our credit card receivables including net interest margins, other income ratio and charge-off levels, our ability to manage credit risks; growth expectations for our credit card, debt collections, retail Micro-Loans, (indiscernible) and other operations; the controlled expenses within our other segment; our recent acquisition of ATC; our recent, our expected levels of marketing expense; our income and earnings expectations and general economic conditions.

For information regarding some of the more important factors that may cause actual results to differ materially from those reflected in the forward-looking statements that we make today you should read the Forward-looking Information section and the Risk Factors in our Form 10-Q for the quarter ended September 30, 2006.

We also encourage you to review updates in the same sections of our Form 2006 Form 10-K when it is filed within the next few weeks. Thank you again for your interest in CompuCredit. Please feel free to contact me if you ever have any questions you would like to discuss.

You may also access our web site to obtain a hard copy of the press release and our financial statement, to view our risk factors or to listen to an archived version of this conference call.

I will now turn it over to David Hanna, Chairman and CEO of CompuCredit, for his remarks.

Thank you, Jay, and thank you all for joining us this morning.

I will spend a few minutes reviewing our results from the quarter and providing an update on our business. Then I will turn things over to J. Paul Whitehead, our CFO, who will discuss our financial results in greater detail.

After our prepared remarks, we will be glad to take any questions that you may have in the question-and-answer session.

Yesterday, we reported fourth quarter 2006 results, and on a GAAP basis we earned $9.7 million or $0.19 per fully diluted share compared to $3 million or $0.06 per share from the fourth quarter of 2005. On a managed basis we reported net income of $19.9 million or $0.40 per fully diluted share compared to $18.1 million or $0.36 per share from the fourth quarter of 2005.

Our managed earnings results were in line with our revived guidance we issued in early January.

Our net interest margin was 22.6% for the fourth quarter of 2006 compared to 22.4% in 2005 fourth quarter. This was down from the record 26% we posted in the third quarter of 2006. As you may recall, we announced on our last conference call that we had implemented a change in our credit card billing practices whereby we would no longer bill finance charges and fees on accounts that become over 90 days past due.

This change caused a drop in our fourth quarter gross yields while our net interest margin was still being offset by charge-offs of finance charges and fees billed on late stage delinquent accounts and earlier quarters, resulting in a temporary mismatch that contributed to our lower fourth quarter net interest margin. This change also depresses earnings in the first quarter of 2007.

But after the first quarter this change will have washed through and we expect to return to more normalized profits during the second quarter and beyond.

Our adjusted charge-off rate for the fourth quarter was 11%, slightly better than the 11.2% from last year's fourth quarter when we saw a spike in bankruptcy filings impact our business. Our adjusted charge-off rate includes the effects of the structural changes that we are experiencing with our receivables mix and J. Paul will address our charge-off statistics in greater detail.

We continue to feel good about our ability to manage credit quality in the current environment. With the tremendous growth we have seen in our largely fee-based credit card offered to those at the lower end of the FICO scoring system. increased charge-offs are to be expected and are worth the trade-off given the strong net margins that this particular offering provides for us.

Last year was another strong account and receivables growth year for us as we ended with $2.8 billion in managed receivables, a 12.9% year-over-year increase.

We have been pleased with the growth we have achieved especially considering that we did not have the benefit of a portfolio acquisition in 2006. Our organic growth more than offset the fairly rapid liquidation of the portfolios we purchased in prior years. With over 400,000 gross credit card originations in the fourth quarter, our marketing efforts continued to produce good results for us. We ramped up marketing spending in the fourth quarter to just over $30 million and as long as conditions remain attractive, as they now are for the origination of credit card accounts, we expect to increase marketing spending to an average of just under $40 million per quarter in 2007.

Much of the increase that we plan for marketing spending in 2007 is related to our Internet and television advertising campaigns that are meant to complement our traditional direct mail and telemarketing efforts. We began originating through these channels in a significant way for the first time in the fourth quarter, and ended up spending more than we had initially planned due to the success we had in originating through these channels.

Although we did not close any portfolio acquisitions in 2006, we were pleased with the growth in earnings performance we were able to achieve. We have maintained our strong liquidity position which should enable our continued active pursuit of credit card portfolio acquisition opportunities throughout 2007.

Moving from our credit card business, our Jefferson Capital subsidiary -- which comprises our investments in previously charged off receivables segment -- had another great quarter with $9.4 million in pretax fourth quarter earnings. This was up from $2.3 million in the fourth quarter of 2005, and we are pleased by the performance of this business line.

Jefferson Capital continues to acquire previously charged off receivables and sell them to Encore Capital Group for a fixed sales price under the five-year forward flow contract we entered into with them in 2005. Jefferson Capital also continues to focus its growth strategy on two other programs. Its balance transfer program and its purchasing and servicing Chapter 13 bankruptcies.

It also has seen some market segments where it makes sense to reengage in acquisition activities. Certainly on at least a test basis with respect to normal delinquency charge-offs. It acquired several small portfolios within these markets' segments in the fourth quarter of 2006 and we expect continued year-over-year quarterly growth from this segment in 2007.

Our retail Micro-Loan segment earned $3.9 million in pretax earnings in the fourth quarter, which was 21% higher than last year's fourth quarter. As of December 31st, 2006, our subsidiaries operated 475 storefronts and we now have four storefronts up and running in the United Kingdom. We plan to open another 60 full-service Texas neighborhood financial centers in 2007 on top of the 20 that we opened there in 2006.

Our data shows that we can greatly improve on the time it takes for a new store to turn profitable and cash flow positive, when compared to a traditional monoline micro-lending seller.

Our retail Micro-Loans subsidiary operates in a heavily regulated industry; yet we believe we are providing products and services that consumers demand and mainstream financial institutions either will not provide to them or will provide them to only at prices well above the prices of our products and services. Without availing themselves of our products and services, some consumers might otherwise be forced to turn to cost-prohibitive late payment charges, bank overdraft charges and NSF check fees.

Interestingly the New York Fed just recently issued a study on the Micro-Loans industry that concurs with our beliefs that these products are beneficial to consumers.

We believe in our multiproduct line neighborhood financial center strategy not only because it yields better financial and operating results than traditional monoline payday storefronts but because it is also a way to graduate our customers to better terms and offer them products and services that have not traditionally been afforded to them. We expect our retail Micro-Loan segment to continue its profitable performance in 2007. However, the first quarter of 2007 is expected to have lower pretax income relative to the fourth quarter due to industrywide seasonal factors coming off the peak demand holiday season.

Our auto finance segment posted fourth quarter results that fell short of our goals for this business unit. In hindsight, the system of records conversion that we did during the first quarter of 2006, while clearly a necessary beneficial long-term move, ended up requiring a significant amount of effort by auto finance operations and sales resources. This conversion and the need for ongoing reconciliations between new and old systems of record data for delinquency Quincy and lender reporting purposes presented challenges for the auto finance management team during much of 2006.

These system-related challenges, coupled with increases in delinquencies and charge-offs that we believe were in part the result of these challenges, kept the auto finance management team from meeting its 2006 growth goals and contributed to the unit's $2.3 million pretax loss in the fourth quarter. We are optimistic that our auto finance management resources have now successfully transitioned from work on the conversion and related post-conversion activity to efforts aimed at gaining operational efficiencies and market share.

As such, we expect growth in receivables and associated revenues during 2007 and a return to profitability for this business unit early in 2007.

We are also encouraged by our recently announced acquisition of ACC Consumer Finance which, along with a $195 million auto loan portfolio that we purchased, will be rolled into our auto finance segment for 2007. These purchases help us in a number of ways. We are adding a great management team with a tremendous amount of knowledge and experience in the auto finance business.

ACC was majority-owned by Rocco Fabiano who has been successful in this space for many years and has joined us in an advisory role. Rocco also has a great deal of experience in operating very large consumer lending operations. He ran large portions of the consumer loan business for Household after selling his first auto lending business to Household in 1999. He will continue to oversee the auto platform and assist in its growth plans. And he will also be working with Rich and I to help us realize greater synergies in growth along with all of our business lines.

ACC's day-to-day business operations will be run by [Tim Condon], the current President of the Company. The ACC deal allows us to grow our portfolio of auto loans in a very fragmented industry. ACC gives us the ability to originate through franchised auto dealers which are much different than the buy here, pay here dealers on which we were focused previously.

The average ACC customer has a higher FICO score than those previously represented within our auto loan portfolio. So we are expanding our footprint, in terms of auto paper credit quality, along with distribution and service delivery channels. We feel the auto financing space represents enormous opportunity; and we want to be the premier provider and servicer of auto loans to the underserved financial consumer.

To complete our discussion of our other business lines, we incurred $9.3 million loss within the other segment which is largely comprised of a number of start up operations and development initiatives. While we have incurred a significant level of cost within the other segment, we have had one breakout success from this other segment in the wake of our Imagine credit card which we now report within the credit card segment.

Through this credit card offering, we have married Micro-Loans underwriting techniques with a credit card product, which allows us to now reach much further beyond our traditional credit card market. Now through Internet and television marketing efforts, for example, we are able to reach millions of consumers who have very low FICO scores and no or thin credit files and to offer them a credit card product in a way that we believe effectively manages the risk to us of making this product available.

We plan to undertake more diligent efforts during 2007, aimed at evaluating the success and milestones of each of our other segment initiatives which currently include store value cards, merchant credit products, Internet installments and other Micro-Loans. Our centralized decision engine development efforts in our origination and servicing of consumer financial receivables secured by all-terrain vehicles, personal watercraft, motorcycles and the like.

Just as we recently did for our stored value offering we plan to evaluate and potentially scale back some of the expenditures that we are making to better align these expenditures with the long-term revenue potential of our offerings. And it is conceivable that we may discontinue certain efforts underway within the other segment or replace these efforts with new initiatives.

Before I turn things over to J. Paul let me spend a few moments talking at a high level about our business and strategy.

As we have noted before, our long-term strategic goal has been to be the pre-eminent provider of financial products and services to the more than 75 million underserved or unbanked people in this country who need access to mainstream financial products and services. While this is a big market in and of itself, we have been spending a lot of time recently in markets outside of the U.S. and see a similar opportunity to reach many more underserved and unbanked people outside of our borders.

I talked previously about our new storefronts in the UK and we certainly expect to be able to do a lot more in the UK over the next few years. We believe that the UK market is a few years behind the U.S. market with respect to the availability of financial products and services for underserved consumers.

We also are seeing some terrific things from our multiproduct line rollout within our retail Micro-Loans stores and we are very excited about our ACC acquisition and the growth potential within our auto financing. As we said before, in ACC we have a team with a proven track record of growing auto finance businesses. By combining our capital and access to capital with their proven talent, we believe we can prosper within this business.

We are often asked about allocation of capital and expected growth rates for our businesses. And our response is always one of not trying to pigeonhole ourselves into a particular capital allocation or growth goals in one particular business segment to the exclusion of others. In the fortunate position that we currently find ourselves in from a liquidity perspective, we have been able to be more flexible or opportunistic in our capital allocation decision.

For example, while we believe that all of our business segments present attractive growth opportunities for us, we have had such significant success within our credit cards business over the past few years that we have a difficult time in ensuring investors that some of our other businesses will grow faster than our credit card business. While we don't know just how long our current economic expansion and the good health that we have seen for our credit card customers will last, we do know that this is a great time for us to continue strong growth for our credit card segment.

The dynamics of our cards business have changed a bit for us over the past few quarters, given some of the structural changes we have seen in our mix of credit card receivables and some of the consumer-friendly changes we have made to our card product offerings. We have made these changes based on our continuous dialogue with our issuing bank partners, in connection with their regulatory reviews. Furthermore, we believe these changes will be viewed favorably by our customer base; and believe they will help us with long-term customer retention.

As J. Paul will discuss in a moment the marketing volume-related volatility in charge of related to our exchange and some of the consumer friendly changes that we have made to our practices and products have ended up costing us a bit more than we initially would have expected. You can see the effects of these costs in our fourth quarter 2006 performance and in our current expectations of 2007 performance, in particular.

We nevertheless see ourselves generating over $4.00 per share on a managed earnings basis in 2007. We expect these earnings to be heavily weighted towards the second half of the year with over $3.00 of these earnings expected to be in the third and fourth quarters. And we continue to see very attractive growth and profitability environment for our credit cards business.

Balanced with the significant opportunities that we see for our other segments, we look forward to what we expect will be record-setting earnings year for CompuCredit in 2007. The ACC purchase was hopefully the first of what will be multiple transactions for us in the coming months, as we continue to actively evaluate opportunities. We feel confident that we can put our available liquidity to work in higher return investments to drive long-term financial success for CompuCredit and its shareholders.

As I conclude my remarks, I want to thank all of our shareholders who participated in our 2006 shareholder charitable designation program through which we donated $15 million in December to a variety of philanthropic causes. This is the third consecutive year of the program through which we have donated $36 million to charity to date. We have remained focused on our responsibility of being good corporate citizens and sharing in our financial success.

With that, I will turn it over to J. Paul for his more detailed financial review.

Thank you, David. First let me review some of our key financial operating and statistical data and then discuss some details of our financial performance. To recap our results for the fourth quarter we had GAAP net income of $9.7 million or $0.19 per share on a fully diluted basis.

We reported managed earnings of $19.9 million or $0.40 per share in a fully diluted basis for the fourth quarter. For a reconciliation of GAAP net income to managed earnings I refer you to the reconciliation table in yesterday's earnings release.

David referenced a few factors that caused a variance between our original earnings guidance and the actual fourth quarter managed earnings, but I would like to provide a little more color on the items.

First we incurred higher marketing costs than we had initially planned coming into the fourth quarter, as we saw higher than expected Internet response rates and ramped up our television advertising spend. We experienced higher fourth quarter expenses within our other segment than originally expected. And David has already addressed some of the efforts underway in 2007 to focus on a level of spending we are incurring on the start-up of other development initiative that are within the other segment.

Additionally, as David previously mentioned, our auto finance segments growth plan did not materialize in the fourth quarter as we had expected. And the segment incurred higher charge-offs than we had expected it to incur in the quarter.

Finally, based on market factors that became apparent to us in the fourth quarter we accelerated depreciation of leasehold improvements on the facilities we will be vacating when we relocate our headquarters and other Atlanta operations later this year.

Getting back to some of our financial metrics, we were able to grow our book value per share for the 18th consecutive quarter to $17.89 as of December 31st, 2006. In terms of our overall liquidity position, our unrestricted cash balance at year end was $95.3 million. And if you combine that with the available to draw amounts secured by our credit card receivables we had approximately $700 million of immediately available liquidity at our disposal at the end of the year.

Turning back to our key managed receivables statistics. Our net interest margin was 22.6% in the fourth quarter of 2006 as compared to 26% during the third quarter of 2006, and 22.4% from the fourth quarter of last year. Our other income ratio improved slightly, 16.5% for the fourth quarter, up from 15.7% in the third quarter of 2006 and off from 17.4% reported in the fourth quarter of 2005.

Our adjusted charge-off ratio was 11% for the fourth quarter 2006 compared to 9.4% in the third quarter of 2006 and 11.2% for the fourth quarter of 2005. And our 60-day plus delinquencies as of December 31st, 2006, were 14.1% versus 14% as of September 30, 2006 and 9.3% as of December 31st, 2005.

These statistics reflect first the continuing structural shift in the mix of our managed receivables with a greater percentage of our managed receivables being comprised of our lower tier fee based receivables in each quarter, given the high growth rate that we had experienced for this particular offering coupled with the liquidation of our pools of acquired credit card receivables.

These statistics also reflect our late third quarter decision to discontinue the billing of finance charges and fees on accounts that become over 90 days delinquent. Our fourth quarter 2006 net interest margin and our other income ratio were adversely affected by our decision to discontinue finance charge and fee billings on credit card accounts that become over 90 days delinquent.

As a result, we had no billings of finance charges and fees on many accounts that became over 90 days past due in the fourth quarter of 2006, while our finance charge and fee charge-offs during that quarter for the effects of finance charges and fees that were assessed on accounts that were already 90 days past due, prior to our change in billing practices. Once we realized the full effects of this transition to our new billing practices -- which will occur by the beginning of the second quarter of 2007 -- neither finance charge and fee assessments, nor finance charge and fee charge-offs will bear the effects of finance charges and fees on accounts that have become over 90 days past due.

Lastly, each of the statistics was adversely affected in the fourth quarter by marketing volume-related volatility for our largely fee-based credit card offering to consumers at the lower end of the FICO scoring range. Given the shorter life cycle of many of the accounts underlying the receivables associated with this lower tier offering, we can experience greater volatility in our charge-off statistics, depending upon the timing and relative volumes of quarterly account originations underlying these receivables in the months preceding their charge-off.

We experienced adverse effects of this volatility in the fourth quarter of 2006, and expect to experience further adverse effect to this volatility in the first quarter of 2007 as a significant level of high volume vintages is flowing through to charge-off during these two quarters. We currently expect greater stability in our charge-off ratios at levels below fourth quarter 2006 and expected first quarter 2007 levels during the subsequent quarters of 2007.

Our gross charge-offs affect each of our net interest in margins, other income ratio and adjusted charge of ratio statistics.

From a cost perspective, David already mentioned in our higher marketing cost in the fourth quarter and our expectation to spend an average of just under $40 million per quarter throughout 2007 as we expand our marketing channels. Aside from higher marketing costs, as we continue to grow our lower tier card offerings at a faster rate than our near-prime cards the lower credit limits result in higher serving costs as a percentage of our outstanding receivables.

For example, it is obviously going to cost more for us to service four cardholders carrying a $300 balance compared to one customer with, say, a $1200 balance. Adjusting for our $15 million charitable contribution during the fourth quarter our operating ratio was at 16.6% and we expect our ongoing receivables mixed change to cause an increase in this ratio during 2007.

We also know that we will be incurring higher affinity agreement and other cost in 2007 associated with our addition of several new issuing Bank relationships one of which began just last month.

Lastly we also expect to incur some higher costs in 2007 associated with a move of our corporate headquarters and other Atlanta facilities to new buildings in mid 2007.

Taking into account any of the above factors and David as David already previously computed our expectation of earnings over $4.00 per share on a managed basis in 2007. Consistent with David's comments about over $3.00 of this number being heavily weighted towards the third and fourth quarters of this year and reflecting the marketing volume-based charge-off site for lower tier card product and the effects of our billing practices changes on accounts (indiscernible) over 90 days we expect first quarter 2007 managed earnings to be significantly below our fourth quarter results.

Let me conclude now by thanking you all on behalf of both David and me for your interest in CompuCredit and your participation in our fourth quarter earnings call. We expect to file our 10-K on or about February 28, 2007, and I would encourage you to review that filing.

With that we would be happy to open things up for any questions that you may have.

(OPERATOR INSTRUCTIONS) Dan Fannon with Jefferies.

Want to talk about your guidance here in more detail. First off the $4.00 a share that you are seeing around for '07, what assumptions are you assuming for deployments of capital or contributions from any acquisitions or investments that might be made?

We're really not baking making any acquisitions into that number that have not already been incurred.

Could you give us a little color on what ACC might contribute or what you are assuming they might contribute? And also of what you paid for that from an acquisition perspective?

We expect about $0.10 per share or so during -- on a pre-tax basis during '06.

For '07, you mean?

'07. I'm sorry. Yes. (MULTIPLE SPEAKERS) pre-tax.

The guidance you gave here for the first quarter being significantly below fourth quarter, seasonally shouldn't you -- I know there's a mix shift going on but in general for your core credit card portfolio, you should be getting the benefit of tax refund season. So can you help us understand a little bit of the change here that's happening from -- I understand you're growing your fee card business. But you also have a pretty large portfolio that will benefit from the seasonality of this business.

When people pay us off, that actually reduces profits a little bit in the core product and you're right. Traditionally in the first quarter of the year, receivables actually decrease in the traditional core product line because people do get the tax refunds. And they pay down their balance and in fact that also is why our microlending storefront business has a slower first quarter than they do the rest of the year. Because people do get the tax refunds and pay down those loans and we don't have as much volume in either the storefront or in the traditional core credit card products.

In addition to that though, we spend a lot of time over the last several weeks going through a lot of our analysis of vintages of when we did many of the lower tier products. And the least in the lower tier products month nine to 12 are the lowest profitability and in fact you go into a loss in month nine to 12 in the lower tier products. And we had a large portion of new marketing that we did at the end of 2005 and at the beginning of 2006 that are flowing through in the fourth quarter and first quarter of this year.

Going forward, we think that our marketing is going to be more stabilized so we don't expect that type of bubble to come through the system again.

I think the other thing that I would say on the delinquencies is typically what we have found historically in our core product and our purchase portfolios and such is, the tax refunds really serve to help folks out that were maybe delinquent. So your delinquencies get lower throughout the tax refund season which is traditionally translated into a higher third quarter earnings for us as well.

That is typically how the refunds manifest themselves for the credit card portfolios. And you see that in David's number on the -- when we talk about the third quarter, fourth quarter earnings this year coupled obviously with the effects of our lower tier product earnings during those quarters.

Can you give us a little bit of -- in discussing what level of transaction you are looking at from investments in comparison when you last booked those in the third quarter? It seems you made a comment that you -- there's things in your pipeline that you are looking at. Are there more investments out there today than there were when you talked to us in the third quarter?

Or give us a little bit of comfort that your -- things are changing more and we might see more deployments of capital here in the near-term.

I think it is safe to say that we have a greater confidence today than we've had in the past nine months to 12 months that there will be some opportunities for us to put capital to work in the next few months. More so than we have over the last year.

Sameer Gokhale with KBW.

Had a question on the net interest margin. You went into some detail for the reasons that net interest margin decreased from last quarter. And I was just wondering how much of that was if you were to split it up related to seasonality versus the change in your billing practices. And also the follow-on to that, what was the impact potentially on the delinquency rate because of the change in billing practices?

Yes. Sameer, we have not broken everything yet down into the specific components that you mentioned. So I will probably just generalize in some discussion around this.

The net interest margin, any other income ratio were both most significantly affected. Most of the effect is the marketing phenomena that we talked about in the call and that David just addressed in Q&A on the lower tier product. Certainly a good piece of it is related to the billing practice changes because of the mismatch between your billings and the charge-offs being at a higher level.

The impact on delinquencies of that change of billing practices, one is we mentioned before we would expect our delinquencies in a steady state to go down, because you have got less of a percentage of your AR balance consists of fees and finance charges that were assessed on this 90-day plus account. The phenomena that goes the other way is we've said throughout our various calls for the past year or so is our percentage of receivables from these lower tier customers keeps rising. And they have greater delinquencies than with our purchase portfolios or our core portfolios.

That's why you are not seeing a decrease in delinquencies associated with that change in billing practices.

I guess I understand the mix shift but it just seems to me when your delinquency rate was lower than what I was looking for and just (indiscernible) basis points sequential increase. I was just trying to see if you try to factor in the change in the billing practices and the impact on delinquencies. Would the number have been another 20, 30 basis points which is -- I was looking for more like 15%. So I was looking more from that angle. So that's why I wanted to ballpark for your delinquency impact.

Yes. I don't have a specific number to share with you there. We haven't stratified it on that basis.

The other thing, if I heard correctly on the call you were thinking about maybe reentering the market for purchasing nonbankruptcy charged off debt? Just wondering why the increase interest in that? Has pricing come down a whole lot? Has anything changed there?

I think that we have seen some opportunities where we think pricing is more rational; whereas at this time last year, we were not seeing the opportunities where we wanted to make any investments. We think the pricing of traditional charged off receivables is better today than it was 12 months ago. It's not great yet but we think there are some selected opportunities that we can participate.

Certainly if, as we believe, the pricing probably may end up coming down in the future -- maybe in the near future -- we have got to be in the game somewhat as far as working on some small portfolios and testing them to make sure that the liquidation curves are still performing like we would think for this particular market segment.

Just my last question on your -- I asked this question before but if you could maybe just refresh my memory. What percentage of your borrowing base consists of homeowners with mortgages? Is that something you looked at recently, given some of the noise and concerns people have had about deterioration in subprime mortgage credit quality? Can you give us some color on that?

Traditionally we have been in the high 30s, around 40%. With our mix shift that has come down a little bit. Our best guess is it's 34, 35% something like that today. And you make a good point in that with what's going on in the subprime mortgage space, is that going to affect our customer base?

Fortunately in the delinquencies and the vintage analysis and the like that we evaluate we've not really seen that to date. As we've followed that segment a great deal to try to understand how it might impact our customer base. It appears as though a lot of the activity in that space is geared towards the early payment defaults which many of those are consisting of what in essence are fraudulent applications.

So that doesn't really have an impact on our customer base, but we are watching that. We do understand the phenomena of people having arms that are reset. Does that affect their ability to service our debt but like I say, fortunately, we have not seen upticks in delinquency on the vintage basis as we analyze pretty closely that would give us cause for concern. But we continue to monitor that because it is a factor out there that theoretically could affect as I said 30% or so of our customers.

I think and, interestingly, and this will actually be a discussion within our 10-K a bit but we've actually seen in the past month or so improved role rates within our portfolios from a collection perspective which is a little bit surprising perhaps. But certainly everything seems to be encouraging there.

John Hecht with JMP Securities.

With respect to marketing and the fact that you observed in [free] success in Q4 which leads you to want to increase the marketing budget, should that lead us to think that we should see an increased amount of growth of the subprime credit card portfolio in '07, relative to the growth in '06?

I think that's a safe bet.

And is there anything we can learn from the seasonality of originations in '06, that we should expect to recur in '07 with respect to the timing and seasonality of the credit trends?

Really -- and this goes back to something we talked about over the years which is, we are going to market and ramp up marketing or ramp down marketing as we see the opportunity. So if all of a sudden we were to have a competitor come in, in the second or third quarter and start marketing heavily in our customer base segment; and we saw our response rates go down and our cost of acquiring a new customer go up significantly, we might scale back a little bit at that point.

Right now, based on everything we see, we are very encouraged about the marketing and about our ability to go and find new customers at a rate that we think we can get great returns on our marketing dollar based on the current cost to acquire that customer. But we don't -- in the past we have seen market shifts pretty quickly. If somebody comes in and floods the market with advertising we are not going to be as anxious to spend our marketing dollars in a lot less efficient manner.

So it's hard to give you an idea as to what exactly is going to happen because we have to look at what the external forces are doing and make those decisions on a monthly basis, as we ramp it up.

Right now we are very encouraged and think we are going to have strong marketing -- we know we're going to have strong marketing in the first quarter -- and believe that is going to continue throughout the year.

The other thing, I guess and I think there may be a little bit of this that you are asking as well and David mentioned this before. But we talked about the vintages and the peak charge-off vintages if you will for the lower tier product. If you'll recall, that's the real big growth in marketing efforts for that product have been fairly recent.

So that's what's causing the spikes that we're seeing in the fourth quarter and then in the first quarter of '07 as these vintages move through for what was at the time a new product offering for which there were a lot of volumes. As we go forward into the future and you have a more mature, meaning older, portfolio of receivables, changes in marketing from one quarter to the next are not likely to produce anywhere near the level of volatility that we have seen today.

A lot of it is new portfolio, significant marketing in one quarter versus the next. And as things average out and the portfolio gets older you'll see much less of an effect there.

Understanding the denominator effects to smooth things out. Can you at least give us a sense of where [team] losses occur in the buckets of that product so we can try to look at spikes in origination activity, and where they might have admittedly smaller effects but effects in charge-off activities in the following periods?

In the lower tier product the nine- to 12-month period is the peak losses in that product line.

And then, can you give us any update on two things? One is any discussions with the FDIC and, second, given that the moratorium from what I understand has been lifted for financial services companies, is there any chance that you could revisit the table of [Cardworks] on a potential acquisition?

We have as we have said in some of our previous documents have had some conversations with FDIC, which we continue to have with them. In terms of the Cardworks acquisition or potential, the whole ILC issue is still a pretty hot button issue. And while they did lift the moratorium on financial buyers, it sends to us that there are still many, many hurdles to go with FDIC approval of either new ILCs or change of controls.

We will continue to look at that and look at ways that we might do something with Cardworks or someone else. But as J. Paul mentioned, one of the other things that we've done over the last 12 months is, we have ramped up our bank partners to add a couple of new partners to issue for us so that the bank charter is not as hot button of an issue as it might have been for us two years ago when we first started working on the Cardworks transaction.

Moshe Orenbuch with Credit Suisse.

David, I was wondering if you could expand a little on what gives you more confidence that there will be acquisition opportunities prospectively? It seems like certainly would have increased share repurchase opportunities prospective.

Welt we don't -- I think that we have a group of people that work within CompuCredit who were confidently looking for things to catch ways for us to deploy capital in the acquisition arena. And while nothing is ever done until it's done, we feel like the pipeline of things that we might be able to invest in is much greater today than it was six months ago.

I guess what I'm asking is what's changed? Has it been fear from other buyers? Is it more sellers? What's changed in that period of time?

I think there's a little bit of a shift throughout the market. I think six months ago we didn't have any subprime mortgage companies that had gone belly up. Now you have people that I believe have some concern about subprime space because of what is going on in the mortgage market. And they may be more open to looking to divest in the like of various subprime lines whereas six, nine months ago they might not have had as much interest. So I think that that has had an impact on sellers that might be willing to look at divesting.

Just to kind of round that out, you mentioned over 700 million of liquidity which I think was a comparable number to what you said three months ago yet you didn't make an acquisition in the quarter. Is that fair?

The acquisition closed actually in January. So the number I quoted was as of December 31st.

How much of that -- if we were to do that analysis today could you opine on what that (MULTIPLE SPEAKERS)

We haven't really -- I haven't really sized things up specifically. We've got tax payment obligations there. We had some proceeds come in from the exercise of the warrants that came in in January. So I don't have an exact number for you, but expect it'd be probably fairly close to 700 million or so.

Fair enough. Just last question on this topic is, given that you do see increased opportunities how do you benchmark those against share repurchase given the stock has kind of taken a little bit of a hit on what is one and perhaps now two reductions in guidance?

That is a very good question and that is probably one of the more difficult capital allocation decisions that we will make internally. I can tell you that share repurchases is always on the list of does this make more sense for us to buy our own stock than to buy somebody else's? And we are constantly evaluating that with -- like I say -- with external opportunities as well.

Joel Houck with Wachovia.

I'm wondering just with kind of the moving parts with the business mix shift if you can give us some thoughts on maybe where risk-adjusted margin is heading in '07. Because it's very difficult to model right now it's very difficult to model you guys without some perspective of how these changes wash out. I know directionally you provided some guidance but if we look at the 27.7% in the December quarter that dipped down to 25, 26 and head back to 30? How should we think about that?

As far as the risk-adjusted margin calculation -- I don't have that in front of me, but I have the significant component that I can talk briefly about.

Right now I guess what I would say is on the net interest margin the operating ratio, other income ratio those -- and just the charge-offs. As we mentioned before we expect those stats to be down in the first quarter and down, relative to the fourth quarter of this year.

Toward the end of the year we seek a significant improvement as David mentioned, these -- the effects of this vintage coming through will be behind us. The effects of the billing change will be behind us and by the end of the year, in the last couple of quarters of the year you are looking at net interest margins that we are planning at this point or would expect to be 100 plus basis points above where they were in the fourth quarter.

Adjusted charge-off rates roughly in line with the fourth quarter and another income ratio that is significantly in excess of what it was in the fourth quarter.

That's helpful, J. Paul. One follow-up I guess on the cost side. How much is -- it seems like some of the businesses you are having to spend more than perhaps planned six months ago but there is clearly a theme toward investment spending as well. Can you help us understand how much is investment spending versus, maybe, higher-than-expected cost six months ago?

Yes, a little bit on that. Certainly in the marketing arena I would characterize all of that as investing. And if you look at our run rate coming into the fourth quarter of this year we were at about $25 million or so a quarter; about $100 million run rate in marketing; and we are ramping that up pretty significantly with averaging just under $40 million a quarter in '07.

We have had some higher costs as I mentioned associated with the expansion of our issuing bank relationships. And that is it's just when you've got several banking partners it's just more expensive than when we used to have one banking partner. So from the standpoint of the affinity agreements and some of the costs of kind of keeping portfolio separate in accounting and systems cost. And that type of thing.

In the other segment we quite honestly, I think, will be doing -- taking a much harder look in '07 at the spending levels that we have been incurring there, relative to the revenue potential and the opportunities. And so that's likely to be an area for which we will be improving efficiency of spend, whether that efficiency manifests itself through just cutting costs and cutting initiatives; or making sure we are spending dollars more wisely on the new initiatives that we are entering into.

I don't know if that's helpful but it's a little bit of color around where we are heading from a cost perspective.

Yes it is helpful. I think maybe to kind of complete the thought, in terms of your guidance for '07, I mean is there specific cost reductions in any other segment or are these reductions incremental to kind of the guidance you are thinking about?

We have -- our forecast does the same cost reductions in areas where we have been a little bit less efficient than we would like to be.

David Hochstim with Bear Stearns.

I'm wondering if you could just spend a few more minutes talking about the auto finance segment and going through, again, what happened in the third and fourth quarters in terms of the systems and collections? And maybe give us some color of how much managed charge-offs went up in dollars to erode income?

I don't have that particular number in front of me, David. but I would be happy to talk about what happened in '06 with respect to the car operations. We had a system of record change from one system of record to a new system of record and, effectively, in working through that, that changed the system of record.

There were some of the data that was coming off the new system record was a fair amount different than the data on the old system of record, with respect to how one measured the performance of the assets. Our management team spent a good bit of time dealing with just that whole system of record conversion; and working through with lender reporting on the various data coming out of the new system of record; and quite honestly was distracted to the point that I don't think perspective is -- not a sufficient level of effort was spent on really growing to business.

So I think the predominant shortfall that we saw in the fourth quarter and throughout the year, relative to our expectations, was --

No sales.

-- nobody was selling or the sales that were happening were not being managed in an appropriate way, given the other distractions that folks had on the -- associated with the system of record conversion. I think some of those sales efforts A., not being robust and some of them not being managed as closely as we would like caused some higher delinquencies and a little bit higher charge-offs.

Our auto system is now built out and the platform is built out for a lot more receivables than what we currently have in it, both from the manpower as well as a system perspective. And one of the things as J. Paul said, we were disappointed in the sales effort out of that unit in 2006. We are --

Couple of things with the ACC transaction, we think we are going to get greater economies with that portfolio, in addition to our portfolio that we had in auto loan business. But we also have challenged both the car team as well as the ACC team to ramp up that growth a fair amount. Because we have an infrastructure, both from a system perspective as well as people, to house a lot more loans than we currently have. And we think we have got a good sales plan in place for 2007 to grow that business pretty good.

But all in all, the auto business has performed reasonably well from a return on capital that we invested in it. Our disappointment is that we would like for it to be a lot bigger than it is and we think we put in plans to help that -- make that happen going forward.

And what we know has changed some of the system of record recording issues and measuring of various attributes like delinquency and such. All of those issues have been resolved. Us, our lender, everybody is comfortable with all of the statistical data. So the management team should not at all be distracted by that going forward.

As we head into the first quarter with those operations, though, I think it's going to take a little while to get the sales engine going and get the growth that we need. So we are probably not going to see the kind of results we want to see in the first quarter either for that business.

And are there any system integration systems with ACC or (MULTIPLE SPEAKERS) -- ?

Not initially. I mean we certainly will be looking for opportunities to integrate and become more efficient, whether it be with respect to systems or using the good collections and call center expertise that we have throughout CompuCredit as a whole. But ACC is fully capable, and in the past, operated as a fully running separate company. That is where it will start with us.

Then, just could you clarify the first quarter earnings guidance whether you are anticipating a profit or loss on the managed EPS basis?

We are anticipating a profit.

Dennis Telzrow with Stephens Inc.

I have a couple of questions trying to understand the lower tier card a little bit better. Obviously you are excited about it because you are ramping up marketing. What sort of a churn rate you mentioned that you (technical difficulties) months nine through 12 as being the highest loss rates. Should I assume that is sort of where you are getting most of your attrition?

We do have attrition during that nine- to 12-month but I'm not sure I understood the question.

I mean, if I look at a new customer who signs on how long does he stay with that card? How many months do you need him in there to get the return you want? Is any of that changing so if I looked at the simple metrics on that card versus the other cards you have?

One of the things that we have been spending a lot of time on is graduation programs, making our products more customer-friendly, and the like from the point of acquisition throughout the lifecycle. So we have, as J. Paul mentioned, we have not had a large business in the lower tier card segment for a long period of time.

One of the things we've done a lot of in 2006 is how to we retain that customer over the long term? What are the specific graduation steps that work the best? And we have tested lots of those and continue to test lots of them. We think that our product mix is better suited to improving that customer's offer or improving that customer's product over time as we get to know the customer. And as the customer performs with us, that customer is getting a better product every several months.

So our hope is that, while in the lower tier market, you traditionally have a fair degree of churn, the goal at CompuCredit is to cut that churn down to what you see in traditional prime credit cards. And we think we can do that by continuing to improve the product offer that we are giving the customer. The customer appreciates when they get a better and better offer. And they see that their positive behavior is rewarded.

So we don't have specific attrition numbers and the like. But -- to share with you today -- but we can tell you that we are highly focused on that whole issue. And we believe, based on what we have seen in the market from others, that we have a much quicker and much friendlier graduation product line and mix than do others in this sector.

Carl Drake with SunTrust Robinson and Humphries.

David and J. Paul, you all talked in the past about high vintages of low tier cards rolling through. And I'm wondering how is this going to be prevented in the future? What is different this time? Because we've talked about this in the last couple of quarters as well. Now I am just trying to understand how this will be prevented in the future also and maybe if you could isolate the impact on the first quarter and the second quarter on the vintage issue alone?

Of '07?

Yes.

I think I go back to my comments to John, I think the way this plays out in the future is you end up with a more mature portfolio of receivables that have been around a long time in a much bigger base so that changes in your marketing levels from one quarter to the next don't have near as profound an impact. This is similar to what we saw in the Company dating back to kind of the early 2000s when you got a young portfolio in recent marketing efforts; and things are cycling through peak charge-off vintages.

Then, if you don't have a base of relatively older longer-term more stable ,accounts you end up with this level of volatility. That is exactly what has happened now. But so your question, how does this change in the future? It is kind of changing as we speak. I mean this balance of receivables is growing more significantly with each quarter so that marketing fluctuation going forward will be less significant as a percentage of our total yield from the stuff.

So it's not that you are layering in more -- you are looking, when you are talking about the volatility you are isolating the low tier results -- this volatility. So it is not a mix shift of going up market or anything like that?

No.

You are going to continue to grow the low tier card at the same growth rate as in the past, you are just going to have a more mature base?

We may not grow it at the same growth rate because last year we came close to doubling that sector. This year, we think we will add more accounts but it may only be a 50% or 60% growth rate in that sector as opposed to 100% last year. So as that sector grows in terms of our overall receivable base, the percentage growth will go down although the number of accounts we think will be the same or higher.

So if you look at the first quarter impact, your guidance what you suggest, somewhere in the $0.20 range significantly below 40 (indiscernible) profit. What is the impact isolated on the mix change? You have got a billing change going on and obviously just higher marketing expenditures alone might be a fairly significant number of that.

Clearly marketing ramp up is a factor and an investment that we think is prudent. You have two fundamental factors. And to isolate them I don't have the pro forma data to be able to do that and this goes to Sameer's question a moment ago. You know running data as if we didn't do our discontinuation of billings on our 90-day plus accounts. Just don't have that data on hand while we sit here today.

So it's both factors affecting the first quarter of '07. It's the vintages, as well as the fact that with various portfolios that we have and programming changes and the like required to affect this 90-day billing change? It was -- we decided to do it late in the third quarter and it was transitioned in throughout the fourth quarter.

So you have got this mismatch that we have in the fourth -- in the first quarter as well like in the fourth quarter whereby we're going to be billing on accounts that are over 90 days past due, no finance charges and fees. But we're going to have charge-offs coming through on stuff that had the finance charges and fees built in because they were over 90 days on the day that we made the change.

So both of those factors are contributing to the first quarter.

Are they equal or is there any -- I guess this combination -- it's hard to isolate if they're an equal impact?

Yes and like I say, we didn't run a pro forma of what it would look like had we not run the billing change.

Overall your guidance is coming down, roughly $0.23 or so, but your marketing spend alone could be $0.75 of that number from the $25 million level. So is there -- the offset I think John mentioned. There's some -- you are assuming some significant offset from the higher marketing expenditures in '07 from receivables growth.

Yes. We are investing a lot in marketing this year. We think that it is going to help us some this year; but more importantly we think it is going to help us as a long-term investment out in the future as well.

Yes that was my next question on '08. Wouldn't you expect '08 levels to be significantly benefiting from this level marketing expenditures in '07?

Yes.

Is there any way to provide any kind of outlook as to the growth rate you might see in '08?

I will tell you that we think that '08 is going to be better than '07 but I'm not going to get into specifics.

Thank you.

Sameer Gokhale with KBW.

The equity to manage receivables ratio is really like a GAAP equity number to a managed receivables ratio so if you were to try to calculate a managed equity to managed receivables ratio, what would that number be? Would it be fairly similar or do you have an exact number?

It would perhaps be -- it would be a little bit similar maybe a bit higher with maybe a little bit higher equity-based on a managed basis over time than GAAP. (indiscernible)

And the way you think about that is you strip out the I/O portion of your equity which is fairly small but there's the discount on your residuals; and if you back that out, you end up with the higher net equity number. And is that roughly the way you're thinking about it?

Well, there are two components if you look at our reconciliation from GAAP to manage. It's all the securitization activity and then there is the difference between our net charge-off data coming off the system of records; and the allowance for doubtful account build-up on the GAAP financial statement.

There are no further questions at this time. I'd like to thank you for your participation on today's conference. This concludes the presentation and you may now disconnect. Good day.