Encore Capital Group Inc (ECPG) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Encore Capital Group second-quarter 2006 conference call.

At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, August 3, 2006.

At this time, I would like to turn the presentation over to Tony Rossi with the Financial Relations Board. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Encore Capital Group's second-quarter 2006 conference call. With us today from management are Brandon Black, the President and Chief Executive Officer, Paul Grinberg, Chief Financial Officer. Management will discuss second-quarter results and we will then open up the call to your questions.

During the discussion today, Brandon and Paul will be referring to information contained in a slide presentation. This presentation can be found on the Company's Web site at www.EncoreCapitalGroup.com in the investor section on the presentation page. Brandon and Paul will be referring to the appropriate slide numbers throughout the call.

Earlier today, Encore Capital Group filed its 10-Q for the quarter ended June 30, 2006. This is a complete report of Encore's results and we encourage you to read it thoroughly as it contains a great deal of useful information.

Before we begin, I'd like to note that certain statements in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company and its subsidiaries to be materially different from any financial results, performance or achievements expressed or implied by such forward-looking statements. For a discussion of these factors, we refer you to the Company's SEC filings, including its annual report on Form 10-K for the year ended December 31, 2005. Forward-looking statements speak only as of the date the statement was made. The Company will not undertake and specifically declines any obligation to publicly release the results of any revision to forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, whether as a result of new information, future events or for any other reason.

In addition, as most of you know, the Company announced, on June 5, 2006, the formation of a special committee of the Board of Directors to consider strategic alternatives. The special committee has retained JPMorgan Securities Inc. and Deutsche Bank Securities Inc. as its financial advisors. The special committee was formed to identify and evaluate various strategic alternatives to enhance stockholder value, including the potential sale of the Company.

The Company announced that it does not intend to disclose developments or provide updates on the progress or status of the strategic alternatives review process or of any strategic alternatives under consideration, unless and until the Board of Directors has approved the specific transaction. As such, the focus of today's call will be on the Company's second-quarter, 2006 results. Management will not discuss or answer questions related to the Company's consideration of strategic alternatives.

With that, I would now like to turn over the call to Brandon Black. Brandon?

Thank you, Tony, and good afternoon.

The second quarter was a strong one for Encore with our results being positively impacted by some of the initiatives we highlighted in our last quarterly conference call.

Gross collections for the quarter were $79.2 million, a 12% increase from $70.4 million in the second quarter of 2005. After a seasonally strong first quarter, these second-quarter collections represent solid follow through as we move into a slower part of the annual collections cycle. We continue to believe that results like these demonstrate the superior portfolio liquidation that is generated by our consumer-level analytical approach, including our continued search for new liquidation initiatives.

Earnings per share for the second quarter of 2006 were $0.32, slightly down from $0.34 in the second quarter of 2005. Included in this quarter's results is approximately $0.04 per share after taxes related to stock option expenses associated with the adoption of FAS 123R.

As I mentioned last quarter, we identified new liquidation initiatives in our legal and direct marketing channels, and we incurred significant expenses in the second quarter to more broadly implement these strategies. With another quarter of results behind us, I am pleased to report that they continue to show significant promise, and we're now able to forecast the incremental collections that these initiatives will generate. We apply these initiatives to a subset of portfolios purchased prior to 2006 and as a result, we expect to add more than $33 million in incremental collections. The estimated impact is now included in our collection curves. We anticipate that the bulk of the collections and costs associated with those collections will be recognized over the next two to three years, while the additional revenue will be recognized over the remaining lives of the related pool groups.

In the second quarter of 2006, the addition of these strategies resulted in an increase in revenue of $2.1 million, which was offset by $1.3 million in operating expenses incurred in connection with these initiatives. As these strategies mature, we believe that they will have broad, positive implications on our entire portfolio.

These collection initiatives reflect three themes we've communicated previously. First, we're focused on growing collections and revenue through innovation without relying on growth and head count. As you can see on Slide 1, our workforce (indiscernible) analysis excludes and our India joint venture, has remained relatively flat since the middle of 2003. During that same period, we were able to increase monthly collections per employee by nearly 60%. Thanks to the hard work and innovation of our analytical teams and channel specialists, we have been able to develop new ways of liquidating our legacy portfolios, which increases our ability to profitably purchase in today's elevated pricing environment. We will continue to invest in analysts, statisticians and IT professionals who can support our technology and data-driven approach.

Second, we will invest in new collection strategies, even though they may have a negative earnings impact in short-term, if we believe future benefits outweigh the near-term impact.

Third, we continue to be conservative in our approach toward increasing collection forecast and IRRs. Until we have sufficient data, we will not add any collections from new initiatives into our curves.

Turning to our investment in India, we continue to see steady improvement in the contributions made by our team there. Our collections continue to track to plan and as a result, we've increased our workforce to more than 170 people. As you may recall, we pursued this strategy not as a cost play but as a way to profitably collect on accounts with historically low liquidation levels, primarily low-balance accounts. With our results to date, we were able to purchase a portfolio in July that included more than 200,000 low-balance accounts. Prior to the opening of this site, we would have had limited strategies to collect these accounts and would probably not have been a competitive bidder.

As anticipated, Ascension Capital, our bankruptcy servicing business, experienced a significant increase in quarterly revenue, reaching $6.2 million, up from $2.9 million in the first quarter. This was toward the high end of the range we provided in our firs-quarter earnings call. The improvement was largely related to the revenue recognized on the large volume of Chapter 7 placements immediately prior to bankruptcy reform in October, 2005. Bankruptcy filings post-reform continue to be at historically low levels and while they are increasing month-over-month, industry experts now predict that it will be early to mid-2007 before they return to the levels experienced prior to bankruptcy reform. As such, quarterly Ascension revenue for the remainder of the year will be at levels similar to our slightly lower than those experienced in the first quarter of this year. We continue to believe that ascension, with its best-in-class technology platform and deep understanding of the bankruptcy process, provides a compelling alternative to in-house bankruptcy processing and will be a long-term driver of growth for Encore.

Finally, turning to purchases for the quarter, we invested $21 million to buy approximately $590 million in face value of debt. The second-quarter pricing environment remained elevated and appropriately priced supply was relatively limited. While we did find some attractive opportunities, we remained steadfast in our disciplined approach to purchasing, buying only those portfolios that meet or exceed our hurdle rates.

As in the first quarter, the purchases for the second quarter were paid for entirely from the quarter's cash flows and a significant percentage were non-credit card, reflecting our strategy of diversifying our purchases and capitalizing on emerging asset classes.

In the second quarter, we paid down an additional $9 million in debt, bringing our debt level to its lowest point since we completed the Jefferson Capital acquisition in June, 2005.

Overall, from a purchasing outlook, while it's difficult to predict the level of purchases that will be made in any particular quarter, we continue to pursue many opportunities to both the traditional credit card market and alternative asset categories, including [owner] deficiencies, healthcare and telecom, that we believe will generate an appropriate level of return for the Company over the long term.

With that, I'd like to turn it over to Paul to review our results in more detail. Paul?

Thanks, Brandon.

Let me begin with the results from our debt-purchasing business. Gross collections in the second quarter of 2006 were $79.2 million, an increase of 12% from $70.4 million in the second quarter of 2005. In the second quarter, all of our collections channels, except for the sales channel, increased their contribution over the prior year.

As I've mentioned in prior calls, we sell accounts opportunistically, when we would receive more from the sale in the open market than the net present value of her expected remaining cash flows. With the initiatives that Brandon discussed earlier, our expected remaining cash flows from many of our portfolios have increased, thus making them more valuable to collect upon than potentially sell.

During the second quarter, $2 million in collections came from the sales channel, compared to $7.4 million in the second quarter of 2005 and $7.1 million in the first quarter of 2006. For the remainder of 2006, we would expect sales to remain around this quarter's lower levels.

Our revenue from receivable portfolios in the quarter was $59.6 million, an 11% increase over the $53.5 million in the same period of the prior year. Revenue recognized on receivable portfolios as a percentage of portfolio collections was 75% in the second quarter, compared with 76% in the same period of the prior year and 66% in the first quarter of 2006.

As we said in the past, in any given period, the revenue recognition percentage is generally impacted by several factors -- first, the mix of collections coming from higher and lower multiple tools; second, the impact of seasonality; third, the timing and volume of purchases within the quarter; finally, it can be impacted by increases in IRRs resulting from additional or accelerated collections and by the impact of valuation allowances.

Also, in the second quarter of 2006, revenue was slightly impacted by the extension of our collection curves to 72 months, which I will discuss in more detail shortly.

As you can see in Slide 2, which compares the second quarter of 2006 to 2005, more revenue is coming from portfolios purchased between 2004 and 2006, which have a lower revenue recognition rate than the 1999 through 2003 vintages. This would normally result in a lower overall revenue recognition rate. However, in this quarter, due to the higher IRRs resulting from the initiatives Brandon discussed earlier and the extension of our curves to 72 months, the revenue recognition rate on the 1999 through 2003 portfolios increased from 76% to 89%, mitigating the impact of the shift in mix.

Comparing the second quarter of 2006 to the first quarter of 2006, Slide 3, the overall revenue recognition rate increased from 66% to 75%, primarily driven by seasonality.

Slide 4 shows how seasonality impacts the revenue recognition rate. Revenue -- the blue line -- gradually declines over time. Excluding the revenue from 2006 portfolios, revenues from the first quarter of 2006 to the second quarter of 2006 declined from nearly $57 million to approximately $55 million. Collections, the green line, are impacted by seasonality, as you can see by the periodic spikes in the collection curve. Excluding 2006 purchases, collections declined $15 million, from $86 million to $71 million, due to seasonality. Revenue as a percentage of collections is the yellow line. Revenue dropped from point A to point B by $2 million, but collections dropped $15 million from point A to point B, resulting in a much higher revenue recognition rate in the second quarter. For the remainder of year, excluding the impact of new purchases, valuation allowances or valuation reversals, we would expect the revenue recognition rate to be in the 70s.

During the second quarter, we had a net reversal of approximately $434,000 in allowances that were taken in prior periods. We reversed $486,000 from five pool groups, and we recorded a $52,000 allowances on two other pool groups. As a result, our valuation allowance for investment in receivables portfolios in the second quarter of 2006 declined to $3 million from $3.4 million in the prior quarter.

On our last call, we mentioned that, historically, we've used either a 54 or 60-month collection curve. We also noted that we continue to generate collections from many of our older vintages, well beyond this period, and that we were considering extending our collection curves to 72 months. During the second quarter, we completed this analysis and have revised our models to extend our curves to 72 months. This moves us closer to our actual collections experience.

Extending the collection curves in our forecast resulted in an increase in total estimated remaining collections from our receivable portfolios of $86 million or 13.6% and resulted in an increase in our IRRs in certain pool groups. Since most of the increased collections will occur in future years, the impact on EPS of this change was modest, adding approximately $0.013 for the quarter, which consisted of an increase in revenue of approximately $900,000, offset by an increase in contingent interest of approximately $400,000.

In accordance with FAS 154, we have reflected the extension of the curves as a change in estimate in our financial statements. The impact of the extension on our collections is most notable in the accretable yield table and the supplemental performance data in the 10-Q that we filed today.

I would like to point out that, generally, we continue to use a 54-month curve for the first six months following the purchase of a portfolio. As such, the collection multiple on our 2006 purchases in our 10-Q is lower than prior years' multiples.

Moving onto Ascension, servicing fees for the quarter were $6.2 million. This was toward the high end of the $5.5 million to $6.5 million range we provided on our last earnings call. Once again, we would like to caution that Ascension's revenue for the remainder of the 2006 will be impacted by the low placement volumes following the bankruptcy reform spike in late 2005.

Turning to expenses, our total operating expenses for the second quarter of 2006 were $45.7 million, compared with $31.9 million in the same period last year. Excluding stock-option expenses of approximately $1.5 million in Ascension, which is a fee-based business, as a percentage of collections, operating expenses increased to 49% in the second quarter of 2006 from 45% in the second quarter of last year. This increase in percentage was primarily a result of the lower level of portfolio sales in the quarter, which generally have a lower cost structure than other collection channels, and the continued investment in our new liquidation strategies. Excluding sales, operating expenses as a percentage of collections remained relatively flat, year-over-year.

Operating expenses in the second quarter of 2006 were impacted by the initiatives mentioned by Brandon. A significant portion of the costs associated with these strategies are incurred upfront. As such, our legal costs as a percentage of collections from the legal channel have increased to nearly 45% in the second quarter of 2006 from 38% in the prior year. Once this initiative is fully ramped up, we would expect our legal costs as a percentage of collections from the legal channel to be approximately 40 to 41%, and our overall expense-to-collections ratio to decline.

As we've said in the past, our business is not a margin business and our goal is to maximize dollars collected less dollars spent. While we will continue to operate our business as efficiently as possible and drive down costs, we will pursue strategies that will generate incremental collections, even if they have a higher cost than our existing strategies.

Moving onto debt and interest expense, we expect that, during times of solid cash flows when we do not invest in large amount of portfolio or new acquisitions, we will continue to pay down outstanding debt. In the second quarter, we were able to reduce debt by another $9 million or 5% of the prior quarter's amount outstanding. Our total interest expense was $7.3 million in the second quarter of 2006, compared to $8.4 million in the same period last year. The contingent interest component of interest expense was $4.2 million in the second quarter of 2006, compared with $6.7 million in the same period last year. In 2006, we expect our contingent interest expense to be approximately 60% of the 2005 level, slightly higher than the percentage we indicated in our year-end 2005 conference call. This is, of course, dependent on the collection levels in the portfolios purchased under this facility.

Our tax expense in the quarter was $5.7 million, compared to $5.6 million in the same period last year. Our effective tax rate in the quarter was 43.3%, compared to 40.7% in the prior quarter. In the second quarter, we recognized the effect of an outstanding tax payment related to our 2001 tax return, and that's the reason for the variance and a $0.015 impact to earnings per share. Going forward, we would continue to recommend a 40% to 41% range for modeling purposes.

Our fully diluted earnings per share were $0.32 in the second quarter of 2006, compared to $0.34 in the same period last year. For comparison purposes, excluding the impact of the change in accounting from the extension of our collection curves, stock option expense and the increased taxes during the quarter, earnings per share would have been approximately $0.36 for the quarter.

Finally, I'd like to refer to our adjusted EBITDA on Slide 5. We believe this metric is an excellent indicator of our ability to profitably liquidate portfolio and provides a more complete picture of the cash flows of the business. In the second quarter of 2006, adjusted EBITDA was $42.8 million, an increase of 10% from the $39 million in the second quarter of 2005.

That concludes our formal remarks. I would now like to open up the call for questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Ellyn Cutler.

Ellyn Cutler with Avondale Partners. A question on the IRRs -- can you tell me how much the IRRs were impacted -- or actually the amortization rate was impacted by the new collection initiatives?

What we've disclosed is -- and since we don't disclose what our IRRs actually are, the new initiatives resulted in approximately $2 million of revenue during the quarter. So I think that's what we are prepared to talk about as it relates to those initiatives.

All right. In terms of the increase in collections, it looks like the bulk of it came from the 2005 pool with the exception of I think, in percentage terms, 2001 increased by the same amount. So can we assume that was primarily driven by the Jefferson Capital pool? That question was a little long, sorry. Did it make sense?

You're asking where the increase in collections has comes from?

Right, for the 2005 pool.

Yes, I mean if you -- we don't disclose which particular purchases we're getting collections from, but the Jefferson Capital purchase was our largest purchase in 2005. Those are our most recent purchases, so it is expected that those will generate the increase in collections. So, we don't break down our purchases by pool. That was a significant portion of our 2005 purchases, about 50% of those purchases.

Okay, so when you increase the collection expectations, was most of that -- did it come from the new collection initiatives or did it come from extending the collection curves?

If you look at the -- are you referring to the increase in estimated remaining collections?

Yes -- right, for the 2005 pools.

So, the increase in ERC largely comes from extending the curve, so that represented about $80 million of the increase, and about $33 million comes from the initiatives. If you look at the supplemental performance data at the back of the Q and look at the increase in the overall multiples across all of the vintages, you'll be able to tell which pool groups were impacted by both the extension of the curves and the initiatives.

Thanks very much.

Mark Hughes, SunTrust.

How much will the Ascension business be impacted in the later period? You talked about the slowing placements from the volatility in the bankruptcy filings. Any sense of the magnitude in the back half of the year?

I think what we've said is that it's, for Q3 and Q4, Ascension revenue will be at or slightly below what it was in the first quarter, and in the first quarter, Ascension revenue was about $2.85 million.

Okay. Then the revenue from the resales in the quarter, could you give me that number again?

We had collections of $2 million coming from sales. We don't attribute revenues specifically to that but those were the collections from sales.

Okay, thank you very much.

Brian Hagler, Kennedy Capital Management.

I guess, Paul, in your comments you mentioned if you adjust for the tax rate and I guess some of the accounting and collection assumption changes, earnings would have been $0.36. Can you quantify what just the additional collection assumption change added in the quarter?

Sure. For the extension of the curves, it added $0.013. That's for the extension of the curves. The new operating initiatives, which were 2.1 in revenue and about 1.3 in costs -- so, it's just under $0.02.

Okay. All right. It sounds like at least some of those adjustments related to I guess Jefferson Capital, so does that portfolio continue to exceed expectations?

As we indicated last quarter, for a period of time, we disclosed what the performance was in that portfolio just because of the magnitude of it. It had been performing and it exceeded expectations through that point in time. We indicated we're no longer going to be providing specific performance data on that portfolio.

One thing I would like to point out is that the increase in revenue and earnings from both the new initiatives as well as the extension of the curves will be ongoing and will be in our results every quarter from now on. So, that is the impact on this quarter but it will continue to impact every quarter going forward.

Will the (indiscernible) curves as well? (multiple speakers)

Yes, it will. So that was the approximately $0.015, $0.013 was just the impact on this quarter had we not extended those curves. That impact will be ongoing every quarter. You know, looking at when the curves would have normally dropped off, it will obviously have a larger impact subsequently, so from months 60 to 72, the impact on that quarter would be larger.

Okay. Then finally, I guess Brandon mentioned it in the opening but I missed it. The extension of the collections, or the increase in your assumptions for collections related to legal and what other channel?

The direct marketing channel.

Okay. Okay, thanks.

(OPERATOR INSTRUCTIONS). Justin Hughes, Philadelphia Financial.

I just have a question on your collections. There's a pretty big sequential decline from the first quarter to the second quarter, and the Street was looking for more like an 85 to 95 number, and I don't know if they were including maybe some returns on these new collection strategies. But should we see that bounce back in the second half of this year or should we see continued deterioration?

Yes, I think it's wrong to categorize it as a deterioration. You know, the collection cycle generally is one where holding a import portfolio constant, you would expect (indiscernible) less in the second quarter than the first quarter. What would impact it would be a flow of new portfolios coming in. So I think what you would expect is that the second half of the year, on like portfolio, would be slightly below the first half of the year. That's just normal seasonality. Then that will be offset by whatever purchasing volume that we have for the remainder of the year.

Okay. What about, with these new collection initiatives, could we see some growth in the second half of the year, maybe?

Yes, we are not giving any guidance on how much collections will be impacted by other than the total. As we've said that the $33 million from the new initiatives we would expect to see over the next two to three years, so that's how you can sort of model what the collections from the new initiatives will look like in terms of when they will hit. I would just point to Slide 4 again on the green line, and that is our typical pattern for our collections over time, so the first quarter always tends to be a very strong performer -- quarterly performance in terms of collections. Obviously, in 2005, when we purchased the Jefferson Capital portfolio in the second quarter, that had a dramatic impact. If we purchased any large portfolio in the months subsequent to that purchase, there could be a spike in collections but on existing portfolio, collections will trend down over time after the first few months and then will spike in the first quarter.

Okay. Then the last question -- you had 43 million of EBITDA this quarter. Why didn't you pay down more debt?

Basically, we pay down -- we've maintained a certain cash balance or a certain amount of cash and all of the excess cash is either used to fund operations or purchase portfolio or pay down debt. So we did acquire $21 million in portfolio during the quarter. We have 10 million of cash on the balance sheet, and we have our operating expenses. So we do take the excess cash and pay down debt, other than maintaining a certain level of cash on the balance sheet.

Okay. Actually one more question if I could? On the [Dell] process, is a date that established when bids are due?

I'm sorry, could you repeat the question?

On the sales process, you know, JPMorgan is currently underway, has a date been established by your banker on when bids are due?

Yes, I'd have to say again as we said in the beginning, we're not going to make any comments on the call and any information that will be disclosed will come at the appropriate time.

Okay, thank you.

Dan Fannon, Jefferies & Company.

Most of my questions have been answered, but I was wondering. Did you extend the collection curves on all your pools that you had previously purchased, or was this -- are you going to -- was it just a basket of them or a certain segment that we could expect that to benefit other future periods as you do it to other pools?

We extended all of them other than the 2006 pools, so for the first six months when we own a portfolio, we typically have the 54-month collection curve. Once it is aged for six months, we will then extend it to 72 months rather than the 60 months that we have historically. So everything other than the 2006 purchases are now at a 72-month curve.

Okay, so then next quarter, you would extend the curves on the first-quarter purchases?

Correct.

A follow-up from Mark Hughes.

Thank you. Could you refresh me on the margin effect of the Ascension business?

We have not disclosed the separate sort of P&L for Ascension, so some of this quarter was highly profitable due to the accounting for the business but we have not disclosed the sort of long-term margin for the business.

Right. Just as a general sense, is that more of a fixed cost business and so extra revenue tends to drop to the bottom line?

I would say it's probably fair to categorize the Ascension business as having more fixed cost than our debt buying business, so variations -- that would be a logical conclusion.

Got you. Then, anything more you can say about the new initiatives? You characterize them as legal and direct marketing. I know you are probably hesitant to say much but anything more you can add?

We'd love to, although we think that it's a real competitive advantage to be innovating in a time of high pricing environment, so unfortunately, I do think we can give any more color.

[Jamie Lester], [Sound Post] Partners.

My first question is did the reversal of the allowance have any impact on earnings?

Yes, the reversal of the allowance hits revenue, so it was 400,000 and change that was included within revenue. (multiple speakers). Excuse me?

What's the bottom-line impact of that?

You know, it's approximately $0.01.

Okay, and then the new initiatives, the extending of the curves also added $0.01? (multiple speakers).

The new initiatives added just under a couple of cents.

Okay. Then could you just talk about the competitive environment? I know one of your competitors seems to I guess characterize it as less competitive as you have, and you seem to have shifted away from the kind of traditional credit card debt to some extent, or more than maybe some of your peers. Can you just characterize the kind of environment now as, say, versus three and six months ago?

You know, from our view, it is equally as competitive as it was three or six months ago. We haven't seen prices rise, although we've seen no decrease in prices. We think our strategy -- and for example our investment in India, which gives us an advantage in some of the asset classes that have a different distribution of balances, maybe skewed toward lower balances, will allow us to buy outside of the credit card space more effectively. But we're not seeing a huge difference in competitiveness across any asset class. They are all very competitive and you have to really have the right valuation capabilities to buy portfolio in today's environment. We feel very comfortable with what we have.

Jeff Evans, First Analysis.

I just want to make sure I'm clear on all these -- the pieces to the different changes. There was the accounting change extending out the curves and then there's some of the new marketing initiatives. The marketing initiatives -- what was the revenue impact to each and the earnings impact to each? It was like 2.1 million for the marketing initiative?

2.1 million for the two initiatives that Brandon mentioned -- or there are initiatives in the direct marketing and legal channels, so we haven't talked about what they are specifically or how many they are, but there are initiatives within both of those channels, which increased revenue by about $2.1 million and had a $0.02 impact. The extension of the curves increased revenue by about $900,000 and because of the additional contingent interest that we need to record because of the collections coming from those pools, it had about a $0.013 impact.

Then the reversal added another penny, correct?

The reversal of the reserve was approximately $0.01, yes.

So you have about $0.04 there. Okay, was there anything else that I am missing?

I mean, there are lots of other things that impact it. So, the tax impacted it by about $0.015; that decreased EPS by about $0.015. The stock-option expense decreased it by about $0.04. (inaudible).

Okay. Well, why would the -- as you look at the amortization rate or however you want to describe it, the revenue recognition rate, that declined sequentially. I know you have a nice table that explains it. But wouldn't the main reason for the decline sequentially just be the extension of the curves?

No. The main reason for the sequential decline is seasonality. When you have revenue going down by $2 million but collections going down by $15 million, the rate drops dramatically. The extension has very little impact on it this quarter.

But if you extend out a bunch of curves, obviously then you're bringing in more revenue at lower amortization rates, right?

We are only bringing in $900,000 of revenue this quarter from extending the curve, so it has very little, very low impact on the rate this quarter.

The extension of the curves -- we did give a full appreciation of the value of the portfolio from a cash basis. (indiscernible) look at, if you did count back the year six collections back to year one, it has a very minimal impact on your IRRs but certainly it means we will generate a lot more cash as a company. So if you think about the -- dollar -- 60 months from now (indiscernible) discount it back at some monthly IRR, which is not insignificant, making its impact on the current period very minimal.

To Paul's point, the greatest impact will happen when you get to the point in the curve where you expect there to be almost no collections, then you'll have a significant number of collections and that will benefit revenue and cash flow.

So I think one of the things we've tried to communicate -- and it's important to understand the phenomenon of revenue and collections and that revenue is smooth over the life and so quarter-to-quarter, you don't have very much of a difference, but collections can move around pretty significantly from the beginning of the year to the end of the year. So when you take the ratio of those two numbers, you can see why there's a big difference. It's solely due to seasonality and very little to do with outside factors.

Paul, you said the revenue recognition rate going forward should be in the 70s?

Yes.

Does that mean anywhere from 70 to 80, or is it low 70s or consistent with the current number or --?

We're not getting more precise than it will be in the 70s. We're talking about for the remainder of this year.

Got it. Okay, thanks.

[John Shelf], with [Schroders].

Can you just walk me through the seasonality? Can you explain that to me? What causes it?

So, in the first three months of the year, you have two pretty material benefits to the collection curve. You have the impact of tax returns, and then generally you have the impact of bonuses -- I'm sorry, tax refunds, so you file your tax return, you get refunds that generate the cash flow and then you have (indiscernible) get a bonus or a lump sum you are either get that in the first part of the year. Then what happens is, throughout the remainder of the year, you have the summer where people take their disposable dollars and go on vacation with their families, and by the fourth quarter, again, our consumers are ones who are pretty strapped; they are buying Christmas presents and other things. So you've got a big benefit in the first quarter and then there are a couple of other quarters where there are things that are happening to our consumers that cause them to have less disposable income to think about paying their debts down with.

Okay, thanks.

Brian Gonick, Corsair Capital.

Just to clarify on the recognition rate for the balance of the year, is that including 0-basis revenue?

Yes.

At this time, we have no additional questions. I would like to turn the conference over to management for any closing remarks.

Thank you. Our second-quarter results have clearly demonstrate that our focus on being proactive in seeking new, innovative ways to liquidate the portfolio in an elevated pricing market is working. Our intention is to continue combining disciplined innovation and diversification to generate increasing returns for our stockholders. We are confident that our consumer-level analytic and innovation provide us with a competitive advantage and an ability to create value in the evolving distressed consumer debt management industry.

I'd like to thank everybody for joining us today. We look forward to speaking with you on our third-quarter earnings call.

Thank you, management. Ladies and gentlemen, at this time, we will conclude today's teleconference presentation. We thank you for your participation on the program. You may now disconnect and please have a pleasant day.